<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 25, 2000
REGISTRATION NO. 333-40518
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
STOCKWALK.COM GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
MINNESOTA 5122 41-1756256
(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Classification Industrial Code) Identification Number)
</TABLE>
Suite 800
5500 Wayzata Boulevard
Minneapolis, Minnesota 55416
Telephone: (763) 542-6000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Philip T. Colton
Stockwalk.com Group, Inc.
Suite 800
5500 Wayzata Boulevard
Minneapolis, Minnesota 55416
Telephone: (763) 542-6000
(Name, address, including zip code and telephone number,
including area code, of agent for service)
------------------------
COPIES OF COMMUNICATIONS TO:
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ALBERT A. WOODWARD JAMES C. MELVILLE
Ruth M. Timm Mary S. Giesler
Maun & Simon, PLC Kaplan, Strangis and Kaplan, P.A.
2000 Midwest Plaza Building West 90 South Seventh Street, Suite 5500
801 Nicollet Mall Minneapolis, Minnesota 55402
Minneapolis, Minnesota 55402 Telephone: (612) 375-1138
Telephone: (612) 904-7400
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
KINNARD INVESTMENTS, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER 5, 2000
To the Shareholders of Kinnard Investments, Inc.:
A special meeting of shareholders of Kinnard Investments, Inc., a Minnesota
corporation, will be held on September 5, 2000 at 10:00 a.m. (local time) at 920
Second Avenue South, Minneapolis, Minnesota, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger dated as of June 5, 2000, among Kinnard,
Stockwalk.com Group, Inc., a Minnesota corporation, and SW Acquisition,
Inc., a Minnesota corporation and wholly-owned subsidiary of Stockwalk,
pursuant to which, among other things, Kinnard will merge with and into SW
upon the terms and subject to the conditions set forth in the merger
agreement, as more fully described in the enclosed proxy
statement/prospectus.
2. To transact any other business that may properly come before the
special meeting or any adjournment or postponement of the special meeting,
including, without limitation, a motion to adjourn the Special Meeting to
another time or place for the purpose of soliciting additional proxies in
order to approve the merger agreement.
A proxy card and a proxy statement/prospectus containing more detailed
information with respect to the matters to be considered at the special meeting
accompany this notice.
The Kinnard Board of Directors has fixed the close of business on July 21,
2000 as the record date for determining those shareholders entitled to vote at
the special meeting and any adjournment or postponement of the special meeting.
The affirmative vote of a majority of the outstanding shares of Kinnard common
stock on the record date is required to approve the merger agreement.
You should not send your stock certificates at this time. If the merger is
completed, instructions will be mailed to you regarding the surrender of your
stock certificates.
Your proxy vote is very important. Whether or not you plan to attend the
special meeting, you should complete, sign, date and promptly return the proxy
card in the enclosed envelope to ensure that your shares will be represented at
the meeting. If you attend the special meeting and wish to vote in person, you
may withdraw your proxy and vote in person.
THE KINNARD BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
By Order of the Board of Directors,
/s/ George F. Stroebel
-----------------------------
George F. Stroebel, Secretary
Minneapolis, Minnesota
July 27, 2000
<PAGE> 3
KINNARD INVESTMENTS, INC.
PROXY STATEMENT
FOR A
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER 5, 2000
STOCKWALK.COM GROUP, INC.
PROSPECTUS
This proxy
statement/prospectus also
constitutes the prospectus of
Stockwalk with respect to
shares of Stockwalk common
stock to be delivered to
Kinnard shareholders in
connection with the merger.
The Stockwalk common stock is
traded on the Nasdaq NMS under
the symbol "STOK."
Consider carefully the risk
factors beginning on page 15
in this proxy
statement/prospectus.
This proxy
statement/prospectus does not
cover, and may not be used in
connection with, any resales
of the Stockwalk stock
received in the merger.
Neither the SEC nor any state
securities commission has
approved the shares of
Stockwalk common stock
issuable in the merger or
determined that this proxy
statement/prospectus is
accurate or complete. Any
representation to the contrary
is a criminal offense.
THE MERGER --
This proxy statement/prospectus is being furnished to you in connection
with the solicitation of proxies by
the board of directors of Kinnard
Investments, Inc. for use at a special
meeting of shareholders at which you
will be asked to approve the proposed
merger of Kinnard with and into SW
Acquisition, Inc., a wholly owned
subsidiary of Stockwalk.com Group,
Inc.
THE MERGER CONSIDERATION --
If the merger is completed, you will receive $6.00 in cash and a fraction
of a share of Stockwalk common stock
for each share of Kinnard common stock
that you own. As long as the average
price of Stockwalk's common stock for
a 20 consecutive trading day period
prior to the merger is between $9.00
and $15.00, you will receive one-half
of a share of Stockwalk common stock
plus $6.00 in cash for each share of
Kinnard common stock that you own. If
the 20-day average closing stock price
is below $9.00 or above $15.00, the
exchange ratio for determining the
number of Stockwalk shares you will
receive will be adjusted so that the
value of the shares you receive based
on the measurement period average
closing stock price will be $4.50 if
the measurement period average stock
price is less than $9.00, or $7.50 if
such average stock price is more than
$15.00.
If the measurement period ended on July 21, 2000, the 20-day average
closing stock price would have been
$8.2596, and the exchange ratio would
have been .5448.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS JULY 27, 2000.
THIS PROXY STATEMENT/PROSPECTUS WAS FIRST SENT OR GIVEN TO
KINNARD SHAREHOLDERS ON OR ABOUT JULY 27, 2000.
<PAGE> 4
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES IMPORTANT BUSINESS AND
FINANCIAL INFORMATION ABOUT KINNARD AND STOCKWALK THAT IS NOT INCLUDED OR
DELIVERED WITH THIS DOCUMENT. YOU CAN REQUEST COPIES OF SUCH INFORMATION. SEE
"WHERE YOU CAN FIND MORE INFORMATION."
TABLE OF CONTENTS
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QUESTIONS AND ANSWERS ABOUT THE MERGER...................... 1
SUMMARY..................................................... 3
The Companies............................................. 3
The Special Meeting....................................... 4
The Merger................................................ 4
Summary Financial Information............................. 9
Historical and Pro Forma Per Share Data................... 10
Summary Consolidated Financial Data....................... 11
Selected Unaudited Pro Forma Financial Data............... 13
Market Price of Stockwalk and Kinnard Common Stock........ 14
RISK FACTORS................................................ 15
Risks Relating to the Merger.............................. 15
Risks Relating to Stockwalk............................... 16
THE SPECIAL MEETING......................................... 26
Date, Time and Place...................................... 26
Purpose of the Special Meeting............................ 26
Record Date; Shares Entitled to Vote; Quorum.............. 26
Voting Rights; Abstentions................................ 26
Kinnard Employee Stock Ownership Plan and Trust........... 27
Voting and Revocation of Proxies.......................... 27
Solicitation of Proxies................................... 27
Recommendation of Kinnard Board........................... 28
THE MERGER.................................................. 28
General................................................... 28
Background of the Merger.................................. 28
Kinnard's Reasons for the Merger and Board
Recommendation......................................... 32
Opinion of Kinnard's Financial Advisor.................... 35
Stockwalk Reasons for the Merger.......................... 40
Conversion of Kinnard Common Stock........................ 41
Treatment of Kinnard Stock Options and Warrants........... 42
Effective Time............................................ 43
Antidilution Adjustments.................................. 43
Interests of Certain Persons in the Merger................ 43
Employees of Kinnard After the Merger..................... 44
Accounting Treatment...................................... 45
Regulatory Approvals Required............................. 45
Resale of Stockwalk Common Stock Issued Pursuant to the
Merger................................................. 45
Certain Material Federal Income Tax Consequences.......... 46
Dissenters' Rights........................................ 48
</TABLE>
i
<PAGE> 5
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THE MERGER AGREEMENT........................................ 51
Structure of Merger....................................... 51
Procedures for Exchange................................... 51
Representations and Warranties............................ 52
Concept of Material Adverse Effect/Material Adverse
Change................................................. 53
Conduct of Kinnard Business Pending the Merger............ 53
No Solicitation........................................... 55
Reasonable Best Efforts; Regulatory Applications.......... 55
Conditions to the Merger.................................. 55
Termination of the Merger Agreement....................... 56
Amendment and Waiver...................................... 57
Payment of Fees and Expenses; Termination Fees............ 57
BUSINESS OF KINNARD......................................... 58
BUSINESS OF STOCKWALK....................................... 58
Overview.................................................. 58
Recent Developments....................................... 59
Steichen Acquisition...................................... 59
Competition............................................... 60
Employees................................................. 61
Properties................................................ 61
SELECTED HISTORICAL FINANCIAL DATA OF KINNARD............... 62
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF KINNARD...................... 63
SELECTED HISTORICAL FINANCIAL DATA OF STEICHEN.............. 72
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF STEICHEN..................... 73
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA OF
STOCKWALK................................................. 79
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF STOCKWALK.................... 80
OWNERSHIP OF VOTING SECURITIES OF KINNARD................... 86
MANAGEMENT OF STOCKWALK..................................... 89
DESCRIPTION OF STOCKWALK CAPITAL STOCK...................... 92
General................................................... 92
Voting Rights; Dividends; Liquidation..................... 92
Stock Options............................................. 92
Warrants.................................................. 93
Minnesota Anti-Takeover Law............................... 93
Transfer Agent............................................ 93
COMPARISON OF RIGHTS OF HOLDERS OF KINNARD COMMON STOCK AND
STOCKWALK COMMON STOCK.................................... 94
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS............. 97
LEGAL MATTERS............................................... 97
SHAREHOLDER PROPOSALS....................................... 97
</TABLE>
ii
<PAGE> 6
<TABLE>
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EXPERTS..................................................... 98
WHERE YOU CAN FIND MORE INFORMATION......................... 98
INDEX TO FINANCIAL STATEMENTS............................... F-1
</TABLE>
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<S> <C> <C>
ANNEXES
ANNEX A Agreement and Plan of Merger, dated June 5, 2000, by and
between Kinnard Investments, Inc., Stockwalk.com Group, Inc.
and SW Acquisition, Inc. ................................... A-1
ANNEX B Opinion of U.S. Bancorp Piper Jaffray....................... B-1
ANNEX C Sections 302A.471 and 302A.473 of the Minnesota Business
Corporation Act............................................. C-1
</TABLE>
iii
<PAGE> 7
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT DO I NEED TO DO NOW?
A. Simply complete, sign and date the proxy card and mail it in the enclosed
return envelope as soon as possible so that your shares will be represented at
the special meeting. If you sign and send in your proxy and do not indicate how
you want to vote, your proxy will be voted in favor of the merger.
Q: MAY I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY?
A. Yes. You may change your vote by delivering a signed notice of revocation or
a later-dated, signed proxy card to Kinnard's secretary on or before the last
business day before the special meeting, or you may attend the special meeting
and vote your shares in person. Your attendance at the meeting will not, by
itself, revoke your proxy.
Q: IF MY SHARES ARE HELD IN MY BROKER'S NAME, WILL MY BROKER AUTOMATICALLY VOTE
MY SHARES FOR ME?
A. No. Your broker will vote your shares only if you provide instructions to
your broker on how you want your shares voted. If you do not provide
instructions to your broker, your shares will not be voted and they will be
counted as votes against the proposals to approve and adopt the merger
agreement.
Q: WHAT WILL I RECEIVE IF THE MERGER IS COMPLETED?
A. If the merger is completed, you will receive $6.00 in cash and a fraction of
a share of Stockwalk common stock in exchange for each share of Kinnard common
stock that you own. The number of shares of Stockwalk common stock you will
receive will be based upon the average closing price of Stockwalk common stock
for a measurement period of 20 consecutive trading days ending on the day
immediately prior to the day that all of the conditions to complete the merger
have been satisfied.
- if the average closing price of Stockwalk common stock for the measurement
period is between $9.00 and $15.00, you will receive $6.00 in cash and .5 of a
share of Stockwalk common stock for each share of Kinnard common stock;
- if the average closing price of Stockwalk common stock for the measurement
period is less than $9.00, you will receive $6.00 in cash and a fraction of a
share of Stockwalk common stock where the numerator is $4.50 and the
denominator is the average closing price of Stockwalk common stock for the
measurement period. For example, if the average closing price for the
measurement period is $8.00, you will receive $6.00 in cash plus .5625 of a
share of Stockwalk common stock for each share of Kinnard common stock; or
- if the average closing price of Stockwalk common stock for the measurement
period is more than $15.00, you will receive $6.00 in cash and a fraction of a
share of Stockwalk stock where the numerator is $7.50 and the denominator is
the average closing price of Stockwalk stock for the measurement period. For
example, if the average closing price for the measurement period is $16.00,
you will receive $6.00 in cash plus .46875 of a share of Stockwalk common
stock for each share of Kinnard common stock.
Q: WHAT WILL BE THE MEASUREMENT PERIOD?
A. We expect that the last condition of the merger will be the shareholder vote,
which is scheduled for September 5, 2000. In such case, the measurement period
for determining the exchange ratio would begin on August 7, 2000 and end on
September 1, 2000.
<PAGE> 8
Q: WHAT WILL HAPPEN IF I DON'T VOTE?
A. The failure to vote has the same effect as a vote against approval of the
merger agreement.
Q: DO I NEED TO SEND IN MY STOCK CERTIFICATES NOW?
A. No. If the merger is completed, we will send you written instructions for
exchanging your stock certificates for the merger consideration.
Q: WHO CAN HELP ANSWER MY QUESTIONS?
A: If you have questions about the merger, you should contact:
Kinnard Investments, Inc.
920 Second Avenue South
Minneapolis, MN 55402
Attention: George F. Stroebel
Telephone: (612) 370-2700
2
<PAGE> 9
SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. For more detailed
information about the proposed merger, we encourage you to read this entire
document, the merger agreement attached hereto as Annex A, and the documents to
which we have referred you. See "Where You Can Find More Information" on page
98. We have parenthetically included page references to indicate where you may
find more complete descriptions of the topics presented in this Summary.
THE COMPANIES
KINNARD (PAGE 58)
Kinnard Investments, Inc.
Kinnard Financial Center
920 Second Avenue South
Minneapolis, Minnesota 55402
(612) 370-2937
Kinnard is a full service investment banking firm. It employs 264 people in
13 branch offices in Minnesota, North Dakota and South Dakota. At March 31,
2000, Kinnard's total assets were approximately $41.3 million, and its total
shareholders' equity was approximately $30.8 million.
STOCKWALK (PAGE 58)
Stockwalk.com Group, Inc.
Suite 800
5500 Wayzata Boulevard
Minneapolis, Minnesota 55416
(763) 542-6000
Stockwalk is a technologically-driven regional securities firm
headquartered in Minneapolis, Minnesota. Through its operating subsidiaries,
Stockwalk provides a broad range of investment services to individual, corporate
and public clients. These services include both traditional and online
securities brokerage, investment banking and research services and the
processing of securities transactions for correspondent brokerage firms and
financial institutions. At March 31, 2000, Stockwalk employed 367 people in nine
offices located in Minnesota, Florida, Texas, Arizona, Illinois and California.
At March 31, 2000, Stockwalk had total assets of approximately $539 million and
shareholders' equity of approximately $24.7 million.
RECENT DEVELOPMENTS -- STOCKWALK ACQUISITION OF R.J. STEICHEN & COMPANY (PAGE
59)
On June 6, 2000, Stockwalk announced that it had entered into a definitive
merger agreement with R.J. Steichen & Company. Steichen is a privately-owned
full service securities brokerage and financial services firm headquartered in
Minneapolis, Minnesota. Steichen has 19 offices in Minnesota, Georgia, Texas,
North Dakota and Arizona, employs 82 people and has approximately 200 licensed
sales representatives, all of whom operate as independent contractors.
3
<PAGE> 10
The Steichen merger agreement provides that the Steichen shareholders will
receive approximately 4,300,000 shares of Stockwalk's restricted common stock in
exchange for all the outstanding shares of Steichen's common stock, plus up to
an additional 2,000,000 shares upon the achievement of certain pre-tax earnings
targets during the two years following the merger. Completion of the merger is
subject to regulatory approval and the satisfaction of certain conditions which
are customary in merger transactions. Stockwalk presently expects the Steichen
transaction to close in early August 2000.
THE COMBINED COMPANIES (PAGE 58)
Stockwalk, Kinnard and Steichen had aggregate revenues in excess of $185
million for the 12 months ended March 31, 2000, which is Stockwalk's fiscal year
end. Combined, the firms will employ more than 850 people, including more than
400 registered representatives. Outside of Minneapolis, the combined companies
will operate 34 branch offices in eight states. The mergers will significantly
increase Stockwalk's presence in the Minneapolis-St. Paul regional brokerage
market, making it the third largest retail broker-dealer headquartered in the
Minneapolis-St. Paul area.
THE SPECIAL MEETING
DATE, TIME AND PLACE (PAGE 26)
The special meeting will be held on the fifth floor of the Kinnard
Financial Center located at 920 Second Avenue South, Minneapolis, Minnesota, at
10:00 a.m. on September 5, 2000. At the special meeting, shareholders of Kinnard
will be asked to consider and vote upon a proposal to approve and adopt the
merger agreement.
RECORD DATE; SHARES ENTITLED TO VOTE (PAGE 26)
You are entitled to vote at the special meeting if you owned shares of
Kinnard common stock at the close of business on July 21, 2000. You can cast one
vote for each share of stock that you owned at that time.
VOTE REQUIRED (PAGE 26)
In order for the merger to be completed, the holders of at least a majority
of outstanding shares of Kinnard common stock on the record date must vote in
favor of the merger agreement.
Kinnard directors and officers and Stockwalk hold, together, approximately
27% of the outstanding shares of Kinnard common stock entitled to vote at the
special meeting.
THE MERGER
The merger agreement is attached to this document as Annex A. Please read
the merger agreement. It is the legal document that governs the merger.
4
<PAGE> 11
WHAT YOU WILL RECEIVE IN THE MERGER (PAGE 41)
If the merger is completed, Kinnard shareholders who have not exercised
dissenters' rights will receive $6.00 in cash and a fraction of a share of
Stockwalk common stock in exchange for each share of Kinnard common stock that
they own. No fractional shares of Stockwalk common stock will be issued.
Instead, Kinnard shareholders will receive a check in payment for any fractional
shares based on the closing price of Stockwalk's common stock on the last
trading day prior to the closing date. Kinnard shareholders will not receive
interest on any cash payments received in the merger.
The number of shares of Stockwalk common stock to be received will be
determined based upon the average closing sale price of Stockwalk common stock
for the 20 trading days ending on the trading day immediately prior to the date
on which all of the conditions in the merger agreement have been satisfied. If
approval of the merger agreement by Kinnard shareholders is the last condition
to be satisfied, and that approval is obtained on September 5, 2000, the
measurement period will include the 20 trading days beginning on August 7, 2000
and ending on September 1, 2000.
If the average closing price of Stockwalk common stock during the
measurement period is between $9.00 and $15.00 per share, you will receive
one-half of a share of Stockwalk common stock together with $6.00 in cash for
each share of Kinnard common stock that you own. If the average closing price of
Stockwalk common stock during the measurement period is above $15.00 per share,
you will receive a fraction of a share of Stockwalk common stock (calculated by
dividing 7.5 by the average closing price of Stockwalk common stock over the
measurement period) and $6.00 in cash for each share of Kinnard common stock
that you own. If the average closing price of Stockwalk common stock during the
measurement period is below $9.00 per share, you will receive a fraction of a
share of Stockwalk common stock (calculated by dividing 4.5 by the average
closing price of Stockwalk common stock over the measurement period) and $6.00
in cash for each share of Kinnard common stock that you own.
TREATMENT OF STOCK OPTIONS AND WARRANTS (PAGE 42)
Each outstanding option and warrant to purchase shares of Kinnard common
stock will vest and be converted into the right to receive cash, without
interest, in an amount equal to the difference between the exercise price of
such option or warrant and an amount equal to $6.00 plus the product of the
average closing price of Stockwalk common stock over the measurement period and
the exchange ratio used to convert Kinnard common stock to Stockwalk common
stock. For example, if the measurement period ended on July 21, 2000, resulting
in an average closing price of $8.2596 per share, and the per share exercise
price of the option or warrant is $5.50, the amount of cash that would be issued
for the option or warrant in connection with the merger would be $5.00 per
share.
RECOMMENDATION OF KINNARD BOARD (PAGE 28)
The Kinnard Board believes that the merger is advisable and is in the best
interest of Kinnard shareholders and recommends that you vote "FOR" approval of
the merger agreement.
5
<PAGE> 12
OPINION OF KINNARD'S FINANCIAL ADVISOR (PAGE 35)
U.S. Bancorp Piper Jaffray delivered an opinion dated June 5, 2000, to the
Board of Directors of Kinnard that, as of that date, based upon and subject to
the assumptions, limitations and qualifications in the opinion, the
consideration to be received by the holders (other than Stockwalk and its
affiliates) of Kinnard common stock in the merger is fair to the holders from a
financial point of view. U.S. Bancorp Piper Jaffray has confirmed that opinion
in an updated written opinion dated July 24, 2000. We have attached a copy of
U.S. Bancorp Piper Jaffray's updated opinion as Annex B to this proxy statement/
prospectus, which is incorporated by reference in this proxy
statement/prospectus. This opinion of U.S. Bancorp Piper Jaffray is addressed to
the Board and does not constitute a recommendation as to how you should vote at
the special meeting.
CONDITIONS TO COMPLETING THE MERGER (PAGE 55)
The completion of the merger depends on a number of conditions being met,
including:
- approval of the merger agreement by Kinnard shareholders;
- absence of any court or governmental entity rendering the merger illegal;
- approval for listing on the Nasdaq NMS of the Stockwalk common stock to
be issued in connection with the merger;
- approval of the merger by the necessary governmental authorities; and
- receipt of the tax opinion from KPMG LLP to the effect that, based upon
the facts and assumptions contained in the tax opinion, the merger should
qualify for federal income tax purposes as a "reorganization" within the
meaning of Section 368(a) of the U.S. tax code.
Where the law permits, Kinnard or Stockwalk could decide to complete the merger
even though one or more of these conditions have not been met. We cannot be
certain when, or if, the conditions to the merger will be satisfied or waived,
or that the merger will be completed.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES (PAGE 46)
Kinnard and Stockwalk expect to receive a tax opinion from KPMG LLP,
Kinnard's independent auditors, stating that, as a general matter:
- a Kinnard shareholder should not recognize loss, but will recognize gain
to the extent of the lesser of the cash received, and the excess of the
sum of the fair market value of the Stockwalk common stock and the amount
of cash received over the shareholder's adjusted tax basis in the shares
of Kinnard that the shareholder surrendered in the exchange. Such gain
will be capital gain, provided the Kinnard stock is held as a capital
asset.
- the tax basis of Stockwalk stock received by Kinnard shareholders in the
merger will be the same as the tax basis of the Kinnard stock exchanged
in the merger, increased by any gain recognized on the exchange and
reduced by any cash received.
6
<PAGE> 13
- the holding period of the Stockwalk stock that a Kinnard shareholder
receives in the merger generally will include the holding period of the
Kinnard stock exchanged for the Stockwalk stock.
INTEREST OF CERTAIN PERSONS IN MERGER (PAGE 43)
Kinnard's officers and directors have interests in the merger that may be
different from, or are in addition to, their interests as shareholders of
Kinnard. The Board was aware of these interests and considered them, among
others, in making its recommendation.
TERMINATION (PAGE 56)
The boards of directors of Kinnard and Stockwalk may at any time prior to
the day the articles of merger are filed with the Minnesota Secretary of State
mutually agree to terminate the merger agreement, even if the Kinnard
shareholders approve the merger agreement.
Also, either board can decide, without the consent of the other, to
terminate the merger agreement under certain circumstances, including the
following:
- the other party materially breaches any of its representations or
warranties and the breach is not cured within 30 days after notice;
- the other party breaches any of its covenants or agreements contained in
the merger agreement and the breach is not cured within 30 days after
notice and the breach is likely to have a material adverse effect on the
breaching party or the surviving corporation;
- the merger is not completed by December 31, 2000;
- the approval required from any governmental authority is denied by final
nonappealable action; or
- the merger agreement is not approved by the Kinnard shareholders at the
special meeting
In addition, Stockwalk may terminate the merger agreement if the Kinnard
board withdraws or modifies its recommendation that Kinnard shareholders approve
the merger agreement, or recommends an alternative acquisition proposal.
Kinnard also may terminate the merger agreement if its board approves an
agreement for Kinnard to be acquired by another party and it has determined in
good faith that the consideration to be received by Kinnard shareholders under
the new proposal is superior to the consideration to be received by Kinnard
shareholders under the merger agreement. However, in such a situation, Kinnard
must (a) notify Stockwalk of the superior proposal, (b) provide Stockwalk with
an opportunity to respond, and (c) pay Stockwalk a termination fee of
$1,000,000.
If the merger is not completed, each party will pay its own expenses,
except that Kinnard and Stockwalk will share equally the printing and mailing
expenses of this proxy statement/prospectus, the registration fees required by
the SEC and the cost of the tax opinion.
7
<PAGE> 14
TERMINATION FEE (PAGE 57)
Kinnard will be obligated to pay Stockwalk a fee of $1,000,000, if the
merger agreement is terminated under circumstances relating to third party
offers, the withdrawal or modification of the recommendation of Kinnard's board
of directors, or the failure of the Kinnard's shareholders to approve the merger
agreement, and within 12 months the stock or assets of Kinnard are acquired by
another party.
REGULATORY APPROVALS (PAGE 55)
Stockwalk and Kinnard are required to make filings with or obtain approvals
from state and other regulatory authorities before the merger can be completed.
These filings and approvals include filings with the SEC and the National
Association of Securities Dealers, Inc.
DISSENTERS' RIGHTS (PAGE 48)
Kinnard shareholders who follow certain procedural requirements may be
entitled to receive cash in the amount of the fair value of their shares instead
of the cash and shares of Stockwalk common stock offered pursuant to the merger.
The fair value of shares of Kinnard common stock would be determined pursuant to
Minnesota law.
Any Kinnard shareholder who wishes to exercise dissenters' rights must not
vote in favor of the merger agreement and must comply strictly with all of the
procedural requirements provided by Minnesota law. A copy of the dissenters'
rights statute is attached as Annex C to this document. You should read the
statute carefully and consult with legal counsel if you desire to exercise your
dissenters' rights.
8
<PAGE> 15
SUMMARY FINANCIAL INFORMATION
You should read this summary financial information in conjunction with the
selected historical financial data, the management's discussion and analysis of
financial condition and results of operations and the financial statements for
each company included elsewhere in this proxy statement/prospectus.
The statement of operations data for Kinnard for each of the years ended
December 31, 1995 through 1999, and the balance sheet data as of December 31,
1995, 1996, 1997, 1998 and 1999 have been derived from Kinnard's audited
consolidated financial statements. Kinnard's statement of operations data for
the three month periods ended March 31, 1999 and 2000 and the balance sheet data
as of March 31, 2000 have been derived from unaudited consolidated financial
statements of Kinnard.
The statement of operations data for Steichen for each of the years ended
September 30, 1995 through 1999, and the balance sheet data as of September 30,
1995, 1996, 1997, 1998 and 1999 have been derived from Steichen's audited
financial statements. Steichen's statement of operations data for the six month
periods ended March 31, 1999 and 2000, and the balance sheet data as of March
31, 2000 have been derived from the unaudited financial statements of Steichen.
The statement of operations data for Stockwalk for each of the five fiscal
years ended March 31, 1996 through March 31, 2000, and the balance sheet data as
of March 31, 1996, 1997, 1998, 1999 and 2000 have been derived from Stockwalk's
audited consolidated financial statements and the consolidated financial
statements of Stockwalk's predecessors.
The Stockwalk pro forma summary financial information is presented to give
effect to the Kinnard and Steichen mergers and assumes the receipt of the net
proceeds from the issuance of $20 million of convertible subordinated notes of
Stockwalk. Stockwalk has filed a registration statement with respect to the
convertible notes, but the registration statement has not yet been declared
effective. Stockwalk anticipates closing the convertible note offering in early
August 2000, but there is no assurance that the offering will be completed.
9
<PAGE> 16
HISTORICAL AND PRO FORMA PER SHARE DATA
The following summary presents selected unaudited comparative per share
data for Stockwalk common stock on a historical and pro forma combined basis and
for Kinnard common stock on a historical and pro forma equivalent basis giving
effect to the merger using the purchase method of accounting. The information is
derived from the historical financial statements of each of Stockwalk and
Kinnard and the Unaudited Pro Forma Financial Information appearing elsewhere in
this proxy statement/prospectus.
The per share data set forth below is presented for comparative purposes
only and is not necessarily indicative of the future operations of the combined
entity or the actual results that would have been achieved had the merger been
completed prior to the dates or periods indicated.
<TABLE>
<CAPTION>
AS OF AND FOR THE
YEAR ENDED
MARCH 31, 2000
-----------------
<S> <C>
STOCKWALK
Basic earnings (loss) per common share
Historical................................................ $(0.09)
Pro forma(1).............................................. $ 0.10
Cash dividends declared per common share:
Historical................................................ --
Pro forma(1).............................................. --
Book value per common share:
Historical................................................ $ 1.14
Pro forma(2).............................................. $ 2.95
KINNARD
Basic earnings per common share:
Historical................................................ $ 0.78
Pro forma equivalent(3)................................... $ 0.05
Cash dividends declared per common share:
Historical................................................ --
Pro forma equivalent(3)................................... --
Book value per common share:
Historical................................................ $ 6.34
Pro forma equivalent(3)................................... $ 1.47
</TABLE>
-------------------------
(1) The pro forma earnings per share amounts have been calculated assuming the
completion of the Kinnard and Steichen mergers, and assuming the receipt and
application of the net proceeds of Stockwalk's $20 million convertible
subordinated note offering which Stockwalk expects to complete in early
August 2000 as if each of the events had been completed on April 1, 1999.
(2) The pro forma book value per common share amounts have been calculated
assuming the completion of the Kinnard and Steichen mergers, and assuming
the receipt and application of the net proceeds of Stockwalk's $20 million
convertible subordinated note offering which Stockwalk expects to complete
in early August 2000 as if each of the events had been completed March 31,
2000.
(3) The pro forma equivalent basic earnings per common share for Kinnard
represents the pro forma basic earnings per share for Stockwalk multiplied
by an assumed exchange ratio of .5, which presumes that the average daily
price of Stockwalk common stock during the measurement period will be
between $9.00 and $15.00 per share. The pro forma equivalent book value per
share for Kinnard represents the pro forma book value per share for
Stockwalk multiplied by the assumed exchange ratio of .5.
10
<PAGE> 17
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data set forth below represents
historical financial information for Kinnard, Steichen and Stockwalk.
KINNARD SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------- ------------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenues............. $75,333 $99,977 $49,846 $40,944 $54,868 $11,818 $19,022
Operating expenses... 69,647 80,311 49,310 46,573 50,355 11,231 16,510
Net income (loss).... 3,376 11,698 308 (3,376) 2,709 353 1,507
Basic earnings (loss)
per share.......... 0.54 1.93 0.05 (0.58) 0.54 0.07 0.31
Diluted earnings
(loss) per share... 0.54 1.92 0.05 (0.58) 0.53 0.07 0.29
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------- AS OF MARCH 31,
1995 1996 1997 1998 1999 2000
------- ------- ------- ------- ------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............ $45,897 $47,141 $43,972 $36,364 $40,427 $41,328
Total liabilities....... 20,592 11,112 8,400 6,858 11,463 10,574
Shareholders' equity.... 25,305 36,029 35,572 29,506 28,964 30,754
</TABLE>
STEICHEN SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FOR THE YEAR ENDED SEPTEMBER 30, MARCH 31,
----------------------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenues............. $26,461 $49,726 $42,520 $37,819 $40,434 $19,144 $31,244
Operating expenses... 21,917 36,364 35,293 35,010 36,374 17,419 25,553
Net income........... 4,544 13,362 7,227 2,809 4,060 1,725 5,691
Net income per share
(20 shares
outstanding)....... 227 668 361 140 203 86 285
</TABLE>
11
<PAGE> 18
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
-------------------------------------------------- AS OF MARCH 31,
1995 1996 1997 1998 1999 2000
------- ------- -------- -------- -------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets......... $61,748 $95,090 $110,420 $104,487 $131,466 $168,047
Total liabilities.... 53,290 78,849 95,811 89,366 113,981 145,523
Shareholders'
equity............. 8,458 16,241 14,609 15,121 17,485 22,524
</TABLE>
STOCKWALK SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
-----------------------------------------------
1996 1997 1998 1999 2000
------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.............................. $26,944 $32,607 $47,093 $55,590 $70,970
Operating expenses.................... 26,085 32,383 48,916 53,332 73,509
Net income (loss)..................... 525 190 (1,224) 1,273 (1,700)
Basic and diluted earnings (loss) per
share............................... 0.03 0.01 (0.08) 0.08 (0.09)
Ratio of earnings to fixed charges.... 1.18x 1.03x 0.85x 1.17x 0.86x
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets..................... $124,633 $181,042 $272,616 $322,353 $538,875
Total liabilities................ 122,241 178,459 271,258 315,342 514,223
Shareholders' equity............. 2,392 2,583 1,358 7,011 24,652
</TABLE>
12
<PAGE> 19
SELECTED UNAUDITED PRO FORMA FINANCIAL DATA
The selected unaudited pro forma financial data present annual operating
results for the year ended March 31, 2000 giving effect to the acquisitions of
Steichen and Kinnard and the assumed receipt of the net proceeds from the
pending sale of Stockwalk's offering of convertible subordinated notes as if
they had occurred on April 1, 1999, and balance sheet data as of March 31, 2000,
giving effect to the acquisitions of Steichen and Kinnard and the assumed
receipt of the net proceeds from the pending sale of Stockwalk's offering of
convertible subordinated notes as if they had occurred on March 31, 2000.
<TABLE>
<CAPTION>
AS OF AND FOR
THE YEAR ENDED
MARCH 31, 2000
----------------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA AND RATIO)
<S> <C>
STATEMENT OF OPERATIONS DATA
Revenues.................................................. $185,381
Operating expenses........................................ 176,160
Net income................................................ 3,542
Basic and diluted earnings per share...................... 0.10
Ratio of earnings to fixed charges........................ 1.31x
BALANCE SHEET DATA
Total assets.............................................. $791,678
Total liabilities......................................... 702,163
Shareholders' equity...................................... 89,515
</TABLE>
13
<PAGE> 20
MARKET PRICE OF STOCKWALK AND KINNARD COMMON STOCK
Stockwalk's common stock is listed on the Nasdaq NMS under the symbol
"STOK." The following table sets forth the high and low sale prices for a share
of Stockwalk common stock for the period from the completion of its merger with
NM Holdings, Inc. through July 21, 2000.
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C> <C>
2001 First Quarter Ended June 30, 2000............... $14.25 $7.08
Second Quarter (through July 21, 2000).......... 9.63 7.13
2000 Second Quarter Ended September 30, 1999......... 16.82 8.63
Third Quarter Ended December 31, 1999........... 11.75 7.25
Fourth Quarter Ended March 31, 2000............. 17.13 6.50
</TABLE>
On June 5, 2000, the last trading day before the announcement of the
proposed merger was made, the last sale price of Stockwalk common stock,
reported on the Nasdaq NMS, was $9.00 per share. The last reported sale price of
Stockwalk common stock, as reported by Nasdaq NMS on July 21, 2000, was $8.00
per share.
Stockwalk has never paid any cash dividends on its common stock and does
not anticipate paying cash dividends in the foreseeable future. On July 21,
2000, there were approximately 130 record holders of Stockwalk common stock.
Stockwalk currently estimates that there are approximately 1,000 beneficial
owners of its common stock.
Kinnard's common stock is listed on the Nasdaq NMS under the symbol "KINN."
The following table sets forth the high and low sale prices for Kinnard's common
stock for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C> <C>
2000 First Quarter................................... $10.13 $7.00
Second Quarter.................................. 9.13 6.25
Third Quarter (through July 21, 2000)........... 8.75 8.00
1999 First Quarter................................... 6.75 3.88
Second Quarter.................................. 5.50 3.88
Third Quarter................................... 4.50 3.63
Fourth Quarter.................................. 8.25 4.25
1998 First Quarter................................... 7.00 5.88
Second Quarter.................................. 7.00 6.00
Third Quarter................................... 6.50 4.13
Fourth Quarter.................................. 4.75 2.63
</TABLE>
On June 5, 2000, the last trading day before the announcement of the
proposed merger was made, the last sale price of Kinnard common stock, as
recorded on the Nasdaq NMS, was $7.63 per share. The last reported sale price of
Kinnard's common stock, as reported by Nasdaq NMS on July 21, 2000, was $8.13
per share.
Kinnard does not currently pay dividends. Under the terms of the merger
agreement, Kinnard may not pay dividends on Kinnard common stock prior to the
effective time of the merger. On July 21, 2000, there were 175 holders of record
of Kinnard common stock.
14
<PAGE> 21
RISK FACTORS
The merger between Kinnard and Stockwalk involves various risks. Before
deciding whether to vote in favor of the merger, you should carefully review and
consider the risk factors set forth below, as well as the other information
contained in this proxy statement/ prospectus.
RISKS RELATING TO THE MERGER
STOCKWALK MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE EITHER KINNARD OR STEICHEN
WITH ITS EXISTING OPERATIONS
Following the closing of the Kinnard and Steichen mergers, Stockwalk will
be required to integrate the operations, technology and services of those
organizations into its own organization. This integration must occur in a timely
and efficient manner. Additionally, Stockwalk will want to retain key personnel
from both organizations. Following integration of the organizations, Stockwalk
faces the risk that expected revenue growth and synergistic benefits may not
materialize. Stockwalk's failure to successfully integrate Kinnard and Steichen
or to successfully manage the challenges presented during and following the
integration process may result in it not achieving the anticipated potential
benefits of the acquisitions. Any delay encountered in the transition process
could materially and adversely affect Stockwalk's business, financial condition
and operating results.
THE MERGERS WITH KINNARD AND STEICHEN MAY DIVERT RESOURCES FROM STOCKWALK'S
ONLINE BROKERAGE BUSINESS STRATEGY
Following the completion of the Kinnard and Steichen mergers, Stockwalk
will begin integrating the Kinnard and Steichen operations with its own. This
integration process will require Stockwalk to devote substantial financial,
human and technical resources to the merger. These resources would otherwise be
utilized in growing the private label business for its online brokerage business
which may delay some of the planned expansion of the online business.
THE KINNARD AND STEICHEN MERGERS MAY RESULT IN THE LOSS OF KEY PERSONNEL
There is no assurance that key Steichen and Kinnard personnel will continue
with Stockwalk after the mergers. Stockwalk and Kinnard are developing a
retention program which will provide incentives for certain Kinnard employees to
continue employment with Kinnard after the merger, but there is no assurance
that the program will be successful. The loss of key employees could adversely
affect the business of the combined companies.
FOLLOWING THE MERGER, CURRENT KINNARD SHAREHOLDERS WILL OWN A PROPORTIONATELY
SMALLER INTEREST IN STOCKWALK THAN THEY PREVIOUSLY HELD IN KINNARD
Although the Kinnard shareholders own 100% of the outstanding common stock
of Kinnard, following the merger, they will collectively hold only approximately
8.8% of the outstanding shares of Stockwalk, assuming an exchange ratio of
one-half of a share of Stockwalk common stock for each share of Kinnard common
stock and completion of the Steichen transaction. Accordingly, as a group, they
will exercise significantly less control
15
<PAGE> 22
over the combined companies. After the merger, Stockwalk's management will
control matters requiring approval of its shareholders.
THE KINNARD AND STEICHEN MERGERS WILL RESULT IN A SIGNIFICANT AMOUNT OF GOODWILL
WHICH WILL BE A FINANCIAL STATEMENT CHARGE TO FUTURE REPORTED EARNINGS
Following the completion of the Kinnard and Steichen mergers, Stockwalk
will recognize approximately $72.8 million in goodwill for financial reporting
purposes. This amount must be amortized over a period of 20 years and will
result in a charge to earnings of approximately $3.6 million per year. This
charge to reported earnings could adversely affect the price of the Stockwalk's
stock.
RISKS RELATING TO STOCKWALK
STOCKWALK EXPERIENCED OVERALL LOSSES IN RECENT OPERATING PERIODS, AND THESE
LOSSES MAY CONTINUE
Stockwalk experienced an after-tax loss of approximately $1.7 million
during the fiscal year ended on March 31, 2000. The loss was primarily related
to start-up costs associated with Stockwalk's online brokerage business that
commenced operations in September 1999. Stockwalk is depending on its online
brokerage business, particularly the private label growth strategy, to provide a
significant portion of its future revenues. However, there is no assurance that
this strategy will prove to be successful or that Stockwalk will realize
sufficient revenues in future operating periods to become profitable.
IF THE STEICHEN MERGER DOES NOT CLOSE, STOCKWALK'S PROJECTED CASH FLOW MAY BE
ADVERSELY AFFECTED
If Stockwalk fails to complete the Steichen merger, it may experience a
reduction in projected cash flow. The cash flow expected to be generated by
Steichen will be used for the operations of the combined companies and to fund
future growth. The loss of expected cash flow could force Stockwalk to slow down
its expansion plans and could adversely affect its ability to service its debt,
including debt incurred in completing the Kinnard merger.
STOCKWALK'S ONLINE BROKERAGE BUSINESS IS IN AN EARLY STAGE OF DEVELOPMENT AND
MAY NOT BECOME PROFITABLE.
Stockwalk began its online brokerage business in September 1999 and
incurred substantial losses due to start-up costs and a limited revenue base.
Stockwalk expects to spend substantial additional amounts to ramp-up Online
Brokerage Solutions, and these amounts may not be recovered. In addition,
Stockwalk cannot assure you that this division will achieve sufficient revenue
to absorb all expenses associated with a rapidly growing business or that market
factors or other factors will not cause continued operating losses.
16
<PAGE> 23
STOCKWALK EXPECTS SIGNIFICANT FLUCTUATIONS IN ITS QUARTERLY OPERATING RESULTS
Stockwalk expects significant fluctuations in future quarterly operating
results, which may be caused by the following factors:
- the timing of introductions or enhancements of online brokerage services
and products by Stockwalk or its competitors;
- market acceptance of private label and online brokerage services and
products;
- changes in trading volume in the securities markets;
- trends in the securities markets;
- changes in Stockwalk's pricing policies or in its competitors' pricing
policies;
- the success of and costs associated with acquisitions, joint ventures or
other strategic relationships; and
- changes in the level of operating expenses to support projected growth.
Due to the factors listed above, quarterly revenue and operating results are
difficult to forecast. As a result, comparing Stockwalk's period-to-period
operating results may not be meaningful, and results of operations from prior
periods may not be indicative of future results. It is likely that Stockwalk's
future quarterly results will fluctuate from time-to-time, which could adversely
affect the market value of its common stock.
BECAUSE STOCKWALK'S ONLINE BROKERAGE BUSINESS IS IN AN EARLY STAGE, IT CANNOT
GUARANTEE THAT CUSTOMERS WILL ACCEPT OR USE ITS ONLINE SERVICES OR THAT IT WILL
BE ABLE TO EFFECTIVELY MANAGE ITS EXPANSION
Stockwalk is in an early stage of development of its online brokerage
business. Customer acceptance and demand for online brokerage services is
uncertain due to the industry's relatively short history, rapid technological
changes, evolving industry standards, and frequent new service and product
announcements, introductions and enhancements. Customers of traditional full
service brokerage firms, banks or discount brokers may be slow to convert to
online brokerage services for a variety of reasons, including security and
privacy concerns. If the market for private label online brokerage services does
not develop as Stockwalk expects, its business, financial condition and
operating results could be materially and adversely affected.
STOCKWALK MUST ADAPT TO RAPID TECHNOLOGICAL CHANGES TO REMAIN COMPETITIVE
The brokerage and financial services industries are characterized by rapid
technological change, changes in customer requirements, frequent new service and
product introductions and enhancements, and emerging industry standards. Recent
legislative changes have led to increased competition and consolidation in the
industry. The introduction of services or products utilizing new technologies
and the emergence of new industry standards and practices can render existing
services or products obsolete and
17
<PAGE> 24
unmarketable. Stockwalk's future success will depend, in part, on its ability to
accomplish the following:
- develop and incorporate leading technologies;
- enhance its existing services and products;
- develop new services and products that address the increasingly
sophisticated and varied needs of its customers and prospective
customers; and
- respond to technological advances and emerging industry standards and
practices in a timely and cost-effective manner.
The development of new services or products or enhanced versions of existing
services and products may require substantial capital to cover related
expenditures. Stockwalk cannot assure you that it will be successful in
effectively implementing and using new technologies, adapting its services and
products to emerging industry standards, or developing, introducing and
marketing service and product enhancements or new services and products.
Additionally, Stockwalk may experience difficulties that could delay or prevent
the successful development, introduction or marketing of these services and
products, or its new services and product enhancements may fail to adequately
meet the requirements of the marketplace and achieve market acceptance. The
failure, for technical reasons or otherwise, 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 to achieve market acceptance of new services and products,
could adversely and materially affect Stockwalk's business, financial condition
and operating results.
STOCKWALK RELIES UPON THIRD PARTIES TO PROVIDE CRITICAL TRANSACTION FUNCTIONS
All of Stockwalk's servers are leased from or housed at Digital Island,
Inc. under an arrangement whereby Digital Island provides turn-key maintenance
of Stockwalk's servers that route all of Stockwalk's transaction traffic.
Automated Financial Systems, Inc. currently provides the trading software
systems that manage all of Stockwalk's securities trading activity. Stockwalk
also has an agreement with Securities Industries Software Corporation, a
division of ADP, to run its back office system. Finally, Stockwalk contracts
with other vendors to produce, batch and mail its confirmations and customer
reports. Stockwalk does not have long-term agreements with any of these third
parties, including Digital Island. As Stockwalk's business grows, it cannot be
assured that the technology and services it requires from third parties will be
available. A third party contractor's inability to meet Stockwalk's needs could
cause Stockwalk to be unable to timely and accurately process its customers'
transactions or maintain complete and accurate records of such transactions. In
such event, Stockwalk may be forced to slow the expansion of its customer base
or risk the loss of customers. Stockwalk's long-term objective is to develop its
own systems to replace certain of these functions provided by critical third
party vendors. However, for the next several years, Stockwalk will continue to
be dependent upon third party vendors, and there is no assurance that it will be
able to successfully develop and install internal systems to provide such
services, or that its systems will be cost-effective or as dependable as those
of its third party vendors.
18
<PAGE> 25
IF THE EQUIPMENT AND SYSTEMS STOCKWALK RELIES UPON FAIL OR PERFORM POORLY,
STOCKWALK'S CUSTOMERS COULD SUFFER DELAYS IN TRADING, WHICH COULD SUBJECT
STOCKWALK TO CLAIMS FOR THOSE LOSSES AND LOST ACCOUNTS
Stockwalk's online brokerage service receives and processes trade orders
principally through the Internet and the telephone. This method of trading
depends heavily on the integrity of the technology supporting it. Orders placed
from the close of the stock markets one day until the opening of the next
business day must be processed through the system in a short period of time
prior to the opening of the stock markets. During peak trading times,
Stockwalk's systems will be subject to heavy volume that could cause them to
operate at inadequate speeds or to fail. Any significant degradation or failure
of Stockwalk's systems or any other systems in the trading process (e.g., online
service providers, Stockwalk's trading engine, 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 result in substantial customer losses and
could subject Stockwalk to claims or litigation for those losses or to the loss
of dissatisfied customers.
STOCKWALK RELIES ON STRATEGIC ALLIANCES WITH THIRD PARTIES TO DEVELOP AND
MAINTAIN ITS PRIVATE LABEL CUSTOMER BASE AND CANNOT GUARANTEE THAT IT WILL BE
ABLE TO ATTRACT CUSTOMERS THROUGH THESE RELATIONSHIPS
A major facet of Stockwalk's growth strategy involves developing
relationships with online bank service providers, small to medium-sized
financial institutions and affinity groups and Internet portals. Stockwalk
relies on these third parties to market its services, and expects that a large
portion of its customer base will come from persons and entities that have
pre-existing customer or membership relationships with these entities and
organizations. If Stockwalk fails to maintain existing relationships with these
online bank service providers, small to medium-sized financial institutions or
affinity groups and Internet portals, or if Stockwalk fails to develop new
relationships, its ability to attract new customers may be impaired. Stockwalk
cannot assure you that its current relationships with these organizations will
continue to exist, nor can it assure you that it will be able to draw customers
out of these relationships. Stockwalk's inability to maintain such relationships
or to acquire customers from these relationships could adversely and materially
affect its business, financial condition and operating results.
THE EXTENSION OF CREDIT TO ITS CUSTOMERS IN MARGIN AND CASH TRANSACTIONS EXPOSES
STOCKWALK TO CREDIT LOSSES IF CUSTOMERS BREACH THEIR OBLIGATIONS TO STOCKWALK
Stockwalk 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. In addition, cash securities transactions subject Stockwalk to
credit risk during the period between the execution of a trade and the
settlement of such transaction by the customer.
If Stockwalk's customers and correspondent firms or a customer of a
correspondent firm, fail (a) to pay for their purchases, (b) to supply
securities that they have sold, (c) to repay funds they have borrowed, or (d) to
satisfy any other customer obligations, Stockwalk may incur losses. There is no
assurance that the customer or correspondent firm will satisfy obligations to
Stockwalk or that the customer's collateral will cover the losses. In such an
event, Stockwalk would be required to absorb the loss.
19
<PAGE> 26
Stockwalk's business is also subject to the risk that market declines will
reduce the value of customers' collateral below required coverage levels.
Stockwalk's agreements with margin and short account clients permit it to
liquidate or buy securities if the amount of its collateral becomes
insufficient. However, Stockwalk may be unable to liquidate or buy securities
for various reasons, including the following:
- the securities may not be actively traded;
- the securities might be a large block of securities that exceeds current
market demand; or
- trading might be halted in a security for various reasons, including the
issuance of a stop order.
As of March 31, 2000, customer margin loans owed to Stockwalk totaled
approximately $216.0 million. If the Steichen and Kinnard transactions had been
completed on March 31, 2000, customer margin loans owed to Stockwalk would have
totaled approximately $403.1 million.
STOCKWALK'S FAILURE TO COMPLY WITH NET CAPITAL REQUIREMENTS COULD RESULT IN
TERMINATION OF ITS BUSINESS
Securities broker-dealers are subject to stringent rules with respect to
the maintenance of specific levels of net capital. Net capital is the measure of
a broker-dealer's readily available liquid assets, reduced by its total
liabilities other than approved subordinated debt. Thus, as Stockwalk increases
the amount of margin credit extended to its customers, its net capital
requirements increase. Furthermore, Stockwalk will, following the closing of the
Kinnard and Steichen transactions, be subject to additional net capital
requirements for each of these new broker-dealer subsidiaries. If Stockwalk's
broker-dealer subsidiaries fail to maintain required net capital levels,
Stockwalk may be subject to suspension or revocation of its license, which could
ultimately lead to its liquidation. If the net capital rules are changed or
expanded, or if Stockwalk incurs an unusually large charge against net capital,
Stockwalk might be required to limit or discontinue those portions of its
business that require the intensive use of capital. A large operating loss or
charge against net capital could adversely affect Stockwalk's ability to expand
or even maintain its present levels of business. Failure to meet regulatory
minimum net capital requirements could require Stockwalk to cease business.
STOCKWALK MAY INCUR SIGNIFICANT LOSSES FROM ITS TRADING AND INVESTMENT
ACTIVITIES DUE TO MARKET FLUCTUATIONS AND VOLATILITY
Stockwalk generally maintains trading and investment positions in the fixed
income, currency and equity markets. To the extent that Stockwalk owns
securities (has long positions) in any of those markets, a downturn in those
markets could result in material losses from a decline in the value of those
long positions. Conversely, to the extent that Stockwalk has sold securities
that it does not own (has short positions) in any of those markets, an upturn in
those markets could expose Stockwalk to potentially unlimited losses as it
attempts to cover its short positions by acquiring assets in a rising market.
Stockwalk may from time-to-time have a trading strategy consisting of holding a
long position in one asset and a short position in another, from which it
expects to earn revenues based on changes in the relative value of the two
assets. If, however, the relative value of the two assets changes in a direction
or manner that Stockwalk did not anticipate, or against which
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it is not hedged, Stockwalk might realize a loss in those paired positions. In
addition, Stockwalk maintains trading positions that can be adversely affected
by the degree to which trading prices fluctuate over a particular period, in a
particular market, regardless of market levels.
STOCKWALK'S SUCCESS DEPENDS UPON RETAINING THE SERVICES OF KEY PERSONNEL
For the foreseeable future, Stockwalk will place substantial reliance upon
the personal efforts and abilities of Eldon C. Miller, Chairman of the Board and
Chief Executive Officer; David B. Johnson, Executive Vice President; and Todd W.
Miller, Chief Financial Officer. The loss of services of any of these
individuals likely would materially and adversely affect Stockwalk's business,
financial condition and operating results. In addition, following the closing of
the Steichen transaction, Stockwalk will be substantially dependent upon the
continued services of Messrs. John E. and John C. Feltl, the Chief Executive
Officer and Director of Corporate Finance, respectively, of Steichen. Stockwalk
cannot assure you that it will be able to retain these individuals or that it
would be able to find an appropriate replacement for any of these individuals if
the need should arise.
STOCKWALK CANNOT GUARANTEE THAT IT WILL BE ABLE TO RETAIN EXISTING PERSONNEL AND
ATTRACT AND RETAIN ADDITIONAL PERSONNEL TO SUPPORT THE GROWTH OF ITS BUSINESS
Stockwalk's success is dependent upon its ability to retain and hire highly
skilled personnel. As its business grows, it will need to hire many additional
employees. Stockwalk faces intense competition from other broker-dealers in
hiring experienced and licensed sales personnel. Additionally, Stockwalk faces a
tight and expensive employment market in general, particularly for skilled
programmers, customer service representatives and systems maintenance personnel.
Stockwalk cannot assure you that it will be able to retain such personnel or
hire and retain additional qualified and skilled personnel.
STOCKWALK'S MANAGEMENT EXERCISES SUBSTANTIAL CONTROL OVER ITS BUSINESS
As of July 21, 2000, Stockwalk's directors and executive officers
beneficially owned, in the aggregate, approximately 16,400,000 shares of
Stockwalk's common stock, representing approximately 76% of its common stock
outstanding. Eldon C. Miller, David B. Johnson, Paul R. Kuehn and Stanley D.
Rahm directly or indirectly own approximately 67% of Stockwalk's common stock.
Additionally, Stockwalk is obligated to issue approximately 4,300,000 shares of
its common stock to Steichen's shareholders upon completion of the transaction.
Such shares represent approximately 19.9% of the outstanding common stock of
Stockwalk. After completion of the Steichen transaction which Stockwalk expects
to close in early August 2000, Messrs. Miller, Johnson, Kuehn, Rahm, and John E.
and John C. Feltl will beneficially own approximately 69% of Stockwalk's
outstanding common stock, excluding up to 2,000,000 shares that may be issued to
Steichen's shareholders in the future. Accordingly, they will control matters
requiring approval of Stockwalk's shareholders, including the election of its
Board of Directors.
THE SEC AND THE NASD COULD REQUIRE STOCKWALK TO CHANGE OR DISCONTINUE ITS METHOD
OF COMPENSATING ENTITIES
Many of the third parties with which Stockwalk contracts to provide access
to its online trading services are not currently registered with the SEC as
broker-dealers under the Securities and Exchange Act of 1934, as amended. If
Stockwalk compensates these
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third parties so that they have a salesperson's stake in the securities
transactions, they may be considered to be acting as broker-dealers. Based on
prior NASD interpretations, Stockwalk believes it may compensate financial
institutions based on the value of the transactions. However, Stockwalk cannot
guarantee that the NASD will not change its current position on compensation of
financial institutions. Additionally, no definitive interpretations exist as to
compensation of non-financial institutions. Currently, Stockwalk compensates
such third parties based on the number of orders executed through their portals.
The possibility exists that a referral fee paid to a third party based on the
number of new customer accounts or orders executed could cause the third party
to be deemed a broker-dealer. In such case, Stockwalk may be required to
discontinue this marketing strategy.
Stockwalk believes that its current method of compensating Internet service
portals is consistent with the current position of the SEC as reflected in
no-action letters. However, the possibility exists that the SEC could determine
that Stockwalk's method of compensating portals does not meet the standards of
its no-action letters, or that the SEC could change its current policy and no
longer allow such compensation to non-broker-dealers. Any change in the SEC's
current policy could materially and adversely affect Stockwalk's business,
financial condition and operating results.
STOCKWALK CANNOT GUARANTEE THAT IT WILL BE FINANCIALLY OR OTHERWISE ABLE TO MAKE
NECESSARY ACQUISITIONS TO FULFILL ITS GROWTH STRATEGY OR THAT THE ACQUISITIONS
IT DOES MAKE WILL BE SUCCESSFUL
Stockwalk plans to make additional strategic acquisitions of complementary
brokerage and technology companies serving the securities industry to help its
business grow. Stockwalk cannot guarantee that it will have the financial
resources to make acquisitions when they become available, nor can it guarantee
that satisfactory acquisition alternatives will always be available. When
Stockwalk does make acquisitions, they may entail significant risks, including
possible difficulty in assimilating acquired operations and products, diverting
management's attention to other business concerns, amortizing acquired
intangible assets, and potentially losing key employees of acquired companies.
Stockwalk cannot guarantee that it will be able to successfully integrate any
operations, personnel, services or products that might be acquired in the
future, or that any such acquisitions will enhance its business, financial
condition or operating results.
STOCKWALK CANNOT GUARANTEE THE SUCCESS OF ITS ENCRYPTION TECHNOLOGY
The secure transmission of confidential information over public networks
places a significant barrier to online commerce and communication. Stockwalk
relies 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. Stockwalk cannot assure you that advances in computer capabilities,
new discoveries in the field of cryptography or other events or developments
will safeguard against a compromise or breach of technologies to be used by it
to protect customer transaction data. Any such compromise of Stockwalk's
security could adversely and materially affect its business, financial condition
and operating results.
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STOCKWALK'S CLEARING OPERATIONS EXPOSE IT TO ADDITIONAL POTENTIAL LOSSES
Stockwalk's clearing division provides clearing and execution services for
all of its brokerage businesses, as well as for its correspondent firms.
Clearing services include the confirmation, receipt, settlement and delivery
functions involved in securities transactions. As a clearing broker, Stockwalk's
clearing division also assumes direct responsibility for the possession and
control of customer securities and other assets, the clearance of customer
securities transactions and customer account record keeping. Stockwalk risks
losses if correspondent firms fail to reimburse Stockwalk if their customers
fail or refuse to perform their obligations to Stockwalk. Additionally, as a
self-clearing securities firm, Stockwalk is subject to substantially more
regulatory control and examination than brokers that rely on others to perform
those functions, such as many of its competitors. Errors in performing clearing
functions, including clerical and other errors related to the handling of funds
and securities held by Stockwalk on behalf of customers and introducing brokers,
could lead to civil penalties imposed by applicable authorities as well as
losses and liability in related lawsuits brought by customers and others.
Kinnard does not clear its own trades, and Stockwalk expects to provide
clearing services for Kinnard upon completion of the Kinnard merger. On the
other hand, Steichen has its own proprietary clearing system. Stockwalk intends
to evaluate the Steichen clearing system and make a determination whether that
clearing system can be incorporated into Stockwalk's system. In the meantime,
Steichen will continue to use its existing clearing system. Stockwalk cannot
provide any assurance that it will be able to successfully integrate the Kinnard
and Steichen businesses following completion of the mergers.
NEW LAWS REGARDING THE INTERNET MAY BE PASSED, WHICH COULD HINDER STOCKWALK'S
ABILITY TO DELIVER ITS ONLINE SERVICES
The legal and regulatory environment surrounding the Internet is uncertain
and rapidly changing. New laws and regulations, including securities laws and
regulations, could be difficult to comply with and could increase Stockwalk's
costs of doing business and prevent it from delivering its products and services
over the Internet, which could adversely affect its customer base and its
revenue. In addition to new regulations being adopted, existing laws may be
applied to the Internet. New and existing laws may cover issues that include
sales and other taxes, access charges, user privacy, characteristics and quality
of products and services, and other claims based on the nature and content of
the Internet.
STOCKWALK IS DEPENDENT ON INTERNET INFRASTRUCTURE IN CONDUCTING ITS BUSINESS
The successful implementation of Stockwalk's online business strategy will
depend in large part upon the continued development of Internet infrastructure,
such as a reliable network backbone with the necessary speed, data capacity and
security, and timely development of complementary products such as high speed
modems for providing reliable Internet access and services. Because global
commerce and online exchange of information on the Internet and other similar
open wide area networks are new and evolving, Stockwalk cannot predict with any
assurance whether the Internet will support increasing use. The Internet has
experienced, and is expected to continue to experience, significant growth in
the number of users and the amount of content. Stockwalk cannot assure you that
the Internet infrastructure will continue to be able to support the demands
placed on
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it. Furthermore, the performance or reliability of the Internet could be
adversely affected by this continued growth.
STOCKWALK'S BUSINESS PLAN WILL REQUIRE MORE CAPITAL, AND STOCKWALK CANNOT
GUARANTEE THAT IT WILL OBTAIN ADDITIONAL FINANCING TO MEET FUTURE CAPITAL NEEDS
Stockwalk's business plan will require additional capital. Each of its
broker-dealer subsidiaries is required to maintain certain minimum regulatory
capital amounts. Stockwalk has historically retained capital substantially in
excess of minimum regulatory requirements. To the extent these broker-dealers
hold customer funds, the capital requirement is much greater. In particular,
growth in Stockwalk's clearing and customer margin business will require
increasing levels of capital. Should the proportionate increase in customer
margin balances outpace earnings, Stockwalk may require additional capital. If
it issues equity securities to raise additional capital, the percentage
ownership of its shareholders will be reduced, shareholders may experience
dilution in net book value or earnings per share, or such equity securities may
have rights, preferences or privileges senior to holders of its common stock.
Stockwalk cannot assure you that additional financing will be available when
needed on terms favorable to it, if at all. If adequate funds are not available
on acceptable terms, Stockwalk may be forced to slow its growth plan and unable
to take advantage of future opportunities or respond to competitive pressures or
unanticipated requirements. Stockwalk's inability to do so could materially and
adversely affect its business, financial condition and operating results.
FUTURE SALES OF LARGE AMOUNTS OF STOCKWALK'S COMMON STOCK IN THE PUBLIC MARKET
COULD DEPRESS ITS STOCK PRICE
Sales of substantial amounts of Stockwalk's common stock in the public
market or the appearance that a large number of Stockwalk's shares are available
for sale, could adversely affect the market price for its common stock. During
the year ended March 31, 2000, Stockwalk sold approximately 2,200,000 shares of
its common stock in private transactions. These shares are restricted and may
not be sold except in conjunction with Rule 144 of the Securities and Exchange
Act.
As of July 21, 2000, Stockwalk had 21,582,148 shares of common stock
outstanding, of which 20,280,272 were sold in private transactions and are
restricted. Of these restricted shares, 17,974,770 shares are freely saleable,
but 15,848,469 shares are held by affiliates and, as a result, are subject to
the volume limitations set forth in Rule 144. An additional 440,000 shares
become freely saleable in August 2000 and an additional 1,864,527 shares become
freely saleable between December 2000 and March 2001. Stockwalk has received
lock-up agreements from substantially all of the holders of its restricted stock
pursuant to which the holders of such shares have agreed not to sell such shares
for between 90 and 120 days after the effective date of Stockwalk's convertible
note prospectus. Upon expiration of that time period, certain of those shares
could be sold under Rule 144.
Stockwalk has adopted two stock option plans and has reserved 1,525,000
shares of common stock for issuance under those plans. As of July 21, 2000,
options to purchase 1,182,288 shares of common stock were outstanding, of which
options to purchase 221,001 shares were exercisable. The shares issuable upon
exercise of outstanding options may be immediately sold as they are covered by
an effective registration statement under the Securities Act of 1933.
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In connection with private placements during the year ended March 2000,
Stockwalk issued warrants to purchase 223,619 shares of its common stock. The
warrants are immediately exercisable at an initial price of $10.00 per share. An
additional 124,278 warrants to purchase Stockwalk's common stock were issued in
conjunction with various prior year debt and equity financing activities. All
warrants are vested and expire between August 2000 and March 2003. Holders of
the warrants are entitled to register the underlying shares in connection with
certain registrations of shares proposed by Stockwalk, unless the shares may
otherwise be sold under Rule 144, or if the underwriter of an offering proposed
by Stockwalk is of the opinion that registration of such shares would have a
significant adverse effect on the offering proposed. The underwriters have made
such a determination in connection with Stockwalk's pending offering of
convertible notes. However, it is possible that these warrant shares may be sold
in a future offering or under Rule 144.
Upon completion of the Kinnard transaction, Stockwalk will issue
approximately 2,400,000 shares of its common stock to Kinnard shareholders,
subject to certain adjustments. These shares will be freely tradable, except for
shares issued to certain Kinnard affiliates. The approximately 4,300,000 shares
of Stockwalk's common stock initially issuable in connection with the Steichen
transaction and any contingent shares, including shares issuable upon exercise
of the warrant being issued in connection with the Steichen transaction and
shares issued upon conversion of John E. Feltl's retained capital, will be
restricted shares and generally may not be sold or transferred for one year
after issuance and then only in compliance with Rule 144 under the Securities
Act.
CERTAIN PROVISIONS OF MINNESOTA LAW, AND THE FACT THAT STOCKWALK IS AUTHORIZED
TO ISSUE PREFERRED STOCK, COULD AFFECT THE VOTING POWER AND RIGHTS OF HOLDERS OF
STOCKWALK'S COMMON STOCK
Stockwalk's authorized and unissued capital stock includes 50,000,000
undesignated shares. The Board of Directors, without any action by Stockwalk's
shareholders, may designate and issue the undesignated shares in such classes
and series as it deems appropriate, and to establish the rights, preferences and
privileges of such shares, including dividends, liquidation and voting rights.
No shares of preferred stock or other senior equity securities are currently
designated, and there is no current plan to designate or issue any such
securities. The issuance of such shares may deprive current shareholders of the
ability to sell their shares at a premium over any market price or adversely
affect the voting power and other rights of holders of Stockwalk common stock.
Stockwalk's Articles of Incorporation and Bylaws do not contain any
anti-takeover provisions. However, Stockwalk is subject to certain provisions of
the Minnesota Business Corporation Act which may inhibit certain changes of
control. These laws could have the effect of discouraging an attempt to acquire
control of Stockwalk's corporation and limit the price of its securities. See
"Description of Stockwalk Capital Stock -- Minnesota Anti-Takeover Law."
STOCKWALK DOES NOT EXPECT TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE
Stockwalk intends to retain all earnings in the foreseeable future for its
continued growth and, thus, does not expect to declare or pay any cash dividends
in the foreseeable future. Additionally, Stockwalk'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.
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THE SPECIAL MEETING
DATE, TIME AND PLACE
This proxy statement/prospectus is furnished to you in connection with the
solicitation of proxies by the Kinnard board of directors for the special
meeting of the shareholders to be held at the corporate offices of Kinnard on
the fifth floor of Kinnard Financial Center, located at 920 Second Avenue South,
Minneapolis, Minnesota on September 5, 2000 at 10:00 a.m., Minneapolis time.
This proxy statement/prospectus, the Notice of Special Meeting and the
accompanying form of proxy are first being mailed to Kinnard shareholders on or
about July 27, 2000.
PURPOSE OF THE SPECIAL MEETING
The purpose of the special meeting is to vote on the proposal to approve
the merger agreement under which shares of Stockwalk common stock and cash will
be exchanged for all of the outstanding shares of Kinnard common stock. You may
also be asked to vote upon a proposal to adjourn or postpone the special
meeting. We could use any adjournment or postponement for the purpose, among
other things, of allowing more time to solicit votes to approve the merger
agreement.
RECORD DATE; SHARES ENTITLED TO VOTE; QUORUM
The Kinnard board has fixed the close of business on July 21, 2000 as the
record date for the determination of shareholders entitled to notice of, and to
vote at, the special meeting. Only the record holders of Kinnard common stock on
that date are entitled to vote at the special meeting. On the record date, there
were 4,975,281 shares of Kinnard common stock outstanding and entitled to vote
at the special meeting held by approximately 175 shareholders of record.
The presence, in person or by proxy, of holders of a majority of the
outstanding shares of Kinnard common stock entitled to vote is necessary to
constitute a quorum for the transaction of business at the Kinnard special
meeting. As of the Kinnard record date, all executive officers and directors of
Kinnard, and Stockwalk, were entitled in the aggregate to vote approximately 27%
of the outstanding Kinnard common stock.
VOTING RIGHTS; ABSTENTIONS
Each holder of record of Kinnard common stock on the Kinnard record date is
entitled to cast one vote per share on each proposal being presented at the
Kinnard special meeting. The affirmative vote of the holders of a majority of
the outstanding shares of Kinnard common stock entitled to vote at the Kinnard
special meeting is required to approve the merger agreement.
Abstentions and broker non-votes will be included in the calculation of the
number of shares represented at the special meeting for purposes of determining
whether a quorum has been achieved. Neither abstentions nor broker non-votes are
counted in determining whether a matter has been approved. Therefore, since
approval of the merger agreement requires the affirmative vote of the holders of
at least a majority of the outstanding shares
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of Kinnard common stock, abstentions and broker non-votes will have the same
effect as a vote against the proposal being submitted to Kinnard shareholders.
KINNARD EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
Shares of Kinnard common stock owned by the Kinnard Employee Stock
Ownership Plan and Trust which are allocated to participant accounts may be
voted by the participant and shares not allocated will be voted by the trustees.
The trustees will furnish information to plan participants regarding their
voting rights.
VOTING AND REVOCATION OF PROXIES
Shares represented by all properly executed proxies for Kinnard common
stock received in time for the special meeting will be voted at the special
meeting in the manner specified by the holders of the proxies. Proxies which do
not contain voting instructions will be voted FOR approval of the proposal at
the special meeting.
The Kinnard board knows of no matter to be presented at the Kinnard special
meeting other than the proposal to vote on the approval of the merger agreement.
If any other matter is properly presented at the Kinnard special meeting for
consideration, such as consideration of a motion to adjourn the special meeting
to another time or place, including for the purposes of soliciting additional
proxies, the persons appointed as proxies will have discretion to vote on these
matters in accordance with their best judgment. Shares represented by proxies
which have been voted "against" approval of the merger agreement will not be
voted in respect of any motion made for adjournment of the special meeting for
the purposes of soliciting additional votes to approve the merger agreement.
The grant of a proxy on the enclosed form of proxy does not preclude a
shareholder from voting in person at the special meeting. In addition, you may
revoke any proxy you give at any time before the special meeting by delivering
to the Secretary of Kinnard on or before the business day prior to the special
meeting, or at the special meeting itself, a written statement revoking your
proxy or a duly executed proxy bearing a later date. Attendance at the special
meeting, without casting a vote, will not in and of itself constitute a
revocation of a proxy.
SOLICITATION OF PROXIES
Kinnard will bear the cost of the solicitation of proxies from its
shareholders. Kinnard and Stockwalk will share equally the cost of printing and
mailing this document and all regulatory filing fees in connection with the
filing of this document. In addition to solicitation by mail, the directors,
officers and employees of Kinnard may solicit proxies from Kinnard shareholders
by telephone or telegram, or in person, but will receive no additional
compensation for these services. Arrangements will also be made with brokerage
houses and other custodians, nominees and fiduciaries for the forwarding of
solicitation material to the beneficial owners of stock held of record by such
persons, and Kinnard will reimburse these custodians, nominees and fiduciaries
for their reasonable out-of-pocket expenses in connection with this
solicitation.
Norwest Bank Minnesota, N.A. will assist in the solicitation of proxies by
Kinnard and will receive customary fees for its services.
KINNARD SHAREHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXY
CARDS.
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RECOMMENDATION OF KINNARD BOARD
The Kinnard board believes that the merger agreement is in the best
interests of Kinnard's shareholders and has unanimously approved the merger
agreement. THE BOARD OF DIRECTORS OF KINNARD UNANIMOUSLY RECOMMENDS THAT YOU
VOTE "FOR" THE PROPOSAL TO APPROVE THE MERGER AGREEMENT. See "The
Merger -- Interests of Certain Persons in the Merger."
THE MERGER
GENERAL
This summary, together with the section of this proxy statement/prospectus
entitled "The Merger Agreement," describes all material terms of the merger and
the merger agreement. However, you should read carefully the complete text of
the merger agreement and other information that may be important to you. The
merger agreement is attached to this proxy statement/prospectus as Annex A and
is incorporated by reference into this document.
BACKGROUND OF THE MERGER
Kinnard, like other participants in the newly deregulated and consolidating
financial services industry, continually explores various strategies and the
possibility of business relationships and cooperative efforts with other
participants in the industry in an effort to enhance shareholder value.
On November 2, 1999, by letter delivered to members of the Kinnard board
and at a meeting with William F. Farley, the Chairman and Chief Executive
Officer of Kinnard, David B. Johnson, the President and a director of Stockwalk,
communicated Stockwalk's preliminary interest in acquiring Kinnard for $6.00 per
share in cash, contingent upon, among other things, obtaining financing and
conducting a due diligence review of Kinnard. On November 10, 1999, Kinnard's
board responded to Stockwalk's unsolicited expression of interest in a letter
from Mr. Farley to Mr. Johnson stating that Kinnard's board was not currently
considering a sale of Kinnard and that, in the board's view, the long-term value
of Kinnard substantially exceeded $6.00 per share. On November 15, 1999, Mr.
Johnson sent a letter to each of the directors of Kinnard stating that Stockwalk
"may well be willing to increase" its offer based upon gaining a better
understanding of Kinnard's assets through a review of non-public information.
At the regularly scheduled board meeting held on November 17, 1999,
Kinnard's management reviewed the substance of Stockwalk's November 15, 1999
letter. After discussion, the Kinnard board concurred with management's
recommendation that Kinnard continue to explore strategic alternatives to
enhance shareholder value. The board also directed Mr. Farley to communicate to
Mr. Johnson that no determination to sell Kinnard had been made and, in the
board's view, the long-term value of Kinnard to shareholders substantially
exceeded $6.00 per share.
As a result of its discussions at its November 17, 1999 meeting, the
Kinnard board formed a Special Committee to assist management in exploring and
making recommendations to the board with respect to strategic alternatives
available to Kinnard to enhance shareholder value.
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On December 6, 1999, Mr. Johnson telephoned Mr. Farley and other members of
the Kinnard board to advise them that Stockwalk was about to publicly announce a
tender offer to Kinnard shareholders at $7.50 per share. Later that day,
Stockwalk publicly announced its intention to commence the tender offer. On
December 8, 1999, Stockwalk filed with the SEC its Schedule 14D-1 with respect
to the tender offer.
On December 8, 1999, Kinnard issued a press release urging its shareholders
to take no action with respect to the tender offer until the Special Committee
had issued its recommendation. On December 8, 1999, the Special Committee
engaged U.S. Bancorp Piper Jaffray Inc. as its financial advisor to assist the
Special Committee in evaluating the unsolicited tender offer by Stockwalk and in
exploring other alternatives to enhance shareholder value.
On December 10, 1999, Kinnard received notice that an arbitration panel
appointed by the NASD had awarded Kinnard $9.1 million in compensatory damages,
$7.1 million in punitive damages and attorney fees of $349,719 in its claim
against Dain Rauscher Incorporated and certain individuals for employee raiding.
Later that day Kinnard issued a press release announcing the award. On December
14, 1999, Stockwalk announced that it was evaluating the impact, if any, of the
NASD award on its tender offer.
On December 16, 1999, the Special Committee met to consider Stockwalk's
tender offer. Following presentations by its legal and financial advisors, the
Special Committee concluded that the Stockwalk tender offer was inadequate,
conditional and without adequate assurance that financing would be available to
complete the tender. The Special Committee authorized the filing of a Schedule
14D-9 summarizing its analysis and determination with respect to the Stockwalk
tender offer. At the same meeting, the Special Committee instructed U.S. Bancorp
Piper Jaffray to begin the process of identifying potential buyers or strategic
partners for Kinnard.
On December 21, 1999, Kinnard filed its Schedule 14D-9 and issued a press
release announcing that the Special Committee had unanimously rejected
Stockwalk's unsolicited tender offer. The press release also announced that the
Special Committee would continue to work with U.S. Bancorp Piper Jaffray on
strategies to enhance shareholder value.
Beginning in late December, U.S. Bancorp Piper Jaffray coordinated the
preparation of a confidential memorandum describing Kinnard to be used in
soliciting indications of interest from parties interested in pursuing a
transaction with Kinnard.
On January 6, 2000, Stockwalk filed an amendment to its tender offer
stating the following amendments: (i) the offer price was increased from $7.50
per share to $8.00 per share, without interest, (ii) the "business combination
condition" was waived, and (iii) the expiration date of the tender offer was
extended from January 10, 2000 to January 31, 2000. Stockwalk also issued a
press release on January 6, 2000 announcing these amendments.
Upon receipt of the amendment, the Special Committee met telephonically on
January 7, 2000 to discuss the revised offer. Following presentations by its
legal and financial advisors, the Special Committee determined that the revised
offer was still inadequate, contingent and not in the best interests of Kinnard
or its shareholders. On January 11, 2000, Kinnard filed an amendment to its
Schedule 14D-9 announcing the Special Committee's rejection of the revised
tender offer.
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As a result of discussions between legal counsel for Kinnard and Stockwalk,
Stockwalk terminated its tender offer as of January 14, 2000, and announced its
intent to participate in the process initiated by the Special Committee to
explore strategic alternatives. On the same day, Kinnard entered into a
confidentiality and non-solicitation agreement with Stockwalk and thereafter
provided Stockwalk representatives with access to its confidential information.
On February 2, 2000, the Special Committee met to consider initial
indications of interest solicited by U.S. Bancorp Piper Jaffray. U.S. Bancorp
Piper Jaffray summarized the solicitation process and advised the Special
Committee that it had identified and contacted 34 potential investors and
received seven initial indications of interest. They reported that the three
highest proposals, including one from Stockwalk, nominally valued Kinnard common
stock in a range of $8.00 to $10.00 per share.
At a Special Committee meeting held on February 8, 2000, U.S. Bancorp Piper
Jaffray updated the Special Committee on the current status of the outstanding
proposals and explained that it had scheduled meetings with two bidders, one of
which was Stockwalk, in order to clarify aspects of their current proposals.
At a meeting on February 11, 2000, U.S. Bancorp Piper Jaffray reported to
the Special Committee on the outcome of a series of discussions with the
interested parties and its evaluation of Stockwalk's ability to finance a
transaction with Kinnard on a timely basis. The Special Committee also was
informed that one of the interested parties who had not initially submitted a
formal, written proposal had indicated that a written proposal would be
forthcoming.
At a meeting of the Kinnard board held on February 15, 2000, the Special
Committee updated the board on the events that had occurred with respect to its
exploration of strategic alternatives. U.S. Bancorp Piper Jaffray then
summarized the solicitation process conducted to date. Following the
presentations of the Special Committee and its financial advisor, the Kinnard
board decided that three of the seven preliminary indications of interest were
either too low or too speculative to pursue further. The Kinnard board then
discussed the remaining four proposals. U.S. Bancorp Piper Jaffray explained
that of the remaining four bidders, one had increased its initial proposal to
$10.00 per share, but required an exclusivity period within which to perform
confirmatory due diligence and to negotiate and execute a definitive transaction
agreement. The Special Committee determined that a limited exclusivity period
should be granted.
At a meeting held on March 7, 2000, the Special Committee was informed by
Kinnard management that the bidder who had been granted exclusivity had
withdrawn its proposal after concluding that Kinnard's business did not fit its
strategic objectives. The Special Committee decided to invite the remaining
three bidders, which included Stockwalk, to conduct a due diligence review of
the corporate, legal and financial records of Kinnard and to conduct management
interviews. During the period from March 8, 2000 through March 22, 2000, the
three bidders each visited Kinnard's data room, attended a management
presentation and conducted key employee interviews. By letter dated March 23,
2000, U.S. Bancorp Piper Jaffray asked the bidders to submit their revised
proposals and comments on a proposed form of merger agreement by the end of
business on April 3, 2000.
At a Special Committee meeting held on April 5, 2000, U.S. Bancorp Piper
Jaffray reported that two parties, not including Stockwalk, had submitted
revised proposals.
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<PAGE> 37
U.S. Bancorp Piper Jaffray reviewed the two proposals, which ranged from $6.75
per share in cash to $8.00 per share, consisting of approximately 80% in the
bidder's stock and 20% in cash, in each case plus a contingent payment based
upon the collection of the Dain NASD award. Kinnard management was asked by the
Special Committee to comment on the proposals submitted. Based on the reports
received from its financial and legal advisors and the recommendations of
Kinnard management, the Special Committee concluded that the financial aspects
of the current proposals were not acceptable in light of Kinnard's improved
financial performance. Following this decision, U.S. Bancorp Piper Jaffray was
instructed to inform the bidders that their proposals, as submitted, were below
the acceptable range and that it would be necessary to increase their proposals
in order to receive further consideration from the Special Committee. It was
also decided at that meeting that members of the Special Committee would arrange
a meeting with Stockwalk's management in order to determine whether Stockwalk
had an interest in increasing its initial proposal to a level that would warrant
further consideration by the Special Committee.
Following the April 5, 2000 meeting, three members of the Special Committee
met with the management of Stockwalk to explore Stockwalk's interest in
submitting a final proposal. Among the issues discussed was the possibility of a
revised proposal that included cash and an equity component in Stockwalk to
facilitate a tax-free transaction, the necessity of protecting Kinnard's
shareholders if an agreed-upon transaction with Stockwalk did not close, and the
need to verify the availability to Stockwalk of sufficient financing.
At a meeting of the Special Committee held on April 20, 2000, U.S. Bancorp
Piper Jaffray reported that the three bidders had each been contacted following
the April 5, 2000 meeting, and that, as a result of those conversations,
Stockwalk and one other bidder submitted revised proposals. The revised proposal
received from Stockwalk consisted of $6.00 in cash plus .30 of a share of
Stockwalk common stock. The revised proposal from the other bidder increased the
consideration from $6.75 in cash, with a contingency payment if the Dain
arbitration award was collected, to $8.25 in cash, contingent on receipt of a
"favorable decision" from the District Court regarding the Dain arbitration
matter.
The consensus of the Special Committee members was that neither of the
proposals presented was acceptable and that prior to making a decision with
respect to the next step in the process it would be useful to solicit the views
of the other Kinnard directors. Accordingly, the Special Committee meeting was
adjourned so that a meeting of the full board could be convened.
At the Kinnard board meeting convened immediately following the adjournment
of the April 20, 2000 meeting of the Special Committee, the Chairman of the
Special Committee summarized the status of the sale process and reported on the
meeting between representatives of the Special Committee and Stockwalk
management. He then summarized for the Kinnard board the major financial terms
of each proposal. After a discussion of the alternatives presented, the Kinnard
board reached a consensus to pursue a transaction with the bidder who had
submitted the modified cash proposal, subject to clarification of the "favorable
ruling" contingency.
On April 25, 2000, a meeting of the Kinnard board was convened to consider
a further revised proposal from the third remaining bidder. A copy of the
modified proposal was circulated to the Kinnard board members for review at the
meeting and reflected an
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<PAGE> 38
increase in the base merger consideration from $8.00 to $8.60 per share,
consisting of approximately 80% in the bidder's stock and 20% in cash, plus a
contingent payment based upon the collection of the Dain NASD award. After
discussion of the modified proposal, the Kinnard board concluded that it
represented value for Kinnard shareholders superior to the other proposal.
At a meeting held on April 27, 2000, U.S. Bancorp Piper Jaffray reviewed
with the board the terms of a modified proposal from Stockwalk, consisting of
$6.00 cash plus one-half of a share of Stockwalk common stock. U.S. Bancorp
Piper Jaffray then compared the financial terms of the proposals from Stockwalk
and the other bidder. The Kinnard board instructed U.S. Bancorp Piper Jaffray to
contact Stockwalk in order to obtain clarifications with respect to issues
concerning employee retention and the proposed break-up fee.
A meeting of the Kinnard board was held on May 8, 2000, for the purpose of
reviewing the two proposals. After presentations by its legal and financial
advisors, the board reached a unanimous decision to pursue a transaction with
Stockwalk.
During the period from May 9 through June 5, 2000, the parties conducted
confirmatory due diligence and negotiated the final terms of the merger
agreement.
At a special meeting held on June 5, 2000, the Kinnard Board reviewed in
detail the material terms of the proposed merger and received reports from its
financial, legal and accounting advisors as to the results of their respective
due diligence investigations. The definitive merger agreement, copies of which
were circulated to the directors in advance of this meeting, was reviewed during
the meeting. Representatives of U.S. Bancorp Piper Jaffray then briefed the
Kinnard directors on the sale process that had been conducted and the bases for
its fairness opinion, which was delivered at the meeting. Following
presentations by Kinnard's legal, financial and accounting advisors, the Kinnard
board determined that the merger was in the best interests of its shareholders
and unanimously voted its approval of the merger and the terms of the merger
agreement. Immediately following the adjournment of the Kinnard board meeting,
Kinnard and Stockwalk executed the merger agreement, and the parties announced
the proposed business combination on the morning of June 6, 2000.
KINNARD'S REASONS FOR THE MERGER AND BOARD RECOMMENDATION
The Kinnard board of directors unanimously approved the merger agreement
and the transactions contemplated in the merger agreement and directed that the
merger agreement be submitted to the Kinnard shareholders for adoption at the
special meeting.
The decision of the Kinnard board to enter into the merger agreement was
the result of its careful and thorough consideration of a range of strategic
alternatives in pursuit of its strategy to enhance shareholder value. In
reaching its decision to approve the merger agreement and the transactions
contemplated in the merger agreement, the Kinnard board consulted with Kinnard's
management, as well as its legal counsel and its financial advisors, and
considered a number of factors, including the following:
- the feasibility and possible effect on shareholder value of strategic
alternatives to the merger, including continuing to operate Kinnard as an
independent entity and the risks associated with doing so;
- the sale process conducted was extensive, comprehensive and managed by
independent financial and legal advisors;
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<PAGE> 39
- the financial and other terms and conditions of the merger and the merger
agreement;
- the belief that increasingly competitive market conditions will favor
larger broker-dealers, and that Kinnard will be able to compete more
effectively in the securities industry as a result of the merger;
- the scale, scope and strength of the operations of the combined company
and the impact on its ability to attract and retain employees given the
competitive hiring practices within the investment banking industry;
- the historical market price of, and historical trading activity in,
Kinnard common stock, particularly the fact that the merger will enable
the shareholders of Kinnard to realize a premium (assuming a $9.00 value
for Stockwalk common stock, the closing price per share on June 5, 2000,
the last trading day prior to the public announcement of the merger) of
approximately 38% over the closing price of Kinnard common stock on June
5, 2000, a premium of approximately 33% over the average closing price of
Kinnard common stock for the three months during which such securities
traded prior to June 5, 2000, and a premium of approximately 87% over the
closing price of Kinnard common stock on December 3, 1999, the last
trading date prior to the public announcement of Stockwalk's tender
offer;
- the written opinion, dated June 5, 2000, to the board, of U.S. Bancorp
Piper Jaffray to the effect that, as of the that date and based upon and
subject to the matters described in the opinion, the per share
consideration (equal to $6.00 in cash and one-half of a share of
Stockwalk common stock) which is to be received in the merger by the
Kinnard holders other than Stockwalk and its affiliates is fair, from a
financial point of view, to the Kinnard shareholders. U.S. Bancorp Piper
Jaffray confirmed that opinion in an updated written opinion dated July
24, 2000. The full text of U.S. Bancorp Piper Jaffray's updated opinion,
which sets forth the assumptions made, procedures followed, matters
considered and limitations on the review undertaken by U.S. Bancorp Piper
Jaffray is attached as Annex B to this proxy statement/prospectus;
- the obligations of Stockwalk to consummate the merger pursuant to the
terms of the merger agreement are not conditioned upon financing;
- retention arrangements with key Kinnard employees in connection with the
merger;
- the availability of a tax opinion from Kinnard's accountants to the
effect that the merger will qualify as a reorganization within the
meaning of Section 368(a) of the U.S. tax code;
- the fact that the risk associated with the collection of the Dain
arbitration award does not affect the amount of the merger consideration
to be received by the Kinnard shareholders upon consummation of the
merger;
- the terms of the merger agreement are unlikely to discourage other third
parties from making bona fide proposals to acquire Kinnard subsequent to
signing the merger agreement and, if any proposal was made, the board, in
the exercise of its fiduciary duties, could determine to provide
information to and engage in negotiations with any other third party;
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<PAGE> 40
- the provisions of the merger agreement that permit the board to furnish
non-public information to, or engage in discussions with, any person in
response to an unsolicited written acquisition proposal that the Board
has determined in good faith to be more favorable to Kinnard's
shareholder than the merger after following certain procedures detailed
in the merger agreement;
- the provisions of the merger agreement that permit the board to terminate
the merger agreement and pay Stockwalk a termination fee of $1,000,000 in
the event that the board decides to accept an acquisition proposal from a
third party;
- the fact that $1,000,000 has been deposited in escrow by Stockwalk for
the benefit of Kinnard in the event the merger agreement is terminated
upon the occurrence of certain breaches by Stockwalk and that the escrow
is not a limitation of any remedy available to Kinnard for breach of the
merger agreement by Stockwalk; and
- the fact that shareholders of Kinnard who do not support the merger, or
are dissatisfied with the merger consideration, are able to obtain "fair
value" for their shares if they properly exercise their rights under the
Minnesota Business Corporation Act.
The Kinnard board also considered a number of potentially negative factors
in its deliberations concerning the merger, including the following:
- the risk that the merger might not be completed;
- the possibility of business deterioration associated with the integration
of the operations of the two companies, and the risk that, despite
retention efforts by Stockwalk, key management and technical personnel of
Kinnard might not continue with the combined company;
- complications associated with the simultaneous integration of the
businesses of Kinnard and Steichen; and
- the possibility that the value of Kinnard to its existing shareholders as
an independent entity will increase over time due either to further
industry consolidation or better than anticipated future operating
results.
After carefully evaluating these factors, both positive and negative, the
board of directors of Kinnard determined that the merger is fair to and in the
best interests of Kinnard shareholders and approved the merger agreement and the
merger. The Kinnard board recommends that Kinnard shareholders approve the
merger agreement and vote in favor of the merger.
The foregoing discussion of factors considered by the Kinnard board is not
intended to be exhaustive, but includes all material factors considered by the
Kinnard board. In reaching its decision with respect to the merger, the Kinnard
board did not find it practicable to, and did not, quantify or otherwise attempt
to assign relative weights to the foregoing factors in reaching their
determinations. In addition, individual members of the Kinnard board may have
given differing weights to different factors. The Kinnard board views its
recommendation as being based upon its judgment, in light of the totality of the
information presented and considered, as summarized in the reasons for the
merger described above, and the overall effect of the merger on Kinnard
shareholders compared to continuing the business of the Kinnard in the ordinary
course or seeking other potential parties to effect a business combination.
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<PAGE> 41
OPINION OF KINNARD'S FINANCIAL ADVISOR
Pursuant to an engagement letter dated December 8, 1999, Kinnard retained
U.S. Bancorp Piper Jaffray to provide strategic investment banking advice and
services to the special committee of Kinnard's board of directors and to act as
its exclusive financial advisor in response to Stockwalk's December 8, 1999,
tender offer for Kinnard's outstanding stock. Under the terms of the engagement,
U.S. Bancorp Piper Jaffray's services included assisting the special committee
in reviewing and analyzing certain strategic alternatives, and, upon request,
assisting in discussions and negotiations leading towards a transaction to
enhance shareholder value and rendering an opinion to the special committee as
to the fairness, from a financial point of view, of the consideration to be
received by Kinnard's shareholders in a sale transaction.
At a meeting of Kinnard's board of directors held on June 5, 2000, U.S.
Bancorp Piper Jaffray delivered its opinion that, as of that date and based on
and subject to the assumptions, factors and limitations set forth in the written
opinion and described below, the consideration proposed to be received by
Kinnard shareholders (other than Stockwalk and its affiliates) in the merger was
fair, from a financial point of view, to those shareholders. U.S. Bancorp Piper
Jaffray has confirmed that opinion in an updated written opinion dated July 24,
2000. A copy of U.S. Bancorp Piper Jaffray's updated opinion is attached as
Annex B to this proxy statement/prospectus and is incorporated in this proxy
statement/prospectus by reference. The June 5, 2000 opinion of U.S. Bancorp
Piper Jaffray is substantially the same as the opinion attached as Annex B.
Although U.S. Bancorp Piper Jaffray rendered its opinion and provided
certain financial analyses to Kinnard's board of directors, U.S. Bancorp Piper
Jaffray was not requested to and did not make any recommendation to the board as
to the specific form or amount of the consideration to be received by Kinnard
shareholders in the proposed merger with Stockwalk, which were determined
through negotiation between Kinnard and Stockwalk. U.S. Bancorp Piper Jaffray's
written opinion, which was delivered for use and considered by Kinnard's board
of directors, is directed only to the fairness, from a financial point of view,
of the consideration to be received by Kinnard shareholders (other than
Stockwalk and its affiliates) in the proposed merger. It does not address the
value of a share of Kinnard common stock or Stockwalk common stock, does not
address Kinnard's underlying business decision to participate in the merger and
does not constitute a recommendation to any Kinnard shareholder as to how a
shareholder should vote with respect to the merger.
In arriving at its opinion, U.S. Bancorp Piper Jaffray reviewed:
- the merger agreement and other documents related to the merger;
- publicly available financial statements and other information concerning
Kinnard and Stockwalk;
- internal financial statements and other financial and operating data
concerning Kinnard and Stockwalk furnished by the management of each
company; and
- financial projections prepared by the management of Kinnard and
Stockwalk.
In addition, U.S. Bancorp Piper Jaffray visited the corporate offices of
Kinnard and Stockwalk and conducted discussions with management of both
companies.
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<PAGE> 42
In delivering its June 5, 2000 opinion to Kinnard's board of directors,
U.S. Bancorp Piper Jaffray prepared and delivered to the board written materials
containing various analyses and other information material to the opinion. The
following is a summary of those analyses.
Implied Consideration. Assuming the unadjusted consideration set forth in
the merger agreement of one-half of a share of Stockwalk common stock and $6.00
in cash to be exchanged for each share of Kinnard common stock, as well as
capitalization data provided by Kinnard's management and the closing price of
Stockwalk common stock on June 2, 2000, of $8.75, U.S. Bancorp Piper Jaffray
calculated the aggregate implied equity value of the stock and cash
consideration to be exchanged in the merger for Kinnard common stock to be
approximately $55.5 million, or $10.38 per outstanding share of Kinnard common
stock.
Comparable Company Analysis for Stockwalk. U.S. Bancorp Piper Jaffray
compared financial information and valuation ratios relating to Stockwalk to
corresponding data and ratios for a group of publicly traded, traditional
broker-dealers and a group of publicly traded, online broker-dealers. In
choosing the group of traditional broker-dealers, U.S. Bancorp Piper Jaffray
selected broker-dealers with a retail presence, a regional focus and publicly
available earnings estimates. In choosing the group of online broker-dealers,
U.S. Bancorp Piper Jaffray selected online broker-dealers that had total annual
revenues greater than $100 million. The analysis produced multiples, based on
Stockwalk's closing stock price of $8.75 on June 2, 2000, of selected valuation
data as follows:
<TABLE>
<CAPTION>
COMPARABLE COMPANIES
-----------------------------------------------------------------
TRADITIONAL ONLINE
BROKER DEALERS BROKER DEALERS
------------------------------ ---------------------------------
STOCKWALK MEAN MEDIAN RANGE MEAN MEDIAN RANGE
--------- ----- ------ ------------- ------ ------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Latest 12 month price to
earnings ratio (x)..... NM 12.64 9.69 3.55 to 41.67 29.11 18.56 8.67 to 70.67
Projected 2000 price to
earnings ratio (x)..... NA 7.96 8.91 3.81 to 9.82 117.33 36.75 12.07 to 459.38
Projected 2001 price to
earnings ratio (x)..... NA 8.27 8.85 4.58 to 10.51 27.03 16.00 14.81 to 65.63
Market capitalization to
latest 12 month revenue
(x).................... 2.66 0.63 0.56 0.41 to 1.02 2.60 2.62 0.53 to 4.72
Market capitalization to
tangible book value
(x).................... 13.20 1.60 1.71 1.07 to 2.45 3.81 2.44 0.69 to 8.01
Market capitalization to
book value (x)......... 7.71 1.50 1.29 0.90 to 2.45 3.75 2.43 0.69 to 7.68
</TABLE>
Pro Forma Analysis. U.S. Bancorp Piper Jaffray analyzed the pro forma
impact of the merger on Stockwalk's projected earnings, book value and tangible
book value per share under two scenarios, using projections provided by
Stockwalk management, among other data. In the first, more conservative,
scenario, U.S. Bancorp Piper Jaffray assumed the Steichen transaction was not
consummated by Stockwalk, the proposed offering by Stockwalk of convertible
subordinated notes was not completed and the online brokerage strategy was not
realized pursuant to Stockwalk's projection model. Under the second, more
optimistic, scenario, U.S. Bancorp Piper Jaffray assumed the Steichen
transaction was consummated by Stockwalk, the proposed offering by Stockwalk of
convertible subordinated notes was completed and the online brokerage strategy
was realized pursuant to Stockwalk's projection model. Under each of these
scenarios, U.S. Bancorp Piper
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<PAGE> 43
Jaffray analyzed the pro forma impact of the Kinnard merger and certain other
pro forma changes, including synergies anticipated by Stockwalk, with and
without realization of a net amount of the Dain award of $9.9 million. U.S.
Bancorp Piper Jaffray determined that the merger could be:
- accretive to 2001 and 2002 earnings, book value and tangible book value
per share under the conservative analysis, including the Dain award;
- accretive to 2001 and 2002 earnings and book value per share, and
dilutive to 2001 and 2002 tangible book value per share under the
conservative analysis, excluding the Dain award;
- accretive to 2001 and 2002 earnings, book value and tangible book value
per share under the optimistic analysis, including the Dain award; and
- accretive to 2001 and 2002 earnings and book value per share, and
dilutive to 2001 and 2002 tangible book value per share under the
optimistic analysis, excluding the Dain award.
Selected Transaction Analysis. U.S. Bancorp Piper Jaffray reviewed merger
and acquisition transactions involving companies deemed comparable to Kinnard.
It selected these transactions by searching SEC filings, public company
disclosures, press releases, industry and popular press reports, databases and
other sources for transactions
- that were announced between January 1, 1997, and June 2, 2000,
- involved an acquisition of all of a broker-dealer target's outstanding
common stock, and
- had a transaction value in the range of $15 million to $300 million.
Specifically, U.S. Bancorp Piper Jaffray analyzed transactions that
satisfied the criteria, and compared resulting selected valuation multiples to
comparable multiples for Kinnard derived from the implied value proposed to be
paid in the merger, as calculated above. U.S. Bancorp Piper Jaffray's analysis
yielded the following results:
<TABLE>
<CAPTION>
COMPARABLE MULTIPLES
------------------------------
KINNARD MEAN MEDIAN RANGE
------- ----- ------ -------------
<S> <C> <C> <C> <C>
Transaction value to latest 12 month
net income (x).................... 14.36 18.41 13.96 5.10 to 73.33
Transaction value to book value
(x)............................... 1.80 3.59 2.83 1.23 to 9.75
Transaction value to latest 12 month
revenue (x)....................... 0.89 1.32 1.16 0.81 to 2.53
</TABLE>
The multiples for Kinnard were calculated including the impact of Kinnard's
exercise of a warrant issued by Ancor Communications, Inc., which accounted for
$2.8 million of Kinnard's net income and $5.7 million of Kinnard's revenue in
1999.
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<PAGE> 44
Premium Analysis. U.S. Bancorp Piper Jaffray reviewed publicly available
information for selected, completed acquisition transactions fulfilling the
criteria used for the comparable transactions analysis described above, but
including transactions with a value greater than $300 million. The table below
compares the premium in these transactions to the premium to Kinnard's
shareholders based on the implied value of the merger.
<TABLE>
<CAPTION>
IMPLIED PREMIUM (DISCOUNT)
------------------------------------------
COMPARABLE TRANSACTIONS
--------------------------------
KINNARD MEAN MEDIAN RANGE
------- ----- ------ ---------------
<S> <C> <C> <C> <C>
One day prior to announcement
(%)............................. 40.68 15.62 16.69 (5.88) to 27.39
30 days prior to announcement
(%)............................. 33.87 32.45 31.97 4.92 to 56.02
60 days prior to announcement
(%)............................. 45.61 30.34 35.37 (5.19) to 50.00
</TABLE>
The premium to Kinnard shareholders based on the implied value of the
merger in relation to Kinnard's common stock price 30 and 60 days prior to
announcement of Stockwalk's December 1999 tender offer is 93.12% and 140.70%,
respectively.
Discounted Dividend Analysis. U.S. Bancorp Piper Jaffray performed a
discounted dividend stream analysis for Kinnard, in which it calculated the
present value of Kinnard's future hypothetical dividend stream through 2003, and
a terminal value for Kinnard in 2003 based on a multiple of net income. The
analysis was performed on Kinnard both with and without the Dain award included
in Kinnard's assets and available for cash distribution. In the analysis, U.S.
Bancorp Piper Jaffray used projected financial statements prepared by Kinnard's
management and a sensitivity analysis based upon a variance in net margin in
2003 from 4.0% to 10.0%, a range of discount rates of 16% to 22%, a range of
terminal value net income multiples of 9.0x to 13.0x, and assumed that Kinnard
maintains an equity level of 35%, subject to the amount of liquid assets that
are available for distribution. This analysis yielded the following results:
<TABLE>
<CAPTION>
SENSITIVITY
ANALYSIS
MANAGEMENT BASED UPON
PROJECTIONS 2003 NET MARGIN
--------------- ----------------
LOW HIGH LOW HIGH
------ ------ ------ -------
<S> <C> <C> <C> <C>
Without Dain award.................... $ 9.29 $13.44 $6.45 $15.51
With Dain award....................... $10.82 $15.05 $7.98 $17.12
</TABLE>
Comparable Company Analysis for Kinnard. U.S. Bancorp Piper Jaffray
compared financial information and valuation ratios relating to Kinnard to
corresponding data and ratios for a group of publicly traded broker-dealers. In
choosing the group of broker-dealers, U.S. Bancorp Piper Jaffray selected
traditional broker-dealers with a regional focus, a retail presence and publicly
available earnings estimates. The analysis produced
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<PAGE> 45
multiples, based upon Kinnard's closing stock price of $7.38 on June 2, 2000, of
selected valuation data as follows:
<TABLE>
<CAPTION>
COMPARABLE COMPANIES
------------------------------
KINNARD MEAN MEDIAN RANGE
------- ----- ------ -------------
<S> <C> <C> <C> <C>
Latest 12 month price to earnings
ratio (x)......................... 9.83 12.64 9.69 3.55 to 41.67
Projected 2000 price to earnings
ratio (x)......................... NA 7.96 8.91 3.81 to 9.82
Projected 2001 price to earnings
ratio (x)......................... NA 8.27 8.85 4.58 to 10.51
Market capitalization to latest 12
month revenue (x)................. 0.58 0.63 0.56 0.41 to 1.02
Market capitalization to tangible
book
value (x)......................... 1.17 1.60 1.71 1.07 to 2.45
Market capitalization to book value
(x)............................... 1.17 1.50 1.29 0.90 to 2.45
</TABLE>
In reaching its conclusion as to the fairness from a financial point of
view to Kinnard's shareholders (other than Stockwalk and its affiliates) of the
merger consideration, U.S. Bancorp Piper Jaffray did not rely on any single
analysis or factor described above, assign relative weights to the analyses or
factors considered by it, or make any conclusion as to how the results of any
given analysis, taken alone, supported its opinion. The preparation of a
fairness opinion is a complex process and not necessarily susceptible to partial
analysis or summary description. U.S. Bancorp Piper Jaffray believes that its
analyses must be considered as a whole and that the selection of portions of its
analyses and of the factors considered by it, without considering all of the
factors and analyses, would create a misleading view of the processes underlying
its opinion.
The analyses of U.S. Bancorp Piper Jaffray are not necessarily indicative
of actual values or future results, which may be significantly more or less
favorable than suggested by the analyses. Analyses relating to the value of
companies do not purport to be appraisals or valuations or necessarily reflect
the prices at which businesses or securities may actually be sold. No company or
transaction used in any analysis for purposes of comparison is identical to
Kinnard, Stockwalk or the merger.
In addition, in performing its analyses, U.S. Bancorp Piper Jaffray made
numerous assumptions with respect to industry performance, general business,
economic, market and financial conditions and other matters, many of which are
beyond the control of the parties to the merger and U.S. Bancorp Piper Jaffray.
Accordingly, an analysis of the results of the comparisons is not mathematical;
rather, it involves complex considerations and judgments about differences in
the companies to which Kinnard and Stockwalk were compared and other factors
that could affect the public trading value of the companies' common stock.
Because these analyses are inherently subject to uncertainty, being based upon
numerous factors and events beyond the control of the parties to the merger and
U.S. Bancorp Piper Jaffray, neither the parties nor U.S. Bancorp Piper Jaffray
assumes responsibility if future results are materially different from those
forecasted.
For purposes of its opinion, U.S. Bancorp Piper Jaffray relied upon and
assumed the accuracy, completeness and fairness of the financial statements and
other information provided to it by Kinnard and Stockwalk or otherwise made
available to it and did not assume responsibility for independently verifying
that information. Information prepared for financial planning purposes was not
prepared with the expectation of public disclosure.
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<PAGE> 46
U.S. Bancorp Piper Jaffray relied upon assurances from management of Kinnard and
Stockwalk that the information provided to it by the respective companies was
prepared on a reasonable basis, according to industry practice, and, with
respect to financial planning data, reflected the best currently available
estimates and judgment of management of Kinnard and Stockwalk, and that such
management was not aware of any information or facts that would make the
information provided to U.S. Bancorp Piper Jaffray incomplete or misleading.
In arriving at its opinion, U.S. Bancorp Piper Jaffray did not perform and
was not furnished with any appraisals or valuations of any specific assets or
liabilities of Kinnard or Stockwalk. U.S. Bancorp Piper Jaffray analyzed each of
Kinnard and Stockwalk as a going concern and, accordingly, expressed no opinion
as to their respective liquidation values. U.S. Bancorp Piper Jaffray expressed
no opinion as to the price at which shares of Kinnard or Stockwalk common stock
have traded or at which the shares of Kinnard, Stockwalk or the combined company
may trade at any future time. The opinion is based on information available to
U.S. Bancorp Piper Jaffray and the facts and circumstances as they existed and
were subject to evaluation on the opinion date. Events occurring after that date
could materially affect the assumptions used in preparing the opinion. U.S.
Bancorp Piper Jaffray has not undertaken to and is not obliged to affirm or
revise its opinion or otherwise comment on any events occurring after the date
its opinion was given.
U.S. Bancorp Piper Jaffray, as a customary part of its investment banking
business, evaluates businesses and their securities in connection with mergers
and acquisitions, underwritings and secondary distributions of securities,
private placements and valuations for estate, corporate and other purposes. The
special committee selected U.S. Bancorp Piper Jaffray because of its expertise,
reputation and familiarity with Kinnard and the investment banking and brokerage
industry in general. In the ordinary course of business, U.S. Bancorp Piper
Jaffray makes a market in Kinnard's common stock. In the ordinary course of its
business, U.S. Bancorp Piper Jaffray and its affiliates may also actively trade
securities of Kinnard or Stockwalk for their own accounts or the accounts of
their customers and, accordingly, may at any time hold a long or short position
in those securities.
Under the terms of the December 8, 1999 engagement letter, Kinnard paid
U.S. Bancorp Piper Jaffray a $50,000 cash retainer upon execution of the
engagement letter, and has agreed to pay U.S. Bancorp Piper Jaffray a cash fee
equal to 1.75% of the total sale price for its financial advisory services.
Kinnard has also paid U.S. Bancorp Piper Jaffray a cash fee of $250,000 in
connection with rendering its June 5, 2000 opinion. This amount, together with
the $50,000 retainer, will be credited against payment of the financial advisory
services fee. U.S. Bancorp Piper Jaffray will also be paid $25,000 in connection
with the July 24, 2000 update to its opinion. The engagement letter further
provides that Kinnard will reimburse U.S. Bancorp Piper Jaffray for its
reasonable out-of-pocket expenses, including fees and disbursements of counsel
(but in an amount not to exceed $25,000 without the prior consent of the
chairman of the special committee) and will indemnify U.S. Bancorp Piper Jaffray
and related parties from and against certain liabilities, including liabilities
under the federal securities laws, arising out of or in connection with the
engagement of U.S. Bancorp Piper Jaffray by the special committee.
STOCKWALK REASONS FOR THE MERGER
The decision of the Stockwalk board of directors and management to pursue
the acquisition of Kinnard, which resulted in the decision of Stockwalk and
Kinnard to enter
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into the merger agreement, was made after careful consideration of Kinnard's
business and the effect of the combination of the Stockwalk and Kinnard full
service brokerage businesses on the future prospects of Stockwalk. In reaching
its decision to approve the merger and the merger agreement, the Stockwalk board
consulted with its management, legal counsel and financial advisors. The board
considered a number of factors, including the following:
- rapid changes in the financial services business are leading to
consolidation among full service brokerage firms in order to remain
competitive;
- economies of scale, particularly savings that could be generated by the
combination of two firms in the same market serving similar customers,
and the opportunity to realize substantial cost savings from converting
Kinnard's clearing business to Stockwalk's clearing platform;
- Kinnard and Stockwalk have complementary public finance departments which
will be able to offer a broader array of investment products to customers
and provide better distribution for public clients;
- the financial terms and conditions of the merger, as negotiated, fairly
valued the business of Kinnard;
- the opportunity to combine the business of Kinnard with Steichen's and
Stockwalk's historical businesses significantly strengthens the
operations of the combined companies and will affect each company's
ability to retain and attract employees and to compete more effectively
in the securities business;
- the impact of the Kinnard and Steichen customer base on the development
of Stockwalk's online and discount brokerage business;
- the cash position of Kinnard;
- the fact that a significant number of Kinnard employees are also
shareholders and will become shareholders of Stockwalk after the merger;
and
- advice from advisors with respect to the terms and conditions of the
merger.
Stockwalk's board of directors did not assign any specific or relative
weight to the factors it considered, including those outlined above. The
Stockwalk board evaluated the merger based on the totality of the information
and factors that it considered and determined that the merger is in the best
interest of Stockwalk and its shareholders and, therefore, unanimously approved
the merger.
CONVERSION OF KINNARD COMMON STOCK
When the merger is complete, each share of Kinnard common stock will
automatically be converted into the right to receive $6.00 in cash, plus
additional cash for any fractional shares, without interest, and a number of
shares of Stockwalk common stock equal to the exchange ratio. The exchange ratio
will depend on the "average daily price" of Stockwalk common stock, which is a
term used in the merger agreement to describe the average closing price of
Stockwalk common stock during a measurement period consisting of the 20
consecutive full trading days on which Stockwalk common stock is traded ending
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on the trading day before all of the closing conditions of the merger are met.
The exchange ratio will be calculated as follows:
- if the average daily price is less than $9.00, the exchange ratio will
equal $4.50 divided by the average daily price, in which case you will
receive a number of shares of Stockwalk common stock with a nominal value
equal to $4.50 based on the average daily price for each share of Kinnard
common stock;
- if the average daily price is between $9.00 and $15.00, inclusive, the
exchange ratio will equal .5, in which case you will receive one-half of
a share of Stockwalk common stock for each share of Kinnard common stock;
- if the average daily price is greater than $15.00, the exchange ratio
will equal $7.50 divided by the average daily price, in which case you
will receive a number of shares of Stockwalk common stock with a nominal
value equal to $7.50 based on the average daily price for each share of
Kinnard common stock.
As a result, as long as the average closing price is between $9.00 and
$15.00, inclusive, the merger consideration will be fixed at .5 of a share of
Stockwalk common stock and $6.00 in cash for each share of Kinnard common stock.
Outside of this range, the value of the stock portion of the merger
consideration will fluctuate with the price of Stockwalk's common stock. Since
the price of Stockwalk's common stock will fluctuate, we cannot assure you as to
what the price of Stockwalk common stock will be during the measurement period
or at any other time.
As an example, assuming the measurement period ended on July 21, 2000, the
average closing price of Stockwalk common stock would have been $8.2596, and the
exchange ratio would have been .5448. In this example, you would receive $6.00
in cash and .5448 shares of Stockwalk common stock for each share of Kinnard
common stock that you own on the merger date.
The exchange ratio is subject to customary adjustments to preserve the
relative value of the consideration Kinnard shareholders are to receive in the
event of stock splits, reverse stock splits or the like with respect to
Stockwalk common stock before the merger is completed, as described below under
"-- Antidilution Adjustments."
Some shares of Kinnard common stock will not be converted in the merger.
These include shares as to which Kinnard shareholders demand appraisal rights in
compliance with Minnesota law, as described below under "Dissenters' Rights."
They also include shares held by Kinnard or any of its subsidiaries or shares
held by Stockwalk, SW Acquisition, Inc. or any of their affiliates. Each
outstanding share of Kinnard common stock owned by Kinnard or its subsidiaries,
or Stockwalk, SW Acquisition, Inc. or their affiliates will be canceled at the
completion of the merger and cease to exist. No Stockwalk common stock or other
consideration will be delivered in exchange for these shares. All other shares
of Stockwalk common stock issued and outstanding immediately before the
completion of the merger will remain issued and outstanding immediately after
completion of the merger. They will not be affected by the merger.
TREATMENT OF KINNARD STOCK OPTIONS AND WARRANTS
The merger agreement provides that each outstanding warrant and option to
purchase shares of Kinnard's common stock, whether or not such securities are
fully vested, will be exchanged at closing for a cash amount equal to $6.00 plus
the cash value of the stock
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that would have been issued had the option or warrant been exercised prior to
the merger, less the per share exercise price of the option or warrant. For
example, if the average daily price during the measurement period is $12 per
share, and the per share exercise price of the option or warrant is $5.50, the
amount of cash that will be issued for the option or warrant in connection with
the merger would be $6.50 per share.
EFFECTIVE TIME
The "effective time" of the merger will be the time set forth in the
articles of merger that we file with the Minnesota Secretary of State on the
closing date of the merger. The "closing date" is the day on which the effective
time occurs. Stockwalk and Kinnard will cause the merger to become effective
- four business days after the satisfaction or waiver of the last remaining
condition to the merger (other than conditions related solely to the
delivery of documents on the effective date), or
- another date on which Kinnard and Stockwalk mutually agree.
Stockwalk and Kinnard anticipate that they will complete the merger in the
third or fourth quarter of 2000. However, completion could be delayed if there
is a delay in obtaining the necessary regulatory approvals or the shareholders'
meeting is delayed. There can be no assurances as to if or when these approvals
will be obtained or that the merger will be completed. If we do not complete the
merger by December 31, 2000, either party may terminate the merger agreement,
unless the failure to complete the merger by this date is due to the knowing
action or inaction of the party seeking to terminate the merger agreement. See
"The Merger Agreement -- Conditions to the Merger" and "The Merger -- Regulatory
Approvals Required" for a more complete description of the conditions that must
be satisfied and the regulatory approvals that must be obtained before the
merger can be consummated.
ANTIDILUTION ADJUSTMENTS
If, between June 5, 2000 and the completion of the merger, the issued and
outstanding shares of Stockwalk common stock are increased, decreased, changed
into or exchanged for a different number or kind of shares or securities as a
result of a reorganization, recapitalization, reclassification, stock dividend,
stock split, reverse stock split or other similar change in capitalization, an
appropriate and proportionate adjustment will be made to the exchange ratio.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
When considering the Kinnard board's recommendation that the Kinnard
shareholders vote in favor of the merger agreement, Kinnard shareholders should
be aware that a number of Kinnard employees and directors have arrangements that
provide them with interests in the merger that are different from, or in
addition to, the interests of Kinnard shareholders as a whole.
Retention Agreements. In connection with the merger, Stockwalk will
implement a retention program for selected individuals identified by Kinnard and
Stockwalk management. The individual retention bonuses will be determined under
a formula or in an amount agreed to by management of Kinnard and Stockwalk and
will be payable, in part,
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upon completion of the merger and, in part, following the first anniversary of
the closing date of the merger. The amount of the retention bonuses in the
aggregate will be approximately $3.5 million.
Change of Control Payments. The terms of Kinnard's employment agreement
with William F. Farley, Kinnard's Chief Executive Officer, require, upon a
change of control, the payment to Mr. Farley, irrespective of whether he remains
employed by Kinnard, of his base salary, incentive compensation, bonuses,
benefits, and perquisites for an additional 36 months after the merger,
calculated at his then current base salary, with his annual incentive payments
calculated at two times his then current base salary. A portion of these
payments is allocated to a non-compete agreement. Mr. Farley's base salary is
currently $250,000 per year. Finally, the non-vested portion of Mr. Farley's
stock options vest upon a change in control. The estimated present value of the
payments to Mr. Farley to be made over the 36-month period is approximately
$2,000,000, exclusive of any amount he is entitled to receive in the merger for
his options and warrants or as a shareholder. Mr. Farley's employment agreement
also provides that he will receive an additional amount to cover federal excise
tax imposed on the portion of the payments to him, if any, deemed to be excess
parachute payments under Section 280G of the Internal Revenue Code. Stockwalk
and Kinnard have determined that the payments to Mr. Farley do not constitute
excess parachute payments.
Indemnification and Insurance. Under the merger agreement, Stockwalk has
agreed to ensure the survival after the merger of all rights to indemnification
and all limitations of liability existing under Minnesota law or in Kinnard's
articles and bylaws in favor of current and former directors and officers of
Kinnard or its subsidiaries, or anyone who becomes a director or officer of
Kinnard prior to the effective time, with respect to certain claims, whether
asserted before or after the merger. These claims include those arising from
facts or events that occurred before the effective time, and the merger
agreement or any of the transactions contemplated by the merger agreement.
The merger agreement also provides that Stockwalk will use its reasonable
best efforts to cover, for a period of six years after the effective time of the
merger, the officers and directors of Kinnard and its subsidiaries under a
director's and officer's liability insurance policy with respect to claims
arising out of facts or events occurring at or prior to the effective time. This
insurance will provide at least the same coverage and amounts as the coverage
currently provided by Kinnard for a total premium cost of not more than 200% of
the current amount expended by Kinnard to provide this insurance.
Director and Executive Officer Stock Options. Under the merger agreement,
each outstanding option to purchase a share of Kinnard common stock, including
options held by officers and directors of Kinnard, will be exchanged at closing
for cash. Kinnard's executive officers and directors hold options to purchase an
aggregate of 550,500 shares of Kinnard common stock at an average weighted
exercise price of $5.87 per share.
EMPLOYEES OF KINNARD AFTER THE MERGER
With respect to the employees of Kinnard as of the effective time of the
merger, Stockwalk has agreed that it will honor and perform all existing
employee benefit obligations to the current and former employees of Kinnard
under any of the Kinnard employee benefit plans or agreements. In addition, to
the extent that Stockwalk discontinues any Kinnard employee benefit plans and
replaces them with new plans, programs or arrangements, such Kinnard employees
will receive full credit for years of
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service with Kinnard for purposes of eligibility and vesting under the new
plans, and Stockwalk will cause any pre-existing condition limitations,
eligibility waiting periods and other similar requirements under any group plans
to be waived for Kinnard employees who participated in a Kinnard-sponsored
health plan and their eligible dependents.
ACCOUNTING TREATMENT
Stockwalk expects to account for the acquisition of Kinnard by Stockwalk
under the purchase method of accounting in accordance with generally accepted
accounting principles.
REGULATORY APPROVALS REQUIRED
Stockwalk and Kinnard have agreed to take all commercially reasonable
actions necessary to obtain all regulatory approvals required to consummate the
merger. These approvals include approval from, or notice to, various state
regulatory authorities and self-regulatory organizations. The merger cannot
proceed in the absence of the requisite regulatory approvals. We cannot assure
you that the requisite regulatory approvals will be obtained, and, if obtained,
we cannot assure you as to the date of any of these approvals or the absence of
any litigation challenging them. Likewise, we cannot assure you that the U.S.
Department of Justice or a state attorney general will not attempt to challenge
the merger on antitrust grounds, or, if such a challenge is made, what the
result of that challenge will be.
Stockwalk and Kinnard are not aware of any other governmental approvals or
actions that are required to complete the merger except as described above.
Should any other approval or action be required, it is presently contemplated
that such approval or action will be sought. However, we cannot assure you that
any of these additional approvals or actions will be obtained.
RESALE OF STOCKWALK COMMON STOCK ISSUED PURSUANT TO THE MERGER
The shares of Stockwalk common stock to be issued to Kinnard's shareholders
in the merger will be registered under the Securities Act of 1933, as amended.
They may be traded freely and without restriction by you unless you are an
affiliate of Kinnard for purposes of Rule 145 under the Securities Act. An
"affiliate" of Kinnard, as defined by Rule 145, is a person who directly, or
indirectly through one or more intermediaries, controls Kinnard, is controlled
by Kinnard, or is under common control with Kinnard. Each affiliate identified
by Kinnard will enter into an agreement with Stockwalk providing that such
affiliate will be subject to Rule 145(d) of the Securities Act, and will not
transfer any Stockwalk common stock received in the merger except in compliance
with the Securities Act. Affiliates of Kinnard may not sell the shares of
Stockwalk common stock offered hereby except pursuant to an effective
registration statement under the Securities Act covering such shares, or in
compliance with Rule 145 under the Securities Act, or another applicable
exemption from the registration requirements of the Securities Act.
Rule 145 generally permits affiliates of acquired companies to sell their
shares of common stock immediately following the acquisition in compliance with
certain volume limitations and manner of sale requirements under Rule 145.
Specifically, Rule 145
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provides that sales by such affiliates during any three-month period cannot
exceed the greater of:
- 1% of all of the shares of Stockwalk common stock outstanding; or
- the average weekly reported volume of trading of Stockwalk common stock
on the Nasdaq NMS during the four calendar weeks preceding the proposed
sale.
Rule 145 also provides that sales by affiliates must be made only in a
broker's transaction or transactions directly with a market maker.
These restrictions will cease to apply under most other circumstances if
the affiliate has held the shares of common stock offered by this proxy
statement/prospectus for resale for at least one year, provided that the person
or entity is not then an affiliate of Stockwalk.
CERTAIN MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Tax Opinion. Completion of the merger is conditioned upon the receipt of an
opinion of KPMG LLP, Kinnard's independent auditors, to the effect that the
merger will qualify as a tax-free reorganization under Section 368(a) of the
Internal Revenue Code of 1986 and that each of Kinnard and Stockwalk will be a
party to that reorganization within the meaning of Section 368(b) of the Code.
If Kinnard and Stockwalk waive the condition to its obligation to consummate the
merger relating to the receipt of the opinion referred to above, Kinnard will
resolicit proxies from its shareholders with respect to the merger.
In rendering this opinion, Kinnard's independent auditors will rely upon
representations contained in letters from Kinnard, Stockwalk and SW Acquisition
delivered for the purpose of the opinion. The opinion will also assume that the
merger will be completed in accordance with the provisions of the merger
agreement.
Certain Consequences of Reorganization Status. Provided that the merger
constitutes a reorganization within the meaning of Section 368(a) of the Code,
and subject to the discussion below under "Additional Considerations," a Kinnard
shareholder will generally recognize capital gain, but not loss, for U.S.
federal income tax purposes with respect to the receipt of Stockwalk common
stock and cash in exchange for Kinnard common stock pursuant to the merger. The
amount of gain, if any, recognized by a Kinnard shareholder will be equal to the
lesser of (i) the amount of gain realized (i.e., the excess of the amount of
cash and the fair market value of Stockwalk common stock received in the merger
over the tax basis of the Kinnard common stock surrendered) and (ii) the amount
of cash (other than cash received in lieu of a fractional share of Stockwalk
common stock) received in the merger. In the case of a Kinnard shareholder that
owns more than one "block" of Kinnard common stock, the amount of gain
recognized should be calculated separately with respect to each "block"
surrendered in the merger. For purposes of such calculation, the aggregate
amount of cash and Stockwalk common stock received by a Kinnard shareholder will
be allocated proportionally among the "blocks" of Kinnard common stock
surrendered pursuant to the merger. In the case of an individual Kinnard
shareholder, capital gain recognized with respect to the receipt of Stockwalk
common stock and cash received in exchange for Kinnard common stock will
generally be subject to U.S. federal income tax at a maximum rate of 20% if the
shareholder held such Kinnard common stock for more than 12 months at the
effective time. The aggregate tax basis of the Stockwalk common stock received
by a Kinnard shareholder will be the same as the aggregate tax basis of the
Kinnard common stock surrendered pursuant to the
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merger, decreased by the total amount of cash received (other than cash received
in lieu of a fractional share of Stockwalk common stock) and increased by the
amount of gain recognized. The holding period of the Stockwalk common stock will
include the holding period of the Kinnard common stock surrendered. A
shareholder of Kinnard who receives cash in lieu of a fractional share of
Stockwalk common stock will generally be treated as having received such
fractional share of Stockwalk common stock and sold such share in a taxable
transaction. Accordingly, such Kinnard shareholder will recognize gain or loss
equal to the difference, if any, between the amount of cash received and such
Kinnard shareholder's adjusted tax basis in the fractional share interest.
Additional Considerations. The gain recognized should be treated as capital
gain provided the requirements of Section 302 of the Code are satisfied. If
those requirements are not satisfied, the gain recognized could be treated as
dividend income. In order to determine whether those requirements are satisfied,
a Kinnard shareholder is treated as receiving solely Stockwalk common stock in
the merger (instead of the combination of shares of Stockwalk common stock and
cash actually received) and then receiving cash from Stockwalk in a hypothetical
redemption of the additional shares of Stockwalk common stock a Kinnard
shareholder would be treated as having received. The hypothetical redemption
will satisfy the requirements of Section 302 if it is "not essentially
equivalent to a dividend." Whether such hypothetical redemption of Stockwalk
common stock is "not essentially equivalent to a dividend" depends on the
individual facts and circumstances of each Kinnard shareholder but in any event
must result in a meaningful reduction of a Kinnard shareholder's proportionate
stock interest in Stockwalk. Generally, in the case of a Kinnard shareholder
whose stock interest in Stockwalk (relative to the total number of Stockwalk
shares outstanding) is minimal, and who exercises no control or management power
over the affairs of Stockwalk, any actual reduction in proportionate interest
will be treated as "meaningful." Because of the complexity of the test under
Section 302 of the Code, Kinnard shareholders are urged to consult their own tax
advisors regarding the proper treatment of the gain recognized by such Kinnard
shareholders in the merger.
Backup Withholding. Unless an exemption applies, Stockwalk's exchange agent
will be required to withhold 31% of the cash payments to which a Kinnard
shareholder or other payee is entitled pursuant to the merger, unless the
Kinnard shareholder or other payee provides his or her tax identification number
(social security number or employer identification number) and certifies that
such number is correct. Each Kinnard shareholder and, if applicable, each other
payee is required to complete and sign the Form W-9 that will be included as
part of the transmittal letter sent to Kinnard shareholders by Stockwalk to
avoid backup withholding, unless an applicable exemption exists and is provided
in a manner satisfactory to Stockwalk and the exchange agent.
The foregoing discussion is intended only as a summary of the material U.S.
federal income tax consequences of the merger and does not purport to be a
complete analysis or description of all potential tax effects of the merger. In
addition, the discussion does not address all of the tax consequences that may
be relevant to particular taxpayers in light of their personal circumstances or
to taxpayers subject to special treatment under the Code (for example, insurance
companies, financial institutions, dealers in securities, tax-exempt
organizations, foreign corporations, foreign partnerships or other foreign
entities and individuals who are not citizens or residents of the United
States).
The foregoing discussion is based upon the provisions of the Code,
applicable Treasury regulations thereunder, Internal Revenue Service rulings and
judicial decisions, as in effect
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as of the date of this proxy statement/prospectus. There can be no assurance
that future legislative, administrative or judicial changes or interpretations
will not affect the accuracy of the statements or conclusions set forth herein.
Any such change could apply retroactively and could affect the accuracy of such
discussion. No rulings have been or will be sought from the Internal Revenue
Service concerning the tax consequences of the merger.
No information is provided herein with respect to the tax consequences, if
any, of the merger under applicable foreign, state, local or other tax laws.
Each shareholder of Kinnard is urged to consult such shareholder's own tax
advisor as to the specific tax consequences to such shareholder of the merger
under U.S. federal, state, local or any other applicable tax laws.
DISSENTERS' RIGHTS
The following summary of the applicable provisions of Sections 302A.471 and
302A.473 of the MBCA is not intended to be a complete statement of such
provisions and is qualified in its entirety, by reference to such sections, the
full texts of which are attached as Annex C to this document. These sections
should be reviewed carefully by any Kinnard shareholder who wishes to exercise
dissenters' rights or who wishes to preserve the right to do so, since failure
to comply with the statutory procedures summarized below will result in the loss
of dissenters' rights. Any holder who forfeits his or her dissenter's rights by
failure to follow these procedures will then receive the merger consideration
described in this document.
The merger agreement constitutes a plan of merger for which shareholder
approval is required under the MBCA. Under Sections 302A.471 and 302A.473 of the
MBCA, holders of Kinnard common stock will have the right, by fully complying
with the applicable provisions of Sections 302A.471 and 302A.473, to dissent
with respect to the merger and to obtain payment in cash of the "fair value" of
their shares of Kinnard common stock after the merger is completed. The term
"fair value" means the value of the shares of Kinnard common stock immediately
before the effective time.
All references in Sections 302A.471 and 302A.473 and in this summary to a
"shareholder" are to a record holder of the shares of Kinnard common stock as to
which dissenters' rights are asserted. A person having beneficial ownership of
shares of Kinnard common stock that are held of record in the name of another
person, such as a broker, nominee, trustee or custodian, must act promptly to
cause the record holder to follow the steps summarized below properly and in a
timely manner in order to perfect whatever dissenters' rights such beneficial
owner may have.
Shareholders of record who desire to exercise their dissenters' rights
under the MBCA must satisfy all of the following conditions:
- Before the Kinnard special meeting, deliver a written notice of intent to
demand fair value for shares to the Secretary of Kinnard, 920 Second
Avenue South, Minneapolis, Minnesota, 55402. The written demand should
specify the shareholder's name and mailing address, the number of shares
owned and that the shareholder intends to demand the value of his or her
shares. This written demand must be in addition to and separate from any
proxy or vote against the merger. Voting against, abstaining from voting
or failing to vote on the merger does not constitute a demand for
appraisal within the meaning of the MBCA.
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- Kinnard shareholders that elect to exercise their dissenters' rights
under the MBCA must not vote for adoption of the merger. A shareholder's
failure to vote against the merger will not constitute a waiver of
dissenters' rights. However, if a shareholder returns a signed proxy but
does not specify a vote against adoption of the merger or direction to
abstain, the proxy will be voted for adoption of the merger, which will
have the effect of waiving that shareholder's dissenters' rights.
- Kinnard shareholders may not assert dissenters' rights as to less than
all of the shares registered in such holder's name except where certain
shares are beneficially owned by another person but registered in such
holder's name. If a record owner, such as a broker, nominee, trustee or
custodian, wishes to dissent with respect to shares beneficially owned by
another person, such shareholder must dissent with respect to all of such
shares and must disclose the name and address of the beneficial owner on
whose behalf the dissent is made. A beneficial owner of shares of Kinnard
common stock who is not the record owner of such shares may assert
dissenters' rights as to shares held on such person's behalf, provided
that such beneficial owner submits a written consent of the record owner
to Kinnard at or before the time such rights are asserted.
After approval of the merger by the shareholders at the Kinnard special
meeting, the surviving corporation will send a written notice to each
shareholder who filed a written demand for dissenters' rights and who did not
vote in favor of the merger. The notice will contain the following information:
- the address to which the shareholder must send a demand for payment and
the stock certificates in order to obtain payment and the date by which
they must be received;
- a form to be used to certify the date on which the shareholder, or the
beneficial owner on whose behalf the shareholder dissents, acquired the
shares or an interest in them and to demand payment; and
- a copy of Section 302A.471 of the MBCA and a copy of this summary
describing the procedures to be followed in asserting dissenters' rights.
In order to receive fair value for his or her shares, a dissenting
shareholder must, within 30 days after the date the notice from the surviving
corporation was given, send his or her stock certificates, and all other
information specified in the notice, to the address identified in such notice. A
dissenting shareholder will retain all rights as a shareholder until the
effective time. After a valid demand for payment and the related stock
certificates and other information are received, or after the effective time,
whichever is later, the surviving corporation will remit to each dissenting
shareholder who has complied with statutory requirements the amount that the
surviving corporation estimates to be the fair value of such shareholder's
shares, with interest commencing five days after the effective time at a rate
prescribed by statute. Remittance will be accompanied by the surviving
corporation's closing balance sheet and statement of income for a fiscal year
ending not more than 16 months before the effective time, together with the
latest available interim financial data, an estimate of the fair value of the
shareholder's shares and a brief description of the method used to reach the
estimate, a brief description of the procedure to be followed if such holder is
demanding supplemental payment and copies of Sections 302A.471 and 302A.473 of
the MBCA.
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If the dissenting shareholder believes that the amount remitted by the
surviving corporation is less than the fair value of such holder's shares, plus
interest, the shareholder may give written notice to the surviving corporation
of such holder's own estimate of the fair value of the shares, plus interest,
within 30 days after the mailing date of the remittance and demand payment of
the difference. Such notice must be delivered to the executive offices of the
surviving corporation. A shareholder who fails to give such written notice
within this time period is entitled only to the amount remitted by the surviving
corporation.
Within 60 days after receipt of a demand for supplemental payment, the
surviving corporation must either pay the shareholder the amount demanded or
agreed to by such shareholder after discussion with the surviving corporation or
petition a court for the determination of the fair value of the shares, plus
interest. The petition must name as parties all shareholders who have demanded
supplemental payment and have not reached an agreement with the surviving
corporation. The court, after determining that the shareholder or shareholders
in question have complied with all statutory requirements, may use any valuation
method or combination of methods it deems appropriate to use, whether or not
used by the surviving corporation or the dissenting shareholder, and may appoint
appraisers to recommend the amount of the fair value of the shares. The court's
determination will be binding on all Kinnard shareholders who properly exercised
dissenters' rights and did not agree with the surviving corporation as to the
fair value of the shares. Dissenting shareholders are entitled to judgment for
the amount by which the court-determined fair value per share, plus interest,
exceeds the amount per share, plus interest, remitted to the shareholders by the
surviving corporation. The shareholders shall not be liable to the surviving
corporation for any amounts paid by the surviving corporation which exceed the
fair value of the shares as determined by the court, plus interest. The costs
and expenses of such a proceeding, including the expenses and compensation of
any appraisers, will be determined by the court and assessed against the
surviving corporation, except that the court may, in its discretion, assess part
or all of those costs and expenses against any shareholder whose action in
demanding supplemental payment is found to be arbitrary, vexatious or not in
good faith. The court may award fees and expenses to an attorney for the
dissenting shareholders out of the amount, if any, awarded to such shareholders.
Fees and expenses of experts or attorneys may also be assessed against any
person who acted arbitrarily, vexatiously or not in good faith in bringing the
proceeding.
The surviving corporation may withhold the remittance of the estimated fair
value, plus interest, for any shares owned by any person who was not a
shareholder or who is dissenting on behalf of a person who was not a beneficial
owner on June 6, 2000, the date on which the proposed merger was first announced
to the public. The surviving corporation will forward to any such dissenting
shareholder who has complied with all requirements in exercising dissenters'
rights the notice and all other materials sent after shareholder approval of the
merger to all shareholders who have properly exercised dissenters' rights,
together with a statement of the reason for withholding the remittance and an
offer to pay the dissenting shareholder the amount listed in the materials if
the shareholder agrees to accept that amount in full satisfaction. The
shareholder may decline this offer and demand payment by following the same
procedure as that described for demand of supplemental payment by shareholders
who owned their shares as of June 6, 2000. Any shareholder who did not own
shares on June 6, 2000 and who fails properly to demand payment will be entitled
only to the amount offered by the surviving corporation. Upon proper demand by
any such shareholder, rules and procedures applicable in connection with receipt
by the surviving corporation of the demand for supplemental payment given by a
dissenting
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shareholder who owned shares on June 6, 2000 will also apply to any shareholder
properly giving a demand but who did not own shares of record or beneficially on
June 6, 2000, except that any such shareholder is not entitled to receive any
remittance from the surviving corporation until the fair value of the shares,
plus interest, has been determined pursuant to such rules and procedures.
Shareholders considering exercising dissenters' rights should bear in mind
that the fair value of their shares determined under Sections 302A.471 and
302A.473 of the MBCA could be more than, the same as or, in certain
circumstances, less than the consideration they would receive pursuant to the
merger agreement if they do not seek appraisal of their shares.
Cash received pursuant to the exercise of dissenters' rights may be subject
to federal or state income tax. See "The Merger -- Certain Material Federal
Income Tax Consequences."
THE MERGER AGREEMENT
The following describes the material terms of the merger agreement. A copy
of the merger agreement is attached to this proxy statement/prospectus as Annex
A and is incorporated herein by reference. Because a summary cannot provide you
with every detail, you are urged to read the entire merger agreement.
STRUCTURE OF MERGER
When the merger is completed, Kinnard will be merged with and into SW
Acquisition, Inc. (a subsidiary formed by Stockwalk to complete the merger), the
separate corporate existence of Kinnard will cease, and SW Acquisition will
continue as the surviving corporation. As a result of the merger, SW Acquisition
will succeed to and assume all of the rights and obligations of Kinnard in
accordance with Minnesota law. The directors of SW Acquisition and the officers
of Kinnard, respectively, will be the directors and officers of the surviving
corporation, and the articles of incorporation and bylaws of SW Acquisition will
be the articles of incorporation and bylaws of the surviving corporation.
The merger will be effective upon the filing of articles of merger with the
Minnesota Secretary of State, or at such later time and date as set forth in the
articles of merger.
PROCEDURES FOR EXCHANGE
Stockwalk will appoint a bank or trust company to act as exchange agent for
the payment of the merger consideration. On the closing date, Stockwalk will
deposit funds with the exchange agent sufficient to pay the cash portion of the
merger consideration. The exchange agent will mail the following to each record
holder of Kinnard stock immediately after the effective time:
- instructions for surrendering the stock certificates for the merger
consideration; and
- a letter of transmittal specifying that delivery of stock certificates,
or other evidence of stock ownership, will be made, and the risk of loss
of the certificates will pass, only on delivery of certificates to the
exchange agent.
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Upon the surrender of each Kinnard certificate, the exchange agent will pay
each holder the cash consideration multiplied by the number of shares exchanged
and deliver the number of whole Stockwalk shares equal to the number of shares
exchanged times the exchange ratio.
No fractional shares of Stockwalk stock will be issued in the merger, and
any holder entitled to receive a fraction of a share will instead receive an
amount in cash equal to the per share market value of the fractional share,
based on the closing price of Stockwalk's stock on the last full day prior to
the closing date. No dividends or other distributions with respect to
unexchanged shares of Kinnard stock with a record date after the effective time
will be paid to the holder of any unsurrendered certificate until the
certificate is surrendered.
Any portion of the exchange fund which remains undistributed to Kinnard
shareholders for six months after the effective time will be delivered to
Stockwalk, upon demand. After that time, any former Kinnard shareholders who
have not complied with the exchange provisions of the merger agreement may look
only to Stockwalk for payment of their merger consideration.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains various representations and warranties with
respect to Kinnard and its subsidiaries relating to, among other things, the
following:
- their corporate organization, existence, good standing and similar
corporate matters;
- the authorization, delivery and enforceability of the merger agreement;
- the absence of governmental consents and approvals;
- the absence of conflicts, violations and defaults under their charters or
bylaws and under other agreements and documents;
- their capitalization;
- information relating to subsidiaries;
- the accuracy and completeness of the documents and reports filed with the
SEC;
- the absence of certain material changes or events since December 31,
1999;
- the absence of defaults or material breaches under existing material
contracts;
- registration matters;
- compliance with applicable laws;
- material properties and assets;
- the filing of tax returns and payment of taxes;
- the absence of material pending or threatened litigation;
- employees and labor matters;
- employee benefit plans and related matters;
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- the absence of environmental liabilities;
- internal accounting controls;
- derivatives;
- intellectual property matters;
- insurance policies;
- brokers fees and expenses; and
- tax treatment of the merger.
The merger agreement also contains various representations and warranties
of Stockwalk and SW Acquisition relating to substantially the same matters, with
the addition of certain representations and warranties concerning the activity
of Stockwalk, the validity of Stockwalk's stock and the availability of funds to
complete the merger.
The representations and warranties of the parties do not continue after
completion of the merger, but could be the basis for a party's refusal to
complete the merger if a representation is not true and the untrue
representation would have a materially adverse effect on the party making the
representation.
CONCEPT OF MATERIAL ADVERSE EFFECT/MATERIAL ADVERSE CHANGE
As used in the merger agreement and this proxy statement/prospectus, the
term "material adverse effect" means an effect that is, individually or in the
aggregate, both material and adverse to Stockwalk, Kinnard or the surviving
corporation. It does not include the effects of general changes in the
securities industry, changes in generally accepted accounting principles or in
laws of general applicability, or actions or omissions of Kinnard taken with
Stockwalk's prior written consent.
CONDUCT OF KINNARD BUSINESS PENDING THE MERGER
Until the completion of the merger, Kinnard will conduct its business in
the ordinary course consistent with past practice and will do the following:
- seek to preserve its business organization and assets;
- seek to preserve its relations with its clients, customers,
correspondents, independent contractors and suppliers; and
- seek to preserve its relations with its employees and business
associates.
Except as permitted or required under the merger agreement, Kinnard has
further agreed that until the completion of the merger it will not, nor will it
permit any of its subsidiaries, to do the following:
- issue any stock, stock options or other similar stock-based employee
rights;
- make, declare, pay or set aside for payment any dividends on its capital
stock;
- adjust, split, combine, redeem, reclassify, purchase or otherwise acquire
any shares of its capital stock;
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- except as may be required by law or permitted by the merger agreement,
adopt, amend, modify or renew any employment agreement;
- enter into, adopt, amend or modify any pension, retirement, stock option,
stock purchase, savings, profit sharing, deferred compensation,
consulting, bonus, group insurance or other employee benefit, incentive
or welfare plan, program or arrangement;
- except in the ordinary course of business, dispose of or discontinue any
material portion of its assets, business or properties;
- except for in the ordinary course of business, acquire a material portion
of the assets of any other person;
- amend its articles of incorporations or bylaws;
- except as may be required by generally accepted accounting principles,
change any of its accounting principles, practices or methods;
- except in the ordinary course of business, enter into, renew or modify
any material contract;
- settle any claim, action or proceeding, except for those, individually
and in the aggregate, with money damages of not more than $250,000, and
which could not reasonably be expected to establish an adverse precedent
or basis for subsequent settlements;
- authorize any new capital expenditure other than budgeted amounts
disclosed to Stockwalk or expenditures in the ordinary course of business
not exceeding $250,000;
- except as required by law or regulation, implement or adopt any material
change in its risk management policies, procedures or practices,
materially restructure or change its investment securities portfolio;
- make or change any tax election, change any accounting period, adopt or
change any method of tax accounting, file any amended tax return, or
settle or compromise any material right to receive a tax refund;
- except in the ordinary course of business or customary forgivable loans
made to employees, incur, assume or guarantee any debt;
- forgive or extinguish any indebtedness to it except for customary
concessions regarding margin indebtedness of brokerage clients and
regularly scheduled forgiveness of loans made to employees prior to the
merger agreement; or
- enter into any agreement or commitment providing for the taking of any
action that would be prohibited by the merger agreement.
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NO SOLICITATION
Kinnard has agreed that it will not, nor will it permit any of its
subsidiaries nor any of its subsidiaries' officers, directors, employees,
representatives, agents or affiliates to
- initiate, solicit or encourage any inquiries or the making of any
proposal that constitutes, or may reasonably be expected to lead to, a
proposal to acquire Kinnard;
- enter into or continue discussions or negotiations in furtherance of any
inquiries or to obtain an acquisition proposal; or
- agree to, approve, recommend or endorse any acquisition proposal.
Kinnard has also agreed to notify Stockwalk of any inquiries or acquisition
proposals.
Despite these restrictions, Kinnard's board may engage in discussions with
any person or entity in response to an unsolicited proposal, and recommend such
unsolicited proposal to its shareholders if the board concludes in good faith
that the proposal is more favorable to Kinnard's shareholders than the merger.
Before entering into such discussions or negotiations, Kinnard must notify
Stockwalk and enter into a confidentiality agreement with the proposing person
or entity. Additionally, if Kinnard does accept a superior proposal or fails to
recommend the merger agreement to its shareholders, and within twelve months
Kinnard enters into an acquisition agreement with another party, Kinnard must
pay Stockwalk a $1.0 million termination fee. See "The Merger Agreement --
Termination of the Merger Agreement" and "The Merger Agreement -- Payment of
Fees and Expenses; Termination Fees."
REASONABLE BEST EFFORTS; REGULATORY APPLICATIONS
Kinnard and Stockwalk will use their reasonable best efforts to complete
the merger as promptly as reasonably possible. Kinnard and Stockwalk have agreed
to use their best efforts to obtain all consents or approvals of persons with
whom they do business if failure to obtain such consents or approvals would have
a material adverse effect on the merger becoming effective. Kinnard and
Stockwalk will also use their reasonable best efforts to obtain all permits,
consents, approvals and authorizations of all third parties and governmental
entities.
CONDITIONS TO THE MERGER
The obligations of Kinnard and Stockwalk to complete the merger are subject
to the satisfaction or waiver of the following conditions:
- no temporary restraining order, preliminary or permanent injunction or
other order preventing the completion of the merger;
- the effectiveness of the registration statement on Form S-4 registering
under the Securities Act the Stockwalk stock to be issued as part of the
merger consideration;
- the authorization by the Nasdaq NMS of the listing of the Stockwalk stock
issuable in the merger;
- all approvals, authorizations and consents of governmental authorities
and regulatory organizations;
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- the approval of the merger agreement by the shareholders of Kinnard;
- the receipt of a tax opinion of Kinnard's independent auditors that the
merger will qualify as a reorganization under the Internal Revenue Code;
- the absence of any federal or state litigation by any government or
governmental agency against Kinnard or Stockwalk challenging the merger
or relating to the merger; and
- the absence of any litigation by any person against either party which
would have a material adverse effect on Kinnard or Stockwalk.
The obligation of Kinnard to complete the merger is also subject to the
satisfaction of the following conditions:
- the representations and warranties of Stockwalk and SW Acquisition
contained in the merger agreement must be true and correct, and Stockwalk
shall have delivered to Kinnard a certificate to that effect; and
- each of the obligations of Stockwalk to be performed before completion of
the merger must have been duly performed in all material respects, and
Stockwalk shall have delivered to Kinnard a certificate to that effect.
The obligations of Stockwalk and SW Acquisition to effect the merger are
also subject to the satisfaction of the following conditions prior to the
effective time:
- the representations and warranties of Kinnard contained in the merger
agreement must be true and correct, and Kinnard shall have delivered to
Stockwalk a certificate to that effect;
- each of the obligations of Kinnard to be performed before completion of
the merger must have been performed in all material respects, and Kinnard
shall have delivered to Stockwalk a certificate to that effect; and
- all consents or approvals of all persons other than governmental entities
required for performance of the merger agreement and for giving the
merger effect shall have been obtained and be in full force and effect,
unless the failure to obtain such consents or approvals is not likely to
have a material adverse effect on Kinnard or the surviving corporation.
TERMINATION OF THE MERGER AGREEMENT
Kinnard and Stockwalk can mutually agree to terminate the merger agreement
at any time prior to the effective time. Kinnard or Stockwalk can terminate the
merger agreement in the following circumstances:
- the other party breaches any representation or warranty, or any of the
covenants or agreements contained within the agreement, if the breach
cannot be cured within 30 days after receiving written notice of the
breach;
- the merger is not completed by December 31, 2000, unless such failure is
the fault of the party seeking to terminate the agreement; or
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- the approval of any governmental authority required for consummation of
the merger is denied by final nonappealable action, or if the approval of
Kinnard's shareholders is not obtained.
Stockwalk can terminate the merger agreement if Kinnard's board withdraws,
modifies or amends its approval or recommendation of the merger or its
recommendation that its shareholders approve the agreement. Stockwalk can also
terminate the agreement if Kinnard's board approves, recommends or endorses any
proposal for a transaction other than the merger.
Kinnard can terminate the merger agreement if its board authorizes it to
enter into a transaction constituting a superior proposal, and Kinnard notifies
Stockwalk of its intention to enter into the agreement, as long as Stockwalk
does not, within 5 business days of receiving such notice, make an offer that
Kinnard's board determines in good faith is at least as favorable to Kinnard's
shareholders as the superior proposal is.
AMENDMENT AND WAIVER
Kinnard and Stockwalk may, prior to completion of the merger, waive any
provision by which they are benefited. Additionally, the merger agreement may be
amended by the parties at any time before shareholder approval. After approval,
no amendment may be made that requires further approval by the shareholders
unless another shareholder vote is taken. The merger agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties and approved or authorized by their respective boards.
PAYMENT OF FEES AND EXPENSES; TERMINATION FEES
Kinnard and Stockwalk will bear all of their own expenses incurred in
connection with the merger. The costs of filing and printing the Form S-4 and
the proxy statement/ prospectus, mailing expenses, and the cost of the tax
opinion will be shared equally by Kinnard and Stockwalk.
Kinnard must pay Stockwalk a $1.0 million termination fee if the merger
agreement is terminated for any of the following reasons:
- by Kinnard to accept a superior proposal;
- by Stockwalk because of Kinnard's board's failure to recommend the merger
agreement, and within 12 months of such termination, Kinnard enters into
a letter of intent or definitive agreement with respect to an acquisition
proposal, or such acquisition proposal is consummated; or
- the agreement is terminated by Kinnard or Stockwalk because of failure to
receive approval of Kinnard's shareholders, and at any time at or before
the shareholder meeting a different acquisition proposal is announced,
and within 12 months of such termination, Kinnard enters into a letter of
intent or definitive agreement with respect to such acquisition proposal,
or such acquisition proposal is consummated.
At the time the merger agreement was signed, Stockwalk placed $1.0 million
in escrow as part of the cash consideration to be paid at closing. If the merger
agreement is terminated by mutual consent (and such mutual termination provides
for the return of the escrow deposit to Stockwalk), or if the merger agreement
is terminated because of failure
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to receive approval from Kinnard's shareholders, failure of Kinnard's board to
recommend the merger, or because Kinnard authorizes an alternative transaction,
or if Stockwalk terminates the agreement because of a breach by Kinnard or
because the merger is not completed by December 31, 2000, the escrow deposit,
plus all interest accrued, will be returned to Stockwalk. If the merger
agreement is terminated by mutual consent (and such mutual termination provides
for payment of the escrow deposit to Kinnard), or if the merger agreement is
terminated by Kinnard because of a breach by Stockwalk or because the merger is
not completed by December 31, 2000, due to inaction or fault by Stockwalk, the
escrow deposit, plus all interest accrued, will be paid to Kinnard.
BUSINESS OF KINNARD
Kinnard is a holding company, whose subsidiaries have been providing
financial products and services for over 50 years. The primary subsidiary, John
G. Kinnard and Company, Incorporated is a regional broker-dealer headquartered
in Minneapolis.
John G. Kinnard is a full-service broker-dealer engaged in securities
brokerage, trading, investment banking, asset management and related financial
services to both retail and institutional customers. The capital markets group
focuses generally on emerging growth companies with market capitalizations of up
to $250 million. Through the fixed income originations group, John G. Kinnard
raises capital for municipalities and other business entities. Other products
and services include mutual funds, insurance products, investment management,
IRA services, and fixed income securities. NoDakBONDSinc, a wholly-owned
subsidiary of John G. Kinnard, acts as a fiscal agent in the state of North
Dakota. John G. Kinnard is a member of the Chicago Stock Exchange and the
National Association of Securities Dealers, Inc. and is registered as an
investment adviser under the Investment Advisers Act of 1940.
As of May 31, 2000, Kinnard employed 264 full-time employees and had 13
branch offices located in Minnesota, North Dakota and South Dakota.
The principal executive offices of Kinnard are located at 920 Second Avenue
South, Minneapolis, Minnesota, 55402, and its telephone number is (612)
370-2700.
BUSINESS OF STOCKWALK
OVERVIEW
Stockwalk is a technologically-driven regional securities firm
headquartered in Minneapolis, Minnesota. Through its operating subsidiaries,
Stockwalk provides a broad range of investment services to individual, corporate
and public clients. These services include both traditional and online
securities brokerage, investment banking and research services and the
processing of securities transactions for correspondent brokerage firms and
financial institutions. At March 31, 2000, Stockwalk employed 367 people in nine
offices located in Minnesota, Florida, Texas, Arizona, Illinois and California.
At March 31, 2000, Stockwalk had total assets of approximately $539 million and
shareholders' equity of approximately $24.7 million.
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RECENT DEVELOPMENTS
In March 2000, Stockwalk completed a $11.7 million private placement, net
of offering expenses, of approximately 1,600,000 million shares of its common
stock. In this placement, each investor also received a three-year warrant to
purchase one additional share of common stock at $10.00 per share for each ten
shares purchased.
Stockwalk's license agreement with Telescan, Inc., completed in March 2000,
allows it to private label Telescan's online financial analytical tools with its
online brokerage services. Thus, both Stockwalk's direct customers and customers
it obtains via its private label agreements will have access to sophisticated
financial information. Stockwalk also purchased a three-year renewable license
to market and sub-license Telescan's system operation services on both an
exclusive and non-exclusive basis to certain banks and broker-dealers. In
connection with this license agreement, Stockwalk issued Telescan 309,000 shares
of its common stock at $7.50 per share, along with warrants to purchase 30,900
shares at $10.00 per share. Approximately $1.8 million of this amount was
applied to eliminate obligations related to the license. A portion of these
shares were allocated to full payment of monthly license service fees.
In April 2000, Stockwalk's Miller, Johnson & Kuehn subsidiary acquired the
brokerage assets of Concord Services, LLC, a Chicago, Illinois, registered
broker-dealer. Concord services approximately 1,100 primarily individual
accounts holding assets of approximately $800 million. The entire purchase price
is payable over a five-year period out of future commissions earned by Stockwalk
from transactions in the customer accounts acquired.
In April 2000, Stockwalk filed a registration statement with the Securities
and Exchange Commission in connection with the offer and sale of $20 million of
convertible subordinated notes. The registration statement has not become
effective, and there is no assurance that the offering will be completed or that
all of the convertible subordinated notes will be sold.
In June 2000, Stockwalk renamed its Arnold Securities broker-dealer
subsidiary Online Brokerage Solutions, Inc. This subsidiary will focus
exclusively on offering Stockwalk's private label Stockwalk.com online brokerage
services to Internet portals, small to medium-sized financial institutions and
affinity groups.
STEICHEN ACQUISITION
On June 6, 2000, along with the Kinnard merger, Stockwalk announced that it
had entered into a definitive agreement and plan of merger pursuant to which
R.J. Steichen & Company would be merged with a Stockwalk subsidiary. 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 Stockwalk'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 82 full-time employees and
200 independent licensed sales representatives and had total revenues of
approximately $52.5 million for the 12 months then-ended. Steichen's principal
office is in Minneapolis, and it operates 11 additional offices in the
Minneapolis-St. Paul metropolitan area, in
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addition to seven other branch offices in Minnesota, Arizona, Georgia, Texas and
North Dakota.
The Steichen merger agreement requires Stockwalk to issue an aggregate of
4,315,062 shares of its common stock in exchange for all of the issued and
outstanding shares of Steichen's capital stock. The shares of Stockwalk's common
stock to be issued pursuant to the Steichen merger agreement will not be
registered. The shareholders of Steichen may earn up to an additional 2,000,000
shares of Stockwalk's restricted common stock pursuant to an earn-out provision.
Completion of the Steichen merger is subject to certain conditions that are
typical in transactions of this nature. 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:
- Mr. John E. Feltl is withdrawing approximately $21.0 million in cash from
Steichen, in the form of a dividend;
- Mr. John E. Feltl has agreed to leave $3.0 million of capital in Steichen
for two years. He will have the option, at the end of the two-year
period, to be repaid $3.6 million or to convert such amount into shares
of Stockwalk'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;
- Stockwalk is also entering into a five-year employment/noncompete
agreement with Mr. John E. 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;
- Stockwalk is also entering into a two-year employment agreement with Mr.
John C. Feltl pursuant to which Stockwalk will pay him a signing bonus of
$100,000 and 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 five-year warrant to purchase 300,000
additional shares of Stockwalk's common stock at 85% of the fair market
value of such shares on the date of completion of the merger. This
warrant does not contain cashless exercise provisions, but it does
contain piggyback registration rights; and
COMPETITION
Stockwalk's online brokerage services offer clients the opportunity to
direct their own investing activity without Stockwalk's advice. Stockwalk offers
Internet and direct dial connections to clients, allowing them to directly place
orders without the need for contact with a live broker. Representative
competitors for online brokerage services include the following:
- Ameritrade;
- Charles Schwab & Co., Inc.;
- DLJdirect Inc.; and
- E*Trade Securities, Inc.
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Stockwalk does not have the resources or market presence to compete
directly with the major online brokerage firms. Therefore, Stockwalk has chosen
to focus its efforts on its private label business and thereby use online bank
service providers, financial institutions and affinity groups and Internet
portals to market its products to their customers and members.
Stockwalk also faces several competitors in the clearing business. Most of
the competition for its clearing division business comes from the following
companies:
- Bear Stearns Securities Corp.;
- Credit Suisse First Boston Corporation;
- National Securities Corporation;
- Southwest Securities, Inc.; and
- U.S. Securities & Futures Corp.
All of these firms provide clearing services including the confirmation,
receipt, settlement and delivery functions involved in securities transactions.
Many of Stockwalk's clearing competitors are substantially larger than it and
may be able to offer more favorable terms to their clearing customers.
EMPLOYEES
As of March 31, 2000, Stockwalk had approximately 367 full-time employees.
Of these, 285 were employed by MJK, and 82 were employed by Stockwalk.com. None
of Stockwalk's employees is represented by a collective bargaining unit.
PROPERTIES
Stockwalk's principal executive offices are located at 5500 Wayzata
Boulevard, Minneapolis, Minnesota 55416 where Stockwalk leases approximately
67,000 square feet of office space. The leases for these premises expire in
March 2004. Stockwalk also has leases for a total of approximately 32,000 square
feet for its regional branch offices, with month-to-month leases or term leases
terminating as late as February 2004. Stockwalk's existing facilities are
adequate for the short-term future, especially if it completes the Steichen and
Kinnard mergers. If Stockwalk outgrows its existing facilities, it believes that
additional space can be timely obtained on acceptable terms.
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SELECTED HISTORICAL FINANCIAL DATA OF KINNARD
The following selected historical financial data of Kinnard for each of the
five years ended December 31, 1995 through December 31, 1999 has been derived
from Kinnard's audited financial statements for such periods. The information as
of, and for the period ended March 31, 2000, has been derived from unaudited
historical financial statements.
<TABLE>
<CAPTION>
AS OF, AND FOR
THE THREE MONTH
FISCAL YEAR ENDED DECEMBER 31, PERIOD ENDED
----------------------------------------------- MARCH 31,
1995 1996 1997 1998 1999 2000
------- ------- ------- ------- ------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL CONDITION:
Cash and cash
equivalents....... $ 5,766 $14,031 $ 3,886 $ 2,689 $ 8,018 $ 8,346
Total assets......... 45,897 47,141 43,972 36,364 40,427 41,328
Total liabilities.... 20,592 11,112 8,400 6,858 11,463 10,574
Shareholders'
equity............ 25,305 36,029 35,572 29,506 28,964 30,754
OPERATING RESULTS:
Total revenues....... 75,333 99,977 49,846 40,944 54,868 19,022
Total operating
expenses.......... 69,647 80,311 49,310 46,573 50,355 16,510
Income (loss) before
income taxes...... 5,686 19,666 536 (5,629) 4,513 2,512
Net income (loss).... 3,376 11,698 308 (3,376) 2,709 1,507
PER SHARE DATA:
Earnings
(loss) -- Basic... 0.54 1.93 0.05 (0.58) 0.54 0.31
Earnings (loss) --
Diluted........... 0.54 1.92 0.05 (0.58) 0.53 0.29
Book value........... 4.04 5.98 5.97 5.38 6.06 6.34
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF KINNARD
RESULTS OF OPERATIONS
The following table sets forth a summary of changes in the major categories
of revenues and expenses from the prior year's results:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 VERSUS 1998 1998 VERSUS 1997
INCREASE (DECREASE) INCREASE (DECREASE)
------------------- -------------------
DOLLARS PERCENT DOLLARS PERCENT
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Commissions...................... $ 1,961 13% $ (61) 0%
Principal transactions........... 6,255 38 (9,476) (37)
Net gains/losses on investment
account....................... 6,707 -- (642) (141)
Investment banking............... (1,801) (32) 1,663 42
Interest......................... 216 15 (854) (38)
Other............................ 586 20 468 19
------- -------
Total revenues................... 13,924 34 (8,902) (18)
Expenses:
Compensation and benefits........ 3,268 10 (2,512) (7)
Floor brokerage and clearance.... 518 15 (758) (18)
Communications................... (145) (16) 123 16
Occupancy and equipment.......... (393) (7) 221 4
Other............................ 534 10 189 4
------- -------
Total expenses................... 3,782 8 (2,737) (6)
------- -------
Income (loss) before income
taxes............................ 10,142 -- (6,165) --
Income tax expense (benefit)....... 4,057 -- (2,481) --
------- -------
Net income (loss).................. $ 6,085 -- $(3,684) --
======= === ======= ====
</TABLE>
GENERAL
Kinnard is engaged in securities brokerage, trading, investment banking,
asset management and related financial services. Competition in these activities
is intense and sensitive to a variety of market factors, including trading
volumes, interest rates, inflation and regional economic changes, which may
result in fluctuating revenues. While revenues may be variable, a large portion
of Kinnard's expenses are fixed, which may result in earning that vary
significantly from period to period.
FISCAL YEARS ENDED DECEMBER 31, 1999 AND 1998
Kinnard earned net income of $2.7 million, or 53 cents per diluted share,
on revenues of $54.9 million for the twelve months ended December 31, 1999. This
compares to a net loss of $3.4 million, or 58 cents per diluted share, on
revenues of $40.9 million for the same period in 1998. Improved earnings were a
result of substantial improvements in the core operating revenue of all business
lines and realized gains in the investment portfolio.
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<PAGE> 70
Commission revenues increased by $1.9 million, or 13% as a result of
industry-wide increases in transaction volumes. Revenues from principal
transactions increased by $6.3 million, or 38% driven by higher transaction
volumes and significantly higher trading profits as investor interest in small
capitalization companies in which Kinnard acts as a market maker increased in
the second half of 1999.
The net gain on securities held in the investment account of $6.5 million
in 1999, compared to a net loss of $187,000 in 1998, included a $4.0 million
gain on the exercise and sale of stock warrants in December 1999. The investment
account has historically been a volatile source of income for Kinnard.
Investment banking revenue decreased by $1.8 million, or 32% as Kinnard's
public equity offerings activity remained weak, and the industry experienced a
slowdown for public finance offerings in the fourth quarter of 1999. Revenues
related to equity offerings decreased by $2.3 million, or 52% as Kinnard
completed two public equity offerings and four private financings, which
compares to three public offerings and two private placements in the prior year.
The mergers, acquisitions and advisory group participated in 19 transactions
during 1999 compared to 15 transactions in the prior year. Revenues related to
fixed income offerings increased by $491,000, or 41% compared to 1998. The fixed
income originations group raised $221 million in capital for its municipal and
corporate clients which compares to $186 million raised in 1998.
Interest income increased by $216,000, or 15% primarily as a result of
increases in customer margin balances and investments in fixed income
securities. Other income increased by $586,000, or 20% as a result of increased
fee revenue from managed accounts and cash management fees.
The expense for employee compensation and benefits increased by $3.3
million or 10% from the prior year, due to increased commissions and
profitability incentives. A portion of this increase was offset by a reduction
in full-time employees predominately in overhead and support positions. Variable
compensation, including commissions and revenue and profit based incentive
compensation, increased $3.0 million over the prior year while fixed
compensation decreased by $463,000 compared to the prior year as a result of a
decrease in the number of full-time employees. The number of full-time employees
decreased from 297 at December 31, 1998 to 248 at December 31, 1999. Kinnard
also accrued for a $796,093 ESOP contribution as a result of the increased
profitability of Kinnard.
Floor brokerage and clearance expense increased by 15%, which is less than
the increase in associated transaction revenues. Kinnard continued to benefit in
1999 from lower clearing fees as a result of converting its clearing business to
Banc of America Securities in June 1998.
The decrease in communications expense in 1999 of $145,000 or 16% reflects
the realization of cost savings from the 1998 implementation of enhanced and
expanded internal communication and information systems. Occupancy and equipment
expense decreased $393,000 or 7% due in part to office consolidations and lower
equipment rental expense. Other expense increased $534,000 or 10% from 1998.
Expense reductions in office supplies, errors and omissions insurance, postage
and travel and entertainment costs were offset by increases in professional
services expense during the year. The increase in professional services expense
was a result of $349,000 in attorney fees relating to the Dain arbitration
proceedings and $385,000 in a one-time charge relating to the termination of a
merger agreement in the third quarter.
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<PAGE> 71
FISCAL YEARS ENDED DECEMBER 31, 1998 AND 1997
For the year ended December 31, 1998, Kinnard incurred a net loss of $3.4
million, or 58 cents per diluted share, on revenues of $40.9 million. This
compares to net earnings of $308,000, or five cents per diluted share, on
revenues of $49.8 million for the same period in 1997. Lower revenues were the
result of fewer retail transactions, a difficult equity trading environment, and
a slowdown of public equity offerings in the latter half of the year.
Commissions decreased by $61,000 in calendar 1998. Record sales of mutual
funds and options were offset by declines in listed equity securities and
insurance products.
Revenues from principal transactions decreased by $9.5 million, or 37%.
Kinnard experienced a difficult equity trading environment due in part to
volatile markets -- particularly small-cap issues in which Kinnard focuses its
market making activities -- and new trading rules and regulatory changes.
Kinnard responded by decreasing the number of stocks in which it makes a market
to under 200 from approximately 350 at December 31, 1997.
The net loss on securities held in the investment account was $187,000 in
1998, which compares to a net gain of $455,000 in 1997. The investment account
has historically been a volatile source of income for Kinnard.
Investment banking revenue increased by $1.7 million or 42% from the prior
year. During 1998 Kinnard completed three public equity offerings and two
private financings, which compares to one public offering and nine private
placements in the prior year. Also during the current year, the mergers,
acquisitions and advisory group participated in 15 transactions. The fixed
income originations group had a record year, raising over $190 million in
capital for its municipal and corporate clients.
Interest income decreased by 38% primarily as a result of declines in fixed
income trading and investment securities, margin balances, and interest rates.
Other income increased by 19% due primarily to an increase in managed accounts
and cash management fees.
The expense for employee compensation and benefits decreased by $2.5
million or 7% from the prior year. Variable compensation, such as commissions
paid to investment executives and incentive compensation, declined as a result
of lower revenues and profitability. Compensation and benefits were also
favorably impacted by a decline in the number of full-time employees to 297 at
December 31, 1998 from 338 at year-end 1997.
Floor brokerage and clearance expense declined by 18%, which was greater
than the decline in associated transactions. Kinnard benefited from lower
clearing fees as a result of converting its clearing business to Banc of America
Securities in June 1998.
The increase in communications expense in 1998 reflects the cost of
enhancing and expanding Kinnard's internal communication and information
systems. Occupancy and equipment expense increased by 4% due in part to the
implementation of new technologies and services, some of which were associated
with the clearing conversion. Other expenses increased by 4% from the prior year
as a result of consulting fees associated with system conversions.
65
<PAGE> 72
QUARTERLY RESULTS
Selected unaudited data reflecting Kinnard's results of operations for each
of the last nine quarters are shown in the following table. The information for
each of these quarters includes all normal and recurring adjustments and
accruals which Kinnard considers necessary for a fair presentation. These
operating results, however, are not necessarily indicative of results for any
future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
2000
Revenues........................ $19,022 $ -- $ -- $ --
Net income...................... 1,507 -- -- --
Basic earnings per share........ 0.31 -- -- --
Diluted earnings per share...... 0.29 -- -- --
1999
Revenues........................ $11,818 $12,806 $11,327 $18,917
Net income (loss)............... 353 324 (368) 2,400
Basic earnings (loss) per
share........................ 0.07 0.06 (0.07) 0.50
Diluted earnings (loss) per
share........................ 0.07 0.06 (0.07) 0.49
1998
Revenues........................ $12,902 $ 9,910 $ 7,270 $10,862
Net income (loss)............... 263 (1,343) (2,068) (228)
Basic earnings (loss) per
share........................ 0.04 (0.22) (0.36) (0.04)
Diluted earnings (loss) per
share........................ 0.04 (0.22) (0.36) (0.04)
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
A large portion of Kinnard's assets are cash and assets readily convertible
to cash. The portion of Kinnard's security investments and inventory that are
readily marketable are stated at quoted market values. The less liquid portion
of inventories and investments, which totaled $807,000 at December 31, 1999, are
stated at fair value, which is determined by management's best estimate
consistent with historical pricing procedures for illiquid securities.
Inventories are generally maintained to facilitate customer transactions
rather than for market speculation. Investment securities decreased $2.9 million
in 1999 as Kinnard liquidated certain investment portfolio securities, resulting
in realized gains and a corresponding increase in cash. Based on Kinnard's
current liquidity position, available bank line, and operating plans, it is
anticipated that Kinnard has sufficient resources to meet the cash requirements
of its operations in the foreseeable future.
As a securities broker-dealer, John G. Kinnard is required by NASD
regulations to meet certain liquidity and capital standards. It has been in
compliance with these regulations at all times.
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<PAGE> 73
FINANCING ACTIVITIES
John G. Kinnard maintains a discretionary credit facility providing for
conditional short-term borrowings of up to $10 million. The facility limits the
borrowing to 90 days and is secured by the firm's marketable securities.
Advances under the facility are at the bank's sole discretion, accrue interest
at a fluctuating interest rate to be agreed upon by Kinnard and the bank, and
are subject to certain affirmative and negative covenants. There are no fees or
compensating balances related to the line of credit. There were no outstanding
borrowings at December 31, 1999 and 1998 nor during the years then ended.
In 1999 and 1998 Kinnard received proceeds of $274,000 and $459,000,
respectively, from the issuance of common stock to participants in the Employee
Stock Purchase Plan and upon the exercise of options.
During the years 1999, 1998 and 1997 Kinnard repurchased 760,000, 566,000
and 465,000 shares of its common stock at a total cost of $3.6 million, $3.1
million and $2.7 million, respectively. In November 1999, the board of directors
authorized the repurchase of an additional 1,000,000 shares in the open market
or through privately negotiated transactions, at the discretion of the firm's
management. Remaining shares authorized for repurchase at December 31, 1999 are
1,231,491.
In April 1997, Kinnard entered into a Subscription and Purchase Agreement
with William F. Farley, whereby Mr. Farley purchased 325,000 Units of securities
of Kinnard for $1.7 million or $5.25 per Unit. Each Unit consisted of one share
of common stock of Kinnard and a warrant to purchase an additional share at a
price of $6.00 per share.
EFFECTS OF INFLATION
Because Kinnard's assets are to a large extent liquid in nature, they are
not significantly affected by inflation. Increases in certain Kinnard expenses
due to inflation, such as employee compensation, rent and communications, may
not be readily recoverable in the price of its services. In addition, to the
extent that inflation results in rising interest rates or has other adverse
effects on the securities markets, it may adversely affect Kinnard's financial
position and results of operations.
SEGMENTS
Kinnard's reportable segments are: retail sales, equity capital markets,
fixed income and other. The retail segment consists of various retail branch
locations and the financial services division. Equity capital markets consists
of equity trading, institutional sales, research and investment banking. Fixed
income includes the origination, trading, and institutional sale of fixed income
securities. Other consists of general corporate, administrative support
functions and net gains or losses on the investment account.
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<PAGE> 74
Information concerning operations in these segments of business is as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1999 1998 1997
------------------------ ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue:
Retail sales............................. $28,730 $24,737 $30,422
Equity capital markets................... 11,720 8,660 10,192
Fixed income............................. 6,182 5,943 6,224
Other.................................... 8,236 1,604 3,008
------- ------- -------
$54,868 $40,944 $49,846
======= ======= =======
Pretax income (loss):
Retail sales............................. $ 4,983 $ 2,501 $ 4,342
Equity capital markets................... (1,148) (3,126) (509)
Fixed income............................. 840 1,132 1,166
Other.................................... (162) (6,136) (4,463)
------- ------- -------
$ 4,513 $(5,629) $ 536
======= ======= =======
</TABLE>
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
The following table sets forth a summary of first quarter increases
(decreases) in segment revenues and expenses for 2000 versus 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED CHANGE FROM
MARCH 31, 2000 PRIOR YEAR PERCENT
------------------ ----------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating revenues:
Retail........................ $11,259 $ 4,363 63.3%
Equity capital markets........ 5,597 3,164 130.0
Fixed income.................. 1,882 553 41.6
Corporate..................... 284 (876) (75.5)
------- ------- ------
Total operating revenues 19,022 8,228 73.8%
------- ------- ------
Operating income:
Retail........................ 2,416 1,233 104.2
Equity capital markets........ 1,074 1,479 (365.2)
Fixed income.................. 435 232 114.3
Corporate..................... (1,413) (1,019) (258.6)
------- ------- ------
Pretax income................... 2,512 1,925 327.9%
------- ------- ------
Income tax expense.............. 1,005 771 329.5
------- ------- ------
Net income...................... $ 1,507 $ 1,154 326.9%
======= ======= ======
</TABLE>
RETAIL SALES
The Retail Sales business segment consists of various branch locations and
the financial services division. Revenue is generated primarily on commissions
generated by the sale of financial products and services to individual
investors.
The improvement in retail revenues was due to increased transaction levels
and improved investment executive productivity. Individual investors were more
active in the
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<PAGE> 75
current period as evidenced by increases in the NASDAQ index, which includes
small cap stocks in which Kinnard specializes. Products that recorded
significant revenue increases included OTC principal, exchange listed
securities, OTC agency, options, unit trust and revenues from corporate finance
and syndicate offerings.
The operating profit of Retail Sales in the current period was $2.4
million, an increase of $1.2 million or 104.2% over the first quarter of 1999.
The improvement was due primarily to an increase in revenues along with a
reduction of certain fixed costs from the closing of unprofitable branch
offices.
EQUITY CAPITAL MARKETS
Equity Capital Markets consists of equity trading, institutional sales,
research and investment banking. Investment banking includes the fees earned on
public equity underwritings, private placements and merger and acquisition
transactions.
The increase in Equity Capital Markets revenue was the result of a $1.3
million increase in trading revenue from $0.9 million in the first quarter of
1999 to $2.2 million in the quarter ended March 31, 2000, and the result of
approximately $1.2 million in revenue generated by the February 2000 WorldQuest
Networks, Inc. public offering for which Kinnard was a co-manager. There were no
significant investment banking transactions in the first quarter of 1999. The
timing and magnitude of investment banking activity can vary significantly from
period to period based on market conditions and other factors.
Equity Capital Markets group operating income of $1,074,000 in the first
quarter of 2000 compares to an operating loss of $405,000 in the first quarter
of 1999. The increase is primarily the result of increased trading and
investment banking revenues offset by commission expense and incentives and
other incremental compensation costs associated with the WorldQuest Networks,
Inc. public offering.
FIXED INCOME
Fixed Income includes the origination, trading and institutional sale of
fixed income securities. The Fixed Income group results are driven largely by
the activity of the originations department which raises capital for municipal
and corporate clients located primarily in the Upper Midwest.
Fixed Income revenues increased by $553,000 or 41.6% from the first quarter
of 1999. Fixed income origination revenue increased $229,000 from the first
quarter of 1999 as a result of an increase in the number and size of bond
originations. Bond trading revenue increased $225,000 from the first quarter of
1999, mostly due to increased municipal bond trading activities. Revenues for
the institutional sales and trading of other fixed income securities were down
reflecting the continued slow pace of volumes from the fourth quarter of 1999.
Fixed income operating income increased $232,000 from the first quarter of 1999
reflecting the higher revenues for both originations and trading.
CORPORATE
Corporate consists of various administrative functions required to support
the revenue generating business units, such as Accounting, Human Resources and
Marketing, and Kinnard's investment portfolio.
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<PAGE> 76
The operating loss in the Corporate area increased by $1.0 million or
258.6%. Operating cost savings improved over last year, offset by higher
incremental incentive compensation costs driven by increased consolidated
corporate profits. The net loss on the investment account of $352,000 in the
current period compares to a net gain of $672,000 in the first quarter of 1999.
Kinnard's investment account has historically been a volatile source of income,
and may change significantly from period to period.
Net income rose by $1,154,000 or 326.9% from the first quarter of 1999.
Diluted earnings per share rose to twenty-nine cents from seven cents.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
A large portion of Kinnard's assets are cash and assets readily convertible
to cash. The liquid portions of Kinnard's trading and investment securities are
stated at quoted market values and are readily marketable. The less liquid
portions of trading and investment securities, which totaled $1,150,000 at March
31, 2000, are stated at fair value, which is determined by management consistent
with prior pricing practices.
Between December 31, 1999 and March 31, 2000 trading securities decreased
$1,017,000 and securities sold but not yet purchased decreased by $96,000. Both
long and short inventories are generally maintained to facilitate customer
transactions rather than for market speculation.
Based on Kinnard's current liquidity positions, available bank line and
operating plans, it is anticipated that Kinnard has sufficient resources to meet
the cash requirements of its operations in the foreseeable future.
INVESTING ACTIVITIES
Kinnard's investment account is invested in fixed income securities,
publicly traded equity securities and privately placed equity securities. Equity
securities, including warrants and private placement securities, are frequently
held as a result of past investment banking activities performed by Kinnard.
Kinnard may utilize outside advisors to manage a portion of the investment
portfolio consistent with Kinnard's investment policy.
The value of certain securities held in the investment account may
fluctuate significantly, with the resulting valuation changes being reported as
net gains or losses on the investment account. These fluctuations in value may
have a material impact on reported earnings.
FINANCING ACTIVITIES
John G. Kinnard maintains discretionary credit facilities in order to meet
short-term operating needs of up to $10 million. At December 31, 1999 and March
31, 2000 there were no outstanding balances under these facilities.
During the first three months of 2000, Kinnard repurchased no shares of its
common stock. For the full year of 1999, a total of 760,000 shares were
repurchased at a cost of $3.6 million. Remaining shares authorized by the Board
of Directors for repurchase at March 31, 2000 are 1,231,491.
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<PAGE> 77
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Kinnard's primary market risk exposure is the impact that market and
interest rate volatility may have on the value of financial securities and
underwriting commitments. Kinnard manages this risk exposure through a process
of internal controls, due diligence and management review. Position limits for
trading and inventory controls are established and monitored on an ongoing
basis. The trading inventory is turned over frequently throughout the year.
Securities held in the investment portfolio are guided by an investment policy
and are reviewed on a regular basis. Current and proposed underwriting and other
banking commitments are subject to due diligence reviews by the appropriate
business unit as well as by senior management.
Kinnard has evaluated its financial securities and underwriting commitments
at March 31, 2000 and assessed the related market risk. This inventory is turned
over frequently throughout the year. Based on this evaluation, in the opinion of
management, the market risk associated with Kinnard's financial securities may
have a material effect on the earnings in a particular period, but will not have
a material adverse effect on the financial condition of Kinnard.
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<PAGE> 78
SELECTED HISTORICAL FINANCIAL DATA OF STEICHEN
The following selected historical financial data for each of the five years
ended September 30, 1995 through September 30, 1999 have been derived from
Steichen's audited financial statements for the same time period. The
information as of, and for the period ended, March 31, 2000, has been derived
from unaudited historical financial statements.
<TABLE>
<CAPTION>
AS OF, AND FOR
THE SIX MONTH
FISCAL YEAR ENDED SEPTEMBER 30, PERIOD ENDED
-------------------------------------------------- MARCH 31,
1995 1996 1997 1998 1999 2000
------- ------- -------- -------- -------- --------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL CONDITION:
Cash............... $ 1,430 $ 7,730 $ 4,717 $ 1,915 $ 13,741 $ 398
Total assets....... 61,748 95,090 110,420 104,487 131,466 168,047
Total
liabilities..... 53,290 78,849 95,811 89,366 113,981 145,523
Shareholders'
equity.......... 8,458 16,241 14,609 15,121 17,485 22,524
OPERATING RESULTS:
Total revenues..... 26,461 49,726 42,520 37,819 40,434 31,244
Total operating
expenses........ 21,917 36,364 35,293 35,010 36,374 25,553
Net income(1)...... 4,544 13,362 7,227 2,809 4,060 5,691
PER SHARE DATA(2):
Earnings(1)........ 227 668 361 140 203 285
Book value......... 423 812 730 756 874 1,126
</TABLE>
-------------------------
(1) For the periods presented above, Steichen has been a subchapter S
corporation for income tax purposes. Accordingly, no provision for income
taxes is included in the financial statements as Steichen's earnings have
been allocated to the shareholder for inclusion in his individual income tax
return.
(2) Per share data based on 20 shares of common stock which were outstanding
during the periods presented.
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<PAGE> 79
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF STEICHEN
GENERAL
Steichen is a regional full service securities brokerage firm based in
Minneapolis, Minnesota offering brokerage, trading, research and investment
banking services. John E. Feltl is its principal shareholder and has owned
Steichen since 1986. Steichen's market for research coverage and investment
banking includes small capitalization, emerging growth and Minnesota start-up
businesses. Steichen is self-clearing, meaning it holds securities on behalf of
the customer and clears trades in-house. Revenues and performance in large part
relate to the overall health of the small capitalization market. Steichen is a
Subchapter S corporation for income tax purposes. Accordingly, no provision for
income taxes is included in the financial statements, as Steichen's earnings are
allocated to the shareholder for inclusion in his individual income taxes.
SEGMENTS
Steichen'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 income has been presented separately as Steichen
does not allocate these amounts to its segments. Other consists of general
corporate and administrative support functions. Steichen 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>
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
----------- ----------- -----------
42,519,978 37,818,942 40,434,229
=========== =========== ===========
Net earnings (loss):
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)
----------- ----------- -----------
$ 7,226,769 $ 2,808,526 $ 4,059,900
=========== =========== ===========
</TABLE>
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<PAGE> 80
RESULTS OF OPERATIONS
FISCAL YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO 1997:
For the year ended September 30, 1998 Steichen earned $2.8 million
excluding taxes on revenues of $37.8 million. Revenues decreased 11% or $4.7
million from $42.5 million in 1997, while earnings before taxes were down $4.4
million from $7.2 million in 1997. The sharp decline in earnings from 1997 is
attributed to two primary components. First, commission-generated income
declined 18%, while commissions and compensation expense was off just 7%.
Second, Steichen incurred additional development costs for proprietary software
in 1998 of approximately $900,000.
The 11% decline in revenues from 1997 was due to a $4.1 million or 38%
decrease in investment banking revenue and a 20% decline of $3.0 million in
principal commissions and trading. Investment banking activity for 1997 included
significant public offering and private placement transactions, which also
impact our trading and principal activity. Beginning the last half of 1997 and
continuing through 1998, Steichen experienced a significant decrease in
investment banking activity, especially at the public level.
Agency commissions actually increased $712,000 or 8%, while sales of
investment company (mutual funds) and insurance products increased $70,000 or
13% from 1997. Interest and dividend income rose $1.2 million or 16% due to a
15% increase in average monthly margin debits in 1998. Margin debits in 1998
averaged $97.3 million verses $84.9 million in 1997.
Other revenue increased $428,000 due to the addition of clearing services
for an introducing brokerage firm.
Expenses in 1998 were off 1% from 1997 at $35.0 million. While commission
expense was lower, Steichen experienced increases in compensation, software
technology, occupancy expenses and clearing costs. Commissions and compensation
paid in 1998 was off $1.8 million or 7%. Lower commissions were offset in part
by increased payroll for research, information technology, administration, and
institutional sales.
Interest expense of $4.9 million in 1998 represented an increase of
$679,000 or 16% commensurate with the percent increase in interest income. Total
customer free credit balances averaged $80.9 million in 1998, an increase of 7%.
Approximately $221,000 of the increase was paid to customers, while the balance
was paid to the bank under Steichen's credit facilities.
Communications expense increased $125,000 or 6% due primarily to the
addition of brokers and technological enhancements. Technology consulting fees
increased $927,000 from $810,000 in 1997 to $1.7 million in 1998. The increase
was due to Steichen's decision to develop proprietary front office and trade
entry software systems to interface with its back office computer platform.
Occupancy expense in 1998 increased $81,000 or 6% to $1.4 million. Steichen
moved its main office into new office space in March 1997. 1998 was the first
full year in the new space.
Clearing costs increased 26% or $78,000 from 1997 due primarily to the
types of transactions carried out in 1998 and due to costs associated with
clearing for another broker dealer in 1998.
74
<PAGE> 81
Other operating expense includes promotion, customer write-offs and
litigation losses and any other operating expenses. The significant decrease of
$410,000 from 1997 is due to fewer losses from customer claims and disputes.
FISCAL YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO 1998
Steichen earned $4.1 million before taxes in 1999 on revenues of $40.4
million. This compares to earnings of $2.8 million on revenues of $37.8 million
in 1998, an increase of 45% and 7%, respectively. Improved earnings were the
result of a substantial increase in commission income that offset revenue
reductions in other categories, coupled with minimal increases in operating
expenses.
Revenues increased $2.6 million or 7% in 1999. Commissions on agency and
principal transactions increased a combined 29%, due to stronger markets in 1999
for smaller capitalization stocks. Investment banking activity dropped by 44% in
1999 due to a reduced number and size of public offerings. Revenue from
investment products and insurance products was up 21%. The combined increase for
these four commission-generating categories was $3.4 million or 12%.
Interest and dividend income was off 7% due to a slight reduction in
interest rates charged margin accounts during 1999 and a 4% decrease in average
monthly margin debits. Other revenue decreased 39% or $222,000 from 1998
primarily to discontinued clearing services for another firm.
Expenses increased $1.4 million or 4% in 1999. Commissions and compensation
increased $2.2 million from 1998, an increase of 10%. Steichen controlled
administrative payroll costs in 1999 to minimize the effects of increased
commissions paid. Interest costs were down $302,000 or 6% despite an 18%
increase in monthly customer free credit balances from 1998. Reduced interest
costs were a result of slightly lower interest rates in 1999 and reduced
borrowings under Steichen's bank line.
Communications expense was up $177,000 or 8% in 1999, due to certain
expenditures for hardware and software upgrades in preparation for the change to
the new millennium (Y2K). Technology consultant and data processing fees were
down $476,000 or 27% in 1999 due to completion of significant ongoing software
enhancements in the first quarter of the year. Occupancy expense remained fairly
constant from 1998 to 1999. Clearing expense increased 7% in 1999 and is in line
with a 7% increase in revenues.
Other operational expense includes promotional fees, customer write-offs,
and miscellaneous expense. This expense category was down $270,000 or 16% in
from 1998 due primarily to lower losses on litigation and customer write-offs.
75
<PAGE> 82
SIX MONTHS ENDED MARCH 31, 2000 COMPARED TO SIX MONTHS ENDED MARCH 31, 1999
<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>
For the six months ended March 31, 2000, revenues and earnings excluding
taxes were $31.2 million and $5.7 million, respectively. Revenues increased
$12.1 million from $19.1 million in 1999, an increase of 63%, while earnings
increased $4.0 million from $1.7, representing an increase of 230%. A
significant increase in profits was the result of a large increase in revenue
while controlling costs. In fact, of seven major expense categories, three
categories experienced an increase less than the percent increase in revenues
and four categories achieved a reduction in expense from 1999.
Commission related income increased 72% from 1999. The most significant
increase experienced by Steichen was in agency commissions, up 112% or $5.8
million from higher listed and unsolicited transactions. Investment banking
almost doubled to $2.7 million in 2000 as Steichen completed a public
underwriting and several private placements in the first half of the year.
Mutual fund and insurance products increased $234,000 in the first half of this
year, an increase of 68%.
Interest income increased 33% or $1.3 million for the first six months of
2000 to $5.2 million. Increased margin interest is due entirely to an increase
in margin debits. Total average margin debits are running $121.1 million in 2000
verses $89.3 million for the same period in 1999, a 36% increase.
Total expenses increased $8.1 million to $25.5 million for the first six
months of 2000, a 47% increase. The largest increase was in commissions and
compensation, rising 64% to $19.0 million, an increase of $7.4 million. Salary
expense increased 5.2% while commissions and sales bonuses rose 80%. Commission
expense rose at a rate greater than commission income (80% verses 72%) due to
sales manager profit bonuses and brokers achieved larger pay out on the
commission grid.
Interest expense increased $602,000 or 28% to $2.8 million for the first
six months of 2000. The increase in expense corresponds to a 30% increase in
free customer credits for the first half of 2000 verses the same period in 1999.
Average customer free credit balances in 2000 was $114.4 million. Average
interest rate paid on credit balances was off 1.3% from 1999 rates paid.
76
<PAGE> 83
Communications expense increased $125,000 in 2000 or 11% to $1.3 million.
The increase reflects continuing upgrades to communication lines and equipment
and additional spending on technology hardware.
Technology consultants and data processing, occupancy and clearing expenses
were all down from 1999. Combined, these expenses decreased $184,000 to $1.4
million or 12%. The drop in expense is due to controlling costs and completion
of certain software projects during 1999.
QUARTERLY RESULTS
Selected unaudited data reflecting Steichen's results of operations for
each of the last ten quarters are shown in the following table. The information
for each of these quarters includes all normal and recurring adjustments and
accruals which Steichen considers necessary for a fair presentation. These
operating results, however, are not necessarily indicative of results for any
future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
FISCAL YEAR DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
2000
Revenues................. $12,222,603 $19,021,431 -- --
Net income............... 1,510,056 4,180,900 -- --
Basic earnings per
share................. 75,503 209,045 -- --
1999
Revenues................. 8,397,650 10,478,129 $10,670,410 $10,888,040
Net income............... 279,256 1,445,767 1,061,869 1,273,008
Basic earnings per
share................. 13,963 72,288 53,093 63,650
1998
Revenues................. 9,207,691 8,578,398 10,426,338 9,606,515
Net income............... 523,705 898,792 955,021 431,008
Basic earnings per
share................. 26,185 44,940 47,751 21,550
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
The vast majority of Steichen's assets consist of receivables due from
customers and assets easily converted into cash. Receivables due from customers
represent balances resulting from normal cash and margin transactions. Amounts
due from customers for margin debits were $141.2 million, $100.6 million and
$90.7 million at March 31,2000 and September 30, 1999 and 1998, respectively.
Securities owned by the customers are held as collateral against margin debits.
Inventories are valued at market and consist of corporate and municipal
bonds, treasuries and equity securities and are maintained to facilitate
customer transactions as opposed to market speculation. Marketable securities
were $3.3 million, $5.8 million and $2.7 million at March 31,2000 and September
30, 1999 and 1998, respectively.
As a securities broker-dealer, Steichen is required by the NASD to meet
certain liquidity and capital requirements. Steichen has been in compliance with
these requirements at all times.
77
<PAGE> 84
FINANCING ACTIVITY
Steichen finances its assets primarily through customer credits and
short-term borrowings. Steichen's financing requirements are directly affected
by changes in the amount of its' trading and underwriting securities and
customer receivables.
Steichen maintains a discretionary line of credit for short-term borrowings
and working capital needs of $35 million, secured by firm and certain customer
securities. Advances under the credit facility accrue interest based on a LIBOR
rate plus 105 basis points. There are no fees or compensating balances required
under the credit facility. Borrowings under the credit line were $1.6 million
and $7.8 million in 1999 and 1998, respectively.
EFFECTS OF INFLATION
Steichen's assets are not significantly affected by inflation, as they are
primarily either cash or easily converted into cash, and turn over frequently.
Increases in certain Steichen expenses due to inflation, such as employee
compensation, rent and communications, may not be readily recoverable in the
price of its services. In addition, to the extent that inflation results in
rising interest rates or has other adverse effects on the securities markets, it
may adversely affect Steichen's financial position and results of operations.
DISCLOSURE ABOUT MARKET RISK
Steichen's primary market risk exposure is the impact that market and
interest rate volatility may have on the value of financial securities and
underwriting commitments. Steichen manages this risk exposure through a process
of internal controls, due diligence and management review. The trading inventory
is turned over frequently throughout the year. Decisions regarding securities to
be held in the investment portfolio are guided by an investment policy and are
reviewed on a regular basis. Current and proposed underwriting and other banking
commitments are subject to due diligence reviews by the appropriate business
unit as well as by senior management.
Steichen has evaluated its financial securities and underwriting
commitments at September 30, 1999 and assessed the related market risk. Based on
this evaluation, in the opinion of management, the market risk associated with
Steichen's financial securities may have a material effect on the earnings in a
particular period, but will not have a material adverse effect on the financial
condition of Steichen.
78
<PAGE> 85
SELECTED HISTORICAL AND PRO FORMA
FINANCIAL DATA OF STOCKWALK
The following selected consolidated financial data for each of the five
years ended March 31, 1996, through March 31, 2000, have been derived from
Stockwalk's audited consolidated financial statements and the audited
consolidated financial statements of Miller, Johnson & Kuehn for the year ended
March 31, 1996, MJK Holdings, Inc. (MJK's parent) for the years ended March 31,
1997, 1998 and 1999 and Stockwalk.com Group, Inc. for the fiscal year ended
March 31, 2000. The unaudited pro forma financial data present annual operating
results for the year ended March 31, 2000 giving effect to the acquisitions of
Steichen and Kinnard and the assumed receipt of the net proceeds from the
pending sale of Stockwalk's offering of convertible subordinated notes as if
they had occurred on April 1, 1999, and balance sheet data as of March 31, 2000,
giving effect to the acquisitions of Steichen and Kinnard and the assumed
receipt of the net proceeds from the pending sale of Stockwalk's offering of
convertible subordinated notes as if they had occurred on March 31, 2000.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
------------------------------------------------------------------
PRO FORMA
1996 1997 1998 1999 2000 2000
-------- -------- -------- -------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
REVENUES:
Trading profits.......... $ 10,536 $ 9,856 $ 10,634 $ 15,063 $ 16,073 $ 67,935
Interest................. 5,487 9,150 13,507 15,410 20,988 35,823
Commissions.............. 2,732 3,930 9,040 9,888 14,287 50,788
Investment banking....... 6,932 7,716 9,656 8,389 10,363 21,134
Clearing fees............ 567 785 1,902 3,105 5,248 5,248
Other income............. 690 1,170 2,354 3,735 4,011 4,453
-------- -------- -------- -------- -------- --------
Total revenues........... 26,944 32,607 47,093 55,590 70,970 185,381
EXPENSES:
Employee compensation and
benefits............... 16,807 17,736 25,950 26,987 34,163 102,608
Clearing fees............ 653 750 1,475 2,890 2,999 6,414
Occupancy and equipment
rental................. 1,052 1,965 3,381 3,285 4,854 11,007
Communication............ 1,655 2,298 3,938 5,251 8,017 10,816
Interest................. 4,429 7,427 11,027 11,806 16,331 25,716
Other expense............ 1,489 2,207 3,145 3,113 7,145 19,599
-------- -------- -------- -------- -------- --------
Total expenses........... 26,085 32,383 48,916 53,332 73,509 176,160
-------- -------- -------- -------- -------- --------
Income (loss) before
income taxes........... 859 224 (1,823) 2,258 (2,539) 9,221
Income tax expense
(benefit).............. 334 34 (599) 985 (839) 5,679
-------- -------- -------- -------- -------- --------
Net income (loss)........ $ 525 $ 190 $ (1,224) $ 1,273 $ (1,700) $ 3,542
======== ======== ======== ======== ======== ========
Basic and diluted
earnings per share..... $ 0.03 $ 0.01 $ (0.08) $ 0.08 $ (0.09) $ 0.10
======== ======== ======== ======== ======== ========
CONSOLIDATED BALANCE SHEET
DATA:
Total assets............. $124,633 $181,042 $272,616 $322,353 $538,875 $791,678
Total debt............... 28,303 27,102 27,728 48,113 55,619 88,962
Total shareholders'
equity................. 2,392 2,583 1,358 7,011 24,652 89,515
</TABLE>
79
<PAGE> 86
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF STOCKWALK
GENERAL
Stockwalk has three principal subsidiaries: Miller, Johnson & Kuehn,
Stockwalk.com and Online Brokerage Solutions. Miller, Johnson & Kuehn is a
Minneapolis-based regional broker-dealer, engaging primarily in principal
transactions, commission business, investment banking activities, and customer
financing, as well as acting as a fully disclosed clearing broker for
approximately 55 brokerage firms. In September 1999, Stockwalk.com commenced
online securities trading through its website.
During fiscal 2000, Stockwalk.com completed the acquisition of two online
brokerage firms. In October 1999, Stockwalk acquired Arnold Securities, Inc.
(renamed Online Brokerage Solutions, Inc.). In November 1999, Stockwalk
completed the acquisition of M-One Securities, which is headquartered in San
Francisco, California and maintains a branch office in Fremont, California.
M-One Securities offers online trading services for its customers through its
website which includes language alternatives in English, Cantonese and Mandarin.
If the pending mergers with Steichen and Kinnard are completed, they will
be accounted for using the purchase method. As purchases, the Steichen and
Kinnard operations will be included in Stockwalk's financial results from the
respective closing dates of the transactions, and the goodwill from the
acquisitions will be amortized over 20 years. See Index to Financial Statements
for pro forma financial information and the historical financial statements of
Steichen and Kinnard.
SEGMENTS
Stockwalk's reportable segments are as follows: clearing services, retail
sales, internet brokerage, underwriting, and other.
CLEARING SERVICES
Stockwalk serves as a clearing agent providing transaction execution,
account maintenance, including extension of credit, and record keeping services
for customers of its introducing brokers. Stockwalk collects a clearing fee and
charges interest on its customers' margin accounts and pays interest on cash in
customers' accounts.
RETAIL SALES
Stockwalk charges a brokerage commission when acting as agent for the
purchaser or seller of a security. Stockwalk also purchases securities from and
sells securities to customers on a principal basis and maintains inventories of
securities for such purposes. In principal transactions, Stockwalk recognizes
income or loss on the inventory it maintains which is marked to market daily.
Stockwalk's retail business also includes federally insured certificate of
deposit participations.
80
<PAGE> 87
INTERNET BROKERAGE
Stockwalk provides automated order placement, portfolio tracking and
related market information, news and other information services 24 hours a day,
seven days a week by means of the Internet and direct modem access which allows
its customers the ability to place orders for stock trades and other investment
transactions directly, and at a lower, more predictable transaction cost than
traditional full-commission brokerage firms. Further, Stockwalk expects that its
technology will be adapted to provide information and transaction processing
services related to other aspects of electronic commerce, such as processing
insurance transactions and electronic cash transfers. In addition, Stockwalk has
recently renamed its Arnold Securities broker-dealer subsidiary Online Brokerage
Solutions, Inc. Stockwalk intends, through this broker-dealer, to continue to
offer privately-labeled Stockwalk.com services to Internet portals, small to
medium-sized financial institutions and affinity groups.
UNDERWRITING
Stockwalk also provides capital finance planning services for its clients.
Such plans are implemented by managing or co-managing public offerings of
securities or by arranging private placements of securities with institutional
or individual investors. The capital finance department coordinates the
distribution of managed and co-managed corporate underwriting, accepts
invitations to participate in competitive or negotiated underwriting
arrangements managed by other investment banking firms, and allocates and
merchandises Stockwalk's underwriting positions to the firm, to institutional
clients and to other broker-dealers. The commission spread generated from sale
of securities is allocated between retail sales and underwriting.
OTHER
Other revenues consist of fiscal consulting fees and management fees
assessed to affiliates that are eliminated in consolidation. Other expenses
include general and administrative expenses for departments not directly related
to one of our broker-dealer subsidiaries.
Segment results are derived from Stockwalk'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, Stockwalk'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
Stockwalk's operating segments. Stockwalk does not provide balance sheet data
for segment reporting as this data is not measured for its operating segments.
81
<PAGE> 88
Information concerning operations in Stockwalk's segments of business is as
follows for the years ended:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
---------------------------------------
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE:
Clearing services..................... $15,968,700 $19,279,800 $28,102,800
Retail sales.......................... 28,009,400 30,672,200 36,276,400
Internet brokerage.................... -- -- 2,717,500
Underwriting.......................... 2,173,600 4,337,600 3,215,500
Other................................. 940,900 1,300,700 1,483,600
Eliminations.......................... -- -- (825,500)
----------- ----------- -----------
Consolidated revenue.................... $47,092,600 $55,590,300 $70,970,300
=========== =========== ===========
PRETAX INCOME (LOSS):
Clearing services..................... $ 1,080,300 $ 2,050,700 $ 4,210,900
Retail sales.......................... (3,066,000) (272,300) (715,900)
Internet brokerage.................... -- -- (3,585,500)
Underwriting.......................... 162,400 485,000 (142,200)
Other................................. -- -- (1,855,900)
Eliminations.......................... -- (5,800) (450,100)
----------- ----------- -----------
Consolidated pretax income (loss)....... $(1,823,300) $ 2,257,600 $(2,538,700)
=========== =========== ===========
</TABLE>
Revenues from clearing services increased $3.3 million from 1998 to 1999
and $8.8 million from 1999 to 2000, representing increases of 20.7% and 45.8%,
respectively. Clearing fee expenses increased $2.3 million from 1998 to 1999 and
$6.7 million from 1999 to 2000, representing increases of 15.7% and 38.7%,
respectively. The significant increase in revenues is directly related to ticket
charges collected on the increased number of customers from our introducing
brokers. The number of introducing brokers for which Stockwalk clears trades has
increased from 22 at March 31, 1998 to 31 at March 31, 1999 and 50 at March 31,
2000. Stockwalk processed 314,600, 504,700 and 916,900 tickets in the fiscal
years ended March 1998, 1999 and 2000, respectively. The increase in clearing
services revenues is also impacted by interest income earned on the higher level
of customer margin loans. Clearing fee expenses have increased primarily because
staff additions are required to service the increasing number of trades and
because interest expense is charged on cash balances for the increased number of
customers from the new correspondent brokers. It is anticipated that clearing
fee income will grow as Stockwalk maintains customer accounts and clears trades
for its expanding internet brokerage business and attracts new correspondents.
Stockwalk's retail sales revenues increased $2.7 million or 9.5% from 1998
to 1999, and $5.6 million or 18.3% from 1999 to 2000. The commissions earned
have increased due to the volume of customer trades associated with the
significant rise in the United States equity markets. The fiscal 2000 results
include record activity in the fourth fiscal quarter generated by record
fluctuations and overall instability in certain markets, both of which generated
a large number of trades for which Stockwalk acts as an agent for its customers.
Retail sales expenditures have increased due to a growth in the administrative
personnel, rent and communications equipment required to enhance customer
service and meet regulatory requirements. The $3.1 million loss on retail sales
in 1998 resulted principally from increased administrative and professional
fees, one-time costs associated with specific
82
<PAGE> 89
arbitration and litigation matters, as well as initial employee retention costs
related to the acquisition of Juran & Moody in fiscal year 1997.
For the fiscal year ended March 31, 2000, Stockwalk's Internet brokerage
business generated trading fee revenues of $2.7 million. In September 1999,
Stockwalk.com launched its website and completed the acquisition of Arnold
Securities, Inc. (renamed Online Brokerage Solutions, Inc.) and M-One Securities
Inc. The $3.6 million loss from Internet brokerage in the year ended March 31,
2000 was attributed to significant costs incurred in advertising designed to
create brand awareness for attracting new online customers and generating new
private label business.
Underwriting revenues increased $2.2 million from 1998 to 1999, and
declined $1.1 million from 1999 to 2000. The 1999 results include a $815,000
placement fee for locating a financial partner of an electricity project. No
similar transaction was completed during fiscal year 2000. The timing of
investment banking activity can vary significantly from period to period based
on market conditions, resulting in fluctuations in revenues and operating
profits in this segment.
The $1.9 million loss from other operations in the year ended March 31,
2000 is related to additional compensation for administrative personnel, legal
and accounting services and other incremental expenditures associated with being
a public company. The loss also includes expenses incurred for development of
Stockwalk's technological infrastructure that cannot be allocated equitably to
the other segments of its business.
QUARTERLY RESULTS
Selected unaudited data reflecting Stockwalk's results of operations for
each of the last eight quarters are shown in the following table. The
information for each of these quarters includes all normal and recurring
adjustments and accruals that Stockwalk considers necessary for a fair
presentation. The quarterly data do not include pro-forma results for the merger
with NM Holdings, Inc. The operating results, however, are not necessarily
indicative of results for any future period. The December 31, 1999 results
included a reclassification of $253,900 between interest revenue and interest
expense.
<TABLE>
<CAPTION>
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
FISCAL YEAR 2000
Revenues................. $13,204,900 $13,891,200 $17,217,900 $26,656,300
Net income (loss)........ (1,044,300) (1,259,400) (996,000) 1,599,800
Basic earnings (loss) per
share................. (0.05) (0.06) (0.05) 0.08
Net income (loss) per
share................. (0.05) (0.07) (0.05) 0.08
FISCAL YEAR 1999
Revenues................. $13,662,400 $13,832,900 $13,989,800 $14,105,200
Net income (loss)........ 392,300 442,300 499,800 (61,800)
Basic earnings (loss) per
share................. 0.03 0.02 0.03 --
Basic earnings (loss) per
share................. 0.03 0.02 0.03 --
</TABLE>
83
<PAGE> 90
LIQUIDITY AND CAPITAL RESOURCES
Stockwalk's assets consist primarily of cash and assets readily convertible
into cash. Security 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 arising from
transactions with customers and other brokers and dealers usually settle within
three days following the date of transaction. Fluctuations in the customer
margin and cash balances result in changes in segregated investments per NASD
reserve requirements. Operations are financed by equity capital, bank lines of
credit and working capital. Due to the liquid nature of Stockwalk's balance
sheet, fluctuations in cash flows from financing activities are directly related
to operating activities.
The $17.7 million increase in deposits during fiscal 2000 at clearing
organizations is the result of the purchase of additional government notes and
bonds for collateral on deposits required by the option clearing corporation for
increased levels of customer positions.
Stockwalk's investing activities used $9.5 million of cash in the year
ended March 31, 2000 as a result of the acquisitions of certain assets of M-One
Securities, Inc., Arnold Securities, Inc. (renamed Online Brokerage Solutions,
Inc.) and the Telescan software license. Stockwalk funded these acquisitions
through the issuance of notes payable and common stock.
Stockwalk's financing activities provided cash of $17.9 million in the year
ended March 31, 2000, primarily resulting from the issuance of approximately
2,200,000 shares of its common stock through private placements at a net price
of $7.125 per share and options and warrants exercised to purchase 63,875 shares
of its common stock. Notes payable were issued in connection with the
acquisitions completed in the year ended March 31, 2000. The increase in
short-term borrowings at March 31, 1999 and subsequent decline in March 31, 2000
is the result of fluctuating operating balances at each respective year-end.
At March 31, 2000, Stockwalk had approximately $70.0 million in
discretionary credit agreements, of which $29.5 million was utilized. The
extended credit was collateralized with approximately $20.9 million of
firm-owned securities and cash and approximately $14.2 million was
collateralized by customer securities collateralizing liabilities subordinated
to claims of general creditors.
Stockwalk's current cash position, cash generated from future operations,
availability of line of credit borrowings and proceeds from its convertible note
offering are adequate to meet the present capital requirements for the combined
entity for at least one year.
QUALITATIVE AND QUANTITATIVE DISCLOSURE OF MARKET RISK
Stockwalk's primary market risk exposure is the impact that equity market
pricing and interest rate fluctuations may have on the value of financial
securities it holds. Stockwalk manages this risk exposure through a process of
internal controls and management review. Position limits for trading and
investments are established and monitored on an on-going basis. The trading
inventory is turned over frequently throughout the year. Stockwalk's customers'
credit standing is reviewed by management and it maintains collateral to support
customer margin loans.
84
<PAGE> 91
Stockwalk's equity price risk results from the risk of loss from price
movements, volatility or liquidity over which it has no control. Stockwalk has
significantly reduced its corporate equity holdings from long positions of $6.3
million at March 31, 1999 to $3.5 million at March 31, 2000. The potential loss
in fair value, using a hypothetical 25% decline in equity prices on the March
31, 2000 holdings, is estimated to be $875,000. A 25% hypothetical decline was
used to represent a significant yet plausible market change.
Stockwalk's primary exposure to interest rate risk arises from its interest
earning assets held primarily for deposits to meet clearing organizations and
NASD reserve requirements. Stockwalk mitigates this risk by holding primarily
high-grade government obligations with short term maturities.
85
<PAGE> 92
OWNERSHIP OF VOTING SECURITIES OF KINNARD
PRINCIPAL SHAREHOLDERS
The following table sets forth information as of July 21, 2000, concerning
persons known by Kinnard to be the beneficial owner of more than five percent of
the Kinnard common stock as of that date.
<TABLE>
<CAPTION>
SHARES PERCENTAGE
NAME AND ADDRESS BENEFICIALLY OF
OF BENEFICIAL OWNER OWNED(1) CLASS(2)
------------------- ------------ ----------
<S> <C> <C>
William F. Farley........................................ 769,603(3) 14.4%
920 Second Avenue S
Minneapolis, MN 55402
John G. Kinnard and...................................... 633,713(4) 12.7%
Company, Incorporated
Employee Stock
Ownership Plan and Trust
920 Second Ave. S
Minneapolis, MN 55402
Stockwalk.com Group, Inc................................. 340,290(5) 6.8%
5500 Wayzata Boulevard
Suite 800
Minneapolis, MN 55416
Dimensional Fund Advisors Inc. .......................... 314,400(6) 6.3%
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
Robert S. Spong.......................................... 302,294(7) 6.1%
920 Second Avenue S
Minneapolis, MN 55402
Sheldon Fleck............................................ 258,750(8) 5.2%
5720 Smetana Drive #300
Minnetonka, MN 55343
</TABLE>
-------------------------
(1) Unless otherwise indicated, each person or entity named or included in the
group has sole power to vote and sole power to direct the disposition of all
shares listed as beneficially owned by such person or entity.
(2) Shares not outstanding but deemed beneficially owned by virtue of the
individual's right to acquire them as of July 21, 2000, or within 60 days of
such date are treated as outstanding only when determining the percent of
the class owned by such individual and when determining the percent owned by
the group.
(3) Includes 374,500 shares which may be purchased pursuant to options and
warrants which were exercisable as of July 21, 2000, or will become
exercisable within 60 days of such date, 78 shares allocated to Mr. Farley's
account under the ESOP and 4,525 shares held for Mr. Farley in Kinnard's
401(k) Profit Sharing account (over which Mr. Farley has dispositive power
but not voting power).
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(4) Such shares are held in trust for the benefit of participants in the John G.
Kinnard and Company, Incorporated Employee Stock Ownership Plan and Trust.
The participants have voting power over shares held by the ESOP which have
been allocated to their accounts, and the Trustees vote shares, if any,
which have not been allocated to participants' accounts.
(5) Stockwalk's information is based on a Schedule 13D filed with the SEC on
June 26, 2000, as amended on June 28, 2000.
(6) Dimensional Fund Advisors Inc. is an investment advisor registered under
Section 203 of the Investment Advisors Act of 1940. In its role as an
investment advisor or manager, Dimensional possesses sole voting power and
sole dispositive power with respect to the 314,400 shares. Dimensional has
disclaimed all beneficial ownership of such shares. The information set
forth above is based on a Schedule 13G dated February 4, 2000 filed by
Dimensional with the SEC.
(7) Includes 117,297 shares held by Mr. Spong's wife, 12,458 shares allocated to
Mr. Spong's account under the ESOP and 72,486 shares held for Mr. Spong in
Kinnard's 401(k) Profit Sharing account (over which Mr. Spong has
dispositive power but not voting power).
(8) Mr. Fleck has sole voting power and sole dispositive power with respect to
the 258,750 shares owned by Mr. Fleck. Mr. Fleck may be deemed to be the
beneficial owner of such shares. The information set forth herein is based
on a Schedule 13G filed with the SEC on May 19, 1999.
DIRECTOR AND MANAGEMENT SHAREHOLDINGS
The following table sets forth the number of shares of Kinnard common stock
beneficially owned as of July 21, 2000, by each director of Kinnard, by each
named executive officer of Kinnard, and by all directors and executive officers
(including the named individuals) as a group:
<TABLE>
<CAPTION>
SHARES PERCENTAGE
BENEFICIALLY OF
NAME OF BENEFICIAL OWNER OWNED(1) CLASS(2)
------------------------ ------------ ----------
<S> <C> <C>
William F. Farley.............................. 769,603(3) 14.4%
Robert S. Spong................................ 302,294(4) 6.1%
Andrew J. O'Connell............................ 133,933(5) 2.7%
Stephen H. Fischer............................. 113,142(6) 2.3%
George F. Stroebel............................. 45,000(7) *
John J. Fauth.................................. 15,000(8) *
Ronald A. Erickson............................. 15,000(8) *
John H. Grunewald.............................. 12,000(8) *
Robert D. Potts................................ 2,500(9) *
All Directors and Executive Officers as a Group
(10 persons)................................. 1,423,472(10) 26.3%
</TABLE>
-------------------------
* Less than one percent
(1) Unless otherwise indicated, each person named or included in the group has
sole power to vote and sole power to direct the disposition of all shares
listed as beneficially owned by such person.
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(2) Shares not outstanding but deemed beneficially owned by virtue of the
individual's right to acquire them as of July 21, 2000, or within 60 days
of such date are treated as outstanding only when determining the percent
of the class owned by such individual and when determining the percent
owned by the group.
(3) Includes 374,500 shares which may be purchased pursuant to options and
warrants which were exercisable as of July 21, 2000, or will become
exercisable within 60 days of such date and 78 shares allocated to his
account under the ESOP, and 4,525 shares held for Mr. Farley in Kinnard's
401(k) Profit Sharing account (over which Mr. Farley has dispositive power
but not voting power).
(4) Includes 117,297 shares held by Mr. Spong's wife, 12,458 shares allocated
to Mr. Spong's account under the ESOP and 72,486 shares held for Mr. Spong
in Kinnard's 401(k) Profit Sharing account (over which Mr. Spong has
dispositive power but not voting power).
(5) Includes 22,000 shares which may be purchased pursuant to options which are
exercisable as of July 21, 2000, or will become exercisable within 60 days
of such date, 19,300 shares allocated to the ESOP account of Mr. O'Connell,
and 45,910 shares held for Mr. O'Connell in Kinnard's 401(k) Profit Sharing
account (over which Mr. O'Connell has dispositive power but not voting
power).
(6) Includes 7,500 shares which may be purchased pursuant to options which were
exercisable as of July 21, 2000 or will become exercisable within 60 days
of such date.
(7) Includes 10,000 shares which may be purchased pursuant to options which
were exercisable as of July 21, 2000 or will become exercisable within 60
days of such date.
(8) Includes 5,000 shares which may be purchased pursuant to options which were
exercisable as of July 21, 2000, or will become exercisable within 60 days
of such date.
(9) Includes 2,500 shares which may be purchased pursuant to options which were
exercisable as of July 21, 2000 or will become exercisable within 60 days
of such date.
(10) Includes 436,500 shares which may be purchased pursuant to options and
warrants which were exercisable as of July 21, 2000, or will become
exercisable within 60 days of such date, 31,836 shares allocated to
accounts under the ESOP, and 122,921 shares held in Kinnard's 401(k) Profit
Sharing Plan (over which participants have dispositive power but not voting
power).
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MANAGEMENT OF STOCKWALK
DIRECTORS AND EXECUTIVE OFFICERS
Stockwalk's directors and executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY
---- --- --------------------------
<S> <C> <C>
Eldon C. Miller............. 59 Chief Executive Officer and Chairman of the
Board
David B. Johnson............ 49 President and Director
Paul R. Kuehn............... 57 President of Miller, Johnson & Kuehn and
Director
Stanley D. Rahm............. 68 Treasurer of Miller, Johnson & Kuehn and
Director
Todd W. Miller.............. 36 Chief Financial Officer
Philip T. Colton............ 41 Senior Vice President, General Counsel, and
Secretary
Andrew R. Guzman............ 49 Chief Information and Technology Officer
Robert Vosburgh............. 46 Chief Executive Officer of Online Brokerage
Solutions
Frank H. Lallos............. 29 President of Stockwalk.com
Randy Nitzsche.............. 36 Chief Executive Officer of Stockwalk.com
N. Lee Wesley............... 59 Director
George E. Kline............. 63 Director
Richard J. Nigon............ 52 Director
</TABLE>
Eldon C. Miller founded Miller Securities, Inc., Stockwalk's predecessor,
in December 1980. He has served as Chairman of the Board and as Chief Executive
Officer since Stockwalk's inception. Prior to forming Miller Securities, Mr.
Miller was a Vice President of Miller & Schroeder Municipals for more than seven
years. Mr. Miller is a 1968 graduate of Stonier Graduate School of Banking at
Rutgers University.
David B. Johnson, President, has served as Executive Vice President and as
a director of Miller, Johnson & Kuehn since Miller, Johnson & Kuehn purchased
certain assets of McClees Investments, Inc. in July 1989. Mr. Johnson served as
Senior Vice President of McClees Investments, Inc. from January 1987 to June
1989. Prior to January 1987, Mr. Johnson acted as Senior Vice President of
Miller Securities for more than five years.
Paul R. Kuehn, director, has served as President and director of Miller,
Johnson & Kuehn since it purchased certain assets of McClees Investments, Inc.
in July 1989. Mr. Kuehn served as President of McClees Investments, Inc. from
February 1988 to July 1989. Prior to 1989, Mr. Kuehn was Senior Vice President
of Marketing for Craig Hallum, Inc., a Minneapolis-based broker-dealer, for more
than 17 years.
Stanley D. Rahm, director, has served as Treasurer and as a Director of
Miller, Johnson & Kuehn since inception in 1989. Prior to 1989, Mr. Rahm was a
Vice President of Miller & Schroeder Municipals, Inc., a Minneapolis-based
broker-dealer, for seven years.
Todd W. Miller, Chief Financial Officer and Senior Vice President of
Miller, Johnson & Kuehn's clearing division, has been employed by Miller,
Johnson & Kuehn since 1982. He is responsible for founding Miller, Johnson &
Kuehn's clearing division.
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He was a member of the NASD's District 4 Business Conduct Committee from 1996 to
1998 and served as its Chairman during 1998. He is licensed by NASD as a
Registered Representative (Series 7), General Securities Principal (Series 24)
and Financial and Operations Principal (Series 27). Mr. Miller holds a CPA
certificate from the State of Minnesota. He received his MBA and BS degrees from
the University of Minnesota.
Philip T. Colton became Senior Vice President and General Counsel to
Stockwalk in September 1999. Mr. Colton has served as Secretary of Stockwalk and
its various predecessors since January 1998. Mr. Colton graduated with honors
from the University of Minnesota Law School in 1984, where he was a member and
editor of the Minnesota Law Review. Mr. Colton also served as a law clerk to
Justice Glenn E. Kelley of the Minnesota Supreme Court. For the past 15 years,
Mr. Colton practiced law at the Minneapolis law firm of Maun & Simon, PLC,
principally in the areas of corporate finance, mergers and acquisitions, and
securities and broker/dealer regulation.
Andrew R. Guzman, Chief Information and Chief Technology Officer, joined us
on September 1, 1999. He has more than 25 years of strategic, information
technology consulting and senior management experience in the financial services
industry. Mr. Guzman has managed the strategic planning, financial,
technological and project-management activities of various firms, as well as the
pursuit of new markets, joint ventures and alliances. He was instrumental in the
success of Olympic Financial (now Arcadia Financial) and other related financial
services companies. Mr. Guzman earned a bachelor of arts degree in Political
Science and the Sciences from Brown University. He also graduated from the
University of Virginia (McIntire School of Commerce) Graduate School of Retail
Bank Management.
Robert Vosburgh joined Stockwalk as Chief Operating Officer on August 1,
1999. He comes from Wells Fargo's (formerly Norwest Financial) Private Client
Services Group, where he was Senior Vice President for the Twin Cities area. He
also managed sales for the brokerage, portfolio management, trust and private
banking operations. In addition, he led Norwest's Investments & Insurance merger
team and held the post of Senior Vice President, Strategic Programs, for the
Investments and Insurance group. Mr. Vosburgh's seven years at Norwest also
included five years managing the institutional sales groups in Iowa and
Nebraska. Mr. Vosburgh is a graduate of Iowa State University (Aerospace
Engineering) and completed his master's degree and Ph.D. coursework in
Astronautical Engineering at the University of Tennessee.
Frank H. Lallos, President of Stockwalk.com, Inc., joined Stockwalk in
February 2000. Previously, he was a Senior Financial Services Analyst at Gomez
Advisors, Inc. in Lincoln, Massachusetts. At Gomez, Mr. Lallos covered online
brokerage and insurance companies and was one of the firm's personal finance
domain experts. Prior to his tenure at Gomez Advisors, Mr. Lallos was Director
of Finance for Fidelity Investments' customer marketing and development group.
He holds a master's degree in business administration from the William E. Simon
Graduate School of Business Administration at the University of Rochester (NY).
He also holds a bachelor's degree in economics and political science from the
same university. Additionally, he has a Chartered Financial Analyst (CFA)
designation and is a member of the Phi Beta Kappa society.
Randy Nitzsche, Chief Executive Officer of the online brokerage division
(or Stockwalk.com), has been employed by Miller, Johnson & Kuehn since 1994.
Prior to 1999, he was a Vice President in the clearing division. His efforts led
to significant growth in the number of correspondents serviced by Miller,
Johnson & Kuehn, from two in 1994
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to approximately 55 today. Prior to his work at Miller, Johnson & Kuehn, Mr.
Nitzsche was employed by the Chicago Stock Exchange in a variety of roles,
including product and sales management.
N. Lee Wesley, Director, has been a private investor in real estate and
securities for more than five years. He is the general partner of Standard Mill
Limited Partnership, the owner of the Whitney Hotel, a 97 room luxury hotel
located in Minneapolis, Minnesota. He was formerly the Vice-Chairman of
Wesley-Jesson, Inc., a contact lens company, and is currently a director of the
National Eye Research Foundation. Mr. Wesley has a Doctor of Ministry from the
Chicago Theological Seminary, an MBA from the University of Chicago and a
Bachelor of Science degree in industrial engineering from the University of
Michigan.
George E. Kline, Director, is a private investor. Mr. Kline has more than
30 years of experience in venture capital related fields. He has been a director
of more than 55 publicly owned companies, and an investor in over 160 companies.
During this period, he has conducted many of his activities through his
business, Venture Management. Through Venture Management, Mr. Kline has assisted
companies in the areas of raising private investment capital, negotiating and
arranging public and private stock offerings, bank term loans and lines of
credit, merger and acquisition activity, and internal management consulting on
financial matters.
Richard J. Nigon, Director, is Chief Financial Officer of Dantis, Inc., a
company formed in January 2000 for the purpose of developing an extensive web
hosting business. Prior to joining Dantis, Inc, Mr. Nigon was with Ernst & Young
LLP for 30 years, most recently as a partner for the past 18 years. For a
three-year period while at Ernst & Young LLP, Mr. Nigon was head of the
Minneapolis Entrepreneurial Services Group and focused on securing financing for
venture-backed start-up organizations, as well as retail and consumer product
manufacturing companies. Mr. Nigon is a graduate of St. John's University of
Minnesota.
In addition, upon completion of the Steichen transaction, Messrs. John E.
and John C. Feltl will become directors of Stockwalk. John E. Feltl is the
principal shareholder of Steichen. Since 1986, when he acquired Steichen, Mr.
Feltl has been that firm's Chief Executive Officer. Since 1994, Mr. John C.
Feltl has been employed by Steichen in various capacities, most recently as a
principal and the director of corporate finance.
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DESCRIPTION OF STOCKWALK CAPITAL STOCK
GENERAL
Stockwalk is currently authorized to issue an aggregate of 100,000,000
shares of capital stock, par value $.04 per share, of which 50,000,000 shares
are designated as common stock. The remaining shares may be divided into classes
and series as the Board of Directors may establish. As of July 21, 2000,
21,582,148 shares of Stockwalk's common stock were outstanding, and there were
no other classes of shares outstanding. In connection with the Steichen and
Kinnard transactions, Stockwalk anticipates issuing up to an aggregate of
approximately 8,735,000 shares of its common stock, subject to certain
adjustments, approximately 2,435,000 shares of which will be issued to Kinnard
shareholders and will be freely tradeable except for shares issued to Kinnard
affiliates, and approximately 4,300,000 of which will be issued to the Steichen
shareholders. Also, an additional 2,000,000 shares may be issued to the Steichen
shareholders based on Steichen's achievement of certain pre-tax earnings targets
during the two-year period following completion of the transaction. Holders of
common stock have no preemptive, subscription or redemption rights. All the
currently outstanding shares of Stockwalk's common stock are fully paid and
nonassessable.
VOTING RIGHTS; DIVIDENDS; LIQUIDATION
Holders of Stockwalk's common stock are entitled to one vote for each share
on all matters submitted to a vote of Stockwalk's shareholders, including the
election of directors. Stockwalk's Articles of Incorporation do not provide for
cumulative voting. Accordingly, holders of a majority of the shares of common
stock entitled to vote in any election of directors may elect all of the
directors standing for election if they choose to do so.
Holders of common stock will be entitled to receive dividends, if any,
declared from time to time by Stockwalk's Board of Directors, and will be
entitled to receive ratably all of Stockwalk's assets available for distribution
to them upon liquidation.
STOCK OPTIONS
Stockwalk has reserved up to 1,500,000 shares of common stock for granting
either nonqualified or incentive stock options to officers and key employees
under its 1995 Long-Term Incentive and Stock Option Plan. As of July 21, 2000,
options to purchase a total of 1,182,288 shares of common stock under this plan
were granted and outstanding, of which 221,001 were exercisable. Stockwalk plans
to increase the number of shares reserved for issuance of stock options under
this plan to 3,000,000 shares.
Under Stockwalk's 1996 Non-Employee Director Stock Option Plan, Stockwalk
has reserved up to 25,000 shares of common stock for granting options to
non-employee directors. As of July 21, 2000, options to purchase a total of
13,125 shares of common stock have been issued under this plan, of which 5,625
remain outstanding and exercisable. Stockwalk intends to increase the number of
shares reserved for issuance of stock options under this plan to 500,000 shares.
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WARRANTS
In connection with private placements of common stock during the year ended
March 2000, Stockwalk issued warrants to purchase 223,619 shares of its common
stock. The warrants are immediately exercisable at a price of $10.00 per share.
An additional 124,278 warrants to purchase Stockwalk's common stock were issued
in conjunction with various prior year debt and equity financings. All warrants
are vested and expire between August 2000 and March 2003. Holders of the
warrants are entitled to register the underlying shares in connection with
certain registrations of shares proposed by Stockwalk, unless the shares may
otherwise be sold under Rule 144, or if the underwriter of an offering proposed
by us is of the opinion that registration of such shares would have a
significant adverse effect on the offering proposed. The underwriters have made
such a determination in connection with Stockwalk's pending offering of
convertible subordinated notes. However, it is possible that these warrant
shares may be sold in a future offering or under Rule 144.
In connection with the Steichen merger, Stockwalk will issue John E. Feltl
a five-year warrant to purchase an aggregate of 300,000 shares of Stockwalk's
common stock at 85% of the fair market value of such stock on the date of
completion of the Steichen merger. Mr. Feltl will also have the right to convert
a $3.6 million he is making to Stockwalk, including accrued interest, into
shares of Stockwalk's common stock two years after completion of the Steichen
merger.
MINNESOTA ANTI-TAKEOVER LAW
Stockwalk is governed by the provisions of Sections 302A.671 and 302A.673
of the Minnesota Business Corporation Act. In general, Section 302A.671 provides
that the shares of a corporation acquired in a "control share acquisition" have
no voting rights unless the control share acquisition is approved in a
prescribed manner. A "control share acquisition" is an acquisition, directly or
indirectly, of beneficial ownership of shares that would, when added to all
other shares beneficially owned by the acquiring person, cause the acquiring
person to have voting power in the election of directors to exceed any one of
the following thresholds of ownership: 20%, 33 1/3% or 50%. In general, Section
302A.673 prohibits a publicly-held Minnesota corporation from engaging in a
"business combination" with an "interested shareholder" for a period of four
years after the date of transaction in which the person became an interested
shareholder, unless the business combination is approved in a prescribed manner.
"Business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested shareholder. An "interested
shareholder" is a person who is the beneficial owner, directly or indirectly, of
10% or more of the corporation's voting stock or who is an affiliate or
associate of the corporation and at any time within four years prior to the date
in question was the beneficial owner, directly or indirectly, of 10% or more of
the corporation's voting stock.
TRANSFER AGENT
The transfer agent for Stockwalk's common stock is Norwest Shareowner
Services, P.O. Box 64854, St. Paul, Minnesota 55164-0854.
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COMPARISON OF RIGHTS OF HOLDERS OF
KINNARD COMMON STOCK AND
STOCKWALK COMMON STOCK
The rights of the shareholders of Kinnard are governed by the Kinnard
Articles of Incorporation, the Kinnard Bylaws, and the MBCA. The rights of the
shareholders of Stockwalk are governed by the Stockwalk Articles of
Incorporation, the Stockwalk Bylaws, and the MBCA. Differences in the rights of
the Kinnard and Stockwalk shareholders may arise from differences between the
provisions of Kinnard's Articles of Incorporation and Bylaws and those of
Stockwalk. Shareholders of Kinnard will, on consummation of the Merger, become
shareholders of Stockwalk. Their rights as Stockwalk shareholders will then be
governed by Stockwalk's Articles of Incorporation and Bylaws and by the MBCA.
The following is a summary of certain material differences between the rights of
Kinnard shareholders and the rights of Stockwalk shareholders, as contained in
provisions of the Kinnard Articles and Bylaws, the Stockwalk Articles and
Bylaws, and the MBCA. This summary does not purport to be a complete statement
of the rights of Kinnard shareholders under the Kinnard Articles and Bylaws and
the MBCA, as compared with the rights of Stockwalk shareholders under the
Stockwalk Articles and Bylaws and the MBCA.
AUTHORIZED CAPITAL STOCK
Kinnard. Under Kinnard's Articles of Incorporation, Kinnard is authorized
to issue up to 25,000,000 shares, of which 12,000,000 shares have been
designated as common stock, par value $0.02 per share, 1,000,000 shares have
been designated as preferred stock, without par value, and 12,000,000 shares
remain undesignated. All shares of Kinnard common stock are identical in rights
and have one vote. The Board of Directors may divide the preferred stock into
series and establish the relative rights and preferences of preferred stock
issued in the future as specified in Kinnard's Articles of Incorporation without
shareholder action and issue such stock in series. As of the date hereof, no
shares of any series of Kinnard preferred stock are issued and outstanding.
Stockwalk. Under Stockwalk's Articles of Incorporation, Stockwalk is
authorized to issue up to 100,000,000 shares, par value $0.04 per share, of
which 50,000,000 are designated as common stock. The remaining 50,000,000 shares
are undesignated. The Board of Directors may divide the undesignated stock into
classes and series and establish the relative rights and preferences of stock
issued in the future as specified in Stockwalk's Articles of Incorporation
without shareholder action and issue such stock in series. As of the date
hereof, the Board has designated no additional classes or series of stock.
DISSENTER'S RIGHTS
Kinnard. Under the MBCA, shareholders have the right, in some
circumstances, to dissent from certain corporate transactions by demanding
payment in cash for their shares equal to the fair value of the shares as
determined by agreement with the corporation or by a court. The MBCA, in
general, affords dissenters' rights in the event of certain amendments to the
articles of incorporation that materially and adversely affect the rights or
preferences of the shares of the dissenting shareholder, the sale or other
disposition of substantially all corporate assets, or certain mergers and
statutory share exchanges involving the corporation, regardless of whether the
shares of the corporation are listed on a national securities exchange or widely
held. Shareholders of Kinnard have the right to dissent from the Merger. See
"The Merger -- Dissenters' Rights."
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Stockwalk. Shareholders of Stockwalk have the same dissenters' rights under
the MBCA as described in the preceding paragraph. Shareholders of Stockwalk do
not have the right to dissent from the Merger.
REQUIRED VOTE
Kinnard. Under the MBCA, Kinnard's Articles of Incorporation generally can
be amended if the proposed amendment is approved by Kinnard's Board of Directors
and by holders of a majority of the voting power of the shares of Kinnard common
stock present and entitled to vote at a meeting. Under the MBCA, the affirmative
vote of a majority of the voting power of all shares of Kinnard common stock is
required to approve mergers and certain other extraordinary transactions.
Stockwalk. Under the MBCA, Stockwalk's Articles of Incorporation generally
can be amended if the proposed amendment is approved by Stockwalk's Board of
Directors and by holders of a majority of the voting power of the shares of
Stockwalk common stock present and entitled to vote at a meeting. Under the
MBCA, the affirmative vote of a majority of the voting power of all shares of
Stockwalk common stock is required to approve mergers and certain other
extraordinary transactions.
DIRECTORS
Kinnard. The Board of Directors of Kinnard is divided into three classes as
nearly equal in number as possible, with the directors in each class serving for
staggered three-year terms. At each annual meeting of Kinnard shareholders, the
successors to the class of directors whose term expires at the time of such
meeting are elected by a majority of the votes cast, assuming a quorum is
present. Kinnard's Board consists of eight directors.
Stockwalk. Stockwalk's Board of Directors consists of a single class of
directors, each of whom serves for the term for which they were appointed or
elected and until their successors are elected or qualified. Stockwalk's Board
currently consists of seven directors. Stockwalk's board will be increased to
nine directors after completion of the Steichen transaction.
REMOVAL OF DIRECTORS
Kinnard. Under the MBCA, a director may be removed, with or without cause,
by the shareholders, or by a majority of the remaining directors if the director
was named by the board to fill a vacancy and the shareholders have not elected
directors in the interval between the time of appointment to fill a vacancy and
the time of removal. Under Kinnard's Bylaws, if, in an election of directors by
the shareholders, a current director does not receive sufficient votes in the
election to fill the position, the current director is automatically removed as
a director at the conclusion of the meeting in which the election occurred and
the directorship remains vacant until otherwise filled.
Stockwalk. Under the MBCA, a director may be removed, with or without
cause, by the shareholders, or by a majority of the remaining directors if the
director was named by the board to fill a vacancy and the shareholders have not
elected directors in the interval between the time of appointment to fill a
vacancy and the time of removal. Any or all directors may be removed from office
at any time, with or without cause, by the affirmative vote of the shareholders
holding a majority of the shares entitled to vote at an
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election of directors except, as otherwise provided by the MBCA Section
302A.223, as amended, when the shareholders have the right to cumulate their
votes.
NEWLY CREATED DIRECTORSHIPS AND VACANCIES ON THE BOARD OF DIRECTORS
Kinnard. The Kinnard Bylaws provide that vacancies on the Kinnard Board may
be filled by the affirmative vote of a majority of the remaining directors, even
though less than a quorum, except that vacancies on the board resulting from
newly created directorships may only be filled by the affirmative vote of
two-thirds of the directors serving at the time of the increase. The Kinnard
Bylaws further provide that any director so elected shall only hold office until
a qualified successor is elected at the next regular or special meeting of the
shareholders.
Stockwalk. The Stockwalk Bylaws provide that vacancies on the Stockwalk
Board may be filled by the affirmative vote of a majority of the remaining
directors, even though less than a quorum, except that vacancies on the Board
resulting from newly created directorships may be filled by a majority vote of
the directors serving at the time of the increase. The Stockwalk Bylaws further
provide that any director so elected shall only hold office until a qualified
successor is elected at the next regular or special meeting of the shareholders.
CERTAIN BUSINESS COMBINATIONS
Kinnard. Kinnard's Articles of Incorporation and Bylaws do not contain any
supermajority voting provisions relating to the approval by the holders of
Kinnard common stock of mergers or other business combinations. Minnesota has
enacted legislation aimed at regulating takeovers of certain corporations and
protecting shareholders of such corporations in connection with certain business
combinations. The Kinnard Articles provide that the control share provision of
the MBCA does not apply to Kinnard.
Stockwalk. Stockwalk's Articles of Incorporation and Bylaws do not contain
any supermajority voting provisions relating to the approval by the holders of
Stockwalk common stock of mergers or other business combinations. Minnesota has
enacted legislation aimed at regulating takeovers of certain corporations and
protecting shareholders of such corporations in connection with certain business
combinations. The two primary provisions of this nature, namely, the business
combination provision and the control share acquisition provision, are not
applicable to Stockwalk.
LIMITATION OF LIABILITY; INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES
Kinnard. Unless limited by the articles of incorporation or bylaws of a
corporation, the MBCA provides for mandatory indemnification of a director,
officer, employee or committee member against certain liabilities and expenses
if such person (i) acted in good faith; (ii) received no improper personal
benefit; (iii) in the case of a criminal proceeding, had no reasonable cause to
believe the conduct was unlawful; and (iv) depending upon the capacity in which
such person was serving, either believed the conduct was in the best interests
of the corporation or believed that the conduct was not opposed to the best
interests of the corporation. Kinnard's Bylaws authorize indemnification of
executive officers and directors of Kinnard consistent with the provisions as
described in this paragraph. The Kinnard Bylaws limit indemnification of other
employees and agents to the extent determined by an officer of Kinnard who is
charged with the responsibility of
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monitoring litigation and other disputes, and whose final determination is
subject to review by the Kinnard Board upon petition by the employee or agent
seeking indemnification. Kinnard directors are at all times indemnified to the
fullest extent allowed by the MBCA, so amended.
Stockwalk. Stockwalk's directors are not liable for breach of fiduciary
duty, except for (i) liability based on a breach of the duty of loyalty to the
corporation or the shareholders; (ii) liability for acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of law;
(iii) liability based on the payment of an improper repurchase of the
corporation's stock under Section 302A.559 of the MBCA; or (iv) liability for
any transaction from which the director derived an improper personal benefit.
Stockwalk directors are at all times indemnified to the fullest extent allowed
by the MBCA, so amended.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. For example, statements included in this prospectus
regarding Stockwalk's financial position, business strategy and other plans and
objectives for future operations, and assumptions and predictions about future
demand for its services, costs, marketing and pricing factors are all
forward-looking statements. When Stockwalk uses words like "intend,"
"anticipate," "believe," "estimate," "plan" or "expect," it is making forward-
looking statements. Stockwalk believes that the assumptions and expectations
reflected in such forward-looking statements are reasonable, based on
information available to it on the date of this prospectus, but it cannot assure
you that these assumptions and expectations will prove to have been correct or
that it will take any action that it may presently be planning. Stockwalk has
disclosed certain important factors that could cause its actual results to
differ materially from its current expectations under "Risk Factors" and
elsewhere in this prospectus. You should understand that forward-looking
statements made in this prospectus are qualified by the factors described under
"Risk Factors" and elsewhere in this prospectus. Stockwalk is not undertaking to
publicly update or revise any forward-looking statement if it obtains new
information or upon the occurrence of future events.
LEGAL MATTERS
The legality of the shares of Stockwalk common stock to be issued in the
merger is being passed upon for Stockwalk by Maun & Simon, PLC, Minneapolis,
Minnesota. Certain legal matters relating to the merger will be passed upon for
Kinnard by Kaplan, Strangis and Kaplan, P.A., Minneapolis, Minnesota and for
Stockwalk by Maun & Simon, PLC.
SHAREHOLDER PROPOSALS
In the event the merger is not completed, any proposals submitted by
shareholders of Kinnard for presentation at the 2001 annual meeting of
shareholders must be received by the Secretary of Kinnard not later than January
31, 2001, for inclusion in the proxy statement and form of proxy relating to the
2001 annual meeting of shareholders.
97
<PAGE> 104
EXPERTS
The consolidated financial statements of Stockwalk.com Group, Inc. at March
31, 1999 and 2000 and for each of the three years in the period ended March 31,
2000, included in the Proxy Statement of Kinnard Investments, Inc., which is a
part of the Prospectus and Registration Statement of Stockwalk.com Group, Inc.,
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report appearing elsewhere herein, and are included in reliance upon such
report given on the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements of Kinnard Investments, Inc. as of
December 31, 1998 and 1999, and for each of the years in the three-year period
ended December 31, 1999, included herein, were audited by KPMG LLP, independent
certified public accountants. Such consolidated financial statements are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
The consolidated financial statements of R.J. Steichen & Company as of
September 30, 1998 and 1999 and for each of the years in the three-year period
ended September 30, 1999, included herein, were audited by KPMG LLP, independent
certified public accountants. Such consolidated financial statements are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
This proxy statement/prospectus is part of a registration statement
Stockwalk filed with the SEC to register the shares of Stockwalk common stock to
be issued to Kinnard shareholders in the merger. Stockwalk and Kinnard also file
annual, quarterly and current reports, proxy statements and other information
with the SEC. You may read and copy any document we file at the SEC's public
reference room at 450 Fifth Street N.W., Washington, D.C. 20549. Please call the
SEC at 1-800-SEC-0330 for further information on the public reference room. Our
SEC filings are also available to the public from the SEC's Website at
"http://www.sec.gov."
The SEC allows us, under certain circumstances, to "incorporate by
reference" the information we file with the SEC, which means that we can
disclose important information to you by referring you to those documents. The
information incorporated by reference is considered to be part of this proxy
statement/prospectus, and information that we later file with the SEC will
automatically update and supersede this information. We incorporate by reference
the documents listed below and any future filings we will make with the SEC
under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act.
Stockwalk (File No. 0-22247):
Form 10-K for the year ended March 31, 2000.
Kinnard (File No. 0-09377):
Form 10-K for the year ended December 31, 1999.
Form 10-Q for the three months ended March 31, 2000.
Form 8-K filed on June 7, 2000.
98
<PAGE> 105
You may request a copy of Stockwalk's filings, at no cost, by writing or
telephoning Stockwalk's Chief Financial Officer at the following address:
Stockwalk.com Group, Inc.
Suite 800
5500 Wayzata Boulevard
Minneapolis, Minnesota 55416
(800) 537-7829
You may request a copy of Kinnard's filings, at no cost, by writing or
telephoning Kinnard's Chief Financial Officer at the following address:
Kinnard Investments, Inc.
Kinnard Financial Center
920 Second Avenue South
Minneapolis, Minnesota 55402
(612) 370-2937
99
<PAGE> 106
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
Independent Auditors' Report................................ F-3
Consolidated Statements of Financial Condition as of
December 31, 1998 and 1999................................ F-4
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999.......................... F-5
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1997, 1998 and 1999.............. F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999.......................... F-7
Notes to Consolidated Financial Statements.................. F-8
Consolidated Statements of Financial Condition as of
December 31, 1999 and March 31, 2000 (unaudited).......... F-20
Unaudited Consolidated Statements of Operations for the
three-month periods ended March 31, 1999 and 2000......... F-21
Unaudited Consolidated Statement of Shareholders' Equity for
the three-month period ended March 31, 2000............... F-22
Unaudited Consolidated Statements of Cash Flows for
three-month periods ended March 31, 1999 and 2000......... F-23
Notes to Unaudited Consolidated Financial Statements........ F-25
R.J. STEICHEN & COMPANY
Independent Auditors' Report................................ F-28
Statements of Financial Condition as of September 30, 1998
and 1999.................................................. F-29
Statements of Operations for the years ended September 30,
1997, 1998 and 1999....................................... F-30
Statements of Stockholders' Equity for the years ended
September 30, 1997, 1998 and 1999......................... F-31
Statements of Cash Flows for the years ended September 30,
1997, 1998 and 1999....................................... F-32
Notes to Financial Statements for the years ended September
30, 1997, 1998 and 1999................................... F-33
Statements of Financial Condition as of September 30, 1999
and March 31, 2000 (unaudited)............................ F-39
Unaudited Statements of Operations for the six-month periods
ended March 31, 1999 and 2000............................. F-40
Unaudited Statement of Stockholders' Equity for the
six-month period ended March 31, 2000..................... F-41
Unaudited Statements of Cash Flows for the six-month periods
ended March 31, 1999 and 2000............................. F-42
Notes to Unaudited Financial Statements..................... F-43
</TABLE>
F-1
<PAGE> 107
<TABLE>
<S> <C>
STOCKWALK.COM GROUP, INC.
Report of Independent Auditors.............................. F-44
Consolidated Statements of Financial Condition as of March
31, 1999 and 2000......................................... F-45
Consolidated Statements of Operations for the years ended
March 31, 1998, 1999 and 2000............................. F-46
Consolidated Statements of Shareholders' Equity for the
years ended March 31, 1998, 1999 and 2000................. F-47
Consolidated Statements of Cash Flows for the years ended
March 31, 1998, 1999 and 2000............................. F-48
Notes to Consolidated Financial Statements.................. F-49
UNAUDITED PRO FORMA FINANCIAL INFORMATION
Unaudited Consolidated Condensed Pro Forma Statement of
Financial Condition as of March 31, 2000.................. F-61
Unaudited Consolidated Condensed Pro Forma Statement of
Operations for the year ended March 31, 2000.............. F-62
Unaudited Consolidated Condensed Pro Forma Footnotes to
Financial Statements...................................... F-63
</TABLE>
F-2
<PAGE> 108
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Kinnard Investments, Inc.:
We have audited the accompanying consolidated statements of financial
condition of Kinnard Investments, Inc. and subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Kinnard
Investments, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Minneapolis, Minnesota
February 17, 2000
F-3
<PAGE> 109
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------
1998 1999
-------- --------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 2,689 $ 8,018
Receivable from clearing firm............................... 1,009 590
Miscellaneous receivables................................... 3,527 2,899
Trading securities, at market............................... 8,221 12,976
Office equipment at cost, less accumulated depreciation of
$2,540 and $3,594, respectively........................... 1,888 1,247
Investment securities, at fair value........................ 16,918 13,992
Income tax receivable....................................... 1,456 0
Deferred income taxes....................................... 242 354
Other assets................................................ 414 351
------- -------
Total assets........................................... $36,364 $40,427
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Securities sold but not yet purchased, at market.......... 257 844
Accrued compensation...................................... 3,770 6,233
Other accounts payable and accrued expenses............... 2,831 3,158
Income taxes payable...................................... 0 1,228
------- -------
Total liabilities...................................... 6,858 11,463
======= =======
Shareholders' equity
Common stock, $.02 par value; authorized 12,000 shares;
issued and outstanding 5,483 and 4,782 shares,
respectively........................................... 110 96
Additional paid-in capital................................ 9,265 6,028
Retained earnings......................................... 20,131 22,840
======= =======
Total shareholders' equity............................. 29,506 28,964
------- -------
Total liabilities and shareholders' equity............. $36,364 $40,427
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE> 110
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
Commissions................................... $14,745 $14,684 $16,645
Principal transactions........................ 25,929 16,453 22,708
Net gains/losses on investment account........ 455 (187) 6,520
Investment banking............................ 3,977 5,640 3,839
Interest...................................... 2,276 1,422 1,638
Other......................................... 2,464 2,932 3,518
------- ------- -------
Total revenues........................ 49,846 40,944 54,868
------- ------- -------
Expenses:
Compensation and benefits..................... 33,872 31,360 34,628
Floor brokerage and clearance................. 4,171 3,413 3,931
Communications................................ 787 910 765
Occupancy and equipment....................... 5,333 5,554 5,161
Other......................................... 5,147 5,336 5,870
------- ------- -------
Total expenses........................... 49,310 46,573 50,355
------- ------- -------
Income (loss) before income taxes............... 536 (5,629) 4,513
Income tax expense (benefit).................... 228 (2,253) 1,804
------- ------- -------
Net income (loss)............................... $ 308 $(3,376) $ 2,709
======= ======= =======
Earnings (loss) per common share:
Basic......................................... $ 0.05 $ (0.58) $ 0.54
Diluted....................................... $ 0.05 $ (0.58) $ 0.53
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE> 111
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------- ----------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996.... 6,027 120 12,710 23,199 36,029
----- ---- ------- ------- -------
Issuance of shares under
employee stock option
plan..................... 68 1 230 231
Issuance of new shares...... 325 7 1,700 1,707
Repurchase of stock......... (465) (9) (2,694) (2,703)
Net income.................. 308 308
----- ---- ------- ------- -------
Balance, December 31, 1997.... 5,955 119 11,946 23,507 35,572
----- ---- ------- ------- -------
Issuance of shares under
employee stock purchase
plan..................... 13 0 78 78
Issuance of shares under
employee stock option
plan..................... 81 2 379 381
Repurchase of stock......... (566) (11) (3,138) (3,149)
Net loss.................... (3,376) (3,376)
----- ---- ------- ------- -------
Balance, December 31, 1998.... 5,483 $110 $ 9,265 $20,131 $29,506
----- ---- ------- ------- -------
Issuance of shares under
employee stock option
plan..................... 59 1 273 274
Repurchase of stock......... (760) (15) (3,604) (3,619)
Tax benefit from stock
options exercised........ 94 94
Net income.................. 2,709 2,709
----- ---- ------- ------- -------
Balance, December 31, 1999.... 4,782 $ 96 $ 6,028 $22,840 $28,964
===== ==== ======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE> 112
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR YEARS ENDED
DECEMBER 31,
-----------------------------
1997 1998 1999
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers and clearing firm............ $45,103 $40,553 $42,960
Cash paid to suppliers and employees...................... (49,473) (46,550) (45,819)
Interest:
Received................................................ 2,276 1,422 1,638
Paid.................................................... 0 0 0
Income taxes (paid) refunded.............................. (3,349) 317 862
------- ------- -------
Net cash used in operating activities..................... (5,443) (4,258) (359)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of:
Office equipment........................................ 5 63 0
Investment securities................................... 16,511 16,285 18,220
Purchases of:
Office equipment........................................ (1,074) (1,505) (413)
Investment securities................................... (17,866) (10,685) (8,774)
Funds released from escrow................................ 0 1,593 0
------- ------- -------
Net cash provided by (used in) investing activities....... (2,424) 5,751 9,033
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock.................................. 1,938 459 274
Repurchase of common stock................................ (2,703) (3,149) (3,619)
------- ------- -------
Net cash used in financing activities..................... (765) (2,690) (3,345)
------- ------- -------
Increase (decrease) in cash and cash equivalents............ (8,632) (1,197) 5,329
Cash and cash equivalents at beginning of year.............. 12,518 3,886 2,689
------- ------- -------
Cash and cash equivalents at end of year.................... $ 3,886 $ 2,689 $ 8,018
======= ======= =======
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH USED IN
OPERATING ACTIVITIES:
Net income (loss)......................................... $ 308 $(3,376) $ 2,709
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization............................. 766 821 1,054
Net unrealized loss (gain) on investment securities....... (222) 626 (1,344)
Net realized gain on sale of investment securities........ (233) (439) (5,176)
Realized loss (gain) on sale of office equipment.......... 21 0 0
Deferred income taxes..................................... 89 (462) (322)
(Increase) decrease in:
Receivable from clearing firm........................... 968 (1,009) 419
Miscellaneous receivables............................... (1,211) (216) 628
Trading securities, at market........................... (3,072) 2,509 (4,755)
Income tax receivable................................... 0 (1,456) 1,456
Other assets............................................ (56) 66 63
Increase (decrease) in:
Due to clearing firm.................................... 1,069 (1,069) 0
Securities sold but not yet purchased, at market........ 73 (658) 587
Accrued compensation.................................... (306) 176 2,463
Other accounts payable and accrued expenses............. (427) 247 327
Income taxes payable.................................... (3,210) (18) 1,532
------- ------- -------
Net cash used in operating activities....................... $(5,443) $(4,258) $ (359)
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-7
<PAGE> 113
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Kinnard Investments, Inc. ("Kinnard") is a holding company that has been
providing financial products and services for over 50 years. The primary
subsidiary, John G. Kinnard and Company, Incorporated ("John G. Kinnard" or
"JGK"), is a regional broker-dealer headquartered in Minneapolis, Minnesota.
Kinnard and John G. Kinnard are hereinafter collectively referred to as the
"Company".
John G. Kinnard is a full-service broker-dealer engaged in securities
brokerage, trading, investment banking, asset management and related financial
services to both retail and institutional customers. Its principal business is
trading, underwriting, research and sale of securities of emerging growth
companies with market capitalizations up to $250 million. Kinnard also
negotiates, underwrites and participates in fixed income debt offerings. Other
products and services include mutual funds, insurance products, investment
management, IRA services and fixed income securities.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Kinnard
Investments, Inc. and its wholly owned subsidiaries. All intercompany accounts
and transactions have been eliminated in consolidation. Kinnard does not present
a statement of comprehensive income as there are no items. Kinnard does not
provide balance sheet data for segment reporting as this data is not measured.
CASH AND CASH EQUIVALENTS
Kinnard considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
SECURITIES TRANSACTIONS
Securities transactions and the related revenues and expenses are recorded
on a settlement date basis, which is not materially different than if such
transactions were recorded on trade date. Trading securities, securities sold
but not yet purchased and investment securities that are readily marketable are
stated at quoted market values. Trading and investment securities not readily
marketable are carried at fair value as determined by management. Unrealized
gains and losses are included in earnings.
MISCELLANEOUS RECEIVABLES
Included in miscellaneous receivables are forgivable loans made to
investment executives and other revenue-producing employees, typically in
connection with their recruitment. Such loans are forgivable based on continued
employment and are amortized
F-8
<PAGE> 114
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
over the term of the loan, which is generally three to five years, using the
straight-line method.
INCOME TAXES
Kinnard accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". Under this
method, deferred tax liabilities and assets and the resultant provision for
income taxes are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
OFFICE EQUIPMENT
The cost of office equipment is depreciated using accelerated methods over
the estimated useful lives of two to seven years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of Kinnard's financial assets and liabilities are carried
at market value or at amounts which, because of their short-term nature,
approximate current fair value.
MANAGEMENT ESTIMATES
The preparation of 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 and expenses during the reporting period. Actual
results could differ from those estimates.
EMPLOYEE STOCK COMPENSATION
Kinnard has elected to continue following the guidance of Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees", for measurement and recognition of stock-based transactions with
employees. Kinnard has adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". See Note 10 to the Consolidated
Financial Statements for additional information.
EARNINGS PER SHARE
Basic earnings per share are based upon the weighted average number of
common shares outstanding during the reporting period. Diluted earnings per
share take into account the dilutive effect, if any, of stock options and other
potential dilutive common shares outstanding during the period.
F-9
<PAGE> 115
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following reconciliation illustrates the computation of basic and
diluted earnings per share:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1998 1999
------ ------- ------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Net income (loss)..................................... $ 308 $(3,376) $2,709
====== ======= ======
Weighted average number of common shares
outstanding......................................... 6,149 5,825 5,050
Dilutive effect of stock options and warrants......... 82 0 22
------ ------- ------
Weighted average number of common and potential
dilutive common shares outstanding:................. 6,231 5,825 5,072
====== ======= ======
Basic earnings (loss) per share....................... $ 0.05 $ (0.58) $ 0.54
Diluted earnings (loss) per share..................... $ 0.05 $ (0.58) $ 0.53
====== ======= ======
</TABLE>
Non-dilutive options as of December 31, 1997, 1998 and 1999 totaled
447,000, 537,000 and 574,000, respectively.
NOTE 2. BINDING ARBITRATION AWARD
On December 10, 1999, the National Association of Securities Dealers
("NASD") issued a binding arbitration award for $16.6 million in favor of
Kinnard and against Dain Rauscher Corporation ("Dain") and several of its
investment executives who were wrongfully recruited by Dain from Kinnard from
1997 to 1999.
NASD arbitration awards are not subject to appeal. While Dain has filed a
motion with the Hennepin County District Court (the "Court") to vacate the
arbitration panel's decision, Kinnard believes that vacatur is unlikely due to
the narrow grounds upon which a binding arbitration award may be vacated. Under
both Federal and Minnesota Arbitration Acts, the Court must find evidence of
fraud, corruption, misconduct or partiality on the part of the arbitration
panel, or that the panel exceeded its powers in rendering its award decision.
The award included compensatory damages of $9.1 million, punitive damages
of $7.1 million and reimbursement of legal costs of $350 thousand. Upon
exhaustion of all vacatur efforts, Kinnard anticipates recognizing up to $16.6
million in revenue. Recognition of such revenue may result in additional
compensation and income tax expense. The additional compensation expense would
result from an incremental ESOP contribution and additional incentive
compensation, both based on pre-tax income.
The following unaudited pro forma information has been prepared assuming
that the binding arbitration settlement had been recognized during the period
presented after the
F-10
<PAGE> 116
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. BINDING ARBITRATION AWARD (CONTINUED)
impact of certain adjustments to revenue, employee compensation based on current
formulas and the related income tax effects thereof.
PRO FORMA STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
---------------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
(UNAUDITED)
<S> <C>
Revenues.................................................... $71,085
Expenses.................................................... $53,491
-------
Income before income taxes.................................. 17,594
Income tax expense.......................................... 7,037
-------
Net income.................................................. $10,557
=======
Earnings per common share:
Basic..................................................... $ 2.09
Diluted................................................... $ 2.08
Book value per common share:................................ $ 7.70
=======
</TABLE>
NOTE 3. OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Included in other accounts payable and accrued expenses are vendor accounts
payable, accrual for contingencies, sales incentive program accruals and
miscellaneous payables.
NOTE 4. SECURITIES
Trading securities are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
------ -------
(IN THOUSANDS)
<S> <C> <C>
Trading securities:
Corporate stocks.......................................... $2,298 1,837
U.S. government and municipal bonds....................... 3,702 10,226
Corporate debt securities................................. 2,221 913
------ -------
$8,221 $12,976
====== =======
Securities sold but not yet purchased:
Corporate stocks.......................................... $ 252 $ 433
Corporate debt securities................................. 5 411
------ -------
$ 257 $ 844
====== =======
</TABLE>
F-11
<PAGE> 117
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. SECURITIES (CONTINUED)
Revenues from principal transactions are generated by market making
activities in both equity and fixed income products. Revenues from equity
principal transactions were $18.8 million, $10.9 million and $17.2 million for
the years ended December 31, 1997, 1998 and 1999. Revenues from fixed income
principal transactions were $7.1 million, $5.5 million and $5.5 million for the
years ended December 31, 1997, 1998 and 1999.
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Investment securities:
Corporate stocks.......................................... $ 4,590 $ 3,166
U.S. government bonds..................................... 5,557 7,065
Outside money managers.................................... 6,771 3,761
------- -------
$16,918 $13,992
======= =======
</TABLE>
NOTE 5. NOTES PAYABLE
JGK maintains a discretionary credit facility providing for conditional
short-term borrowing of up to $10 million. The facility limits borrowing to 90
days and is secured by the firm's marketable securities. Advances under the
facility are at the bank's sole discretion, accrue interest at a fluctuating
interest rate to be agreed upon by JGK and the bank, and are subject to certain
affirmative and negative covenants. There are no fees or compensating balances
related to this line of credit. There were no outstanding borrowings at December
31, 1998 and 1999 nor for the years then ended.
NOTE 6. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
Employees are eligible to participate in the Employee Stock Ownership Plan
and Trust (ESOP) upon completing one year of service. Contributions to the ESOP
are made at the discretion of Kinnard and can be made in cash or other property,
as the Trustees of the ESOP consider appropriate. These contributions are used
primarily to purchase stock of Kinnard. A participant is generally fully vested
after five years of service. During the years ended December 31, 1997, 1998 and
1999, Kinnard contributed $0, $0 and $796,093, respectively, to the ESOP.
PENSION AND PROFIT SHARING PLANS
Kinnard has defined contribution pension and profit sharing plans covering
substantially all employees who have completed at least one full year of
continuous service. Kinnard contributes to the pension plan, on behalf of each
eligible employee, an amount equal to five percent of their annual qualified
compensation. This contribution is reflected
F-12
<PAGE> 118
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
as an operating expense and amounted to $1.0 million, $781,000 and $854,000 for
the years ended December 31, 1997, 1998 and 1999, respectively.
There were no contributions to the Profit Sharing Plan for the years ended
December 31, 1999, 1998 and 1997. Kinnard does not intend to make any further
contributions to the Profit Sharing Plan so long as the ESOP is in effect.
NOTE 7. INCOME TAXES
Income tax expense (benefit) is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
---- -------------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal........................................... $ 97 $(1,433) $2,533
State............................................. 42 (358) (407)
Deferred............................................ 89 (462) (322)
---- ------- ------
$228 $(2,253) $1,804
==== ======= ======
</TABLE>
The provision for income taxes for the years ended December 31, 1997, 1998
and 1999, differs from the amount obtained by applying the U.S. federal income
tax rate of 34% to pretax income due to the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
---- ------- ------
<S> <C> <C> <C>
Ordinary federal income tax expense (benefit)......... $182 $(1,914) $1,534
State income taxes, net of federal tax benefit........ 46 (339) 0
Other................................................. 0 0 270
---- ------- ------
$228 $(2,253) $1,804
==== ======= ======
</TABLE>
F-13
<PAGE> 119
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to Kinnard's
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1998 1999
---- ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accruals not currently deductible......................... $627 $ 680
Receivables............................................... 216 219
Other..................................................... 137 386
---- ------
980 1,285
==== ======
Deferred tax liabilities:
Unrealized appreciation of investment securities.......... 658 868
Other..................................................... 80 63
---- ------
738 931
---- ------
Net deferred tax asset...................................... $242 $ 354
==== ======
</TABLE>
Kinnard has determined that there is no need to establish a valuation
allowance for the deferred tax asset. That determination is based on the
assumption that it is more likely than not that the deferred tax asset will be
realized principally through future reversals of existing taxable temporary
differences and future taxable income.
NOTE 8. NET CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS
Kinnard is subject to the Securities and Exchange Commission (SEC) Rule
15c3-1, net capital requirements for brokers and dealers, which required Kinnard
to maintain minimum net capital of $799,000 as of December 31, 1999. Also, under
this rule, the ratio of aggregate indebtedness to net capital may not exceed 15
to 1, and Kinnard may be prohibited from expanding its business or paying cash
dividends if its ratio of aggregate indebtedness to net capital is greater than
10 to 1. At December 31, 1999, Kinnard had net capital of $8.0 million, and a
ratio of aggregate indebtedness to net capital of 1.5 to 1.
Kinnard is exempt from the provisions of SEC Rule 15c3-3, customer
protection: reserves and custody of securities, as Kinnard's clearing firm is
responsible for complying with these provisions. Accordingly, the computation
for determination of reserve requirements and information relating to the
possession or control requirements is not required for Kinnard.
NOTE 9. EQUITY
Kinnard's 12 million shares of authorized undesignated stock may be
designated by the Board of Directors as either preferred stock or common stock.
During the years 1997, 1998 and 1999 Kinnard repurchased 465,000, 566,000
and 760,000 shares of its common stock at a total cost of $2.7 million, $3.1
million and
F-14
<PAGE> 120
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. EQUITY (CONTINUED)
$3.6 million, respectively. In October 1998, the board of directors authorized
the repurchase of 1,000,000 shares in the open market or through privately
negotiated transactions, at the discretion of the firm's management. In November
1999, the board of directors authorized the repurchase of an additional
1,000,000. Remaining shares authorized for repurchase at December 31, 1999 are
1,231,491.
In April 1997, Kinnard entered into a Subscription and Purchase Agreement
with William F. Farley, whereby Mr. Farley purchased 325,000 Units of securities
of Kinnard for $1.7 million or $5.25 per Unit. Each Unit consisted of one share
of common stock of Kinnard and a warrant to purchase an additional share at a
price of $6.00 per share.
Kinnard has an Employee Stock Purchase Plan ("ESPP") under which 1,050,000
shares are authorized for issuance. The ESPP allows employees to set aside up to
15% of earnings to purchase shares of Kinnard's common stock. Shares are issued
semi-annually at a price equal to 85% of a defined market price, but not less
than book value at the end of the period. Reserved but unissued shares under the
Plan were 689,538 at December 31, 1999.
NOTE 10. STOCK OPTION PLANS
Under Kinnard's 1990 and 1997 Stock Option Plans, a total of 620,000 and 1
million shares, respectively, have been reserved for options to employees and
Directors of Kinnard. At December 31, 1999 authorized but unissued shares were
161,857 for the 1990 Stock Option Plan and 463,500 for the 1997 Stock Option
Plan. Under terms of the plan, options are generally granted at the current
market price, but not less than the book value per share. The options may be
exercised over the period prescribed at the time of the grant, not to exceed ten
years.
F-15
<PAGE> 121
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. STOCK OPTION PLANS (CONTINUED)
The options, in general, vest evenly over five years. Stock option
transactions are summarized below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding at December 31, 1996........................... 368,200 $4.40
Granted.................................................... 488,000 5.98
Exercised.................................................. (67,693) 4.01
Forfeited or expired....................................... (131,557) 5.39
-------- -----
Outstanding at December 31, 1997........................... 656,950 5.37
Granted.................................................... 250,000 5.97
Exercised.................................................. (81,250) 4.69
Forfeited or expired....................................... (95,000) 5.74
-------- -----
Outstanding at December 31, 1998........................... 730,700 5.62
Granted.................................................... 159,500 4.70
Exercised.................................................. (58,950) 3.74
Forfeited or expired....................................... (143,000) 4.98
-------- -----
Outstanding at December 31, 1999........................... 688,250 $5.52
======== =====
Exercisable at:
December 31, 1997..................................... 416,450 5.07
December 31, 1998..................................... 373,700 5.37
December 31, 1999..................................... 477,500 5.62
======== =====
</TABLE>
The following table summarizes information for stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
RANGE OF AVERAGE AVERAGE WEIGHTED
EXERCISE NUMBER LIFE EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING (YEARS) PRICE EXERCISABLE PRICE
-------- ----------- ------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$3.58 to $4.04................ 66,750 1.08 $4.00 0 N/A
$4.25 to $5.88................ 234,500 6.71 4.91 200,000 $4.91
$5.98 to $5.98................ 119,500 1.22 5.98 20,000 5.98
$6.00 to $6.88................ 267,500 6.51 6.18 257,500 6.15
------- ---- ----- ------- -----
$3.58 to $6.88................ 688,250 6.25 $5.50 477,500 $5.62
======= ==== ===== ======= =====
</TABLE>
No compensation expense has been recognized for its stock option and stock
purchase plans because the exercise price of all options granted under the stock
option plan and price of shares issued under the stock purchase plan were not
deemed to be less than fair value.
F-16
<PAGE> 122
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. STOCK OPTION PLANS (CONTINUED)
Had compensation cost for these equity instruments been determined based on
the fair value at the grant dates, Kinnard's net income (loss) and earnings
(loss) per share for the years ended December 31, 1997, 1998 and 1999 would have
been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1998 1999
------ ------- ------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Net income (loss):
As reported...................................... $ 308 $(3,376) $2,709
Pro forma........................................ $ (145) $(3,514) $2,357
Basic earnings (loss) per share:
As reported...................................... $ 0.05 $ (0.58) $ 0.54
Pro forma........................................ $(0.02) $ (0.60) $ 0.47
Diluted earnings (loss) per share:
As reported...................................... $ 0.05 $ (0.58) $ 0.53
Pro forma........................................ $(0.02) $ (0.60) $ 0.46
====== ======= ======
</TABLE>
Using the Black-Scholes option pricing model, the estimated weighted
average fair value of options granted during 1997, 1998 and 1999 was $2.04,
$2.71 and $5.25 per share. The assumptions used in the computations for 1997,
1998 and 1999 are as follows: risk-free interest rate of 6.3%, 5.6% and 6.2%;
expected dividend yield of 0% in all three years; expected life of five, four
and six years; and expected volatility of 43%, 42% and 61%. Pro forma
compensation cost of shares issued under the Employee Stock Purchase Plan is
measured based on the discount from market value. At December 31, 1999, the
closing price of Kinnard's common stock was $7.44 per share.
NOTE 11. COMMITMENTS
Kinnard and its subsidiaries lease office space and equipment under various
operating leases with remaining terms ranging up to eight years. Certain of
these leases have escalation clauses and renewal options. Minimum rentals
required under these non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
2000............................................... $ 758
2001............................................... 728
2002............................................... 709
2003............................................... 620
2004............................................... 322
Thereafter......................................... 398
------
$3,535
======
</TABLE>
Rent expense was $2.9 million, $3.2 million and $2.8 million for the years
ended December 31, 1997, 1998 and 1999, respectively.
F-17
<PAGE> 123
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11. COMMITMENTS (CONTINUED)
In the normal course of business, Kinnard 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 consolidated financial
statements.
NOTE 12. LEGAL PROCEEDINGS
Kinnard is a defendant in various other actions relating to its business,
some of which involve claims for unspecified amounts. Although the ultimate
resolution of these matters cannot be predicted with certainty, in management's
opinion, while their outcome may have a material effect on the earnings in a
particular period, the outcome will not have a material adverse effect on the
financial condition of Kinnard.
NOTE 13. SEGMENTS
Kinnard's reportable segments are: retail sales, equity capital markets,
fixed income and other. The retail segment consists of various retail branch
locations and the financial services division. Equity capital markets consists
of equity trading, institutional sales, research and investment banking. Fixed
income includes the origination, trading, and institutional sales of fixed
income securities. Other consists of general corporate, administrative support
functions and net gains or losses on the investment account. Kinnard 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>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue:
Retail sales................................... $30,422 $24,737 $28,760
Equity capital markets......................... 10,192 8,660 11,720
Fixed income................................... 6,224 5,943 6,182
Other.......................................... 3,008 1,604 8,206
------- ------- -------
$49,846 $40,944 $54,868
======= ======= =======
Pretax income (loss):
Retail sales................................... $ 4,342 $ 2,501 $ 4,983
Equity capital markets......................... (509) (3,126) (1,148)
Fixed income................................... 1,166 1,132 840
Other.......................................... (4,463) (6,136) (162)
------- ------- -------
$ 536 $(5,629) $ 4,513
======= ======= =======
</TABLE>
F-18
<PAGE> 124
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Kinnard sells securities that are not yet purchased (short sales) for its
own account. The establishment of short positions exposes Kinnard to
off-balance-sheet market risk in the event prices increase, as Kinnard 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
consolidated financial statements.
In connection with its trading securities, Kinnard 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, Kinnard's activities involve the
execution, settlement and financing of various securities transactions. These
activities may expose Kinnard 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.
Kinnard clears all transactions for its customers on a fully disclosed
basis with a clearing firm that carries all customer accounts and maintains
related records. However, Kinnard is liable to the clearing firm for the
transactions of its customers. These activities may expose Kinnard to
off-balance-sheet risk in the event a customer or counterparty is unable to
fulfill its contractual obligations. Kinnard maintains all of its trading
securities at the clearing firm. These trading securities may collateralize
amounts due to the clearing firm.
Kinnard is also exposed to the risk of loss on customer transactions in the
event of the customer's or counterparty's inability to meet the terms of their
contracts, in which case Kinnard may have to purchase or sell financial
instruments at prevailing market prices. The impact of unsettled transactions is
not expected to have a material effect upon Kinnard's consolidated financial
statements.
Kinnard's customer securities activities are transacted on either a cash or
margin basis. Kinnard seeks to control the risks associated with its customer
margin activities by requiring customers to maintain margin collateral in
compliance with regulatory and internal guidelines. Kinnard monitors required
margin levels daily, and pursuant to such guidelines, requires that customers
deposit additional collateral, or reduce margin positions, when necessary.
As a broker dealer, JGK is engaged in various securities trading and
brokerage activities serving a diverse group of corporations, governments,
institutions and individual investors. JGK'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 Kinnard. 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, Kinnard has established
credit limits which are monitored on an on-going basis in light of market
conditions.
F-19
<PAGE> 125
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ -----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents............................ $ 8,018 $ 8,346
Receivable from clearing firm........................ 590 999
Miscellaneous receivables............................ 2,899 4,734
Trading securities, at market........................ 12,976 11,959
Office equipment at cost, less accumulated
depreciation of $3,594 and $3,841, respectively.... 1,247 1,133
Investment securities, at fair value................. 13,992 13,477
Deferred income taxes................................ 354 337
Other assets......................................... 351 343
------- -------
Total assets.................................... $40,427 $41,328
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Securities sold but not yet purchased, at market... 844 748
Accrued compensation............................... 6,233 5,111
Other accounts payable and accrued expenses........ 3,158 3,020
Income taxes payable............................... 1,228 1,695
------- -------
Total liabilities............................... 11,463 10,574
Shareholders' equity
Common Stock, $.02 par value;
Authorized 7,500 shares;........................
Issued and outstanding 4,782 and 4,853 shares,
respectively.................................. 96 97
Additional paid-in capital......................... 6,028 6,310
Retained earnings.................................. 22,840 24,347
------- -------
Total shareholders' equity...................... 28,964 30,754
------- -------
Total liabilities and shareholders' equity...... $40,427 $41,328
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-20
<PAGE> 126
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1999 2000
------ ------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
(UNAUDITED)
<S> <C> <C>
OPERATING REVENUES:
Commissions............................................. $4,177 $6,031
Principal transactions.................................. 5,049 9,324
Investment banking...................................... 562 2,388
Interest................................................ 393 670
Net gain (loss) on investment account................... 672 (352)
Other................................................... 965 961
------ ------
Total operating revenues........................... 11,818 19,022
OPERATING EXPENSES:
Compensation and benefits............................... 7,630 12,670
Floor brokerage and clearance........................... 965 1,497
Communications.......................................... 198 200
Occupancy and equipment................................. 1,437 1,292
Other................................................... 1,001 851
------ ------
Total operating expenses........................... 11,231 16,510
Operating income.......................................... 587 2,512
Pretax income............................................. 587 2,512
Income tax expense........................................ 234 1,005
Net income................................................ $ 353 $1,507
Earnings per common share:
Basic................................................... $ 0.07 $ 0.31
Diluted................................................. $ 0.07 $ 0.29
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-21
<PAGE> 127
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997....... 5,955 $119 $11,946 $23,507 $35,572
----- ---- ------- ------- -------
Issuance of shares under the
employee stock purchase
plan........................ 13 0 78 -- 78
Issuance of shares under the
employee stock option
plan........................ 81 2 379 -- 381
Repurchase of stock............ (566) (11) (3,138) -- (3,149)
Net loss....................... -- -- -- (3,376) (3,376)
----- ---- ------- ------- -------
Balance, December 31, 1998....... 5,483 110 9,265 20,131 29,506
----- ---- ------- ------- -------
Issuance of shares under the
employee stock option
plan........................ 59 1 367 -- 368
Repurchase of stock............ (760) (15) (3,604) -- (3,619)
Net income..................... -- -- -- 2,709 2,709
----- ---- ------- ------- -------
Balance, December 31, 1999....... 4,782 96 6,028 22,840 28,964
----- ---- ------- ------- -------
Issuance of shares under the
employee stock option
plan........................ 71 1 282 -- 283
Net income..................... -- -- -- 1,507 1,507
----- ---- ------- ------- -------
Balance, March 31, 2000
(unaudited).................... 4,853 $ 97 $ 6,310 $24,347 $30,754
===== ==== ======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-22
<PAGE> 128
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1999 2000
-------- -------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers and clearing firm............ $ 9,646 $19,216
Cash paid to suppliers and employees...................... (12,779) (19,350)
Interest received......................................... 393 670
Income taxes paid/income tax refunds received............. 38 (615)
-------- -------
Net cash used in operating activities....................... (2,702) (79)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investment securities............... 7,827 846
Purchases of:
Office equipment....................................... (71) (133)
Investment securities.................................. (5,209) (683)
-------- -------
Net cash provided by investing activities................... 2,547 30
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock.................................. 21 377
Repurchase of common stock................................ (1,716) --
-------- -------
Net cash provided by (used in) financing activities......... (1,695) 377
Increase (decrease) in cash and cash equivalents............ (1,850) 328
Cash and cash equivalents at beginning of period............ 2,689 8,018
-------- -------
Cash and cash equivalents at end of period.................. $ 839 $ 8,346
======== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-23
<PAGE> 129
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
------------------
1999 2000
---- ----
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH USED IN OPERATING
ACTIVITIES:
Net income................................................ $ 353 $ 1,507
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization.......................... 284 247
Net unrealized loss on investment securities........... 115 979
Net realized gain on sale of investment securities..... (787) (627)
Deferred income taxes.................................. (18) 17
(Increase) decrease in:
Receivable from clearing firm........................ (515) (409)
Miscellaneous receivables............................ 164 (1,835)
Trading securities, at market........................ (702) 1,017
Income tax receivable................................ 291 --
Other assets......................................... 110 8
Increase (decrease) in:
Securities sold but not yet purchased, at market..... 111 (96)
Accrued compensation................................. (1,769) (1,122)
Other accounts payable and accrued expenses.......... (339) (138)
Income taxes payable................................. -- 373
------- -------
Net cash used in operating activities....................... $(2,702) $ (79)
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-24
<PAGE> 130
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements of Kinnard have been
prepared in conformity with generally accepted accounting principles and should
be read in conjunction with Kinnard's financial information included elsewhere
herein. The results of operations for the three months ended March 31, 2000 are
not necessarily indicative of the results to be expected for the year ending
December 31, 2000.
The consolidated statement of financial condition as of March 31, 2000 and
other financial information for the three months ended March 31, 1999 and 2000,
are unaudited, but Kinnard's management believes that all adjustments
(consisting only of normal recurring adjustments) necessary for a fair statement
of the results of operations for the periods have been included.
NOTE 2. BINDING ARBITRATION AWARD
On December 10, 1999, the NASD issued a binding arbitration award for $16.6
million in favor of Kinnard and against Dain Rauscher Corporation ("Dain") and
several of its investment executives who were wrongfully recruited by Dain from
Kinnard from 1997 to 1999.
NASD arbitration awards are not subject to appeal. While Dain has filed a
motion with the Hennepin County District Court to vacate the arbitration panel's
decision, Kinnard believes that vacature is unlikely due to the narrow grounds
upon which a binding arbitration award may be vacated. Under both Federal and
Minnesota Arbitration Acts, the court must find evidence of fraud, corruption,
misconduct or partiality on the part of the arbitration panel, or that the panel
exceeded its powers in rendering its award decision.
The award included compensatory damages of $9.1 million, punitive damages
of $7.1 million and reimbursement of legal costs of $350 thousand. Under NASD
Rules, Dain is required to pay interest on the unpaid settlement amount based on
a statutory interest rate of 5.5%. Upon exhaustion of all vacatur efforts,
Kinnard anticipates recognizing up to $16.6 million in revenue from the
settlement, plus interest income during the period that the settlement remains
unpaid. Recognition of such revenue may result in additional compensation and
income tax expense.
The following unaudited pro forma information has been prepared assuming
that the binding arbitration settlement and related accrued interest had been
recognized at the end
F-25
<PAGE> 131
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. BINDING ARBITRATION AWARD (CONTINUED)
of the period presented after the impact of certain adjustments to revenue,
employee compensation based on current formulas and the related income tax
effects thereof.
PRO FORMA STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
THREE-MONTH PERIOD
ENDED
MARCH 31, 2000
------------------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
(UNAUDITED)
<S> <C>
Revenues................................................. $35,810
Expenses................................................. $19,647
Income before income taxes............................... 16,163
Income tax expense....................................... 6,465
-------
Net income............................................... $ 9,698
=======
Earnings per common share:
Basic.................................................. $ 2.01
Diluted................................................ $ 1.89
Book value per common share:............................. $ 8.02
</TABLE>
NOTE 3. OTHER COMMITMENTS AND CONTINGENT LIABILITIES
John G. Kinnard and Company, Incorporated is a defendant in various actions
relating to its business, some of which involve claims for unspecified amounts.
Although the resolution of these matters cannot be predicted with certainty,
management believes that while their outcome may have a material effect on the
earnings in a particular period, the outcome will not have a material adverse
effect on the financial condition of Kinnard.
NOTE 4. SEGMENTS
Kinnard's reportable segments are: retail sales, equity capital markets,
fixed income and other. The retail segment consists of various retail branch
locations and the financial services division. Equity capital markets consists
of equity trading, institutional sales, research and investment banking. Fixed
income includes the origination, trading, and institutional sales of fixed
income securities. Other consists of general corporate and administrative
support functions. Kinnard does not provide balance sheet data for segment
reporting as this data is not measured.
F-26
<PAGE> 132
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. SEGMENTS (CONTINUED)
Information concerning operations in these segments of business is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
------------------
1999 2000
------- -------
(IN THOUSANDS)
<S> <C> <C>
Operating revenue:
Retail sales.............................................. $ 6,896 $11,259
Equity capital markets.................................... 2,433 5,597
Fixed income.............................................. 1,329 1,882
Other..................................................... 1,160 284
------- -------
Total.................................................. $11,818 $19,022
Operating income/(loss):
Retail sales.............................................. $ 1,183 $ 2,416
Equity capital markets.................................... (405) 1,074
Fixed income.............................................. 203 435
Other..................................................... (394) (1,413)
------- -------
Total.................................................. $ 587 $ 2,512
======= =======
</TABLE>
F-27
<PAGE> 133
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
F-28
<PAGE> 134
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.
F-29
<PAGE> 135
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.
F-30
<PAGE> 136
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.
F-31
<PAGE> 137
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.
F-32
<PAGE> 138
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
F-33
<PAGE> 139
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.
F-34
<PAGE> 140
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.
F-35
<PAGE> 141
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.
F-36
<PAGE> 142
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.
F-37
<PAGE> 143
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>
F-38
<PAGE> 144
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.
F-39
<PAGE> 145
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.
F-40
<PAGE> 146
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.
F-41
<PAGE> 147
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.
F-42
<PAGE> 148
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>
F-43
<PAGE> 149
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Stockwalk.com Group Inc.
We have audited the accompanying consolidated statements of financial
condition of Stockwalk.com Group, Inc. and subsidiaries as of March 31, 2000 and
1999 and the related consolidated statements of operations, shareholders' equity
and cash flows for each of the three years in the period ended March 31, 2000.
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 audit in accordance with auditing standards generally
accepted in the United States. Those standards required 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 consolidated financial position of Stockwalk.com
Group, Inc. and subsidiaries at March 31, 2000 and 1999 and the consolidated
results of their operations and their cash flows for the each of the three years
in the period ended March 31, 2000, in conformity with accounting principles
generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Minneapolis, MN
May 3, 2000, except for Note 12,
as to which the date is June 7, 2000
F-44
<PAGE> 150
STOCKWALK.COM GROUP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH 31,
----------------------------
1999 2000
------------ ------------
<S> <C> <C>
ASSETS
Cash................................................ $ 3,200,700 $ 5,533,500
Cash and cash equivalents-segregated................ 73,130,500 83,009,400
Receivables from customers.......................... 139,910,800 216,216,100
Receivables from brokers and dealers................ 70,350,300 160,230,300
Deposits at clearing organizations.................. 8,492,200 26,234,900
Trading securities owned, at market................. 9,274,300 8,320,100
Secured demand notes receivable..................... 9,675,000 18,575,000
Goodwill, less accumulated amortization of $243,600
and $489,400...................................... 1,380,200 10,284,900
Other assets........................................ 6,938,800 10,471,100
------------ ------------
Total assets................................... $322,352,800 $538,875,300
============ ============
LIABILITIES
Short-term borrowings............................... $ 33,900,000 $ 29,500,000
Payables to customers............................... 203,313,800 280,364,200
Payables to brokers and dealers..................... 53,363,600 160,153,400
Trading securities sold but not yet purchased, at
market............................................ 812,200 1,339,000
Notes payable....................................... 4,538,100 7,544,400
Liabilities subordinated to claims of general
creditors......................................... 9,675,000 18,575,000
Other liabilities................................... 9,738,900 16,747,000
------------ ------------
Total liabilities.............................. 315,341,600 514,223,000
SHAREHOLDERS' EQUITY
Common stock, 1999 -- $.01 par value; 2000 -- $.04
par value
Authorized shares: 50,000,000
Issued and outstanding 1999 -- 4,255,971; 2000 --
21,575,313..................................... 42,600 863,000
Preferred stock -- no par
Authorized shares: 1999 -- 5,000,000; 2000 -- 0
Issued and outstanding 1999 -- 558,000;
2000 -- 0...................................... 4,380,300 --
Paid-in capital..................................... 2,540,000 25,440,900
Retained earnings (deficit)......................... 48,300 (1,651,600)
------------ ------------
Total shareholders' equity........................ 7,011,200 24,652,300
------------ ------------
Total liabilities and shareholders' equity........ $322,352,800 $538,875,300
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-45
<PAGE> 151
STOCKWALK.COM GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
-----------------------------------------
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Trading profits.......................... $10,634,100 $15,063,100 $16,073,000
Interest................................. 13,506,700 15,410,200 20,988,500
Commissions.............................. 9,039,900 9,888,200 14,287,200
Investment banking....................... 9,656,200 8,388,900 10,362,900
Clearing fees............................ 1,902,300 3,105,400 5,247,600
Other income............................. 2,353,400 3,734,500 4,011,100
----------- ----------- -----------
Total revenues...................... 47,092,600 55,590,300 70,970,300
EXPENSES:
Employee compensation and benefits....... 25,950,400 26,986,900 34,163,000
Clearing fees............................ 1,474,500 2,890,100 2,998,900
Occupancy and equipment.................. 3,380,600 3,285,100 4,853,800
Communication............................ 3,937,900 5,251,400 8,016,500
Interest................................. 11,027,400 11,805,900 16,331,400
Other expense............................ 3,145,100 3,113,300 7,145,400
----------- ----------- -----------
Total expenses...................... 48,915,900 53,332,700 73,509,000
Income (loss) before income taxes.......... (1,823,300) 2,257,600 (2,538,700)
Income tax expense (benefit)............... (599,000) 985,000 (838,800)
----------- ----------- -----------
Net income (loss).......................... $(1,224,300) $ 1,272,600 $(1,699,900)
=========== =========== ===========
Basic earnings (loss) per share............ $(0.08) $0.08 $(0.09)
=========== =========== ===========
Weighted average shares
outstanding -- basic..................... 15,848,500 15,848,500 18,849,200
=========== =========== ===========
Diluted earnings (loss) per share.......... $(0.08) $0.08 $(0.09)
=========== =========== ===========
Weighted average shares
outstanding -- diluted................... 15,848,500 15,848,500 18,998,400
=========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-46
<PAGE> 152
STOCKWALK.COM GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31, 1998, 1999 AND 2000
-----------------------------------------------------------------------------
COMMON STOCK ADDITIONAL RETAINED
PREFERRED --------------------- PAID IN EARNINGS
STOCK SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
----------- ---------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1997.......... -- 4,255,971 $ 42,600 $ 1,297,300 $ 1,242,700 $ 2,582,600
Exchange of MJK common stock
for MJK Holdings............. -- -- -- 1,242,700 (1,242,700) --
Net loss....................... -- -- -- -- (1,224,300) (1,224,300)
----------- ---------- -------- ----------- ----------- -----------
Balance, March 31, 1998.......... -- 4,255,971 $ 42,600 $ 2,540,000 $(1,224,300) $ 1,358,300
Issuance of preferred stock.... 4,380,300 -- -- -- 4,380,300
Net income..................... -- -- -- -- 1,272,600 1,272,600
----------- ---------- -------- ----------- ----------- -----------
Balance, March 31, 1999.......... 4,380,300 4,255,971 $ 42,600 $ 2,540,000 $ 48,300 $ 7,011,200
Issuance of preferred stock.... 101,800 -- -- -- -- 101,800
Recapitalization in connection
with merger of NM Holdings,
Inc.......................... (4,482,100) 14,959,670 726,000 6,380,100 -- 2,624,000
Exercise of options and
warrants..................... 63,875 2,600 165,200 167,800
Issued shares of common stock
through private placements... -- 2,239,500 89,600 15,910,600 -- 16,000,200
Issued in connection with
acquisition of Arnold
Securities, Inc.............. -- 10,000 400 71,900 -- 72,300
Issued in connection with
acquisition of M-One
Securities................... -- 40,000 1,600 318,400 -- 320,000
Issued in connection with
marketing agreement.......... -- 6,297 200 54,700 -- 54,900
Net loss....................... -- -- -- -- (1,699,900) (1,699,900)
----------- ---------- -------- ----------- ----------- -----------
Balance, March 31, 2000.......... -- 21,575,313 $863,000 $25,440,900 $(1,651,600) $24,652,300
=========== ========== ======== =========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-47
<PAGE> 153
STOCKWALK.COM GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
------------------------------------------
1998 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).......................... $ (1,224,300) $ 1,272,600 $ (1,699,900)
Adjustments to reconcile net income (loss)
to net cash used for operating
activities:
Depreciation and amortization............ 919,200 1,013,900 946,600
Changes in assets and liabilities:
Cash and investments segregated....... (60,772,200) 22,515,600 (9,878,900)
Customer receivables and payables..... 35,621,800 11,199,000 745,100
Broker and dealer receivables and
payables............................ (190,500) (47,410,100) 16,909,800
Deposits at clearing organizations.... 236,300 (7,689,300) (17,742,700)
Trading securities.................... 9,724,000 (9,168,700) 1,481,000
Other assets and liabilities........ 5,103,700 3,264,000 3,113,500
------------ ------------ ------------
Net cash used for operating activities..... $(10,582,000) $(25,003,000) $ (6,125,500)
INVESTING ACTIVITIES
Acquisition of certain assets of broker
dealers and license agreements........... $ 15,400,400 $ -- $ (9,150,500)
Increase in goodwill due to completion of
acquisition of assets and assumption of
liabilities of Juran & Moody............. (481,900) -- --
Purchase of equipment and office furniture,
net...................................... (1,356,900) (645,100) (338,500)
------------ ------------ ------------
Net cash provided by (used for) investing
activities............................... $ 13,561,600 $ (645,100) $ (9,489,000)
FINANCING ACTIVITIES
Increase (decrease) in short-term
borrowings............................... $ (5,000,000) $ 21,900,000 $ (4,400,000)
Issuance of notes payable.................. 5,100,000 -- 4,667,400
Payments on notes payable.................. (969,000) (714,400) (1,661,100)
Issuance of preferred stock................ -- 4,380,300 101,800
Issuance of common stock................... -- -- 19,239,200
------------ ------------ ------------
Net cash provided by (used for) financing
activities............................... $ (869,000) $ 25,565,900 $ 17,947,300
Net increase (decrease) in cash and cash
equivalents.............................. $ 2,110,600 $ (82,200) $ 2,332,800
Cash at beginning of period................ 1,172,300 3,282,900 3,200,700
------------ ------------ ------------
Cash at end of period...................... $ 3,282,900 $ 3,200,700 $ 5,533,500
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid (received) during the year for:
Interest................................. $ 11,188,100 $ 11,297,200 $ 15,333,500
============ ============ ============
Income taxes............................. $ 38,800 $ (373,400) $ 798,600
============ ============ ============
</TABLE>
See accompany notes to the consolidated financial statements.
F-48
<PAGE> 154
STOCKWALK.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Our history began in 1980 with the incorporation of Miller Securities, a
specialized municipal bond firm. Miller Securities eventually broadened its
business to include a variety of financial services, including securities
clearing, and changed its name to Miller, Johnson & Kuehn, Incorporated ("MJK").
MJK Holdings, Inc. ("MJKH") was formed in June 1997 as a holding company for MJK
and MJK's clearing division. On July 7, 1999, then privately-owned MJKH and
publicly-held NM Holdings, Inc. completed a merger whereby MJKH became a
wholly-owned subsidiary of NM Holdings, Inc. The surviving entity changed its
name to Stockwalk.com Group, Inc., and is today the ultimate holding company of
MJK, MJK Capital Corporation, MJKH, MJK Management Services, Inc.,
Stockwalk.com, Inc. and Arnold Securities, Inc. MJK, Stockwalk.com, Inc. and
Arnold Securities, Inc. are registered as broker-dealers with the SEC and are
members of the NASD and SIPC. Our stock trades on the NASDAQ under the ticker
symbol "STOK."
We are a technologically-driven regional securities firm headquartered in
Minneapolis, Minnesota. Through our operating subsidiaries, we provide a broad
range of investment services to individual, corporate and public clients. These
services include both traditional and online securities brokerage, investment
banking and research services and the processing of securities transactions for
correspondent brokerage firms and financial institutions. Our Miller, Johnson &
Kuehn, Incorporated subsidiary offers traditional securities brokerage,
securities trading, investment banking and research services. Our niche market
includes small capitalization, emerging and start-up businesses and public
finance clients located principally in the upper midwest. In 1999, our
Stockwalk.com, Inc. subsidiary began offering a secure online brokerage service
that provides order placement, portfolio tracking and related market
information, news and other information to investors 24 hours a day, seven days
a week, by means of the Internet and telephone. These Stockwalk.com services are
offered to our customers and to customers and members of small to medium-sized
financial institutions, affinity groups and Internet portals through a private
label program.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION AND SECURITIES TRANSACTIONS
Purchases and sales of securities are recorded on a settlement date basis,
which is generally the third business day following the transaction date. The
impact of unsettled transactions on trading securities owned, trading securities
sold but not yet purchased, and income, net of related expenses, is not
material.
F-49
<PAGE> 155
STOCKWALK.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
VALUATION OF FINANCIAL INSTRUMENTS
Trading securities owned and trading securities sold but not yet purchased
are carried at fair value. The fair values of the financial instruments are
generally based on listed market prices. If listed market prices are not
available, fair value is based on other relevant factors, including dealer price
quotations.
GOODWILL
Excess of cost over fair value of net assets acquired ("goodwill") is
amortized using the straight-line method over periods not exceeding 20 years.
Goodwill is evaluated periodically for impairment, in accordance with the
requirements of generally accepted accounting principles.
CUSTOMER RECEIVABLES, PAYABLES AND SECURITIES
Receivables from and payables to customers arise from cash and margin
transactions executed on behalf of our customers. Receivables are generally
collateralized by securities with market values in excess of the amounts due. It
is our policy to monitor the market value of the collateral and request
additional collateral when required. Such collateral is not reflected in the
accompanying financial statements.
We are required to maintain possession or control, as defined, of all fully
paid securities and excess margin securities of customers. To the extent such
control cannot be obtained from various counterparties, we may have to purchase
or sell securities at prevailing market rates to obtain such possession or
control.
We charge interest on our customer margin accounts and pay interest on
customers' free credit balances based on prevailing market rates. We recorded
interest revenue of approximately $11.1 million, $10.1 million and $9.7 million
on customer margin accounts in the fiscal years ended March 31, 2000, 1999, and
1998, respectively, and interest expense of approximately $9.3 million, $7.7
million and $6.8 million in the same periods.
REVERSE REPURCHASE AGREEMENTS
Securities purchased under agreements to resell (reverse repurchase
agreements) are recorded at the contract amount at which the securities will be
subsequently resold plus accrued interest. These financial instruments are
collateralized by U.S. government securities. It is our policy to take
possession of securities purchased under agreements to resell.
CASH AND CASH EQUIVALENTS
We consider all highly liquid investments, including reverse repurchase
agreements, with a maturity of three months or less when purchased to be cash
equivalents.
F-50
<PAGE> 156
STOCKWALK.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash and investments segregated consist of funds segregated in special
reserve bank accounts for the benefit of customers under rule 15c3-3 of the
Securities and Exchange Commission. The cash and cash equivalents segregated in
special reserve bank accounts included $17.1 million and $8.7 million of reverse
repurchase agreements at March 31, 2000 and 1999, respectively.
INCOME TAXES
Deferred income taxes are recorded to reflect the tax consequences of
differences between the tax and financial reporting bases of assets and
liabilities. Recorded amounts relate primarily to net operating losses and tax
credit carryforwards.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Stockwalk.com
Group, Inc. and its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation. We do not present a
statement of comprehensive income as there are no items.
SEGMENT REPORTING
Segment results are derived from our 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, our 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 our operating
segments. We do not provide balance sheet data for segment reporting as this
data is not measured for our operating segments.
Information concerning operations in our segments of business is detailed
in the Management's Discussion and Analysis of Financial Condition and Results
of Operations.
ADVERTISING EXPENDITURES
Our advertising costs of $1.5 million in fiscal 2000 have been expensed as
incurred. No significant advertising expenses were incurred in fiscal 1998 or
1999.
INVESTMENT BANKING
Investment banking revenues include gains, losses and fees arising from
securities offerings in which we act as an underwriter or agent. Investment
banking management fees are recorded on offering date, sales concessions on
settlement date, and underwriting fees at the time the underwriting is completed
and the income is reasonably determinable.
F-51
<PAGE> 157
STOCKWALK.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACCOUNTING CHANGES
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
is effective for financial statements for periods beginning after June 15, 2000.
This statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivative instruments as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The adoption of
SFAS No. 133 is not expected to have a material impact on our financial results.
3. BROKER-DEALER RECEIVABLES AND PAYABLES
Broker-dealer receivables and payables at March 31, consisted of the
following:
<TABLE>
<CAPTION>
1999 2000
----------- ------------
<S> <C> <C>
Securities borrowed.................................. $51,283,400 $148,564,800
Securities failed-to-deliver......................... 17,859,900 6,608,200
Receivable from introducing broker................... 473,400 2,632,200
Other................................................ 733,600 2,425,100
----------- ------------
Total receivables.................................... $70,350,300 $160,230,300
=========== ============
Securities loaned.................................... $35,550,200 $147,089,600
Securities failed-to-receive......................... 5,440,100 5,605,300
Payable to introducing broker........................ 2,398,300 4,347,900
Payable to clearing broker........................... 9,975,000 3,110,600
----------- ------------
Total payables....................................... $53,363,600 $160,153,400
=========== ============
</TABLE>
Broker-dealer receivables and payables arise from securities transactions
executed for our customers. The receivables are generally collected within 30
days and collateralized by securities in physical possession, on deposit or
receivable from customers or other broker-dealers.
Broker-dealer payables represent amounts due upon the receipt of
securities. Should the broker-dealer fail to deliver the securities to us, we
may be required to purchase identical securities on the open market. The market
value of such securities at March 31, 1999 and 2000 approximates the amount
owed.
Securities borrowed and loaned are stated in the Consolidated Statements of
Financial Condition at the amounts of collateral advanced and received in
connection with the transactions. We measure the fair value of the securities
borrowed and loaned against the cash collateral on a daily basis. Additional
collateral is obtained as necessary to ensure such transactions are adequately
collateralized.
4. TRADING SECURITIES
Our trading securities represent investments in fixed income securities,
publicly traded equity securities and privately placed equity securities. The
value of certain trading
F-52
<PAGE> 158
STOCKWALK.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. TRADING SECURITIES (CONTINUED)
securities can fluctuate significantly, with the resulting valuation changes
being reported as net gains or losses. Trading securities at March 31, consisted
of the following:
<TABLE>
<CAPTION>
1999 2000
---------- ----------
<S> <C> <C>
Trading securities owned, at market
Corporate equities.................................... $6,318,800 $2,346,200
State and municipal obligations....................... 2,950,800 4,372,900
U.S. government obligations........................... -- 938,900
Corporate obligations................................. 4,700 662,100
---------- ----------
$9,274,300 $8,320,100
========== ==========
</TABLE>
Our trading securities sold but not yet purchased represent our obligations
to deliver a specified security at the contracted price and thereby create a
liability to purchase the security in the market at prevailing prices.
Accordingly, these transactions result in off-balance-sheet market risk as the
ultimate obligations to satisfy the sale of securities sold but not yet
purchased may exceed the amount recorded in the Consolidated Statements of
Financial Condition at March 31, 1999 and 2000. Trading securities sold but not
yet purchased at March 31, consisted of the following:
<TABLE>
<CAPTION>
1999 2000
-------- ----------
<S> <C> <C>
Trading securities sold but not yet purchased, at market
Corporate equities..................................... $ 40,200 $ 688,600
State and municipal obligations........................ 148,000 370,100
U.S. government obligations............................ 246,500 156,100
Corporate obligations.................................. 377,500 124,200
-------- ----------
$812,200 $1,339,000
======== ==========
</TABLE>
5. FINANCING ARRANGEMENTS
We had discretionary lines of credit totaling $60.0 million at March 31,
1999 and $70.0 million at March 31, 2000 which are secured by firm-owned
securities, customer securities collateralizing liabilities subordinated to
claims of general creditors and unpaid customer securities. These lines are
payable on demand. Borrowings on the lines bear interest at various rates over
the banks' cost of funds; such rates generally vary daily. The weighted average
interest rates on the lines were 7.55%, 6.48% and 7.55% on March 31, 1998, 1999,
and 2000, respectively. The March 31, 1999 balance outstanding of $33.9 million
was collateralized by approximately $10.8 million of firm-owned securities, $9.0
million of customer securities collateralizing liabilities subordinated to
claims of general creditors and $14.1 million of unpaid customer securities. The
March 31, 2000 balance outstanding of $29.5 million was collateralized by
approximately $20.9 million of firm owned securities and cash, and $14.2 million
of customer securities collateralizing liabilities subordinated to claims of
general creditors. The lines of credit require us to comply with certain
financial debt covenants. A compensating balance arrangement totaling $575,000
exists with respect to one of our discretionary lines of credit.
F-53
<PAGE> 159
STOCKWALK.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. FINANCING ARRANGEMENTS (CONTINUED)
At March 31, 2000, we had a note payable of $3.0 million, which was secured
by our ownership interest in MJKI. The note bears an interest rate of the bank's
reference rate unless our investment account at the bank is less than the
principal balance of the note. If our investment account balance 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 March 31, 2000 was 9.00%. The note matures in installments through March
2005.
We also had various notes payable at March 31, 1999 and 2000 of $938,100
and $4.5 million, respectively, which were secured by certain assets. 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 March 31, 1999 and 5.25% to 10.16% as of March 31, 2000.
Notes payable at March 31, 2000 mature as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING MARCH 31,:
-----------------------------
<S> <C>
2001............................................. $3,689,000
2002............................................. 1,217,500
2003............................................. 1,132,700
2004............................................. 891,200
2005............................................. 614,000
----------
$7,544,400
==========
</TABLE>
We had liabilities subordinated to claims of general creditors at March 31,
2000 representing 73 secured demand notes receivable, which are collateralized
by securities with market values in excess of their respective face amounts. The
notes bear interest at 5% and mature as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING MARCH 31,:
-----------------------------
<S> <C>
2001............................................. $11,275,000
2002............................................. 7,300,000
-----------
$18,575,000
===========
</TABLE>
6. SHAREHOLDERS' EQUITY
EFFECTS OF THE REORGANIZATION
Pursuant to the terms of the reorganization agreement, all outstanding
shares of NM Holdings, Inc.'s merger subsidiary corporation held by us were
converted into one share of common stock, $.01 par value, of the surviving
corporation, each share of MJK common stock and MJK Series I Preferred Stock
outstanding (other than shares owned by us, such merger subsidiary or MJK)
converted into 3.72382 shares of common stock. Each share of MJK common stock or
MJK Series I Preferred Stock owned by us, MJK, or such merger subsidiary
immediately prior to the effective time were canceled and extinguished without
any conversion thereof.
F-54
<PAGE> 160
STOCKWALK.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
All shares of MJK common stock and MJK Series I Preferred Stock converted
into shares of common stock in the merger were canceled and retired and ceased
existence. As of May 28, 1999, there were 4,255,971 shares of MJK common stock
outstanding and 571,000 shares of MJK Series I Preferred Stock outstanding.
Based upon the exchange ratio and the number of shares of common stock, MJK
common stock and MJK Series I Preferred Stock outstanding as of the record date.
COMPUTATION OF WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
We calculate earnings per share in accordance with FASB Statement No. 128
by dividing net income by the weighted average number of shares of common stock
outstanding to arrive at the basic earnings per common share. We calculate
diluted earnings per share by dividing net income by the weighted average number
of shares of common stock and dilutive stock equivalents from the exercise of
stock options and warrants using the treasury stock method. The results for
March 31, 1999 and 1998 reflect the conversion of MJK shares into Stockwalk.com
Group, Inc. shares at a rate of 3.72382 to 1.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
--------------------------------------
1998 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average shares
outstanding -- basic...................... 15,848,500 15,848,500 18,849,200
Dilutive effect of stock options and
warrants after application of the treasury
stock method.............................. -- -- 149,200
---------- ---------- ----------
Weighted average shares
outstanding -- diluted.................... 15,848,500 15,848,500 18,998,400
========== ========== ==========
</TABLE>
STOCK OPTION PLAN
The 1995 Stock Option Plan (the "1995 Plan") adopted by NM Holdings, Inc.
provided for a maximum of 200,000 shares of authorized common stock issuable
upon exercise of options or other awards granted or issued under the 1995 Plan.
Following the merger, the 1995 Plan was amended in July 1999 by increasing to
1,500,000 the maximum number of shares of authorized common stock issuable upon
exercise of options or other awards granted or issued under the 1995 Plan.
Twenty-Five Thousand shares of our common stock are reserved for option grants
under our 1996 Non-Employee Director Stock Option Plan.
F-55
<PAGE> 161
STOCKWALK.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
Stock options granted, exercised and forfeited under the plans are as
follows:
<TABLE>
<CAPTION>
SHARES AVAILABLE NUMBER OF WEIGHTED AVERAGE
FOR GRANT SHARES EXERCISE PRICE
---------------- --------- ----------------
<S> <C> <C> <C>
Outstanding at March 31, 1997......... 53,437 169,563 $ 7.88
Granted............................. (28,500) 28,500 11.88
Exercised........................... 2,000 (2,000) 4.00
Forfeited........................... 30,000 (30,000) 9.04
--------- --------- ------
Outstanding at March 31, 1998......... 56,937 166,063 $ 8.52
Granted............................. (125,000) 125,000 1.17
Exercised........................... -- (89,625) 1.81
Forfeited........................... 87,500 (87,500) 8.85
--------- --------- ------
Outstanding at March 31, 1999......... 19,437 113,938 $ 5.16
Granted............................. (969,050) 969,050 9.02
Exercised........................... -- (60,125) 2.41
Forfeited........................... 400 (400) 10.84
Increase in authorized shares....... 1,300,000 -- --
--------- --------- ------
Outstanding at March 31, 2000......... 350,787 1,022,463 $ 9.01
========= ========= ======
</TABLE>
Options available for future years as of March 31, 2000 are exercisable as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
WEIGHTED AVERAGE
REMAINING
RANGE OF NUMBER CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ .625 - $ 6.00 23,438 5.08 $ 3.03 $ 22,501 $ 3.13
6.80 - 8.25 571,825 8.69 7.34 110,375 7.38
9.76 - 10.84 255,450 9.30 10.82 3,750 9.76
11.25 - 14.00 171,750 7.41 12.69 86,250 12.65
--------- --------
1,022,463 222,876
========= ========
</TABLE>
WARRANTS
In conjunction with various debt and equity financing activities, we have
granted warrants to purchase our common stock at exercise prices ranging between
$3.50 and $16.80.
At March 31, 2000 warrants to purchase 347,903 common shares were
outstanding at a weighted average exercise price of $9.11 per share. All
warrants are vested and expire between August 2000 and March 2003.
F-56
<PAGE> 162
STOCKWALK.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
SUPPLEMENTAL DISCLOSURES FOR STOCK-BASED COMPENSATION
We account for the above plans under APB Opinion No. 25, and, accordingly,
no compensation expense relating to the grant of options has been recognized in
the Consolidated Statements of Operations. Had the compensation cost for these
plans been determined consistent with Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" (SFS 123), our pro
forma net income and net income per common share diluted would have been
adjusted to the following pro forma amounts:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
--------------------------------------
1998 1999 2000
----------- ---------- -----------
<S> <C> <C> <C> <C>
Net income (loss): As reported...... $(1,224,300) $1,272,600 $(1,699,900)
Pro forma........ (1,291,400) 1,232,800 (2,487,500)
Diluted earnings (loss) per
share: As reported...... $ (0.08) $ 0.08 $ (0.09)
Pro forma........ $ (0.08) $ 0.08 $ (0.13)
</TABLE>
The fair value of each option granted subsequent to January 1, 1995 in
accordance with SFAS No. 123 was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions: risk free interest rates of 6.08% to 6.67% in 1998, 4.56% to 6.33%
in 1999 and 5.67% to 6.77% in 2000; expected life of 5 years for 1998, 2.5 to 5
years for 1999 and 5 to 10 years for 2000 and; expected volatility of 51.85% to
54.22% in 1998, 43.95% to 57.36% in 1999 and 113.32% to 159.75% in 2000.
7. NET CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS
Our three broker-dealers are subject to the Securities and Exchange
Commission's Uniform Net Capital Rule (Rule 15c3-1) which requires the
maintenance of minimum net capital. MJK has elected to use the alternative
method permitted by Rule 15c3-1 which requires that MJKI maintain minimum net
capital equal to the greater of $250,000 or 2.0% of aggregate debit balances
arising from customer transactions, as defined. At March 31, 2000, MJK's net
capital of $18.4 million was 7.9% of aggregate debit balances and $13.7 million
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 5.0% of aggregate debits. Stockwalk.com and Arnold
Securities each require a minimum of $50,000 net capital. At March 31, 1999,
Stockwalk.com and Arnold Securities had net capital of $318,500 and $87,900,
respectively. Under the provisions of financing arrangements entered into during
fiscal 1998, we may not declare or pay dividends on any of the outstanding
capital stock.
8. EMPLOYEE BENEFIT PLANS
We have a qualified profit-sharing plan and a 401(k) plan, which cover all
employees who are at least 21 years old and have at least six months of
continuous employment.
F-57
<PAGE> 163
STOCKWALK.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
Employees may contribute up to 10% of their compensation to the 401(k) plan.
Employer contributions are made to the profit sharing plan at the discretion of
our Board of Directors. We did not contribute to the profit-sharing plan in
fiscal 1998 or 2000. We contributed $100,000 in fiscal 1999.
9. COMMITMENTS AND CONTINGENCIES
We are obligated for the rental of office space, automobiles, and equipment
under noncancelable operating leases which expire at various dates from 2001 to
2004. The office lease includes escalation clauses for increases in taxes and
operating expenses of the leased premises. Minimum annual rental payments under
noncancelable leases in effect at March 31, 2000 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING MARCH 31,:
-----------------------------
<S> <C>
2001............................................. $2,540,600
2002............................................. 2,406,400
2003............................................. 1,702,900
2004............................................. 794,800
Thereafter....................................... --
----------
Total minimum future rental payments............. $7,444,700
==========
</TABLE>
10. RELATED PARTY TRANSACTIONS
Liabilities subordinated to claims of general creditors included secured
demand notes entered into by a member of our Board of Directors. The notes
totaled $300,000 in each period and mature in 2001.
We also had $1,484,100 and $1,758,400 of notes receivable from employees
which are included in other assets as of March 31, 1999 and 2000, respectively.
The amounts consist of 33 and 41 notes at March 31, 1999 and 2000, respectively,
which bear various interest rates and mature at various dates through 2003.
11. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts
F-58
<PAGE> 164
STOCKWALK.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES (CONTINUED)
used for income tax purposes. Significant components of our deferred tax assets
as of March 31 are as follows:
<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Deferred tax assets:
Amortization of leasehold improvements................... $ 70,100 $108,300
Amortization of notes receivable......................... 41,300 44,400
Deferred rent............................................ 17,100 65,000
Accrued bonuses.......................................... 11,400 74,800
Other.................................................... -- 57,400
-------- --------
139,900 349,900
Net operating loss carryforwards........................... 172,800 421,000
-------- --------
Total deferred tax assets, net of valuation allowance...... $282,900 $741,100
-------- --------
Deferred tax liabilities:
Unrealized gain on investments........................... $ -- $301,800
Amortization of goodwill................................. -- 3,500
-------- --------
Deferred tax liabilities................................. -- 305,300
-------- --------
Net deferred tax assets.................................... $282,900 $435,800
======== ========
</TABLE>
The income tax expense (benefit) for the fiscal years ended March 31
included the following:
<TABLE>
<CAPTION>
1998 1999 2000
--------- -------- ---------
<S> <C> <C> <C>
Federal........................................ $(344,700) $706,000 $(698,100)
State.......................................... 5,000 100,000 12,200
Deferred....................................... (259,300) 179,000 (152,900)
--------- -------- ---------
$(599,000) $985,000 $(838,800)
========= ======== =========
</TABLE>
Reconciliation of the provision for income taxes and the amounts that would
be computed using the statutory federal income tax rate for the years ended
March 31, 1998, 1999 and 2000 are as follows:
<TABLE>
<CAPTION>
1998 1999 2000
--------- -------- ---------
<S> <C> <C> <C>
Tax at statutory rate.......................... $(620,400) $769,700 $(863,100)
Tax-exempt interest, net of related expenses... (30,800) 22,800 63,900
State taxes, net of federal tax benefit........ (64,000) 128,700 (240,100)
Non-deductible life insurance.................. 40,600 52,900 54,000
Non-deductible meals and entertainment......... 31,300 29,700 36,000
Change in valuation allowance.................. -- (95,300) --
Other.......................................... 44,300 76,500 110,500
--------- -------- ---------
$(599,000) $985,000 $(838,800)
========= ======== =========
</TABLE>
F-59
<PAGE> 165
STOCKWALK.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES (CONTINUED)
At March 31, 2000, we had a net operating loss (NOL) carryforward of
approximately $421,000 for federal income tax purposes that expires in 2004. The
utilization of the NOL carryforward is restricted under the provisions of
Section 382 of the Internal Revenue Code.
12. SUBSEQUENT EVENTS
In June 2000, we entered into merger agreements with Kinnard and Steichen.
Under the terms of the Kinnard agreement, we agreed to pay $6.00 cash per share
and issue one-half of a share our common stock for each of the approximately 4.9
million outstanding shares of Kinnard common stock. Under the terms of the
Steichen agreement we agreed to issue approximately 4.3 million shares of our
restricted common stock in exchange for all the capital stock of Steichen, plus
up to an additional 2.0 million common shares based on Steichen's future
operations. Both transactions are subject to regulatory and shareholder
approval. Completion of the mergers is expected to occur in the second quarter
of fiscal 2001. The merger transactions will be accounted for using the purchase
method.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected unaudited data reflecting our results of operations for each of
the last eight quarters are shown in the following table. The information for
each of these quarters includes all normal and recurring adjustments and
accruals that we consider necessary for a fair presentation. The quarterly data
do not include pro-forma results for the merger with NM Holdings, Inc. The
operating results, however, are not necessarily indicative of results for any
future period.
The December 31, 1999 results included a reclassification of $253,900
between interest revenue and interest expense.
<TABLE>
<CAPTION>
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Fiscal Year 2000
Revenues..................... $13,204,900 $13,891,200 $17,217,900 $26,656,300
Net income (loss)............ (1,044,300) (1,259,400) (996,000) 1,599,800
Basic earnings (loss) per
share...................... $ (0.05) $ (0.06) $ (0.05) $ 0.08
Diluted earnings (loss) per
share...................... $ (0.05) $ (0.07) $ (0.05) $ 0.08
Fiscal Year 1999
Revenues..................... $13,662,400 $13,832,900 $13,989,800 $14,105,200
Net income (loss)............ 392,300 442,300 499,800 (61,800)
Basic earnings (loss) per
share...................... $ 0.03 $ 0.02 $ 0.03 $ 0.00
Diluted earnings (loss) per
share...................... $ 0.03 $ 0.02 $ 0.03 $ 0.00
</TABLE>
F-60
<PAGE> 166
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>
F-61
<PAGE> 167
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) 19,599
---------- ------- ------- ------- ------- ------- ----------
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>
F-62
<PAGE> 168
STOCKWALK.COM GROUP, INC.
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA
FOOTNOTES TO FINANCIAL STATEMENTS
BASIS OF PRESENTATION
These pro forma financial statements are presented as a combination of the
respective statements of Stockwalk.com Group, Inc. (the "Company"), R.J.
Steichen & Company and Kinnard Investments, 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. 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 pending 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 acquisitions of Steichen and
Kinnard and assumes the receipt of the net proceeds from and the completion of
the pending offering of the convertible notes as if they 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 and the cash
resulting from the pro forma earnings for the fiscal year ended March 31,
2000.
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
accounts.
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. Feltl removing approximately
$21 million of capital at the time of the acquisition.
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%).
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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 Kinnards 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.
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ANNEX A
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of June 5, 2000 (the "Agreement"),
by and between Kinnard Investments, Inc., a Minnesota corporation (the
"Company"), Stockwalk.com Group, Inc., a Minnesota corporation ("Acquiror") and
SW Acquisition, Inc., a Minnesota corporation ("MergerCo").
WHEREAS, the Board of Directors of the Company (the "Company Board") and
the Board of Directors of each of Acquiror and MergerCo have determined that the
merger of the Company with and into MergerCo (the "Merger"), in accordance with
the Minnesota Business Corporation Act (the "MBCA") and upon the terms and
subject to the conditions set forth in this Agreement, would be fair to and in
the best interests of their respective shareholders, and such Boards of
Directors have approved such Merger, pursuant to which each share of common
stock, par value $.01 per share of the Company (the "Company Common Stock")
issued and outstanding immediately prior to the Effective Time will be converted
into the right to receive one-half share of common stock, par value $.04 per
share of Acquiror, subject to adjustment as hereafter provided (the "Acquiror
Common Stock"), and cash in an amount equal to $6.00.
WHEREAS, it is the intention of the parties to this Agreement that the
Merger be treated as a "reorganization" under Section 368(a) of the Code.
WHEREAS, Acquiror, MergerCo and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the Merger.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained in this Agreement, the parties agree as
follows:
ARTICLE 1
CERTAIN DEFINITIONS; INTERPRETATION
SECTION 1.1 Certain Definitions. The following terms are used in this
Agreement with the meanings set forth below:
"Acquiror" has the meaning assigned in the preamble to this Agreement.
"Acquiror Benefit Plans" has the meaning assigned in Section 4.4(n).
"Acquiror Broker-Dealer Subsidiaries" has the meaning assigned in Section
4.4(g).
"Acquiror Common Stock" has the meaning assigned in the first recital of
this Agreement.
"Acquiror ERISA Affiliate" has the meaning assigned in Section 4.4(n).
"Acquiror ERISA Client" has the meaning assigned in Section 4.4(l).
"Acquiror Financial Statements" has the meaning assigned in Section 4.4(g).
"Acquiror FOCUS Reports" has the meaning assigned in Section 4.4(g).
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"Acquiror Form ADV" has the meaning assigned in Section 4.4(l).
"Acquiror Form BD" has the meaning assigned in Section 4.4(l).
"Acquiror Forms" has the meaning assigned in Section 4.4(l).
"Acquiror Insurance Policies" has the meaning assigned in Section 4.4(s).
"Acquiror SEC Documents" has the meaning assigned in Section 4.4(g).
"Acquiror Stock" has the meaning assigned in Section 4.4(e).
"Acquiror Stock Options" has the meaning assigned in Section 4.4(e).
"Acquiror Undesignated Stock" has the meaning assigned in Section 4.4(e).
"Acquiror Warrants" has the meaning assigned in Section 4.4(e).
"Acquisition Proposal" has the meaning assigned in Section 5.3.
"Affiliate," means, with respect to any specified person, any other person,
directly or indirectly controlling, controlled by or under common control with
such specified person. For purposes of this definition, "control" when used in
connection with any specified person means the power to direct the management or
policies of such person, directly or indirectly, whether through the ownership
of voting securities, by Contract or otherwise; and the terms "controlling" and
"controlled" have correlative meanings to the foregoing.
"Agreement" means this Agreement, as amended or modified from time to time
in accordance with Section 8.2.
"Articles of Merger" has the meaning assigned in Section 2.2.
"Average Daily Price" means the average of the closing sale prices of one
share of Acquiror Common Stock as reported on the NASDAQ/NMS for the 20
consecutive full trading days (in which such shares are traded on the
NASDAQ/NMS) ending on the close of trading on the NASDAQ/NMS trading day
immediately preceding the Condition Date.
"Cash Consideration" has the meaning assigned in Section 3.1(c).
"Certificates" has the meaning assigned in Section 3.4(b).
"Client" means any person to whom the Company or any of its Subsidiaries
provides products or services under a Contract.
"Closing" has the meaning assigned in Section 2.2.
"Closing Date" has the meaning assigned in Section 2.2.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" has the meaning assigned in the preamble to this Agreement.
"Company Affiliate" has the meaning assigned in Section 5.14(a).
"Company Articles" means the Articles of Incorporation of the Company, as
amended.
"Company Benefit Plans" has the meaning assigned in Section 4.3(q).
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"Company Board" has the meaning assigned in the first recital of this
Agreement.
"Company Broker-Dealer Subsidiaries" has the meaning assigned in Section
4.3(g).
"Company Bylaws" means the Bylaws of the Company, as amended.
"Company Common Stock" has the meaning assigned in the first recital of
this Agreement.
"Company ERISA Affiliate" has the meaning assigned in Section 4.3(q).
"Company ERISA Client" has the meaning assigned in Section 4.3(k).
"Company Financial Statements" has the meaning assigned in Section 4.3(g).
"Company FOCUS Reports" has the meaning assigned in Section 4.3(g).
"Company Form ADV" has the meaning assigned in Section 4.3(k).
"Company Form BD" has the meaning assigned in Section 4.3(k).
"Company Forms" has the meaning assigned in Section 4.3(k).
"Company Insurance Policies" has the meaning assigned in Section 4.3(v).
"Company Preferred Stock" has the meaning assigned in Section 4.3(e).
"Company Reports" has the meaning assigned in Section 4.3(l).
"Company SEC Documents" has the meaning assigned in Section 4.3(g).
"Company Stock" means, collectively, the Company Common Stock, the Company
Preferred Stock and the Company Undesignated Stock.
"Company Stock Option" has the meaning assigned in Section 3.3(a).
"Company Stock Plans" means stock-based compensation plans and incentive
plans of the Company Previously Disclosed.
"Company Undesignated Stock" has the meaning assigned in Section 4.3(e).
"Company Warrants" has the meaning assigned in Section 3.3(a).
"Condition Date" has the meaning assigned in Section 2.2.
"Confidentiality Agreement" has the meaning assigned in Section 5.8(b).
"Continuing Employees" means employees of the Company or any Subsidiary at
immediately before the Effective Time who continue as employees of Acquiror, the
Surviving Corporation or any other Affiliate of Acquiror.
"Contract" means, with respect to any person, any agreement, indenture,
undertaking, debt instrument, contract, contractual obligation, lease or other
commitment to which such person or any of its Subsidiaries is a party or by
which any of them is bound or to which any of their properties is subject.
"Convertible Notes" has the meaning assigned in Section 4.4(e).
"CSE" means the Chicago Stock Exchange.
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"Disclosure Schedule" has the meaning assigned in Section 4.1.
"Dissenting Shares" has the meaning assigned in Section 3.1(d).
"Effective Date" means the date on which the Effective Time occurs.
"Effective Time" has the meaning assigned in Section 2.2.
"Environmental Laws" means any federal, state or local law, regulation,
order, decree, permit, authorization, common law or agency requirement with
force of law relating to: (1) the protection or restoration of the environment,
health or safety (in each case as relating to the environment) or natural
resources, or (2) the handling, use, presence, disposal, release or threatened
release of any Hazardous Substance.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ESPP" has the meaning assigned in Section 3.3(c).
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder.
"Exchange Agent" has the meaning assigned in Section 3.4(a).
"Exchange Fund" has the meaning assigned in Section 3.4(h).
"Exchange Ratio" has the meaning assigned in Section 3.1(c).
"Exchanged Shares" has the meaning assigned in Section 3.4(b).
"Federal Reserve System" means the Board of Governors of the Federal
Reserve System and the Federal Reserve Banks.
"Governmental Authority" means any court, administrative agency or
commission or other foreign, federal, state or local governmental authority or
instrumentality.
"Hazardous Substance" means any hazardous or toxic substance, material or
waste, including those substances, materials and wastes listed in the United
States Department of Transportation Hazardous Materials Table (49 C.F.R. (S)
172.101), or by the United States Environmental Protection Agency as hazardous
substances (40 C.F.R. Part 302) and amendments thereto, or become regulated
under any applicable local, state or federal law, including petroleum compounds,
lead, asbestos and polychlorinated biphenyls.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
"Indemnified Party" has the meaning assigned in Section 5.12(a).
"Insurance Amount" has the meaning assigned in Section 5.12(c).
"Investment Advisors Act" means the Investment Advisers Act of 1940, as
amended, and the rules and regulations thereunder.
"Investment Company Act" means the Investment Company Act of 1940, as
amended, and the rules and regulations thereunder.
"IRS" means the Internal Revenue Service.
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"Liens" means any charge, mortgage, pledge, security interest, restriction,
claim, lien, or encumbrance.
"Litigation" has the meaning assigned in Section 4.3(o).
"Litigation List" has the meaning assigned in Section 4.3(o).
"Material" means, with respect to any fact, circumstance, event or thing,
that such fact, circumstance, event or thing is or would reasonably be expected
to be material to (1) the financial position, results of operations, assets,
properties or business of the Acquiror and its Subsidiaries, taken as a whole,
the Company and its Subsidiaries, taken as a whole, or the Surviving Corporation
and its Subsidiaries, taken as a whole, as the case may be (other than to the
extent such fact, circumstance, event or thing is due to (x) general changes in
conditions in the securities industry, or in the global or United States economy
or capital markets, or (y) changes in applicable generally accepted accounting
principles or in laws, regulations or regulatory policies of general
applicability), or (2) the ability of either the Acquiror or the Company, as the
case may be, timely to perform its obligations under this Agreement or otherwise
to consummate the transactions contemplated by this Agreement.
"Material Adverse Effect" means with respect to the Acquiror, the Company,
or the Surviving Corporation, respectively, an effect that, individually or in
the aggregate, is both Material and adverse with respect to the Acquiror and its
Subsidiaries, the Company and its Subsidiaries or the Surviving Corporation and
its Subsidiaries, in each case taken as a whole; provided that "Material Adverse
Effect" shall not be deemed to include the effects of (x) general changes in
conditions in the securities industry, or in the global or United States economy
or capital markets, or (y) changes in applicable generally accepted accounting
principles or in laws, regulations or regulatory policies of general
applicability, or (z) actions or omissions of the Company taken with the prior
written consent of the Acquiror.
"MBCA" has the meaning assigned in the first recital of this Agreement.
"Merger" has the meaning assigned in the first recital of this Agreement.
"MergerCo" has the meaning assigned in the preamble to this Agreement.
"Merger Consideration" has the meaning assigned in Section 3.1(c).
"MSRB" means the Municipal Securities Rulemaking Board.
"NASD" means the National Association of Securities Dealers, Inc.
"NYSE" means the New York Stock Exchange, Inc.
"Option Consideration" has the meaning assigned in Section 3.3.
"person" shall mean and include an individual, bank, partnership, joint
venture, limited liability company, corporation, trust, unincorporated
organization and government or any department or agency thereof.
"Previously Disclosed" has the meaning assigned in Section 4.1.
"Prospectus/Proxy Statement" has the meaning assigned in Section 5.5(a).
"Registration Statement" has the meaning assigned in Section 5.5(a).
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"Representatives" has the meaning assigned in Section 5.3.
"Rights" means, with respect to any person, securities or obligations
convertible into or exercisable or exchangeable for, or giving any person any
right to subscribe for, redeem or acquire, or any options, calls or commitments
relating to, or any stock appreciation right or other instrument the value of
which is determined in whole or in part by reference to the market price or
value of, shares of capital stock of such person.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations thereunder.
"Securities Laws" means, collectively, the Securities Act, the Exchange
Act, the Investment Advisors Act, the Investment Company Act and any state
securities and "blue sky" laws.
"Self-Regulatory Organization" means the National Association of Securities
Dealers, Inc., the NYSE, the AMEX, the MSRB or other commission, board, agency
or body that is not a Governmental Authority but is charged with the supervision
or regulation of brokers, dealers, securities underwriting or trading, stock
exchanges, commodities exchanges, insurance companies or agents, investment
companies or investment advisers, or to the jurisdiction of which the Company or
one of its Subsidiaries is otherwise subject.
"Share" has the meaning assigned in Section 3.1(c).
"Shareholders Meeting" has the meaning assigned in Section 5.4.
"Stock Consideration" has the meaning assigned in Section 3.1(c).
"Subsidiary" and "Significant Subsidiary" have the meanings ascribed to
them in Rule 1-02 of SEC Regulation S-X.
"Superior Proposal" has the meaning assigned in Section 5.3.
"Surviving Corporation" has the meaning assigned in Section 2.1.
"Takeover Laws" has the meaning assigned in Section 4.3(c).
"Tax Opinion" has the meaning assigned in Section 6.1(f).
"Taxes" means all federal, state, local and foreign taxes, levies or other
assessments imposed by any taxing authority, however denominated, including,
without limitation, all net income, gross income, gross receipts sales, use, ad
valorem, goods and services, capital, transfer, franchise, profits, license,
withholding, payroll, employment, employer health, excise, estimated, severance,
stamp, occupation, property or other taxes, and custom duties, together with any
interest and any penalties, additions to tax or additional amounts imposed by
any taxing authority.
"Tax Returns" means, collectively, all returns, declarations, reports,
estimates, information returns and statement required to be filed under federal,
state, local or any foreign tax laws.
"Termination Fee" has the meaning assigned in Section 7.2.
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SECTION 1.2 Interpretation. When a reference is made in this Agreement to
Recitals, Sections, Annexes or Schedules, such reference shall be to a Recital
or Section of, or Annex or Schedule to, this Agreement unless otherwise
indicated. The table of contents and headings contained in this Agreement are
for reference purposes only and are not part of this Agreement. Whenever the
words "include," "includes" or "including" are used in this Agreement, they
shall be deemed followed by the words "without limitation." No rule against the
draftsperson shall be applied in connection with the interpretation or
enforcement of this Agreement. Whenever this Agreement shall require a party to
take an action, such requirement shall be deemed to constitute an undertaking by
such party to cause its Subsidiaries, and to use its reasonable best efforts, to
cause its Affiliates, to take appropriate action in connection therewith.
ARTICLE 2
THE MERGER
SECTION 2.1 The Merger. Upon the terms and subject to the conditions
hereof, at the Effective Time and in accordance with the provisions of the MBCA,
the Company shall be merged with and into MergerCo, whereupon the separate
corporate existence of the Company shall cease, and MergerCo shall continue as
the surviving corporation (the "Surviving Corporation"). From and after the
Effective Time, the Surviving Corporation shall possess all the rights,
privileges, immunities, powers and franchises, of a public as well as a private
nature, of the Company and MergerCo and be subject to all the liabilities,
obligations and duties of the Company and MergerCo, all as more fully described
in the MBCA.
SECTION 2.2 Closing; Effective Time. Subject to the provisions of Article
6, the closing of the Merger (the "Closing") shall take place in the offices of
Kaplan, Strangis and Kaplan, P.A., 5500 Norwest Center, 90 South Seventh Street,
Minneapolis, Minnesota 55402, as soon as practicable but in no event later than
10:00 a.m. Minneapolis time on the fourth business day after the date on which
each of the conditions set forth in Article 6 has been satisfied or waived by
the party or parties entitled to the benefit of such conditions (the "Condition
Date"), or at such other place, at such other time or on such other date as
MergerCo and the Company may mutually agree. The date on which the Closing
actually occurs is hereinafter referred to as the "Closing Date." At the
Closing, MergerCo and the Company shall cause articles of merger for the Merger
(the "Articles of Merger") to be executed and filed with the Secretary of State
of the State of Minnesota in the form required by and executed in accordance
with the applicable provisions of the MBCA. The Merger shall become effective as
of the date and time of such filings or such other time after such filings as
the parties hereto shall agree to in the Articles of Merger (the "Effective
Time").
SECTION 2.3 Articles of Incorporation. At the Effective Time, and without
any further action on the part of the Company or MergerCo, the articles of
incorporation of MergerCo shall be the articles of incorporation of the
Surviving Corporation and thereafter may be amended or repealed as provided by
law.
SECTION 2.4 Bylaws. The bylaws of MergerCo, as in effect immediately prior
to the Effective Time, shall become, from and after the Effective Time, the
bylaws of the Surviving Corporation, until thereafter altered, amended or
repealed as provided therein or
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in the articles of incorporation of the Surviving Corporation and in accordance
with applicable law.
SECTION 2.5 Directors and Officers. The directors of MergerCo and officers
of the Company, respectively, immediately prior to the Effective Time shall
become, from and after the Effective Time, the directors and officers of the
Surviving Corporation, until their respective successors are duly elected or
appointed or their earlier resignation or removal.
SECTION 2.6 Further Assurances. At and after the Effective Time, the
officers and directors of the Surviving Corporation will be authorized to
execute and deliver, in the name and on behalf of the Company or MergerCo, any
deeds, bills of sale, assignments or assurances and to take and do, in the name
and on behalf of the Company or MergerCo, any other actions and things to vest,
perfect or confirm of record or otherwise in the Surviving Corporation any and
all right, title and interest in, to and under any of the rights, properties or
assets acquired or to be acquired by the Surviving Corporation as a result of,
or in connection with, the Merger.
ARTICLE 3
CONVERSION OF SHARES; SHAREHOLDER APPROVAL
SECTION 3.1 Effect on Capital Stock. At the Effective Time, by virtue of
the Merger and without any action on the part of the holder of any shares of
Company Common Stock or any shares of capital stock of MergerCo:
(a) Capital Stock of MergerCo. Each share of common stock of MergerCo
issued and outstanding immediately prior to the Effective Time shall be
converted into and become one share of common stock of the Surviving
Corporation.
(b) Treasury Stock and MergerCo-Owned Stock. Each share of Company
Common Stock that is owned by the Company or any subsidiary of the Company
and each share of Company Common Stock that is owned by Acquiror, MergerCo
or any affiliate of Acquiror or MergerCo shall automatically be canceled
and retired and shall cease to exist, and no consideration shall be
delivered in exchange therefor.
(c) Conversion of Company Common Stock. Except as otherwise provided
in Section 3.1(b) or 3.1(d), each issued and outstanding share of Company
Common Stock (each, a "Share") shall be canceled, extinguished and
converted into and become a right to receive (i) cash, without interest, in
an amount equal to $6.00 (the "Cash Consideration") and (ii) a number of
shares of validly issued, fully paid and nonassessable shares of Acquiror
Common Stock (the "Stock Consideration" and together with the Cash
Consideration, the "Merger Consideration") equal to (i) if the Average
Daily Price is less than $9.00, a quotient, the numerator of which is $4.50
and the denominator of which is the Average Daily Price (such quotient to
be rounded to the nearest ten thousandth); (ii) if the Average Daily Price
is equal to or less than $15.00 and equal to or greater than $9.00, 0.5; or
(iii) if the Average Daily Price is greater than $15.00, a quotient, the
numerator of which is $7.50 and the denominator of which is the Average
Daily Price (such quotient to be rounded to the nearest ten thousandth) (in
each case, subject to adjustment pursuant to Section 3.2, the "Exchange
Ratio").
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(d) Dissenting Shares. Notwithstanding anything in this Agreement to
the contrary, each share of Company Common Stock that is issued and
outstanding immediately prior to the Effective Time and that is held by a
shareholder who has properly demanded and perfected such shareholder's
rights to dissent from the Merger and to be paid the fair value of such
shares in accordance with Sections 302A.471 and 302A.473 of the MBCA (the
"Dissenting Shares"), shall not be converted into or exchangeable for the
right to receive the Merger Consideration, but the holder thereof shall be
entitled to such rights as are granted by the MBCA and the Surviving
Corporation shall make all payments to the holders of the shares of Company
Common Stock with respect to such demands in accordance with the MBCA;
provided, however, that if such holder shall have failed to perfect or
shall have lost the right to dissent and payment under the MBCA, each share
of Company Common Stock held by such holder shall thereupon be deemed to
have been converted into and to have become exchangeable for, as of the
Effective Time, solely the right to receive Merger Consideration. The
Company shall give reasonably prompt notice to MergerCo of any demands
received by the Company for payment under Sections 302A.471 and 302A.473 of
the MBCA, and MergerCo shall have the right to participate in all
negotiations and proceedings with respect to such demands. The Company
shall not, except with the prior written consent of MergerCo, make any
payment with respect to, or settle or offer to settle, such demands.
(e) Cancellation and Retirement of Common Stock. Each Share converted
into the right to receive the Merger Consideration pursuant to Section
3.1(c) shall no longer be outstanding and shall automatically be canceled
and retired and shall cease to exist, and each holder of a certificate
representing any such Shares shall, to the extent such certificate
represents such Shares, cease to have any rights with respect thereto,
except the right to receive the cash applicable thereto, upon surrender of
such certificate in accordance with Section 3.4.
SECTION 3.2 Adjustment of Exchange Ratio. If, after the date of this
Agreement, but prior to the Effective Time, the shares of Acquiror Common Stock
issued and outstanding shall, through a reorganization, recapitalization,
reclassification, stock dividend, stock split, reverse stock split or other
similar change (regardless of the method of effectuation of any of the
foregoing, including by way of a merger or otherwise) in the capitalization of
the Acquiror, increase or decrease in number or be changed into or exchanged for
a different kind or number of securities, then an appropriate and proportionate
adjustment shall be made to the Exchange Ratio.
SECTION 3.3 Treatment of Options, Warrants and Employee Stock Purchase
Plan. (a) Each option to purchase shares of Company Common Stock (each, a
"Company Stock Option") (and any rights thereunder) and each warrant to purchase
shares of Company Common Stock (and any rights thereunder) (each, a "Company
Warrant"), whether vested or unvested, outstanding immediately prior to the
Effective Time shall be cancelled immediately prior to the Effective Time in
exchange for the right to receive an amount in cash, without interest, equal to
the product of (i) the number of shares of Company Common Stock subject to such
Company Stock Option or Company Warrant immediately prior to the Effective Time
and (ii) the difference, if any, of (A) the sum of $6.00 plus the product of the
Daily Average Price and the Exchange Ratio (the "Option Consideration") minus
(B) the per share exercise price of such Company Stock Option or Company
Warrant, to be delivered by the Surviving Corporation immediately following the
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Effective Time. All applicable withholding taxes attributable to the payments
made hereunder shall be deducted from the amounts payable under this Section
3.3.
(b) Prior to the Effective Time, the Company shall have taken all actions
necessary or appropriate in the judgment of MergerCo to ensure that all stock
options, stock appreciation right or other equity-based plans maintained with
respect to the Shares shall terminate as of the Effective Time and the
provisions in any other compensation or benefit plan providing for the issuance,
transfer or grant of any capital stock of the Company or any interest in respect
of any capital stock of the Company shall be terminated as of the Effective
Time, and the Company shall use its reasonable best efforts to ensure that
following the Effective Time neither the Company nor any of its subsidiaries is
or will be bound by any Company Stock Options which would entitle any person,
other than MergerCo or its affiliates, to beneficially own, or receive any
payments (other than as otherwise contemplated by Section 3.1 and this Section
3.3) in respect of, any capital stock of the Company or the Surviving
Corporation.
(c) Prior to the Effective Time, the Company shall take all action
necessary to terminate the Company's 1992 Employee Stock Purchase Plan (as
amended and restated, the "ESPP"). As soon as practicable after the Effective
Time, the Surviving Corporation shall refund to participants in the ESPP amounts
credited to such participants' bookkeeping accounts thereunder.
SECTION 3.4 Payment for Common Stock (a) Exchange Agent. At or before the
Effective Time, Acquiror shall designate a bank or trust company reasonably
acceptable to the Company to act as Exchange Agent in connection with the Merger
(the "Exchange Agent") for the purpose of exchanging certificates representing
Shares for the Merger Consideration. On the Closing Date, Acquiror will make
available to the Exchange Agent the Merger Consideration to be paid and
delivered in respect of the Shares.
(b) Exchange. Promptly after the Effective Time, the Surviving Corporation
shall cause the Exchange Agent to mail to each record holder, except the holders
of Dissenting Shares, as of the Effective Time, of any outstanding certificate
or certificates which immediately prior to the Effective Time represented
outstanding shares of Company Common Stock (the "Certificates"), a form letter
of transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon proper delivery of the
Certificates to the Exchange Agent) and instructions for use in effecting the
surrender of the Certificates for payment therefor. In effecting the payment and
delivery of the Merger Consideration in respect of Shares represented by
Certificates entitled to the Merger Consideration pursuant to Section 3.1 (the
"Exchanged Shares"), upon the surrender of each such Certificate, the Exchange
Agent shall pay the holder of such Certificate the Cash Consideration multiplied
by the number of Exchanged Shares and deliver certificates for the number of
whole shares of Acquiror Common Stock determined by multiplying the Exchange
Ratio by the number of Exchanged Shares, in consideration therefor. Upon such
payment and delivery, such Certificate so surrendered shall forthwith be
canceled. No interest will be paid or accrued on the cash payable upon the
surrender of the Certificates. If cash or Acquiror Common Stock is to be
remitted to a person other than that in which the Certificate for Shares
surrendered for exchange is registered, it shall be a condition of such payment
or delivery (a) that the Certificate so surrendered shall be properly endorsed,
with signature guaranteed or otherwise in proper form for transfer and (b) the
person requesting such exchange shall pay any transfer or other taxes required
by reason of the payment of cash to a person, other than that of the registered
holder of the Certificate surrendered, or establish to the satisfaction of the
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Surviving Corporation that such tax has been paid or is not applicable. Until
surrendered in accordance with the provisions of this Section 3.4, each
Certificate (other than Certificates representing Shares owned by the Company,
any subsidiary of the Company or by Acquiror or MergerCo or any affiliate of
Acquiror or MergerCo and Certificates representing Dissenting Shares), shall
represent for all purposes only the right to receive the Merger Consideration
applicable thereto, without any interest thereon, subject to any required
withholding taxes. The stock transfer books of the Company shall be closed
immediately upon the Effective Time and there shall be no further registration
of transfers of shares of Company Common Stock thereafter on the records of the
Company. On or after the Effective Time, any Certificates presented to the
Exchange Agent or the Surviving Corporation for any reason shall be converted
into the Merger Consideration with respect to the shares of Company Common Stock
formerly represented thereby.
(c) No Issuance of Fractional Shares. No certificates or scrip for
fractional shares of Acquiror Common Stock shall be issued, but in lieu thereof
each holder of Shares who would otherwise be entitled to receive certificates or
scrip for a fraction of a share of Acquiror Common Stock shall receive from
Acquiror, at such time as such holder shall receive a certificate representing
shares of Acquiror Common Stock, an amount of cash equal to the per share market
value of Acquiror Common Stock determined by multiplying (i) the closing price
of one share of Acquiror Common Stock as reported on the NASDAQ/NMS on the last
full trading day prior to the Closing Date by (ii) the fraction of a share of
Acquiror Common Stock to which such holder would otherwise be entitled.
(d) Investment of Exchange Fund. The Exchange Agent shall invest any cash
included in the Exchange Fund as directed by the Surviving Corporation on a
daily basis; provided, that no such investment or loss thereon shall affect the
amounts payable to Company shareholders pursuant to Article 3. Any interest and
other income resulting from such investments shall promptly be paid to the
Surviving Corporation.
(e) Lost Certificates. If any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by the
Surviving Corporation, the posting by such person of a bond in such reasonable
amount as the Surviving Corporation may direct as indemnity against any claim
that may be made against it with respect to such Certificate, the Exchange Agent
will deliver in exchange for such lost, stolen or destroyed Certificate the
applicable Merger Consideration with respect to the Shares formerly represented
thereby, pursuant to this Agreement.
(f) Distributions With Respect to Unexchanged Shares. No dividends or other
distributions with respect to unexchanged Shares with a record date after the
Effective Time shall be paid to the holder of any unsurrendered Certificate for
Shares with respect to the unexchanged Shares represented thereby until the
surrender of such Certificate in accordance with Article 3.
(g) No Further Ownership Rights in Shares Exchanged for Cash. The Merger
Consideration paid or delivered upon the surrender for exchange of Certificates
representing Shares in accordance with the terms of Article 3 shall be deemed to
have been paid in full satisfaction of all rights pertaining to the Shares
exchanged for the Merger Consideration theretofore represented by such
Certificates.
(h) Termination of Exchange Fund. Any portion of the Merger Consideration
deposited with the Exchange Agent pursuant to this Section 3.4 (the "Exchange
Fund")
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which remains undistributed to the holders of the Certificates representing
Shares for six months after the Effective Time shall be delivered to the
Surviving Corporation, upon demand, and any holders of Shares prior to the
Merger who have not theretofore complied with Article 3 shall thereafter look
only to the Surviving Corporation for payment and delivery of the Merger
Consideration, for unexchanged Shares to which such holders may be entitled. Any
portion of the Exchange Fund remaining unclaimed by holders of Shares five years
after the Effective Time (or such earlier date immediately prior to the time as
such amounts would escheat to or become property of any Governmental Authority
shall, to the extent permitted by law, become the property of the Surviving
Corporation, free and clear of any claims or interest of any person previously
entitled thereto.
(i) No Liability. None of Acquiror, MergerCo, the Surviving Corporation or
the Exchange Agent shall be liable to any person in respect of any cash from the
Exchange Fund delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF
THE COMPANY, ACQUIROR AND MERGERCO
SECTION 4.1 Disclosure Schedules. On or prior to the date hereof, the
Company has delivered to the Acquiror, and the Acquiror has delivered to the
Company, a schedule (respectively, its "Disclosure Schedule") setting forth,
among other things, items the disclosure of which is necessary or appropriate
either (i) in response to an express informational requirement contained in or
requested by a provision hereof, or (ii) as an exception to one or more
representations or warranties contained in Section 4.3 or 4.4, respectively, or
to one or more of its covenants contained in Article 5; provided, that (a) no
such item is required to be set forth on the Disclosure Schedule as an exception
to a representation or warranty if its absence is not reasonably likely to
result in the related representation or warranty being deemed incorrect or
untrue under the standard established in Section 4.2 and (b) the mere inclusion
of an item in a Disclosure Schedule as an exception to a representation or
warranty or covenant shall not be deemed an admission by a party that such item
(or any undisclosed item or information of comparable or greater significance)
represents a Material exception or fact, event or circumstance with respect to
the Company, Acquiror or MergerCo, respectively. "Previously Disclosed" means
information set forth in a Disclosure Schedule, whether in response to an
express informational requirement or as an exception to one or more
representations or warranties or covenants, in each case, that is contained in a
correspondingly enumerated portion of such Disclosure Schedule. To the extent
information is Previously Disclosed pursuant to the foregoing, the corresponding
representation, warranty or covenant shall be deemed to be modified by such
Previously Disclosed information and references herein (including in Section
4.2) to such corresponding representation, warranty or covenant shall be deemed
to be references to such representation, warranty or covenant as so modified.
SECTION 4.2 Standard. No representation or warranty of the Company, on the
one hand, or the Acquiror and MergerCo, on the other, contained in Section 4.3
or 4.4 shall be deemed untrue or incorrect, and no party hereto shall be deemed
to have breached a representation or warranty, as a consequence of the existence
of any fact, event, or circumstance that is inconsistent with one or more
representations or warranties (with such representations and warranties being
read, for purposes of this Section 4.2, without regard
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to individual references to "Materiality" or "Material Adverse Effect" set forth
therein), unless such fact, event or circumstance (individually or taken
together with all other facts, events or circumstances that are inconsistent
with any representation or warranty contained in Section 4.3 or 4.4) would be
Material with respect to the Company or the Acquiror, as the case may be.
SECTION 4.3 Representations and Warranties of the Company. Except as
Previously Disclosed in a paragraph of its Disclosure Schedule corresponding to
the relevant paragraph below, the Company hereby represents and warrants to the
Acquiror and MergerCo as follows:
(a) Organization, Standing and Authority. The Company is a
corporation, duly organized, validly existing and in good standing under
the laws of the State of Minnesota, and is duly qualified to do business
and is in good standing in all jurisdictions where its ownership or leasing
of property or assets or the conduct of its business requires it to be so
qualified.
(b) Corporate Power. The Company and each of its Subsidiaries has the
corporate power and authority to carry on its business as it is now being
conducted and to own or lease all its properties and assets.
(c) Corporate Authority and Action.
(1) The Company has the requisite corporate power and authority,
and has taken all corporate action necessary, in order to authorize the
execution and delivery of, and performance of its obligations under,
this Agreement and, subject only to receipt of the requisite approval
and adoption of this Agreement and the Merger by the holders of a
majority of the outstanding shares of Company Common Stock, to
consummate the transactions contemplated by this Agreement. This
Agreement is a valid and legally binding obligation of the Company,
enforceable in accordance with its terms.
(2) The Company has taken all action required to be taken by it in
order to exempt this Agreement from, the requirements of any applicable
"moratorium," "control share," "fair price" or other antitakeover laws
and regulations of the State of Minnesota (collectively, "Takeover
Laws").
(d) Regulatory Filings; No Defaults.
(1) No consents or approvals of, or filings or registrations with,
any Governmental Authority, Self-Regulatory Organization or with any
third party are required to be made or obtained by the Company in
connection with the execution, delivery or performance by the Company of
this Agreement, or to consummate the Merger, except for (A) those
required under the HSR Act; (B) filings of applications or notices with
the CSE, the NASD and other Previously Disclosed securities licensing or
supervisory authorities, (C) the filing with the SEC of the
Prospectus/Proxy Statement and compliance with the Exchange Act; (D)
approval of the Company's shareholders as contemplated by Section
4.3(c); (E) approval of the CSE and consents of national securities
exchanges to the transfer of ownership of seats or memberships; and (F)
the filing of Articles of Merger with the Secretary of State of the
State of Minnesota pursuant to the MBCA. As of the date hereof, the
Company is not aware of any reason why the approvals of all Governmental
Authorities or Self-Regulatory
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Organizations necessary to permit consummation of the transactions
contemplated by this Agreement will not be received.
(2) Subject only to the approval by the holders of a majority of
the outstanding shares of Company Common Stock, the receipt of the
regulatory approvals referred to in Section 4.3(d)(1), the expiration of
applicable waiting periods and the making of required filings under
federal and state securities laws, the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby do not and will not (A) constitute a breach or
violation of, or a default under, or give rise to any Lien, any
acceleration of remedies or any right of termination (with or without
the giving of notice, passage of time or both) under, any law, rule or
regulation or any judgment, decree, order, governmental or
nongovernmental permit or license, or Contract of the Company or of any
of its Subsidiaries or to which the Company or any of its Subsidiaries
or its or their properties is subject or bound, (B) constitute a breach
or violation of, or a default under, the Company Articles or the Company
Bylaws or similar governing documents of any of its Subsidiaries, or (C)
require any consent or approval under any such law, rule, regulation,
judgment, decree, order, governmental or nongovernmental permit or
license or Contract.
(e) Company Stock. The authorized capital stock of the Company
consists of (i) 7,500,000 shares of Company Common Stock, (ii) 1,000,000
shares of preferred stock (the "Company Preferred Stock"), and (iii)
16,500,000 shares of undesignated stock (the "Company Undesignated Stock").
As of May 30, 2000, (a) 4,891,191 shares of Company Common Stock were
issued and outstanding, (b) no shares of Company Preferred Stock were
issued and outstanding, (c) no shares of Company Undesignated Stock were
issued and outstanding, (d) 670,762 shares of Company Common Stock were
reserved for issuance under the Company's ESPP, (e) 625,357 shares of
Company Common Stock were reserved for issuance under the Company's 1990
and 1997 Stock Option Plans and (f) 325,000 shares of Company Common Stock
were reserved for issuance under Company Warrants. The outstanding shares
of Company Common Stock have been duly authorized and are validly issued
and outstanding, fully paid and nonassessable, and subject to no preemptive
rights (and were not issued in violation of any subscriptive or preemptive
rights). As of the date hereof, other than the Company Stock Options and
the Company Warrants, there are no shares of Company Common Stock
authorized and reserved for issuance, the Company does not have any Rights
issued or outstanding with respect to Company Stock, and the Company does
not have any commitment to authorize, issue or sell any Company Stock or
Rights, except pursuant to this Agreement. Section 4.3(e) of the Company
Disclosure Schedule sets forth a list of the holders of outstanding Company
Stock Options and Company Warrants, the date that each such Company Stock
Option or Company Warrant was granted, the number of shares of Company
Common Stock subject to each such Company Stock Option or Company Warrant,
the expiration date of each such Company Stock Option or Company Warrant
and the price at which each such Company Stock Option or Company Warrant
may be exercised.
(f) Subsidiaries. The Company has Previously Disclosed a list of all
its Subsidiaries, including the states in which such Subsidiaries are
organized, a brief description of such Subsidiaries' principal activities,
and if any of such Subsidiaries is
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not wholly owned by the Company or one of its Subsidiaries, the percentage
owned by the Company or any such Subsidiary and the names, addresses and
percentage ownership by any other person. No equity securities of any of
the Company's Subsidiaries are or may become required to be issued,
transferred or otherwise disposed of (other than to the Company or a wholly
owned Subsidiary of the Company) by reason of any Rights with respect
thereto. There are no Contracts by which any of the Company's Subsidiaries
is or may be bound to sell or otherwise issue any shares of its capital
stock, and there are no Contracts relating to the rights or obligations of
the Company to vote or to dispose of such shares. All of the shares of
capital stock of each of the Company's Subsidiaries are fully paid and
nonassessable and subject to no subscriptive or preemptive rights or Rights
and, except as Previously Disclosed, are owned by the Company or a Company
Subsidiary free and clear of any Liens. Each of the Company's Subsidiaries
is duly organized, validly existing and in good standing under the laws of
the jurisdiction in which it is organized and is duly qualified to do
business and in good standing in each jurisdiction where its ownership or
leasing of property or the conduct of its business requires it to be so
qualified.
(g) SEC Documents, Financial Statements.
(1) The Company has provided or made available to the Acquiror
copies of each registration statement, offering circular, report,
definitive proxy statement or information statement filed by the Company
with the SEC or circulated by the Company from December 31, 1996 through
the date of this Agreement and will promptly provide each such
registration statement, offering circular, report, definitive proxy
statement or information statement filed or circulated after the date
hereof (collectively, the "Company SEC Documents"), each in the form
(including exhibits and any amendments thereto) filed with the SEC (or,
if not so filed, in the form used or circulated). As of their respective
dates (and without giving effect to any amendments or modifications
filed after the date of this Agreement), each of the SEC Documents,
including the financial statements, exhibits and schedules thereto,
filed or circulated prior to the date hereof complied (and each of the
SEC Documents filed after the date of this Agreement will comply) as to
form with applicable Securities Laws and did not (or in the case of
reports, statements, or circulars filed after the date of this
Agreement, will not) contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary
to make the statements made therein, in the light of the circumstances
under which they were made, not misleading.
(2) Each of the Company's consolidated statements of financial
condition or balance sheets included in or incorporated by reference
into the SEC Documents, including the related notes and schedules,
fairly presented (or, in the case of SEC Documents filed after the date
of this Agreement, will fairly present) the consolidated financial
condition of the Company and its Subsidiaries as of the date of such
statement of financial condition or balance sheet and each of the
consolidated statements of income, cash flows and changes in
shareholders' equity included in or incorporated by reference into the
SEC Documents, including any related notes and schedules (collectively,
the foregoing financial statements and related notes and schedules are
referred to as the "Company Financial Statements"), fairly presented
(or, in the case of SEC Documents filed after the date of this
Agreement, will fairly present) the consolidated results of operations,
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cash flows and shareholders' equity, as the case may be, of the Company
and its Subsidiaries for the periods set forth therein (subject, in the
case of unaudited statements, to normal year-end audit adjustments), in
each case in accordance with generally accepted accounting principles
consistently applied during the periods involved (except as may be noted
therein and except that such unaudited statements include no notes).
(3) Except as disclosed in the Financial Statements or the Company
SEC Documents filed prior to the date of this Agreement, none of the
Company or any of its Subsidiaries has any liability or obligation
(contingent or otherwise) that, individually or in the aggregate, is
reasonably likely to have a Material Adverse Effect on the Company.
(4) The Company has delivered or made available to the Acquiror
true and complete copies of the FOCUS Reports filed on Form X-17A-5 (the
"Company FOCUS Reports") for the quarters ended March 31, 1999, June 30,
1999, September 30, 1999, December 31, 1999 and March 31, 2000 by each
Subsidiary of the Company that is a "broker" or "dealer", as such terms
are defined in Sections 2(a)(4) and 2(a)(5) of the Exchange Act
(collectively, the "Company Broker-Dealer Subsidiaries"). Each Company
FOCUS Report complied (and with respect to Company FOCUS Reports filed
after the date hereof, will comply) at the date thereof with the rules
and regulations of the SEC relating thereto and fairly presented (or
will present, as the case may be) the information required to be
presented therein pursuant to Rule 17a-5 under the Exchange Act.
(h) Absence of Certain Changes. Since December 31, 1999, the business
of the Company and its Subsidiaries has been conducted in the ordinary and
usual course, consistent with past practice, and there has not been:
(1) any event, occurrence, development or state of circumstances or
facts which has had or is reasonably likely to have a Material Adverse
Effect on the Company;
(2) any amendment of any term of any outstanding security of the
Company or any of its Subsidiaries or to the Company or any of its
Subsidiaries' articles of incorporation or bylaws (or similar governing
documents);
(3) any (A) incurrence, assumption or guarantee by the Company or
any of its Subsidiaries of any indebtedness for borrowed money, or (B)
assumption, guarantee, endorsement or otherwise by the Company of any
obligations of any other person, in each case, other than in the
ordinary and usual course of business, consistent with past practice,
and in amounts and on terms consistent with past practices;
(4) any creation or assumption by the Company or any of its
Subsidiaries of any Lien on any material asset other than in the
ordinary and usual course of business consistent with past practices;
(5) prior to or on the date hereof, any making of any loan in
excess of $100,000, or aggregate loans in excess of $250,000, advance or
capital contributions to or investment in any person, in each case,
other than in the ordinary and usual course of business consistent with
past practice;
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(6) any change in any accounting policies or practices by the
Company or any of its Subsidiaries; or
(7) any (A) employment, deferred compensation, severance,
retirement or other similar agreement entered into with any director,
officer, consultant, partner or employee of the Company or any of its
Subsidiaries (or any amendment to any such existing agreement), (B)
grant of any severance or termination pay to any director, officer,
consultant, partner or employee of the Company or any of its
Subsidiaries, or (C) change in compensation or other benefits payable to
any director, officer, consultant, partner or employee of the Company or
any of its Subsidiaries, except, in each case, in the ordinary course of
business or as required by Contract or applicable law with respect to
employees of the Company or any of its Subsidiaries.
(i) Contracts.
(1) The Company has Previously Disclosed each of the following
executory Contracts to which either the Company or any of its
Subsidiaries is a party, or by which any of them is bound or to which
any of their properties is subject:
(A) any lease of real property;
(B) any partnership, joint venture or other similar agreement
or arrangement, or any options or rights to acquire from any person
any capital stock, voting securities or securities convertible into
or exchangeable for capital stock or voting securities or such
person, in each case, entered into other than in the ordinary
course of business;
(C) any agreement relating to the acquisition or disposition
of any business (whether by merger, sale of stock, sale of assets
or otherwise);
(D) any indenture, mortgage, promissory note, loan agreement,
guarantee or other agreement or commitment, outstanding as of the
date hereof, for the borrowing of money by the Company or one of
its Subsidiaries or the deferred purchase price of property in
excess of $100,000 (in either case, whether incurred, assumed,
guaranteed or secured by any asset);
(E) any agreement in force as of the date hereof that creates
future payment obligations in excess of $100,000 in the aggregate
and which by its terms does not terminate or is not terminable
without penalty upon notice of 90 days or less;
(F) any license, franchise or similar agreement material to
the Company or any of its Subsidiaries or any agreement relating to
any trade name or intellectual property right that is material to
the Company or any of its Subsidiaries;
(G) any exclusive dealing agreement or any agreement that
limits the freedom of the Company or any of its Subsidiaries to
compete in any line of business or with any person or in any area
or that would so limit their freedom after the Effective Date;
(H) any compensation, employment, severance, supplemental
retirement or other similar agreement or arrangement with any
employee or
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former employee of, or independent contractor with respect to, the
Company or any of its Subsidiaries, or any other agreement with any
current or former Affiliate of the Company; and
(I) any other Contract that is a "material contract" as
defined in Item 601(b)(10) of SEC Regulation S-K and that has not
been filed prior to the date hereof as an exhibit to the Company's
SEC Documents.
(2) Each Contract that has been, or is required to be, Previously
Disclosed pursuant to this Section is a valid and binding agreement of
the Company or one or more of its Subsidiaries, as the case may be, and
is in full force and effect, and the Company or its Subsidiaries parties
thereto are not in default or breach in any material respect under the
terms of any such Contract.
(j) Contracts with Clients. Each of the Company and its Subsidiaries
is in compliance with the terms of each Contract with any Client, and each
such Contract is in full force and effect with respect to the applicable
Client. There are no disputes pending or threatened with any Client under
the terms of any such Contract or with any former Client.
(k) Registration Matters.
(1) Each of the Company's Subsidiaries required to be registered as
a broker-dealer or investment advisor with the SEC, the securities
commission or similar authority of any state or any Self-Regulatory
Organization are duly registered and such registrations are in full
force and effect. Each Company Broker-Dealer Subsidiary is, and at the
Effective Time will be, a member in good standing with all required
Self-Regulatory Organizations and in compliance with all applicable
rules and regulations of the Self-Regulatory Organizations.
(2) The Company has delivered or made available to the Acquiror,
true, correct and complete copies of (A) each Company Broker-Dealer
Subsidiary's Uniform Application for Broker-Dealer Registration on Form
BD (each, "Company Form BD") and (B) each Uniform Application for
Investment Adviser Registration filed by the Company or any Subsidiary
(each, a "Company Form ADV", and together with Company Form BD, "Company
Forms"), all of the Company Forms reflecting all amendments thereto
filed with the NASD or the SEC, as the case may be, on or prior to the
date hereof. The Company Forms are in compliance with the applicable
requirements of the Exchange Act or the Investment Advisers Act, as the
case may be and do not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading. The Company has provided or
made available true and complete copies of all audit reports since
December 31, 1996 by the SEC or the NASD regarding the Company or its
Subsidiaries. Each director, officer, agent and employee of each Company
Broker-Dealer Subsidiary who is required to be registered as a
representative, principal or agent with the securities commission of any
state or with any Self Regulating Organization is duly registered as
such and such registration is in full force and effect. Each registered
representative and principal of each Company Broker-Dealer Subsidiary
has at least the minimum series license for the
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activities which such registered representative or principal performs
for such Company Broker-Dealer Subsidiary.
(3) The net capital, as such term is defined in Rule 15c3-1 under
the Exchange Act, of each Company Broker-Dealer Subsidiary satisfies the
minimum net capital requirements of the Exchange Act and of the laws of
any jurisdiction in which the Company Broker-Dealer Subsidiary conducts
business, and has been sufficient to permit each Company Broker-Dealer
Subsidiary to operate without restriction on its ability to expand its
business under NASD Conduct Rule 3130.
(4) None of the Company Broker-Dealer Subsidiaries nor any
"associated person" thereof (a) is subject to a "statutory
disqualification" as such terms are defined in the Exchange Act, (b) is
ineligible to serve as a broker-dealer or as an associated person to a
registered broker-dealer or (c) is subject to a disqualification that
would be a basis for censure, limitations on the activities, functions
or operations of, or suspension or revocation of the registration of any
Company Broker-Dealer Subsidiary as broker-dealer, municipal securities
dealer, government securities broker or government securities dealer
under Section 15, Section 15B or Section 15C of the Exchange Act and
there is no reasonable basis for, or proceeding or investigation,
whether formal or informal, or whether preliminary or otherwise, that is
reasonably likely to result in, any such censure, limitations,
suspension or revocation.
(5) Except for John G. Kinnard and Company, Incorporated and as
Previously Disclosed, neither the Company nor its Subsidiaries is or is
required to be registered as an investment company, investment adviser,
commodity trading advisor, commodity pool operator, futures commission
merchant, introducing broker, insurance agent, or transfer agent under
any United States federal, state, local or foreign statutes, laws, rules
or regulations. No Company Broker-Dealer Subsidiary acts as the
"sponsor" of a "broker-dealer trading program", as such terms are
defined in Rule 17a-23 under the Exchange Act.
(6) Neither the Company, its Subsidiaries nor any "associated
person" (as defined in the Investment Advisers Act) thereof, as
applicable, is ineligible pursuant to Section 203 of the Investment
Advisers Act to serve as an investment adviser or as an associated
person to a registered investment adviser. Neither the Company nor its
Subsidiaries provides investment advisory, subadvisory or management
services to or through (i) any issuer or other Person that is an
investment company (within the meaning of the Investment Company Act),
(ii) any issuer or other Person that would be an investment company
(within the meaning of the Investment Company Act) but for the
exemptions contained in Section 3(c)(1), Section 3(c)(7), the final
clause of Section 3(c)(3) or the third or fourth clauses of Section
3(c)(11) of the Investment Company Act, or (iii) any issuer or other
Person that is or is required to be registered under the laws of the
appropriate securities regulatory authority in the jurisdiction in which
the issuer is domiciled (other than the United States or the states
thereof), which is or holds itself out as engaged primarily in the
business of investing, reinvesting or trading in securities.
(7) Each account to which the Company provides investment
management, advisory or subadvisory services that is (i) an employee
benefit plan, as defined in Section 3(3) of ERISA, that is subject to
Title I of ERISA; (ii) a Person
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acting on behalf of such a plan; or (iii) any entity whose underlying
assets are deemed, under 29 C.F.R. Section 2510.3-101, to include the
assets of such a plan by reason of such plan's investment in such entity
(each, a "Company ERISA Client") has been managed or provided brokerage
services by the Company or a Subsidiary thereof, as applicable, such
that the Company or such Subsidiary in the exercise of such management
or in the provision of such services is in compliance in all material
respects with the applicable requirements of ERISA.
(l) Compliance with Laws. Each of the Company and its Subsidiaries,
and, to the best of the Company's knowledge, each of their respective
officers and employees:
(1) is in compliance with all applicable federal, state, local and
foreign statutes, laws, regulations, ordinances, rules, judgments,
orders or decrees applicable to the conduct of its businesses or to the
employees conducting such businesses, and the rules of all
Self-Regulatory Organizations applicable thereto;
(2) has all permits, licenses, authorizations, orders and approvals
of, and has made all filings, applications and registrations with, all
Governmental Authorities and Self-Regulatory Organizations that are
required in order to permit them to own or lease their properties and to
conduct their businesses as presently conducted; all such permits,
licenses, certificates of authority, orders and approvals are in full
force and effect and are current and, to the best of the Company's
knowledge, no suspension or cancellation of any of them is threatened or
is reasonably likely and all such filings, applications and
registrations are current; (3) has received, since January 1, 1998, no
written notification or communication (or, to the best knowledge of the
Company, any other communication) from any Governmental Authority or
Self-Regulatory Organization (A) asserting non-compliance with any of
the statutes, regulations, rules or ordinances that such Governmental
Authority or Self-Regulatory Organization enforces, (B) threatening any
material penalty or to revoke any license, franchise, seat on any
exchange, permit, or governmental authorization, (C) requiring any of
them (including any of the Company's or its Subsidiary's directors or
controlling persons) to enter into a cease and desist order, agreement,
or memorandum of understanding (or requiring the board of directors
thereof to adopt any resolution or policy), or (D) restricting or
disqualifying their activities (except for restrictions imposed by rule,
regulation or administrative policy on brokers or dealers generally);
(4) is not aware of any pending or threatened investigation, review
or disciplinary proceedings by any Governmental Authority or
Self-Regulatory Organization against the Company, any of its
Subsidiaries or any officer, director or employee thereof;
(5) in the conduct of its business with respect to employee benefit
plans subject to Title I of ERISA, has not (A) breached any applicable
fiduciary duty under Part 4 of Title I of ERISA which would subject it
to liability under Sections 405 or 409 of ERISA and (B) engaged in a
"prohibited transaction" within the meaning of Section 406 of ERISA or
Section 4975(c) of the Code which would subject it to liability or Taxes
under Sections 409 or 502(i) of ERISA or Section 4975(a) of the Code;
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(6) The Company has made available to the Acquiror true and correct
copies of (A) each Form G-37/G-38 filed with the MSRB since January 1,
1998 and (B) all records required to be kept by the Company under Rule
G-8(a)(xvi) of the MSRB. Since January 1, 1998, other than as disclosed
in such Forms G-37/G-38 made available to the Acquiror, there have been
no contributions or payments, and there is no other information, that
would be required to be disclosed by the Company or any of the Company's
Subsidiaries;
(7) is not subject to any cease-and-desist or other order issued
by, or a party to any written agreement, consent agreement or memorandum
of understanding with, or a party to any commitment letter or similar
undertaking to, or subject to any order or directive by, a recipient of
any supervisory letter from or has adopted any board resolutions at the
request of, any Governmental Authority or Self-Regulatory Organization,
or been advised since January 1, 1998, by any Governmental Authority or
Self-Regulatory Organization that it is considering issuing or
requesting any such agreement or other action or has knowledge of any
pending or threatened regulatory investigation; and
(8) since January 1, 1998, has timely filed all reports,
registrations and statements, together with any amendments required to
be made with respect thereto, that were required to be filed under any
applicable law, regulation or rule, with (A) any applicable Governmental
Authority and (B) any Self-Regulatory Organization (collectively, the
"Company Reports"). As of their respective dates, the Company Reports
complied with the applicable statutes, rules, regulations and orders
enforced or promulgated by the regulatory authority with which they were
filed.
(m) Properties; Securities.
(1) Except as may be reflected in the Company's Financial
Statements dated before the date hereof, the Company and its
Subsidiaries have good and marketable title, free and clear of all Liens
(other than Liens for current taxes not yet delinquent) to all of the
Material properties and assets, tangible or intangible, reflected in
such financial statements as being owned by the Company and its
Subsidiaries as of the dates thereof. To the best of the Company's
knowledge, all buildings and all the Material fixtures, equipment, and
other property and assets held under leases or subleases by any of the
Company and its Subsidiaries are held under valid leases or subleases,
enforceable in accordance with their respective terms (except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws affecting creditors' rights
generally and to general equity principles). The Company has Previously
Disclosed a list of any and all real estate owned or leased by it or a
Company Subsidiary as of the date hereof. Each of the Company and its
Subsidiaries has good and marketable title to all securities held by it
(except securities sold under repurchase agreements or held in any
fiduciary or agency capacity), free and clear of any Lien, except to the
extent such securities are pledged in the ordinary course of business
consistent with prudent business practices to secure obligations of each
of the Company or any of its Subsidiaries. Such securities are valued on
the books of the Company or its Subsidiaries in accordance with
generally accepted accounting principles.
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(2) Except as Previously Disclosed, neither the Company nor any
Subsidiary thereof holds any equity securities for its own account
involving, in the aggregate, ownership or control of 5% or more of any
class of an issuer's voting securities or 25% or more of the issuer's
equity (treating subordinated debt as equity). Except as Previously
Disclosed, there are no partnerships, limited liability companies, joint
ventures or similar entities, in which the Company or any of its
Subsidiaries is a general partner, manager, managing member or holds
some other similar position or owns or controls any interest, directly
or indirectly, of 5% or more and the nature and amount of each such
interest.
(n) Taxes.
(1) The Company and its Subsidiaries have filed, completely and
correctly in all material respects, all Tax Returns that are required by
applicable law to be filed by the Company or its Subsidiaries;
(2) All Taxes shown to be due on such Tax Returns have been paid in
full;
(3) All Taxes due with respect to completed examinations have been
paid in full;
(4) No currently effective waivers of statutes of limitations
(excluding such statues that relate to years currently under examination
by the IRS) have been given by or requested with respect to any Taxes of
the Company or any of its Subsidiaries;
(5) Each of the Company and its Subsidiaries has duly paid or made
provision for the payment of all Taxes that have been incurred or are
due or claimed to be due from it by federal, state, foreign or local
taxing authorities other than Taxes that are not yet delinquent or are
being contested in good faith and have not been finally determined;
(6) The federal and state income Tax Returns of the Company and its
Subsidiaries have been examined by the IRS or the relevant state taxing
authorities, as the case may be, through December 31, 1996. The federal
income tax returns of the Company and its Subsidiaries for the fiscal
year ended December 31, 1995 and for all fiscal years prior thereto are,
for purposes of routine audit by the IRS, closed because of the statute
of limitations, and no claims for additional taxes for such fiscal years
are pending. Except as Previously Disclosed, there are no audits by, or
disputes pending between the Company or any of its Subsidiaries and, any
taxing authority of which the Company or any of its Subsidiaries has
received written notice, or claims asserted in writing by any taxing
authority for, Taxes or assessments upon the Company or any of its
Subsidiaries. In addition, (A) proper and accurate amounts have been
withheld by the Company and its Subsidiaries from their employees for
all prior periods in compliance with the Tax withholding provisions of
applicable federal, state and local laws, (B) federal, state and local
Tax Returns that are complete and accurate have been filed by the
Company and its Subsidiaries for all periods for which Tax Returns were
due with respect to income Tax withholding, Social Security and
unemployment Taxes, (C) the amounts shown on such federal, state or
local Tax Returns to be due and payable have been paid in full and (D)
there are no Tax liens upon any property or assets of the Company or its
Subsidiaries except liens for current Taxes not yet due;
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(7) Neither the Company nor any of its Subsidiaries has been
required to include in income any adjustment pursuant to Section 481 of
the Code by reason of a voluntary change in accounting method initiated
by the Company or any of its Subsidiaries, and the IRS has not initiated
or proposed any such adjustment or change in accounting method; and
(8) Neither the Company nor any of its Subsidiaries is a party to
or is bound by any Tax sharing, allocation or indemnification agreement
or arrangement. Neither the Company nor any of its Subsidiaries has any
liability for the Taxes of any person (other than the Company and its
Subsidiaries) under Treasury Regulation Section 1.1502-6 (or any similar
provision of state, local or foreign law), as successor or transferee,
by contract or otherwise.
(o) Litigation. Company has furnished Acquiror copies of (i) all
attorney responses to the request of the independent auditors for Company
with respect to loss contingencies as of the end of its fiscal year most
recently completed as of the date hereof in connection with the Company's
financial statements included in the Company's most recent annual report on
Form 10-K as filed with the SEC, and (ii) a written list of all Material
legal litigation, proceedings, investigations or controversy ("Litigation")
before any court, arbitrator, mediator, Governmental Authority or Self-
Regulatory Organization to which the Company or any Company Subsidiary has
been a party since the end of such fiscal year ("Litigation List"). Except
as disclosed in the Litigation List, no Litigation before any court,
arbitrator, mediator, Governmental Authority or Self-Regulatory
Organization that has been or would reasonably be expected to be Material
to the Company and its Subsidiaries taken as a whole is pending against the
Company or any of its Subsidiaries, and, to the best of the Company's
knowledge, no such Litigation has been threatened.
(p) Employees; Labor Matters.
(1) Each of the Company and its Subsidiaries is in compliance with
all currently applicable laws respecting employment and employment
practices, terms and conditions of employment and wages and hours,
including the Immigration Reform and Control Act, the Worker Adjustment
and Retraining Notification Act, any such laws respecting employment
discrimination, harassment, disability rights or benefits, equal
opportunity, plant closure issues, affirmative action, workers'
compensation, employee benefits, severance payments, labor relations,
employee leave issues, wage and hour standards, occupational safety and
health requirements and unemployment insurance and related matters. None
of the Company or any of its Subsidiaries are engaged in any unfair
labor practice and there is no unfair labor practice complaint pending
or threatened against the Company or any of its Subsidiaries before the
National Labor Relations Board. There are no charges or complaints
against the Company or any of its Subsidiaries pending of threatened in
writing alleging sexual or other harassment, or other discrimination, by
the Company, any of its Subsidiaries or by any of their employees,
agents or representatives.
(2) Neither the Company nor any of its Subsidiaries is a party to,
or is bound by, any collective bargaining agreement, Contract or other
agreement or understanding with any labor union or organization, nor has
it agreed to recognize any union or other collective bargaining unit,
nor has any union or other
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collective bargaining unit been certified, or is seeking certification,
as representing any of the employees of any of the Companies or their
Subsidiaries.
(q) Employee Benefit Plans.
(1) The Company has Previously Disclosed a complete list of each
employee or director benefit plan, arrangement or agreement, whether or
not written, including without limitation any employee welfare benefit
plan within the meaning of Section 3(1) of ERISA, any employee pension
benefit plan within the meaning of Section 3(2) of ERISA (whether or not
such plan is subject to ERISA) and any bonus, incentive, deferred
compensation, vacation, stock purchase, stock option, severance,
employment, change of control or fringe benefit plan, program or
agreement that is sponsored, maintained or contributed to by the Company
or any of its Subsidiaries for the benefit of current or former
employees or directors or their beneficiaries (the "Company Benefit
Plans").
(2) The Company has heretofore made available to Acquiror (A) true
and complete copies of each of the Company Benefit Plans (or written
explanations of any unwritten Company Benefit Plans) as in effect on the
date hereof; (B) the three most recent Annual Reports (Form 5500 Series)
and accompanying schedules, if any; and (C) the most recent
determination letter from the IRS (if applicable) for such Company
Benefit Plan.
(3) With respect to each Company Benefit Plan, the Company and its
Subsidiaries have complied, and are now in compliance, in all material
respects with all provisions of ERISA, the Code and all laws and
regulations applicable to such Company Benefit Plans and each Company
Benefit Plan has been administered in all material respects in
accordance with its terms. The Internal Revenue Service has issued a
favorable determination letter with respect to each Company Benefit Plan
that is intended to be a "qualified plan" within the meaning of Section
401(a) of the Code and the related trust that has not been revoked, and,
to the knowledge of the Company, no circumstances exist and no events
have occurred that could reasonably be expected to adversely affect the
qualified status of any such plan or the related trust (except for
changes in applicable law for which the remedial amendment period has
not yet expired). No Company Benefit Plan is intended to meet the
requirements of Code Section 501(c)(9).
(4) All contributions required to be made to any Company Benefit
Plan by applicable law or regulation or by any plan document or other
contractual undertaking, and all premiums due or payable with respect to
insurance policies funding any Plan, for any period through the date
hereof have been timely made or paid in full or, to the extent not
required to be made or paid on or before the date hereof, have been
fully reflected on the Company Financial Statements. Each Company
Benefit Plan, if any, that is an employee welfare benefit plan under
Section 3(1) of ERISA is either (A) funded through an insurance company
contract and is not a "welfare benefit fund" with the meaning of Section
419 of the Code or (B) unfunded.
(5) There is no pending or, to the knowledge of the Company,
threatened litigation relating to the Company Benefit Plans. Neither the
Company nor any of its Subsidiaries has engaged in a transaction with
respect to any Company Benefit
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Plan that would subject the Company or any of its Subsidiaries to a
Material tax or penalty imposed by either Section 4975 of the Code or
Section 502(i) of ERISA.
(6) No Company Benefit Plan is subject to Title IV or Section 302
of ERISA or Section 412 or 4971 of the Code, and neither the Company nor
any of its Subsidiaries has contributed or been obligated to contribute
to a "multiemployer plan" (as defined in Section 3(37) of ERISA) or a
plan that has two or more contributing, but unrelated, sponsors and that
is subject to Title IV of ERISA at any time on or after December 31,
1994. No liability under Subtitle C or D of Title IV of ERISA has been
or is reasonably expected to be incurred by the Company or any of its
Subsidiaries with respect to any ongoing, frozen or terminated
"single-employer plan," within the meaning of Section 4001 of ERISA,
currently or formerly maintained by any of them, or the single-employer
plan of any entity which is considered one employer with the Company
under Section 4001 of ERISA or Section 414 of the Code (a "Company ERISA
Affiliate"). No notice of a "reportable event," within the meaning of
Section 4043 of ERISA, for which the 30-day reporting requirement has
not been waived has been required to be filed for any Company Benefit
Plan or, to the knowledge of the Company, by any Company ERISA
Affiliate. Neither the Company nor any of its Subsidiaries or Company
ERISA Affiliates has provided, or is required to provide, security to
any Company Benefit Plan or any single-employer plan of a Company ERISA
Affiliate.
(7) Neither the Company nor any of its Subsidiaries has any
obligation for retiree health, life or other welfare benefits, except
for benefits and coverage required by applicable law, including, without
limitation, Section 4980B of the Code and Part 6 of Title I of ERISA.
There are no restrictions on the rights of the Company or any of its
Subsidiaries to amend or terminate any such plan (other than reasonable
and customary advance notice requirements) without incurring any
Material liability thereunder.
(8) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby (either standing
alone or in conjunction with any other event) will (A) result in any
payment (including severance, unemployment compensation, "excess
parachute" (within the meaning of 280G of the Code), forgiveness of
indebtedness or otherwise) becoming due to any director or any employee
of the Company or any of its Subsidiaries under any Company Benefit
Plan, (B) increase any benefits otherwise payable under any Company
Benefit Plan, (C) result in any acceleration of the time of payment or
vesting of any such benefit or (D) affect in any way the ability to
amend, terminate, merge or administer any Company Benefit Plan.
(r) Environmental Matters. The Company and its Subsidiaries have
complied at all times with applicable Environmental Laws; no property
(including buildings and any other structures) currently or formerly owned
or operated (or which the Company or any of its Subsidiaries would be
deemed to have owned or operated under any Environmental Law) by the
Company or any of its Subsidiaries or in which the Company or any of its
Subsidiaries (whether as fiduciary or otherwise) has a Lien, has been
contaminated with, or has had any release of, any Hazardous Substance in
such form or substance so as to create any liability for the Company or its
Subsidiaries; the Company is not subject to liability for any Hazardous
Substance
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disposal or contamination on any other third-party property; within the
last six years, the Company and its Subsidiaries have not received any
notice, demand letter, claim or request for information alleging any
violation of, or liability of the Company under, any Environmental Law; the
Company and its Subsidiaries are not subject to any order, decree,
injunction or other agreement with any Governmental Authority or any third
party relating to any Environmental Law; the Company and its Subsidiaries
are not aware of any reasonably likely liability relating to environmental
circumstances or conditions (including the presence of asbestos,
underground storage tanks, lead products or polychlorinated biphenyls)
involving the Company or one of its Subsidiaries, any currently or formerly
owned or operated property (whether as fiduciary or otherwise), or any
reasonably likely liability related to any Lien held by the Company or one
of its Subsidiaries; and the Company has made available to the Acquiror
copies of all environmental reports, studies, sampling data,
correspondence, filings and other environmental information in its
possession or reasonably available to it relating to the Company or one of
its Subsidiaries or any currently or formerly owned or operated property or
any property in which the Company or one of its Subsidiaries (whether as
fiduciary or otherwise) has held a Lien.
(s) Internal Controls. The Company and its Subsidiaries have devised
and maintained a system of internal accounting controls sufficient to
provide reasonable assurances that (1) transactions are executed in
accordance with management's general or specific authorizations, (2)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principals and
to maintain accountability for assets, (3) access to assets is permitted
only in accordance with management's general or specific authorization, and
(4) the recorded accountability for assets is compared with the existing
assets at reasonable intervals and appropriate action is taken with respect
to any differences.
(t) Derivatives; Etc. All exchange-traded, over-the-counter or other
swaps, caps, floors, collars, option agreements, futures and forward
contracts and other similar arrangements or Contracts, whether entered into
for the Company's own account, or for the account of one or more of the
Company's Subsidiaries or their customers, were entered into (1) in
accordance with prudent business practices and all applicable laws, rules,
regulations and regulatory policies and (2) with counter parties reasonably
believed to be financially responsible at the time; and each of them
constitutes the valid and legally binding obligation of the Company or one
of its Subsidiaries, enforceable in accordance with its terms (except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer and similar laws of general
applicability relating to or affecting creditors' rights or by general
equity principles), and are in full force and effect. Neither the Company
nor its Subsidiaries, nor, to the best of the Company's knowledge, any
other party thereto, is in breach of any of its obligations under any such
agreement or arrangement. The Company's SEC Documents disclose the value of
such agreements and arrangements on a mark-to-market basis in accordance
with generally accepted accounting principles and, since December 31, 1999,
there has not been a material change in such value.
(u) Names and Trademarks. The Company and its Subsidiaries have the
right to use the names, service-marks, trademarks and other intellectual
property currently used by them in the conduct of their businesses; each of
such names, service-marks, trademarks and other intellectual property has
been Previously Disclosed; and, in the case of such names, service-marks
and trademarks, in each state of the United States,
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such right of use is free and clear of any Liens, and no other person has
the right to use such names, service-marks or trade marks in any such
state.
(v) Insurance. The Company has Previously Disclosed all of the
insurance policies, binders, or bonds maintained by the Company or its
Subsidiaries ("Company Insurance Policies"). The Company and its
Subsidiaries are insured with reputable insurers against such risks and in
such amounts as the management of the Company reasonably has determined to
be prudent in accordance with industry practices. All of the Company
Insurance Policies are in full force and effect; the Company and its
Subsidiaries are not in material default thereunder; and all claims
thereunder have been filed in due and timely fashion.
(w) No Brokers. No action has been taken by the Company that would
give rise to any valid claim against any party hereto for a brokerage
commission, finder's fee or other like payment with respect to the
transactions contemplated by this Agreement, excluding the fees to be paid
by the Company to U.S. Bancorp Piper Jaffray in amounts and on terms
Previously Disclosed.
(x) Tax Treatment. As of the date hereof, the Company has no reason to
believe that the Merger will not qualify as a "reorganization" within the
meaning of Section 368(a) of the Code.
SECTION 4.4 Representations and Warranties of the Acquiror and
MergerCo. Except as Previously Disclosed in a paragraph of its Disclosure
Schedule corresponding to the relevant paragraph below, each of the Acquiror and
MergerCo, as the case maybe, hereby represents and warrants to the Company as
follows:
(a) Organization, Standing and Authority. Each of the Acquiror and
MergerCo is a corporation duly organized, validly existing and in good
standing under the laws of the State of Minnesota (in the case of the
Acquiror) or the State of Minnesota (in the case of MergerCo), and is duly
qualified to do business and is in good standing in all jurisdictions where
its ownership or leasing of property or assets or the conduct of its
business requires it to be so qualified.
(b) Corporate Power. The Acquiror and each of its Subsidiaries has the
corporate power and authority to carry on its business as it is now being
conducted and to own all its properties and assets.
(c) Corporate Authority. Each of the Acquiror and MergerCo has the
requisite corporate power and authority, and has taken all corporate action
necessary, in order to authorize the execution, delivery of and performance
of its obligations under, this Agreement and to consummate the transactions
contemplated by this Agreement. This Agreement is a valid and legally
binding agreement of each of the Acquiror and MergerCo, enforceable in
accordance with its terms.
(d) Regulatory Approvals; No Defaults.
(1) No consents or approvals of, or filings or registrations with,
any Governmental Authority, Self-Regulatory Organization or with any
third party are required to be made or obtained by the Acquiror or any
of its Subsidiaries in connection with the execution, delivery or
performance by the Acquiror and MergerCo of this Agreement, or to
consummate the Merger, except for (A) those required under the HSR Act;
(B) filings of applications or notices with the CSE, the NASD and other
Previously Disclosed securities licensing or
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supervising authorities; (C) approval of the CSE and consents of
national securities exchanges for the transfer of ownership of seats or
membership; (D) the filing and declaration of effectiveness of the
Registration Statement; (E) approval of the listing on the NASDAQ/NMS of
the shares of Acquiror Common Stock to be issued as Merger
Consideration; and (F) the filing of Articles of Merger with the
Secretary of State of the State of Minnesota pursuant to the MBCA. As of
the date hereof, the Acquiror is not aware of any reason why the
approvals of all Governmental Authorities or Self-Regulatory
Organizations necessary to permit consummation of the transactions
contemplated hereby will not be received.
(2) Subject only to receipt of the regulatory approvals referred to
in Section 4.4(d)(1), the expiration of applicable waiting periods and
the making of all required filings under federal and state securities
laws, the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby do not and will not
(A) constitute a breach or violation of, or a default under, or give
rise to any Lien, any acceleration of remedies or any right of
termination (with or without the giving of notice, passage of time or
both) under, any law, rule or regulation or any judgment, decree, order,
governmental or nongovernmental permit or license, or Contract of the
Acquiror or of any of its Subsidiaries or to which the Acquiror or any
of its Subsidiaries or its or their properties is subject or bound, (B)
constitute a breach or violation of, or a default under, the articles of
incorporation or bylaws (or similar governing documents) of the Acquiror
or any of its Subsidiaries, or (C) require any consent or approval under
any such law, rule, regulation, judgment, decree, order, governmental
permit or license or Contract.
(e) Acquiror Stock. The authorized capital stock of the Acquiror
consists of 100,000,000 shares of capital stock, par value $.04 per share,
of which 50,000,000 shares are designated as Acquiror Common Stock, and
50,000,000 shares are undesignated (the "Acquiror Undesignated Stock" and
together with the Acquiror Common Stock, the "Acquiror Stock"). As of March
31, 2000, (a) 21,575,273 shares of Acquiror Common Stock were issued and
outstanding, and (b) no shares of Acquiror Undesignated Stock were issued
and outstanding, (c) 1,525,000 shares of Acquiror Common Stock were
reserved for issuance upon the exercise of options issued or issuable under
the Acquiror's 1995 Stock Option Plan and 1996 Non-Employee Director Stock
Option Plan (the "Acquiror Stock Options") and (d) 314,258 shares of
Acquiror Common Stock were reserved for issuance under outstanding warrants
to purchase Acquiror Common Stock (the "Acquiror Warrants"). The
outstanding shares of Acquiror Common Stock have been duly authorized and
are validly issued and outstanding, fully paid and nonassessable, and
subject to no preemptive rights (and were not issued in violation of any
subscriptive or preemptive rights). As of the date hereof, other than the
Acquiror Stock Options and the Acquiror Warrants and the convertible notes
("Convertible Notes") which are proposed to be issued, offered and sold
pursuant to SEC registration 333-35544 filed April 25, 2000, there are no
shares of Acquiror Common Stock authorized and reserved for issuance, the
Acquiror does not have any Rights issued or outstanding with respect to
Acquiror Stock, and the Acquiror does not have any commitment to authorize,
issue or sell any Acquiror Stock or Rights, except pursuant to this
Agreement. The Convertible Notes, when issued, will have a conversion price
of not less than the fair market value of a share of Acquiror Common Stock.
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(f) Subsidiaries. Each of the Acquiror's Subsidiaries has been duly
organized, is validly existing and in good standing under the laws of the
jurisdiction of its organization, and is duly qualified to do business and
in good standing in the jurisdictions where its ownership or leasing of
property or the conduct of its business requires it to be so qualified. The
Acquiror has continuously owned all of the outstanding capital stock of
MergerCo since the initial issuance by MergerCo of its capital stock.
(g) SEC Documents; Financial Statements.
(1) Since December 31, 1998, Acquiror and each Acquiror Subsidiary
has filed all reports, registrations, and statements it was required to
file with the SEC under the Securities Act, or under Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act, including, but not limited to
Acquiror's Annual Reports on Form 10-K for the fiscal year ended
December 31, 1998, Forms 10-Q, registration statements, definitive proxy
statements, and information statements and Acquiror has Previously
Disclosed to the Company a draft of its Annual Report on Form 10-K for
the fiscal year ended March 31, 2000 (collectively, the "Acquiror SEC
Documents"). As of their respective dates (and without giving effect to
any amendments or modification filed after the date of this Agreement)
each of the Acquiror SEC Documents, including the financial statements,
exhibits, and schedules thereto, filed, circulated or Previously
Disclosed prior to the date hereof complied (and each of the Acquiror
SEC Documents filed after the date of this Agreement will comply) as to
form with applicable Securities Laws and did not (or, in the case of
reports, statements, or circular filed after the date of this Agreement,
will not) contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which
they were made, not misleading.
(2) Each of the balance sheets included in or incorporated by
reference into the Acquiror SEC Documents and the audited balance sheet
of MJK Holdings, Inc for the period ended March 31, 1999 Previously
Disclosed to the Company, including the related notes and schedules,
fairly presented (or, in the case of Acquiror SEC Documents filed after
the date of this Agreement, will fairly present) the consolidated
financial condition of the Acquiror and its Subsidiaries as of the date
of such balance sheet and each of the statements of income, cash flows
and changes in shareholders' equity and comprehensive income included in
or incorporated by reference into the Acquiror SEC Documents or in the
audited financial statements of MJK Holdings, Inc. for the period ended
March 31, 1999 Previously Disclosed to the Company, including any
related notes and schedules (collectively the foregoing financial
statements and related notes and schedules are referred to as the
"Acquiror Financial Statements"), fairly presented (or, in the case of
Acquiror SEC Documents filed after the date of this Agreement, will
fairly present) the consolidated results of operations, cash flows and
shareholders' equity, as the case may be, of the Acquiror and its
Subsidiaries for the periods set forth therein (subject, in the case of
unaudited statements, to normal year-end audit adjustments), in each
case in accordance with generally accepted accounting principles
consistently applied during the periods involved (except as may be noted
therein and except that such unaudited statements include no notes).
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(3) Except as disclosed in the Acquiror Financial Statements or the
Acquiror SEC Documents filed prior to the date of this Agreement, none
of the Acquiror or any of its Subsidiaries has any liability or
obligation (contingent or otherwise) that, individually or in the
aggregate, is reasonably likely to have a Material Adverse Effect on
Acquiror.
(4) Acquiror has delivered or made available to the Company true
and complete copies of the FOCUS Reports filed on Form X-17A-5 (the
"Acquiror FOCUS Reports") for the quarters ended March 31, 1999, June
30, 1999, September 30, 1999, December 31, 1999 and March 31, 2000 by
each Subsidiary of Acquiror that is a "broker" or "dealer", as such
terms are defined in Sections 2(a)(4) and 2(a)(5) of the Exchange Act
(collectively, the "Acquiror Broker-Dealer Subsidiaries"). Each Acquiror
FOCUS Report complied (and with respect to Acquiror FOCUS Reports filed
after the date hereof, will comply) at the date thereof with the rules
and regulations of the SEC relating thereto and fairly presented (or
will present, as the case may be) the information required to be
presented therein pursuant to Rule 17a-5 under the Exchange Act.
(h) Absence of Certain Changes. Since March 31, 2000, the business of
the Acquiror and its Subsidiaries has been conducted in the ordinary and
usual course, consistent with past practice, and there has not been:
(1) any event, occurrence, development or state of circumstances or
facts which has had or is reasonably likely to have a Material Adverse
Effect on the Acquiror;
(2) any amendment of any term of any outstanding security of the
Acquiror or any of its Subsidiaries or to the Acquiror or any of its
Subsidiaries' articles of incorporation or bylaws (or similar governing
documents);
(3) any (A) incurrence, assumption or guarantee by the Acquiror or
any of its Subsidiaries of any indebtedness for borrowed money, or (B)
assumption, guarantee, endorsement or otherwise by the Acquiror of any
obligations of any other person, in each case, other than in the
ordinary and usual course of business, consistent with past practice,
and in amounts and on terms consistent with past practices;
(4) any creation or assumption by the Acquiror or any of its
Subsidiaries of any Lien on any material asset other than in the
ordinary and usual course of business consistent with past practices;
(5) prior to or on the date hereof, any making of any loan in
excess of $100,000, or aggregate loans in excess of $250,000, advance or
capital contributions to or investment in any person, in each case,
other than in the ordinary and usual course of business consistent with
past practice;
(6) any change in any accounting policies or practices by the
Acquiror or any of its Subsidiaries; or
(7) any (A) employment, deferred compensation, severance,
retirement or other similar agreement entered into with any director,
officer, consultant, partner or employee of the Acquiror or any of its
Subsidiaries (or any amendment to any such existing agreement), (B)
grant of any severance or termination pay to any director, officer,
consultant, partner or employee of the Acquiror or any of its
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Subsidiaries, or (C) change in compensation or other benefits payable to
any director, officer, consultant, partner or employee of the Acquiror
or any of its Subsidiaries, except, in each case, in the ordinary course
of business or as required by Contract or applicable law with respect to
employees of the Acquiror or any of its Subsidiaries.
(i) Contracts.
(1) The Acquiror has Previously Disclosed each of the following
executory Contracts to which either the Acquiror or any of its
Subsidiaries is a party, or by which any of them is bound or to which
any of their properties is subject:
(A) any lease of real property;
(B) any partnership, joint venture or other similar agreement
or arrangement, or any options or rights to acquire from any person
any capital stock, voting securities or securities convertible into
or exchangeable for capital stock or voting securities or such
person, in each case, entered into other than in the ordinary
course of business;
(C) any agreement relating to the acquisition or disposition
of any business (whether by merger, sale of stock, sale of assets
or otherwise);
(D) any indenture, mortgage, promissory note, loan agreement,
guarantee or other agreement or commitment, outstanding as of the
date hereof, for the borrowing of money by the Acquiror or one of
its Subsidiaries or the deferred purchase price of property in
excess of $100,000 (in either case, whether incurred, assumed,
guaranteed or secured by any asset);
(E) any agreement in force as of the date hereof that creates
future payment obligations in excess of $100,000 in the aggregate
and which by its terms does not terminate or is not terminable
without penalty upon notice of 90 days or less;
(F) any license, franchise or similar agreement material to
the Acquiror or any of its Subsidiaries or any agreement relating
to any trade name or intellectual property right that is material
to the Acquiror or any of its Subsidiaries;
(G) any exclusive dealing agreement or any agreement that
limits the freedom of the Acquiror or any of its Subsidiaries to
compete in any line of business or with any person or in any area
or that would so limit their freedom after the Effective Date;
(H) any compensation, employment, severance, supplemental
retirement or other similar agreement or arrangement with any
employee or former employee of, or independent contractor with
respect to, the Acquiror or any of its Subsidiaries, or any other
agreement with any current or former Affiliate of the Acquiror; and
(I) any other Contract that is a "material contract" as
defined in Item 601(b)(10) of SEC Regulation S-K and that has not
been filed prior to the date hereof as an exhibit to the Acquiror's
SEC Documents.
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(2) Each Contract that has been, or is required to be, Previously
Disclosed pursuant to this Section is a valid and binding agreement of
the Acquiror or one or more of its Subsidiaries, as the case may be, and
is in full force and effect, and the Acquiror or its Subsidiaries
parties thereto are not in default or breach in any material respect
under the terms of any such Contract.
(j) Litigation. Except as disclosed in the Acquiror's SEC Documents
filed before the date of this Agreement, no Litigation before any court,
arbitrator, mediator, Governmental Authority or Self-Regulatory
Organization that has been or would reasonably be expected to be Material
to the Acquiror and its Subsidiaries taken as a whole is pending against
the Acquiror or any of its Subsidiaries, and, to the best of the Acquiror's
knowledge, no such Litigation has been threatened.
(k) Compliance with Laws. The Acquiror and each of its Significant
Subsidiaries: is in compliance with all applicable federal, state, local
and foreign statutes, laws, regulations, ordinances, rules, judgments,
orders or decrees applicable to the conduct of its businesses or to the
employees conducting such businesses in all material respects, and the
rules of all Self-Regulatory Organizations applicable thereto and has all
permits, licenses, authorizations, orders and approvals of, and has made
all filings, applications and registrations with, all Governmental
Authorities and Self-Regulatory Organizations that are required in order to
permit them to own or lease their properties and to conduct their
businesses as presently conducted (all such permits, licenses, certificates
of authority, orders and approvals are in full force and effect and are
current and, to the best of the Acquiror's knowledge, no suspension or
cancellation of any of them is threatened or is reasonably likely and all
such filings, applications and registrations are current).
(l) Registration Matters.
(1) Each of the Acquiror's Subsidiaries required to be registered
as a broker-dealer or investment advisor with the SEC, the securities
commission or similar authority of any state or any Self-Regulatory
Organization are duly registered and such registrations are in full
force and effect. Each Broker-Dealer Subsidiary is, and at the Effective
Time will be, a member in good standing with all required
Self-Regulatory Organizations and in compliance with all applicable
rules and regulations of the Self-Regulatory Organizations.
(2) The Acquiror has delivered or made available to the Company,
true, correct and complete copies of (A) each Acquiror Broker-Dealer
Subsidiary's Uniform Application for Broker-Dealer Registration on Form
BD (each, "Acquiror Form BD") and (B) each Uniform Application for
Investment Adviser Registration filed by the Acquiror or any Subsidiary
(each, an "Acquiror Form ADV", and together with Acquiror Form BD,
"Acquiror Forms"), all of the Acquiror Forms reflecting all amendments
thereto filed with the NASD or the SEC, as the case may be, on or prior
to the date hereof. The Acquiror Forms are in compliance with the
applicable requirements of the Exchange Act or the Investment Advisers
Act, as the case may be and do not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Acquiror
has provided or made available true and complete copies of all audit
reports since December 31, 1996 by the SEC or the NASD regarding the
Acquiror or its Subsidiaries. Each
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director, officer, agent and employee of each Acquiror Broker-Dealer
Subsidiary who is required to be registered as a representative,
principal or agent with the securities commission of any state or with
any Self Regulating Organization is duly registered as such and such
registration is in full force and effect. Each registered representative
and principal of each Acquiror Broker-Dealer Subsidiary has at least the
minimum series license for the activities which such registered
representative or principal performs for such Acquiror Broker-Dealer
Subsidiary.
(3) The net capital, as such term is defined in Rule 15c3-1 under
the Exchange Act, of each Acquiror Broker-Dealer Subsidiary satisfies
the minimum net capital requirements of the Exchange Act and of the laws
of any jurisdiction in which the Acquiror Broker-Dealer Subsidiary
conducts business, and has been sufficient to permit each Acquiror
Broker-Dealer Subsidiary to operate without restriction on its ability
to expand its business under NASD Conduct Rule 3130.
(4) None of the Acquiror Broker-Dealer Subsidiaries nor any
"associated person" thereof (a) is subject to a "statutory
disqualification" as such terms are defined in the Exchange Act, (b) is
ineligible to serve as a broker-dealer or as an associated person to a
registered broker-dealer or (c) is subject to a disqualification that
would be a basis for censure, limitations on the activities, functions
or operations of, or suspension or revocation of the registration of any
Acquiror Broker-Dealer Subsidiary as broker-dealer, municipal securities
dealer, government securities broker or government securities dealer
under Section 15, Section 15B or Section 15C of the Exchange Act and
there is no reasonable basis for, or proceeding or investigation,
whether formal or informal, or whether preliminary or otherwise, that is
reasonably likely to result in, any such censure, limitations,
suspension or revocation.
(5) Except as Previously Disclosed, neither the Acquiror nor its
Subsidiaries is or is required to be registered as an investment
company, investment adviser, commodity trading advisor, commodity pool
operator, futures commission merchant, introducing broker, insurance
agent, or transfer agent under any United States federal, state, local
or foreign statutes, laws, rules or regulations. No Acquiror
Broker-Dealer Subsidiary acts as the "sponsor" of a "broker-dealer
trading program", as such terms are defined in Rule 17a-23 under the
Exchange Act.
(6) Neither the Acquiror, its Subsidiaries nor any "associated
person" (as defined in the Investment Advisers Act) thereof, as
applicable, is ineligible pursuant to Section 203 of the Investment
Advisers Act to serve as an investment adviser or as an associated
person to a registered investment adviser. Neither the Acquiror nor its
Subsidiaries provides investment advisory, subadvisory or management
services to or through (i) any issuer or other Person that is an
investment company (within the meaning of the Investment Company Act),
(ii) any issuer or other Person that would be an investment company
(within the meaning of the Investment Company Act) but for the
exemptions contained in Section 3(c)(1), Section 3(c)(7), the final
clause of Section 3(c)(3) or the third or fourth clauses of Section
3(c)(11) of the Investment Company Act, or (iii) any issuer or other
Person that is or is required to be registered under the laws of the
appropriate securities regulatory authority in the jurisdiction in which
the issuer is domiciled (other than the United States or the states
thereof),
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which is or holds itself out as engaged primarily in the business of
investing, reinvesting or trading in securities.
(7) Each account to which the Acquiror provides investment
management, advisory or subadvisory services that (i) is an employee
benefit plan, as defined in Section 3(3) of ERISA, that is subject to
Title I of ERISA; (ii) a Person acting on behalf of such a plan; or
(iii) any entity whose underlying assets are deemed, under 29 C.F.R.
Section 2510.3-101, to include the assets of such a plan by reason of
such a plan's investment in such entity (each, an "Acquiror ERISA
Client") has been managed or provided brokerage services by the Acquiror
or a Subsidiary thereof, as applicable, such that the Acquiror or such
Subsidiary in the exercise of such management or in the provision of
such services is in compliance in all material respects with the
applicable requirements of ERISA.
(m) Employees; Labor Matters.
(1) Each of the Acquiror and its Subsidiaries is in compliance with
all currently applicable laws respecting employment and employment
practices, terms and conditions of employment and wages and hours,
including the Immigration Reform and Control Act, the Worker Adjustment
and Retraining Notification Act, any such laws respecting employment
discrimination, harassment, disability rights or benefits, equal
opportunity, plant closure issues, affirmative action, workers'
compensation, employee benefits, severance payments, labor relations,
employee leave issues, wage and hour standards, occupational safety and
health requirements and unemployment insurance and related matters. None
of the Acquiror or any of its Subsidiaries are engaged in any unfair
labor practice and there is no unfair labor practice complaint pending
or threatened against the Acquiror or any of its Subsidiaries before the
National Labor Relations Board. There are no charges or complaints
against the Acquiror or any of its Subsidiaries pending of threatened in
writing alleging sexual or other harassment, or other discrimination, by
the Company, any of its Subsidiaries or by any of their employees,
agents or representatives.
(2) Neither the Acquiror nor any of its Subsidiaries is a party to,
or is bound by, any collective bargaining agreement, Contract or other
agreement or understanding with any labor union or organization, nor has
it agreed to recognize any union or other collective bargaining unit,
nor has any union or other collective bargaining unit been certified, or
is seeking certification, as representing any of the employees of the
Acquiror or its Subsidiaries.
(n) Employee Benefit Plans.
(1) The Acquiror has Previously Disclosed a complete list of each
employee or director benefit plan, arrangement or agreement, whether or
not written, including without limitation any employee welfare benefit
plan within the meaning of Section 3(1) of ERISA, any employee pension
benefit plan within the meaning of Section 3(2) of ERISA (whether or not
such plan is subject to ERISA) and any bonus, incentive, deferred
compensation, vacation, stock purchase, stock option, severance,
employment, change of control or fringe benefit plan, program or
agreement that is sponsored, maintained or contributed to by the
Acquiror or any of its Subsidiaries for the benefit of current or former
employees or directors or their beneficiaries (the "Acquiror Benefit
Plans").
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(2) The Acquiror has heretofore made available to the Company (A)
true and complete copies of each of the Acquiror Benefit Plans (or
written explanations of any unwritten Benefit Plans) as in effect on the
date hereof; (B) the three most recent Annual Reports (Form 5500 Series)
and accompanying schedules, if any; and (C) the most recent
determination letter from the IRS (if applicable) for such Acquiror
Benefit Plan.
(3) With respect to each Acquiror Benefit Plan, the Acquiror and
its Subsidiaries have complied, and are now in compliance, in all
material respects with all provisions of ERISA, the Code and all laws
and regulations applicable to such Acquiror Benefit Plans and each
Acquiror Benefit Plan has been administered in all material respects in
accordance with its terms. The Internal Revenue Service has issued a
favorable determination letter with respect to each Acquiror Benefit
Plan that is intended to be a "qualified plan" within the meaning of
Section 401(a) of the Code and the related trust that has not been
revoked, and, to the knowledge of the Acquiror, no circumstances exist
and no events have occurred that could reasonably be expected to
adversely affect the qualified status of any such plan or the related
trust (except for changes in applicable law for which the remedial
amendment period has not yet expired). No Acquiror Benefit Plan is
intended to meet the requirements of Code Section 501(c)(9).
(4) All contributions required to be made to any Acquiror Benefit
Plan by applicable law or regulation or by any plan document or other
contractual undertaking, and all premiums due or payable with respect to
insurance policies funding any Plan, for any period through the date
hereof have been timely made or paid in full or, to the extent not
required to be made or paid on or before the date hereof, have been
fully reflected on the Acquiror Financial Statements. Each Acquiror
Benefit Plan, if any, that is an employee welfare benefit plan under
Section 3(1) of ERISA is either (A) funded through an insurance company
contract and is not a "welfare benefit fund" with the meaning of Section
419 of the Code or (B) unfunded.
(5) There is no pending or, to the knowledge of the Acquiror,
threatened litigation relating to the Acquiror Benefit Plans. Neither
the Acquiror nor any of its Subsidiaries has engaged in a transaction
with respect to any Acquiror Benefit Plan that would subject the
Acquiror or any of its Subsidiaries to a Material tax or penalty imposed
by either Section 4975 of the Code or Section 502(i) of ERISA.
(6) No Acquiror Benefit Plan is subject to Title IV or Section 302
of ERISA or Section 412 or 4971 of the Code, and neither the Acquiror
nor any of its Subsidiaries has contributed or been obligated to
contribute to a "multiemployer plan" (as defined in Section 3(37) of
ERISA) or a plan that has two or more contributing, but unrelated,
sponsors and that is subject to Title IV of ERISA at any time on or
after December 31, 1994. No liability under Subtitle C or D of Title IV
of ERISA has been or is reasonably expected to be incurred by the
Acquiror or any of its Subsidiaries with respect to any ongoing, frozen
or terminated "single-employer plan," within the meaning of Section 4001
of ERISA, currently or formerly maintained by any of them, or the
single-employer plan of any entity which is considered one employer with
the Acquiror under Section 4001 of ERISA or Section 414 of the Code (an
"Acquiror ERISA
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Affiliate"). No notice of a "reportable event," within the meaning of
Section 4043 of ERISA, for which the 30-day reporting requirement has
not been waived has been required to be filed for any Acquiror Benefit
Plan or, to the knowledge of the Acquiror, by any Acquiror ERISA
Affiliate. Neither the Acquiror nor any of its Subsidiaries or Acquiror
ERISA Affiliates has provided, or is required to provide, security to
any Benefit Plan or any single-employer plan of an Acquiror ERISA
Affiliate.
(o) Environmental Matters. The Acquiror and its Subsidiaries have
complied at all times with applicable Environmental Laws; no property
(including buildings and any other structures) currently or formerly owned
or operated (or which the Acquiror or any of its Subsidiaries would be
deemed to have owned or operated under any Environmental Law) by the
Acquiror or any of its Subsidiaries or in which the Acquiror or any of its
Subsidiaries (whether as fiduciary or otherwise) has a Lien, has been
contaminated with, or has had any release of, any Hazardous Substance in
such form or substance so as to create any liability for the Acquiror or
its Subsidiaries; the Acquiror is not subject to liability for any
Hazardous Substance disposal or contamination on any other third-party
property; within the last six years, the Acquiror and its Subsidiaries have
not received any notice, demand letter, claim or request for information
alleging any violation of, or liability of the Acquiror under, any
Environmental Law; the Acquiror and its Subsidiaries are not subject to any
order, decree, injunction or other agreement with any Governmental
Authority or any third party relating to any Environmental Law; the
Acquiror and its Subsidiaries are not aware of any reasonably likely
liability relating to environmental circumstances or conditions (including
the presence of asbestos, underground storage tanks, lead products or
polychlorinated biphenyls) involving the Acquiror or one of its
Subsidiaries, any currently or formerly owned or operated property (whether
as fiduciary or otherwise), or any reasonably likely liability related to
any Lien held by the Acquiror or one of its Subsidiaries; and the Acquiror
has made available to the Acquiror copies of all environmental reports,
studies, sampling data, correspondence, filings and other environmental
information in its possession or reasonably available to it relating to the
Acquiror or one of its Subsidiaries or any currently or formerly owned or
operated property or any property in which the Acquiror or one of its
Subsidiaries (whether as fiduciary or otherwise) has held a Lien.
(p) Internal Controls. The Acquiror and its Subsidiaries have devised
and maintained a system of internal accounting controls sufficient to
provide reasonable assurances that (1) transactions are executed in
accordance with management's general or specific authorizations, (2)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principals and
to maintain accountability for assets, (3) access to assets is permitted
only in accordance with management's general or specific authorization, and
(4) the recorded accountability for assets is compared with the existing
assets at reasonable intervals and appropriate action is taken with respect
to any differences.
(q) Derivatives; Etc. All exchange-traded, over-the-counter or other
swaps, caps, floors, collars, option agreements, futures and forward
contracts and other similar arrangements or Contracts, whether entered into
for the Acquiror's own account, or for the account of one or more of the
Acquiror's Subsidiaries or their customers, were entered into (1) in
accordance with prudent business practices and all applicable laws, rules,
regulations and regulatory policies and (2) with counter parties reasonably
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believed to be financially responsible at the time; and each of them
constitutes the valid and legally binding obligation of the Acquiror or one
of its Subsidiaries, enforceable in accordance with its terms (except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer and similar laws of general
applicability relating to or affecting creditors' rights or by general
equity principles), and are in full force and effect. Neither the Acquiror
nor its Subsidiaries, nor, to the best of the Acquiror's knowledge, any
other party thereto, is in breach of any of its obligations under any such
agreement or arrangement. The Acquiror's SEC Documents disclose the value
of such agreements and arrangements on a mark-to-market basis in accordance
with generally accepted accounting principles and, since December 31, 1999,
there has not been a material change in such value.
(r) Names and Trademarks. The Acquiror and its Subsidiaries have the
right to use the names, service-marks, trademarks and other intellectual
property currently used by them in the conduct of their businesses; each of
such names, service-marks, trademarks and other intellectual property has
been Previously Disclosed; and, in the case of such names, service-marks
and trademarks, in each state of the United States, such right of use is
free and clear of any Liens, and no other person has the right to use such
names, service-marks or trade marks in any such state.
(s) Insurance. The Acquiror has Previously Disclosed all of the
insurance policies, binders, or bonds maintained by Acquiror or its
Subsidiaries ("Acquiror Insurance Policies"). The Company and its
Subsidiaries are insured with reputable insurers against such risks and in
such amounts as the management of Acquiror reasonably has determined to be
prudent in accordance with industry practices. All of the Acquiror
Insurance Policies are in full force and effect; the Acquiror and its
Subsidiaries are not in material default thereunder; and all claims
thereunder have been filed in due and timely fashion.
(t) Brokers. No action has been taken by the Acquiror that would give
rise to any valid claim against any party hereto for a brokerage
commission, finder's fee or other like payment with respect to the
transactions contemplated by this Agreement, excluding the fees to be paid
by Acquiror to R.J. Steichen & Company in amounts and on terms Previously
Disclosed.
(u) Absence of Certain Changes. Since March 31, 2000, there has not
been any event, occurrence, development or state of circumstances or facts
which has had or is reasonably likely to have a Material Adverse Effect on
Acquiror.
(v) Activities of Merger Sub. MergerCo does not have any Subsidiaries
or material investments of any kind in any entity. MergerCo has been
incorporated on behalf of the Acquiror solely for purposes of accomplishing
the Merger, has not engaged in any other business activity and has
conducted its operations only as contemplated hereby.
(w) Funds. Acquiror has available and will make available to MergerCo
at the Effective Time, sufficient funds to consummate the Merger and pay
the Cash Consideration in accordance with the terms of this Agreement.
(x) Validity of Acquiror Common Stock. The shares of Acquiror Common
Stock to be issued to the holders of Company Common Stock as part of the
Merger Consideration will be, when issued, duly authorized, validly issued,
fully paid and nonassessable and not in violation of any preemptive rights.
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(y) Taxes.
(1) The Acquiror and its Subsidiaries have filed, completely and
correctly in all material respects, all Tax Returns that are required by
applicable law to be filed by the Acquiror or its Subsidiaries;
(2) All Taxes shown to be due on such Tax Returns have been paid in
full;
(3) All Taxes due with respect to completed examinations have been
paid in full;
(4) No currently effective waivers of statutes of limitations
(excluding such statutes that relate to years currently under
examination by the IRS) have been given by or requested with respect to
any Taxes of the Acquiror or any of its Subsidiaries;
(5) Each of the Acquiror and its Subsidiaries has duly paid or made
provision for the payment of all Taxes that have been incurred or are
due or claimed to be due from it by federal, state, foreign or local
taxing authorities other than Taxes that are not yet delinquent or are
being contested in good faith and have not been finally determined.
(z) Tax Treatment. As of the date hereof, Acquiror has no reason to
believe that the Merger will not qualify as a "reorganization" within the
meaning of Section 368(a) of the Code.
ARTICLE 5
COVENANTS
SECTION 5.1 Forebearances of the Company. From the date hereof until the
Effective Time, except as expressly contemplated by this Agreement, without the
prior written consent of the Acquiror, the Company will not, and will cause each
of its Subsidiaries not to:
(a) Ordinary Course. Conduct the business of the Company or any of its
Subsidiaries other than in the ordinary and usual course, or, to the extent
consistent therewith, fail to use reasonable best efforts to preserve
intact any of their business organizations and assets and maintain their
rights, franchises and existing relations with clients, customers,
correspondents, independent contractors, suppliers, employees and business
associates; or engage in any new lines of business.
(b) Capital Stock. Other than pursuant to the exercise of Previously
Disclosed Rights outstanding on the date hereof, (1) issue, sell or
otherwise permit to become outstanding, or authorize the creation of, any
additional shares of Company Stock or any Rights, (2) enter into any
Contract with respect to the foregoing or (3) permit any additional shares
of Company Stock to become subject to new grants of employee or director
stock options, other Rights or similar stock-based employee rights.
(c) Dividends, Etc. (1) Make, declare, pay or set aside for payment
any dividend on or in respect of, or declare or make any distribution on,
any shares of its capital stock, other than dividends from wholly owned
Subsidiaries to the Company (in each case having record and payment dates
consistent with past practice) or (2) directly or indirectly adjust, split,
combine, redeem, reclassify, purchase or
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otherwise acquire, any shares of its capital stock, other than as required
by the Company Stock Plans upon exercise of Previously Disclosed Rights
outstanding on the date hereof.
(d) Compensation; Employment Agreements; Etc. Enter into, amend,
modify or renew any Contract regarding employment, consulting, severance or
similar arrangements with any directors, officers, employees of, or
independent contractors with respect to, the Company or its Subsidiaries,
or grant any salary, wage or other increase in compensation or increase in
any employee benefit (including incentive or bonus payments), except (1)
for changes that are required by applicable law, (2) to satisfy Previously
Disclosed Contracts existing on the date hereof, or (3) for employment
arrangements for, or grants of awards to, newly hired non-officer employees
in the ordinary course of business consistent with past practice or (4) for
normal individual increases in compensation to non-officer employees in the
ordinary and usual course of business consistent with past practice.
(e) Benefit Plans. Enter into, establish, adopt, amend or modify any
pension, retirement, stock option, stock purchase, savings, profit sharing,
deferred compensation, consulting, bonus, group insurance or other employee
benefit, incentive or welfare Contract, plan, program or arrangement, or
any trust agreement (or similar arrangement) related thereto, in respect of
any directors, officers, employees of, or independent contractors with
respect to, the Company or its Subsidiaries, including taking any action
that accelerates the vesting or exercisability of stock options, restricted
stock or other compensation or benefits payable thereunder, except, in each
such case, as may be required by applicable law or expressly required by
the terms of Contracts Previously Disclosed as such Contracts are in effect
as of the date hereof.
(f) Dispositions. Except for sales of securities or other investments
or assets in the ordinary course of business consistent with past practice,
sell, transfer, mortgage, lease, encumber or otherwise dispose of or
discontinue any material portion of its assets, business or properties.
(g) Acquisitions. Except for the purchase of securities or other
investments or assets in the ordinary course of business consistent with
past practice, acquire a material portion of the assets of any other
person.
(h) Governing Documents. Amend the Company Articles, the Company
Bylaws or the articles of incorporation or bylaws (or similar governing
documents) of any of the Company's Subsidiaries.
(i) Accounting Methods. Implement or adopt any change in accounting
principles, practices or methods, other than as may be required by
generally accepted accounting principles.
(j) Contracts. Except in the ordinary course of business consistent
with past practice, enter into, renew or terminate any material Contract or
amend or modify in any material respect, or waive any material right under,
any of its existing material Contracts.
(k) Claims. Settle any claim, action or proceeding, except for any
claim, action or proceeding involving solely money damages in an amount,
individually and in the aggregate for all such settlements, not more than
$250,000 and which could not
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reasonably be expected to establish an adverse precedent or basis for
subsequent settlements.
(l) Capital Expenditures. Authorize or make any capital expenditures,
other than (1) annual budgeted amounts Previously Disclosed, or (2) in the
ordinary and usual course of business consistent with past practice in
amounts not exceeding $250,000 in the aggregate.
(m) Risk Management. Except as required by applicable law or
regulation, (1) implement or adopt any change in the risk management
policies, procedures or practices of the Company, which, individually or in
the aggregate with all such other changes, would be Material, or (2)
materially restructure or change its investment securities portfolio, if
any, or the manner in which such portfolio is classified or reported.
(n) Tax Matters. Make or change any tax election, change any annual
tax accounting period, adopt or change any method of tax accounting, file
any amended Tax Return, enter into any closing agreement, settle any Tax
claim or assessment, surrender or compromise any right to claim a Tax
refund or consent to any extension or waiver of the limitations period
applicable to any Tax claim or assessment, other than any of the foregoing
actions that are (i) not, alone or in the aggregate, Material and (ii)
taken in the ordinary and usual course of business, consistent with past
practice.
(o) Indebtedness. (i) Other than in the ordinary course of business
consistent with past practice, (A) incur any indebtedness for borrowed
money (other than short-term indebtedness incurred to refinance existing
short-term indebtedness, and indebtedness of the Company or any of its
Subsidiaries to the Company or any of its Subsidiaries, and indebtedness
under existing lines of credit), (B) assume, guarantee, endorse or
otherwise as an accommodation become responsible for the obligations of any
other Person, (C) make any loan or advance other than forgivable loans to
employees in connection with the hiring of such employees consistent with
past practice, or (ii) other than with respect to customary concessions
regarding margin indebtedness of brokerage clients in the ordinary course
of business consistent with past practice, and with respect to the
regularly scheduled forgiveness of loans made to employees prior to the
date hereof in connection with the hiring of such employees when and as
required by the express provisions of Previously Disclosed Contracts in
full force and effect between such employees and the Company or any of its
Subsidiaries, forgive or extinguish any indebtedness to the Company or any
of its Subsidiaries for borrowed money or otherwise waive any rights under
any instrument or arrangement pursuant to which such indebtedness was
incurred.
(p) Commitments. Agree or commit to do, or adopt any resolutions of
its board of directors in support of, anything that would be precluded by
clauses (a) through (o).
SECTION 5.2 Forbearances of the Acquiror and MergerCo. From the date hereof
until the Effective Time, except as expressly contemplated by this Agreement,
without the prior written consent of the Company, each of the Acquiror and
MergerCo will not take any action that is intended or is reasonably likely to
result in (A) any of its representations and warranties set forth in this
Agreement being or becoming untrue in any material respect at any time at or
prior to the Effective Time, (B) any of the conditions to the
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Merger set forth in Article 6 not being satisfied, or (C) a material breach of
any provision of this Agreement.
SECTION 5.3 No Solicitation. (a) From the date of this Agreement until the
Effective Time or the termination of this Agreement pursuant to its terms, the
Company agrees that it will not and will not permit any of its subsidiaries, or
any of its or their officers, directors, employees, representatives, agents, or
affiliates, including, without limitation, any investment banker, attorney or
accountant retained by the Company or any of its subsidiaries (collectively,
"Representatives") to, directly or indirectly, (i) initiate, solicit, encourage
or otherwise facilitate (including by way of furnishing information), any
inquiries or the making of any proposal or offer that constitutes, or may
reasonably be expected to lead to an Acquisition Proposal (as defined below), or
(ii) enter into or maintain or continue discussions or negotiate with any person
in furtherance of such inquiries or to obtain an Acquisition Proposal, or (iii)
agree to, approve, recommend, or endorse any Acquisition Proposal, or authorize
or permit any of its or their subsidiaries or Representatives to take any such
action and, except to the extent prohibited by contracts existing at the date of
this Agreement, the Company shall promptly notify Acquiror of any such inquiries
and proposals received by the Company or any of its subsidiaries or
Representatives, relating to any of such matters; provided, however, that
nothing contained in this Agreement shall prohibit the Board from (A) furnishing
nonpublic information to, or engaging in discussions or negotiations with, any
person in response to an unsolicited bona fide written Acquisition Proposal; or
(B) recommending such an unsolicited bona fide written Acquisition Proposal to
the shareholders of the Company, if and only to the extent that (a) the Board
concludes in good faith (after consultation with its financial advisors) that
such Acquisition Proposal would constitute a Superior Proposal (as hereinafter
defined), and (b) prior to furnishing such information to, or entering into
discussions or negotiations with, such person the Company provides prompt
written notice to Acquiror to the effect that it is furnishing information to,
or entering into discussions or negotiations with, such person (which notice
shall identify the nature and material terms of the proposal), and (c) prior to
providing any information or data to any person in connection with an
Acquisition Proposal by any such person, the Board receives from such person an
executed confidentiality agreement no less restrictive than the confidentiality
agreement previously entered into between the Company and Acquiror in connection
with their consideration of the Merger.
(b) For purposes of this Agreement, "Acquisition Proposal" means an
inquiry, offer or proposal regarding any of the following (other than the
transactions contemplated by this Agreement) including the Company or its
subsidiaries: (i) any merger, reorganization, consolidation, share exchange,
recapitalization, business combination, liquidation, dissolution, or other
similar transaction involving, or, any sale, lease, exchange, mortgage, pledge,
transfer or other disposition of, all or any significant portion of the assets
or 20% or more of the equity securities of, the Company or any of its
subsidiaries, in a single transactions or series of related transactions which
would reasonably be expected to interfere with the completion of the Merger; or
(ii) any tender offer or exchange offer for 20% or more of the outstanding
shares of capital stock of the Company or the filing of a registration statement
under the Securities Act in connection therewith.
(c) For purposes of this Agreement, "Superior Proposal" means a bona fide
Acquisition Proposal made by a third person that the Board determines in its
good faith judgment to be more favorable to the Company's shareholders than the
Merger and for which financing, to the extent required, is then committed or
which, in the good faith
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judgment of the Board (based on the written advice of the Company's independent
financial advisor) is reasonably capable of being obtained by such third person.
(d) Nothing contained in this Section 5.3 shall prohibit the Company from
taking and disclosing to its shareholders a position contemplated by Rule 14e-2
promulgated under the Exchange Act or from making any disclosure to the
Company's shareholders which, in the good faith judgment of the Board based on
the advice of outside counsel, is required under applicable law.
SECTION 5.4 Shareholders' Meeting. The Company, acting through the Board,
will as promptly as practicable following the date of this Agreement and in
consultation with Acquiror and MergerCo:
(i) duly call, give notice of, convene and hold a meeting of its
shareholders for the purpose of approving and adopting this Agreement and
the transactions contemplated hereby (the "Shareholders Meeting"), and
(ii) (A) include in the Prospectus/Proxy Statement (as defined in
Section 5.5) the recommendation of the Board that the shareholders of the
Company vote in favor of the approval and adoption of this Agreement and
the transactions contemplated hereby, as well as the written opinion of U.
S. Bancorp Piper Jaffray, the Board's financial advisor, that, as of the
date of such opinion, the consideration to be received by the shareholders
of the Company pursuant to the Merger is fair to such shareholders from a
financial point of view and (B) use its reasonable best efforts to obtain
the necessary approval and adoption of this Agreement and the transactions
contemplated hereby by its shareholders, provided however, that the Board
may fail to make or may withdraw or modify such recommendation or fail to
seek such approval if the Board has determined in good faith after
consultation with outside counsel that failure to so act would result in a
breach by the Board of its fiduciary duties to the Company's shareholders
under applicable law.
SECTION 5.5 Registration Statement. (a) For the purpose of (i) of holding
the Shareholders' Meeting to approve the Merger and this Agreement, and (ii) of
registering with the SEC and with applicable state securities authorities the
Acquiror Common Stock to be issued as contemplated by this Agreement, the
parties hereto shall cooperate in the preparation of an appropriate registration
statement (such registration statement, together with all and any amendments and
supplements thereto, being herein referred to as the "Registration Statement"),
which shall include a prospectus/proxy statement satisfying all applicable
requirements of the Securities Act, the Exchange Act, applicable state
securities laws and the rules and regulations thereunder (such prospectus/proxy
statement, together with any and all amendments or supplements thereto, being
herein referred to as the "Prospectus/Proxy Statement").
(b) Acquiror shall furnish such information concerning Acquiror and its
Subsidiaries as is necessary in order to cause the Prospectus/Proxy Statement,
insofar as it relates to Acquiror, the Acquiror Subsidiaries and Acquiror
securities, to be prepared in accordance with Section 5.4(b). Acquiror agrees
promptly to advise the Company if at any time prior to the Shareholders' Meeting
any information provided by Acquiror in the Prospectus/ Proxy Statement becomes
incorrect or incomplete in any material respect, and to share with the Company
the information needed to correct such inaccuracy or omission.
(c) The Company shall furnish Acquiror with such information concerning the
Company and its Subsidiaries as is necessary in order to cause the
Prospectus/Proxy
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Statement, insofar as it relates to the Company, the Company Subsidiaries and
the Company securities, to be prepared in accordance with Section 5.4(b). The
Company agrees promptly to advise Acquiror if at any time during which the
Prospectus/Proxy Statement is required to be delivered any information provided
by the Company in the Prospectus/Proxy Statement becomes incorrect or incomplete
in any material respect and to provide Acquiror with the information needed to
correct such inaccuracy or omission.
(d) Acquiror shall use reasonable efforts to cause the Registration
Statement to become effective under the Securities Act and applicable state
securities laws at the earliest practicable date. Acquiror agrees to provide the
Company with reasonable opportunity to review and comment on the Registration
Statement and any amendment thereto before filing with the SEC or any other
governmental entity and agrees not to make such filing if the Company reasonably
objects to the completeness or accuracy of any information contained therein.
Acquiror shall advise the Company promptly when the Registration Statement has
become effective and of any supplements or amendments thereto, and Acquiror
shall furnish the Company with copies of all such documents. Prior to the
Effective Date or the termination of this Agreement, each party shall consult
with the other with respect to any material (other than the Prospectus/Proxy
Statement) that might constitute a "prospectus" relating to the Merger within
the meaning of the Securities Act.
(e) The Company shall use its reasonable best efforts to cause to be
delivered to Acquiror a letter and consent relating to the financial statements
of the Company included in the Registration Statement from KPMG LLP, the
Company's independent auditors, dated a date within two business days before the
date on which the Registration Statement shall become effective and addressed to
Acquiror, in form and substance reasonably satisfactory to Acquiror and
customary in scope and substance for letters and consents delivered by
independent public accountants in connection with registration statements
similar to the Registration Statement.
(f) Acquiror shall use its reasonable best efforts to cause to be delivered
to the Company a letter and consent relating to the financial statements of
Acquiror included in the Registration Statement from Ernst & Young LLP,
Acquiror's independent auditors, dated a date within two business days before
the date on which the Registration Statement shall become effective and
addressed to the Company, in form and substance reasonably satisfactory to the
Company and customary in scope and substance for letters and consents delivered
by independent public accountants in connection with registration statements
similar to the Registration Statement.
(g) Acquiror agrees to use its reasonable best efforts to obtain all
necessary state securities law or "Blue Sky" permits and approvals required to
carry out the transactions contemplated by this Agreement.
SECTION 5.6 Stock Listing. Acquiror shall use its reasonable best efforts
to list on the NASDAQ/NMS the shares of Acquiror Common Stock to be issued in
connection with the Merger on the Effective Date.
SECTION 5.7 Clearing Agreement. The Company and Acquiror will cooperate
with each other to transfer all clearing functions of the Company to an Acquiror
Broker-Dealer Subsidiary as soon as reasonably practicable after the Effective
Time, including by giving appropriate prospective notice of such transfer
conditional on the consummation of the Merger to NationsBanc Montgomery
Securities, LLC at least 90 days prior to the
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anticipated Closing Date and to the Company's Clients at least 15 days prior to
the anticipated Closing Date.
SECTION 5.8 Access; Information. (a) The Company and its Subsidiaries, on
one hand, and Acquiror and its Subsidiaries on the other, shall upon reasonable
notice and subject to applicable laws relating to the exchange of information,
afford the other party and its officers, employees, counsel, accountants and
other authorized representatives, such access during normal business hours
throughout the period prior to the Effective Time to the books, records
(including, without limitation, tax returns and work papers of independent
auditors), properties, personnel and to such other information as the other
party may reasonably request and, during such period, it shall furnish promptly
to such other party (1) a copy of each material report, schedule and other
document filed by it pursuant to the requirements of federal or state securities
laws, and (2) all other information concerning the business, properties and
personnel of it as the other may reasonably request.
(b) The Acquiror and the Company agree that any information obtained
pursuant to this Section 5.8 will be subject to the terms of the letter
agreements, dated January 14, 2000 and May 12, 2000 between the Acquiror and the
Company (collectively the "Confidentiality Agreement"). No investigation by any
party of the business and affairs of another party shall affect or be deemed to
modify or waive any representation, warranty, covenant or agreement in this
Agreement or the conditions to consummation contained in Article 6.
SECTION 5.9 Reasonable Best Efforts. (a) Subject to the terms and
conditions of this Agreement, each of the Company and the Acquiror agrees to use
its reasonable best efforts in good faith to take, or cause to be taken
(including causing any of its Subsidiaries to take), all actions, and to do, or
cause to be done, all things necessary, proper or desirable, or advisable under
applicable laws, so as to permit consummation of the Merger as promptly as
reasonably practicable and otherwise to enable consummation of the transactions
contemplated hereby, and shall cooperate fully with the other party hereto to
that end.
(b) Without limiting the generality of Section 5.9(a), the Company agrees
to use its reasonable best efforts to obtain the consent or approval of all
persons party to a Contract with the Company, to the extent the failure to
obtain such consent is reasonably likely to have a Material Adverse Effect on
the Company giving effect to the Merger, or is required in order to consummate
the Merger.
SECTION 5.10 Regulatory Applications. (a) The Acquiror and the Company and
their respective Subsidiaries shall cooperate and use their respective
reasonable best efforts to prepare all documentation, to effect all filings and
to obtain all permits, consents, approvals and authorizations of all third
parties and Governmental Authorities necessary to consummate the transactions
contemplated by this Agreement as promptly as reasonably practicable. Each of
the Acquiror and the Company shall have the right to review in advance, and to
the extent practicable each will consult with the other (subject in each case to
applicable laws relating to the exchange of information) with respect to, all
material written information submitted to any third party or Governmental
Authority in connection with the transactions contemplated by this Agreement. In
exercising the foregoing right, each of the Acquiror and the Company agrees to
act reasonably and as promptly as practicable. Each of the Acquiror and the
Company agrees that it will consult with the other party hereto with respect to
the obtaining of all material permits, consents,
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approvals and authorizations of all third parties and Governmental Authorities
necessary or advisable to consummate the transactions contemplated by this
Agreement and each party will keep the other party apprised of the status of
material matters relating to completion of the transactions contemplated hereby.
(b) Each of the Acquiror and the Company agrees, upon request, to furnish
the other party with all information concerning itself, its Subsidiaries,
directors, officers and shareholders and such other matters as may be reasonably
necessary or advisable in connection with any filing, notice or application made
by or on behalf of such other party or any of its Subsidiaries to any third
party or Governmental Authority.
SECTION 5.11 Certain Employee Benefits. In the event that Acquiror
discontinues any Company Benefit Plans for the benefit of Continuing Employees
and replaces them with new benefit plans, programs or arrangements or Acquiror
Benefit Plans, Acquiror shall, or shall cause its Subsidiaries to, cause each
such plan, program or arrangement to treat such Continuing Employee in the same
manner as similarly situated employees of the Acquiror and treat the prior
service with the Company of each Covered Employee (to the same extent such
service is recognized under any analogous plans, programs or arrangements of the
Company immediately prior to the Effective Time to the extent such a plan,
program or arrangement is in effect immediately prior to the Effective Time) as
service rendered to the Acquiror or its Subsidiaries, as the case may be, solely
for purposes of eligibility to participate and for vesting thereunder (but not
for purposes of benefit accruals). The Acquiror and its Subsidiaries will cause
any and all pre-existing condition limitations (to the extent such limitations
did not apply to a pre-existing condition under the new plan or Acquiror Benefit
Plans) and eligibility waiting periods, under any health plans maintained or
adopted by the Acquiror or its Subsidiaries in which Covered Employees are
eligible to participate after the Effective Time, to be waived with respect to
(a) Covered Employees who, immediately prior to the Effective Time, participated
in a Company-sponsored health plan and (b) their eligible dependents. The
Acquiror and its Subsidiaries will recognize, for purposes of any annual
deductible and out-of-pocket limits under its existing or any new health plans,
deductible and out-of-pocket expenses paid by Covered Employees and their
dependents during the calendar year in which the Effective Time occurs under the
health plans of the Company and its Subsidiaries. The Acquiror and its
Subsidiaries shall honor, pursuant to the terms of the Previously Disclosed
Company Benefit Plans, and to the extent consistent with applicable law, all
accrued employee benefit obligations to current and former employees of the
Company under such plans. Nothing in this Section 5.11 shall prevent Acquiror
from amending or terminating any Company Benefit Plans or benefit plans of the
Acquiror (or its Subsidiaries) or any other contracts, arrangements, commitments
or understandings, in accordance with their terms and applicable law; providing,
however, that the arrangements identified in Section 5.11 of the Company
Disclosure Schedule shall be administered as described therein. The Acquiror
acknowledges that the consummation of the Merger (or, if otherwise provided
under the applicable Company Benefit Plan, the approval of the Merger by the
Company's shareholders) shall constitute a "Change of Control" or "Change in
Control" or "Change of Control not initiated by the Company" for purposes of
each Company Benefit Plan for which the concept is relevant.
SECTION 5.12 Indemnification. With respect to the indemnification of
directors and officers, Acquiror agrees as follows:
(a) Acquiror shall ensure that all rights to indemnification and all
limitations of liability existing in favor of any person who is now, or has
been at any time prior to
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the date hereof, or who becomes prior to the Effective Time of the Merger,
a director or officer of Company or any Company Subsidiary (an "Indemnified
Party" and, collectively, the "Indemnified Parties"), under applicable law,
in the Company Articles or Bylaws or similar governing documents of any
Company Subsidiary, as applicable in the particular case and as in effect
on the Effective Date, shall, with respect to claims arising from (A) facts
or events that occurred before the Effective Time of the Merger or (B) this
Agreement or any of the transactions contemplated by this Agreement,
whether in any case asserted or arising before or after the Effective Time
of the Merger, survive the Merger and shall continue in full force and
effect. Nothing contained in this Section 5.12(a) shall be deemed to
preclude the liquidation, consolidation, or merger of Company or any
Company Subsidiary, in which case all of such rights to indemnification and
limitations on liability shall be deemed to survive and continue as
contractual rights notwithstanding any such liquidation or consolidation or
merger; provided, however, that in the event of liquidation or sale of
substantially all of the assets of Company or a Company Subsidiary, the
Acquiror shall guarantee, the indemnification obligations of Company or
such Company Subsidiary to the extent of indemnification obligations of
Company and the Company Subsidiaries described above.
(b) Any Indemnified Party wishing to claim indemnification under this
Section, upon learning of such claim, action, suit, proceeding, or
investigation, shall promptly notify the Acquiror thereof, but the failure
to so notify shall not relieve the Acquiror of any liability it may have to
such Indemnified Party unless such failure has actually prejudiced the
Acquiror. In the event of any such claim, action, suit, proceeding, or
investigation (whether arising before or after the Effective Time) (i) if
the Acquiror agrees that the claim, action, suit, proceeding or
investigation is fully indemnifiable and that the Acquiror will pay any
liability resulting from such claim, action, suit, proceeding or
investigation, the Acquiror shall have the right to assume the defense
thereof and shall not be liable to any Indemnified Party for any legal
expenses of other counsel or any other expenses subsequently incurred by
such Indemnified Party in connection with the defense thereof, except that
if the Acquiror elects not to assume such defense or counsel for the
Indemnified Party advises that there are issues which raise conflicts of
interest between Acquiror and the Indemnified Party, the Indemnified Party
may retain counsel satisfactory to them, and the Acquiror shall pay the
reasonable fees and expenses of such counsel for the Indemnified Party
promptly as statements therefor are received; provided, however, that
Acquiror shall be obligated pursuant to this subparagraph (b) to pay for
only one firm of counsel for all Indemnified Parties in any jurisdiction
unless the use of one counsel for such Indemnified Parties would present
such counsel with a conflict of interest, and (ii) such Indemnified Party
shall cooperate fully in the defense of any such matter.
(c) For a period of six years from the Effective Time, the Acquiror
shall use its reasonable best efforts to provide that portion of director's
and officer's liability insurance that serves to reimburse the present and
former officers and directors of the Company or any of its Subsidiaries
with respect to claims against such directors and officers arising from
fact or events which occurred before the Effective Time, which insurance
shall contain at least the same coverage and amounts, and contain terms and
conditions no less advantageous, as that coverage currently provided by the
Company; provided, however, that in no event shall the Acquiror be required
to expend per annum more than 200 percent of the current amount expended by
the Company (such limit on the premiums required to be expended by the
Acquiror, the
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"Insurance Amount") to maintain or procure such directors and officers
insurance coverage for a comparable six-year period; provided, further,
that if the Acquiror is unable to maintain or obtain the insurance called
for by this Section 5.12(c), the Acquiror shall use its reasonable best
efforts to obtain as much comparable insurance as is available for the
Insurance Amount; provided, further, that officers and directors of the
Company or any subsidiary may be required to make application and provide
customary representations and warranties to the Acquiror's insurance
carrier for the purpose of obtaining such insurance.
(d) If the Acquiror or any of its successors shall consolidate with,
or merge into, any other entity and shall not be the continuing or
surviving entity of such consolidation or merger, or shall transfer all of
its assets to any other entity, then, and in each case, proper provision
shall be made so that the successor and assigns of the Acquiror shall
assume the obligations set forth in this Section 5.12.
(e) The provisions of this Section 5.12 are intended to be for the
benefit of, and enforceable in accordance with their terms by, Indemnified
Parties.
SECTION 5.13 Notification of Certain Matters. (a) Each of the Company and
the Acquiror shall give prompt notice to the other of any fact, event or
circumstance known to it that is reasonably likely, individually or taken
together with all other facts, events and circumstances known to it, to result
in a material breach of any of its representations, warranties, covenants or
agreements contained herein.
(b) The Company and each of its Subsidiaries shall promptly notify the
Acquiror, and the Acquiror shall promptly notify the Company, of any written
notice (or any other communication of which the Company and each of its
Subsidiaries, on the one hand, or the Acquiror, on the other hand, becomes
aware) from any person alleging that the consent of such person is or may be
required as a condition to the Merger or any notice or other communication from
any Governmental Authority or Self-Regulatory Organization in connection with
the transactions contemplated by this Agreement.
SECTION 5.14 Affiliate Agreements. (a) Not later than the 15th day prior to
the mailing of the Prospectus/Proxy Statement, the Company shall deliver to the
Acquiror a schedule of each person that, to the best of its knowledge, is or is
reasonably likely to be, as of the date of the Shareholder's Meeting, deemed to
be an "affiliate" of the Company (each, a "Company Affiliate") as that term is
used in Rule 145 under the Securities Act.
(b) The Company shall use its reasonable best efforts to cause each person
who may be deemed to be a Company Affiliate to execute and deliver to the
Acquiror, on or before the date of mailing of the Prospectus/Proxy Statement, an
agreement in substantially the form attached hereto as Annex A.
SECTION 5.15 Retention Program. At the Effective Time, the Company, in
cooperation with the Acquiror, will have established a retention program on
terms described in Schedule 5.15 to be used to retain certain employees of the
Company, and Acquiror, the Company and the Surviving Corporation, as applicable,
shall take all actions necessary to implement the provisions of such Schedule
5.15.
SECTION 5.16 Press Releases. Each of the Company and the Acquiror agrees
that it will not, without the prior approval of the other party, issue any press
release or written statement for general circulation relating to the
transactions contemplated hereby, except
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as otherwise required by applicable law or regulation or the rules of any
applicable Self-Regulatory Organization.
SECTION 5.17 Section 16 Matters. Prior to the Effective Time, the Acquiror
and the Company shall take all such steps as may be required to cause any
dispositions of Company Common Stock (including derivative securities with
respect to Company Common Stock) or acquisitions of Acquiror Common Stock
resulting from the transactions contemplated by Article 3 of this Agreement by
each individual who is subject to the reporting requirements of Section 16(a) of
the Exchange Act with respect to the Company, to be exempt under Rule 16b-3
promulgated under the Exchange Act, such steps to be taken in accordance with
the No-Action Letter dated January 12, 1999, issued by the SEC to Skadden, Arps,
Slate, Meagher & Flom LLP.
ARTICLE 6
CONDITIONS TO CONSUMMATION OF THE MERGER
SECTION 6.1 Conditions to Obligations of Each Party. The respective
obligations of each of the parties hereto to consummate the Merger shall be
subject to the fulfillment or written waiver by the Acquiror and the Company
prior to the Effective Time of the following conditions:
(a) No Restraints. No temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the
Merger shall have been issued since the date of this Agreement by any U. S.
federal or state court of competent jurisdiction and shall remain in
effect; and no U. S. federal or state law, statute, rule, regulation or
decree that makes consummation of the Merger illegal shall have been
enacted or adopted since the date of this Agreement and shall remain in
effect.
(b) Registration Statement. The Registration Statement shall have been
declared effective in accordance with the provisions of the Securities Act;
and no stop order suspending the effectiveness of the Registration
Statement shall have been issued by the SEC, and no proceeding shall have
been initiated or threatened in writing by the SEC for the purpose of
seeking or obtaining such a stop order.
(c) Listing. The Acquiror Common Stock to be issued to holders of
Company Common Stock as a result of the Merger shall have been approved for
listing on the NASDAQ/NMS.
(d) Governmental and Regulatory Consents. All approvals and
authorizations of, filings and registrations with, and notifications to,
all Governmental Authorities and Self-Regulatory Organizations required for
the consummation of the Merger shall have been obtained or made and shall
be in full force and effect and all waiting periods required by law shall
have expired.
(e) Shareholder Approval. This Agreement and the Merger shall have
been duly approved by the requisite vote of the holders of outstanding
shares of Company Common Stock entitled to vote thereon in accordance with
the MBCA, other applicable law and the Company Articles and Company Bylaws.
(f) Tax Opinion. The Company and the Acquiror shall have received an
opinion (the "Tax Opinion") of KPMG LLP, the Company's independent
auditors,
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dated the Effective Date, substantially to the effect that, based upon the
facts and assumptions stated therein for United States federal income tax
purposes, the merger should qualify as a "reorganization" within the
meaning of Section 368(a) of the Code.
(g) No Governmental Litigation. There shall not be pending before any
U. S. federal or state court of competent jurisdiction any suit, action or
proceeding commenced by any U. S. federal or state Governmental Authority
against Acquiror or the Company (and no U. S. federal or state Governmental
Authority shall have overtly threatened to commence any action, suit or
proceeding against Acquiror or the Company before any U. S. federal or
state court of competent jurisdiction): (i) challenging or seeking to
restrain or prohibit the consummation of the Merger; (ii) relating to the
Merger and seeking to obtain from Acquiror or the Company or any of their
Subsidiaries any damages that would be material to Acquiror or the Company;
(iii) seeking to prohibit or limit in any material respect Acquiror's
ability to vote, receive dividends with respect to or otherwise exercise
ownership rights with respect to the stock of the Surviving Corporation; or
(iv) which would materially and adversely affect the right of the Surviving
Corporation to own the assets or operate the business of the Company.
(h) No Other Litigation. There shall not be pending before any U. S.
federal or state court of competent jurisdiction any suit, action or
proceeding commenced by any person against Acquiror in which there is a
reasonable likelihood of a judgment against Acquiror or the Company
providing for an award of damages or other relief that would have a
Material Adverse Effect on Acquiror or the Company; (i) challenging or
seeking to prohibit or limit in any material respect Acquiror's ability to
vote, receive dividends with respect to or otherwise exercise ownership
rights with respect to the stock of the Surviving Corporation; or (iii)
which would affect adversely the right of the Surviving Corporation to own
the assets or operate the business of the Company.
SECTION 6.2 Conditions to Obligation of the Company. The obligation of the
Company to consummate the Merger is also subject to the fulfillment or written
waiver by the Company prior to the Effective Time of each of the following
conditions:
(a) Representations and Warranties. Subject to the standard set forth
in Section 4.2, the representations and warranties of the Acquiror and
Merger Sub set forth in this Agreement shall be true and correct as of the
Effective Date as though made on and as of the Effective Date (except that
representations and warranties that by their terms speak as of the date of
this Agreement or some other date shall be true and correct only as of such
date), and the Company shall have received a certificate, dated the
Effective Date, signed on behalf of the Acquiror by a senior executive
officer to such effect.
(b) Performance of Obligations of the Acquiror. The Acquiror shall
have performed in all material respects all obligations required to be
performed by it under this Agreement at or prior to the Effective Time, and
the Company shall have received a certificate, dated the Effective Date,
signed on behalf of the Acquiror by a senior executive officer to such
effect.
SECTION 6.3 Conditions to Obligation of the Acquiror and Merger Sub. The
obligation of the Acquiror and Merger Sub to consummate the Merger is also
subject to
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the fulfillment or written waiver by the Acquiror prior to the Effective Time of
each of the following conditions:
(a) Representations and Warranties. Subject to the standard set forth
in Section 4.2 (except with respect to Section 4.3(e), which shall be true
and correct in all material respects), the representations and warranties
of the Company set forth in this Agreement shall be true and correct as of
the Effective Date as though made on and as of the Effective Date (except
that representations and warranties that by their terms speak as of the
date of this Agreement or some other date shall be true and correct only as
of such date) and the Acquiror shall have received a certificate, dated the
Effective Date, signed on behalf of the Company by a senior executive
officer to such effect.
(b) Performance of Obligations of the Company. The Company shall have
performed in all material respects all obligations required to be performed
by it under this Agreement at or prior to the Effective Time, and the
Acquiror shall have received, prior to the Effective Time, a certificate,
dated the Effective Date, signed on behalf of the Company by a senior
executive officer to such effect.
(c) Third Party Consents. All consents or approvals of all persons,
other than Governmental Authorities, required for or in connection with the
execution, delivery and performance of this Agreement and the consummation
of the Merger shall have been obtained and shall be in full force and
effect, unless the failure to obtain any such consent or approval is not
reasonably likely to have, individually or in the aggregate, a Material
Adverse Effect on the Company or the Surviving Corporation.
ARTICLE 7
TERMINATION
SECTION 7.1 Termination. This Agreement may be terminated, and the Merger
may be abandoned at any time prior to the Effective Time, whether before or
after approval thereof by shareholders of the Company:
(a) Mutual Consent. At any time prior to the Effective Time, by the
mutual consent of the Acquiror and the Company.
(b) Breach. At any time prior to the Effective Time, by the Acquiror
or the Company in the event of either: (1) a breach by the other party of
any representation or warranty contained herein (subject to the standard
set forth in Section 4.2), which breach cannot be or has not been cured
within 30 days after the giving of written notice to the breaching party of
such breach, or (2) a breach by the other party of any of the covenants or
agreements contained herein, which breach cannot be or has not been cured
within 30 days after the giving of written notice to the breaching party of
such breach and which breach is reasonably likely, individually or in the
aggregate, to have a Material Adverse Effect on the breaching party or the
Surviving Corporation.
(c) Delay. At any time prior to the Effective Time, by the Acquiror or
the Company in the event that the Merger is not consummated by December 31,
2000, except to the extent that the failure of the Merger then to be
consummated arises out
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of or results from the knowing action or inaction of the party seeking to
terminate pursuant to this Section 7.1(c).
(d) No Approval. By the Company or the Acquiror in the event (1) the
approval of any Governmental Authority required for consummation of the
Merger and the other transactions contemplated by this Agreement shall have
been denied by final nonappealable action of such Governmental Authority,
or such Governmental Authority shall have requested the permanent
withdrawal of any application therefor, or (2) the shareholder approval
required by Section 6.1(h) herein is not obtained at the Shareholder
Meeting or at any adjournment or postponement thereof.
(e) Failure to Recommend, Etc. By Acquiror if the Board shall have
withdrawn, or modified or amended in a manner adverse to Acquiror, its
approval or recommendation of this Agreement and the Merger or its
recommendation that shareholders of the Company adopt and approve this
Agreement and the Merger or approved, recommended or endorsed any proposal
for a transaction other than the Merger (including a tender or exchange
offer for Shares).
(f) Alternative Transaction. By the Company, if (i) the Board
authorizes the Company, subject to complying with the terms of this
Agreement, to enter into a binding written agreement to enter into a
transaction that constitutes a Superior Proposal and the Company notifies
Acquiror in writing that it intends to enter into such an agreement,
attaching a description of the material terms and conditions thereof, (ii)
Acquiror does not make, within five business days of receipt of the
Company's written notification of its intention to enter into a binding
agreement for a Superior Proposal, an offer that the Board determines in
good faith by a majority vote after consultations with its financial
advisors, is at least as favorable to the shareholders of the Company as
the Superior Proposal, it being understood that the Company shall not enter
into any such binding agreement during such five day period and (iii) the
Company prior to such termination pursuant to this clause (f) pays to
Acquiror in immediately available funds the fees required to be paid
pursuant to Section 7.2. The Company agrees to notify Acquiror promptly if
its intention to enter into a written agreement referred to in its
notification shall change at any time after giving such notification; and
SECTION 7.2 Fees and Expenses. If (i) this Agreement is terminated by the
Company pursuant to Section 7.1(f) to accept a Superior Proposal; or (ii)(A)
this Agreement is terminated by Acquiror pursuant to Section 7.1(e), and (B)
within 12 months of any such termination of this Agreement, the Company shall
enter into a letter of intent or definitive agreement with respect to such
Acquisition Proposal or such Acquisition Proposal shall have been consummated;
or (iii)(A) this Agreement is terminated by the Company or Acquiror pursuant to
Section 7.1(d)(2), (B) at any time after the date of this Agreement and at or
before the Shareholder Meeting an Acquisition Proposal shall have been publicly
announced or communicated to the Board, and (C) within 12 months of any such
termination of this Agreement, the Company shall enter into a letter of intent
or definitive agreement with respect to such Acquisition Proposal or such
Acquisition Proposal shall have been consummated; then the Company shall pay
Acquiror a fee in the amount of $1,000,000 (the "Termination Fee"). The
Termination Fee payable pursuant to clause (i) above shall be paid by the
Company prior to the termination of this Agreement by the Company. The
Termination Fee payable pursuant to clauses (ii)-(iii) above shall be paid at or
before the consummation of such
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Acquisition Proposal or within one business day following the effective date of
such letter of intent or definitive agreement, whichever is earlier.
SECTION 7.3 Acquiror Deposit. (a) Upon execution of this Agreement,
Acquiror deposited in escrow $1,000,000 to be delivered at Closing to the
Exchange Agent as part of the Cash Consideration (the "Escrow Deposit"). In the
event that this Agreement is terminated, the Escrow Deposit will be disbursed as
follows:
(i) The Escrow Deposit (plus all interest accrued thereon) shall be
distributed to Acquiror upon written notice by Acquiror to the Exchange
Agent if this Agreement is terminated (A) pursuant to Section 7.1(a) and
such mutual termination provides for a return to Acquiror of the Escrow
Deposit, (B) pursuant to Section 7.1(d), (e) or (f), or (C) by Acquiror
pursuant to Section 7.1(b) or (c).
(ii) The Escrow Deposit (plus all interest accrued thereon) shall be
distributed to the Company upon written notice by the Company to the
Exchange Agent if this Agreement is terminated (A) pursuant to Section
7.1(a) and such mutual termination provides for a disposition to the
Company of the Escrow Deposit, (B) by the Company pursuant to Section
7.1(b), or (C) by the Company pursuant to Section 7.1(c) and the failure to
consummate the Merger results from the knowing action or inaction of
Acquiror or MergerSub.
(b) Such payment shall not limit any remedy available to the Company for
breach of the Agreement by Acquiror. Acquiror shall pay the cost of the escrow
and shall be entitled to any income thereon. The escrow shall be governed by an
escrow agreement substantially in the form of Annex B hereto.
SECTION 7.4 Effect of Termination and Abandonment. In the event of
termination of this Agreement and the abandonment of the Merger pursuant to this
Article 7, no party to this Agreement shall have any liability or further
obligation to any other party hereunder except (1) as set forth in Sections 7.3,
8.1 and 8.5 and (2) that termination will not relieve a breaching party from
liability for any willful breach of this Agreement.
ARTICLE 8
MISCELLANEOUS
SECTION 8.1 Survival. No representations, warranties, agreements and
covenants contained in this Agreement shall survive the Effective Time or
termination of this Agreement if this Agreement is terminated prior to the
Effective Time; provided, however, that (a) to the extent the agreements of the
parties contained herein by their terms apply after the Effective Time, such
agreements shall survive the Effective Time, and (b) if this Agreement is
terminated prior to the Effective Time, the agreements of the parties contained
in Sections 5.8(b), 7.2, 7.3 and in this Article 8 shall survive such
termination.
SECTION 8.2 Waiver; Amendment. Prior to the Effective Time, any provision
of this Agreement may be (1) waived by the party benefited by the provision, or
(2) amended or modified at any time, by an agreement in writing between the
parties hereto approved or authorized by their respective Boards of Directors
and executed in the same manner as this Agreement, except that, after approval
of the Merger by the shareholders of the Company, no amendment may be made which
under applicable law requires further approval of such shareholders without
obtaining such required further approval.
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SECTION 8.3 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to constitute an original.
SECTION 8.4 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Minnesota, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof.
SECTION 8.5 Expenses. Each party hereto will bear all expenses incurred by
it in connection with this Agreement and the transactions contemplated hereby,
except the printing and mailing expenses, the SEC registration fees and the cost
of the Tax Opinion shall be shared equally between the Company and Acquiror.
SECTION 8.6 Notices. All notices, requests and other communications
hereunder to a party shall be in writing and shall be deemed given (1) on the
date of delivery, if personally delivered or telecopied (with confirmation), (2)
on the first business day following the date of dispatch, if delivered by a
recognized next-day courier service, or (3) on the third business day following
the date of mailing, if mailed by registered or certified mail (return receipt
requested), in each case to such party at its address or telecopy number set
forth below or such other address or numbers as such party may specify by notice
to the parties hereto.
If to the Acquiror or MergerCo, to:
Stockwalk.com Group, Inc.
5500 Wayzata Boulevard
Suite 800
Minneapolis, Minnesota 55416
Facsimile: (763) 542-3591
Telephone: (763) 542-6000
Attention: President
With a copy to:
Maun & Simon, PLC
2000 Midwest Plaza Building West
801 Nicollet Mall
Minneapolis, Minnesota 55402
Facsimile: (612) 904-7424
Telephone: (612) 904-7400
Attention: Albert A. Woodward
If to the Company, to:
Kinnard Investments, Inc.
920 Second Avenue South
Minneapolis, Minnesota 55402
Facsimile: (612) 370-2803
Telephone: (612) 370-2700
Attention: President
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With a copy to:
Kaplan, Strangis & Kaplan, P.A.
5500 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402
Facsimile: (612) 375-1143
Telephone: (612) 375-1138
Attention: James C. Melville
SECTION 8.7 Entire Understanding, No Third Party Beneficiaries. This
Agreement (together with the Disclosure Schedules) and the Confidentiality
Agreement represent the entire understanding of the parties hereto with
reference to the transactions contemplated hereby and thereby and supersede any
and all other oral or written agreements heretofore made. Except for Section
5.11, insofar as such Section expressly provides certain rights to the persons
named therein, nothing in this Agreement, expressed or implied, is intended to
confer upon any person, other than the parties hereto or their respective
successors and permitted assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
SECTION 8.8 Assignment. Neither this Agreement nor any of the rights or
obligations hereunder may be assigned by any party without the prior written
consent of the other parties hereto. Subject to the foregoing, this Agreement
shall be binding upon, inure to the benefit of and be enforceable by the parties
and their respective successors and assigns.
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IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
duly executed as of the day and year first above written.
KINNARD INVESTMENTS, INC.
By: /s/ WILLIAM F. FARLEY
--------------------------------------
Name: William F. Farley
Its:Chairman and Chief Executive
Officer
STOCKWALK.COM GROUP, INC.
By: /s/ ELDON C. MILLER
--------------------------------------
Name: Eldon C. Miller
Its:Chairman and Chief Executive
Officer
SW ACQUISITION, INC.
By: /s/ ELDON C. MILLER
--------------------------------------
Name: Eldon C. Miller
Its:Chairman and Chief Executive
Officer
(Signature Page to Agreement and Plan of Merger)
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ANNEX B
OPINION OF U.S. BANCORP PIPER JAFFRAY
July 24, 2000
The Board of Directors
Kinnard Investments, Inc.
920 2nd Avenue South
Minneapolis, MN 55402
Members of the Board:
You have requested our opinion as to the fairness, from a financial point
of view, to the holders of the common stock of Kinnard Investments, Inc. (the
"Company"), other than Stockwalk.com Group, Inc. (the "Acquiror") and its
affiliates, of the consideration to be received by such holders pursuant to the
Agreement and Plan of Merger (the "Agreement") by and between the Company, the
Acquiror and SW Acquisition, Inc. (the "Merger Co"). The Agreement provides for
the merger of the Company into the Merger Co (the "Merger"), pursuant to which
each share of common stock of the Company will be converted into the right to
receive one-half share of common stock of the Acquiror, subject to adjustment as
provided in the Agreement, and cash in an amount equal to $6.00. The terms and
conditions of the Merger are more fully set forth in the Agreement.
U.S. Bancorp Piper Jaffray Inc. ("U.S. Bancorp Piper Jaffray"), as a
customary part of its investment banking business, is regularly engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, underwritings and secondary distributions of securities, private
placements, and valuations for estate, corporate and other purposes. We have
been engaged to act as financial advisor to the Special Committee of the Board
of Directors of the Company. The Company will pay us a fee for our services as
financial advisor, a portion of which is contingent upon the consummation of the
Transaction. The Company has also agreed to indemnify us against certain
liabilities in connection with our services. In the ordinary course of business,
we make a market in the common stock of the Company.
In arriving at our opinion, we have undertaken such review, analyses and
inquiries as we deemed necessary or appropriate under the circumstances. Among
other things, we have reviewed (i) the Agreement dated June 5, 2000 and certain
other documents related to the Merger; (ii) certain publicly available financial
statements and other information concerning the Company and the Acquiror; (iii)
certain internal financial statements and other financial and operating data
concerning the Company and the Acquiror, supplied to us by the management of
each company; and (iv) certain financial projections prepared by the managements
of the Company and the Acquiror. We have visited the corporate offices of the
Company and the Acquiror and we have conducted discussions with certain members
of management of the Company and the Acquiror. In addition, we have compared
certain financial and other data of the Company and the Acquiror with certain
financial and other data of companies we deemed comparable to the Company and
the Acquiror, reviewed prices paid in certain other business combinations,
performed a discounted dividend analysis of the Company based on projections
furnished by management of the Company and conducted such other financial
studies, analyses and investigations as we deemed appropriate for purposes of
this opinion.
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In conducting our review and in rendering our opinion, we have, with your
consent relied upon and assumed the accuracy, completeness and fairness of the
financial statements and other information provided to us by the Company and the
Acquiror or otherwise made available to us and have not assumed responsibility
to independently verify such information. We have further relied upon the
assurances of the Company's and the Acquiror's managements that the information
provided to us has been prepared on a reasonable basis and, with respect to
financial planning data and other business outlook information, reflects the
best currently available estimates, and that they are not aware of any
information or facts that would make the information provided to us incomplete
or misleading. We have also assumed that there have been no material changes in
the assets, financial condition, results of operations, business or prospects of
the Company or the Acquiror since the date of the last financial statements made
available to us. Without limiting the generality of the foregoing, we have
assumed that neither the Company nor the Acquiror is party to any material
pending transaction that has not been disclosed to us, including external
financing, recapitalizations, acquisitions or merger discussions, other than the
Merger. We have assumed that the final form of the Agreement will be
substantially similar to the last draft reviewed by us, without modification of
material terms or conditions.
In arriving at our opinion, we have not performed nor been furnished with
any appraisals or valuations of the specific assets or liabilities of the
Company or the Acquiror. We express no opinion regarding the liquidation value
of the Company or the Acquiror. We have undertaken no independent analysis of
any pending or threatened litigation, possible unasserted claims or other
contingent liabilities, to which either the Company, the Acquiror or their
affiliates is a party or may be subject and, at the Company's direction and with
its consent, our opinion makes no assumption concerning, and therefore does not
consider, the possible assertion of claims, outcomes or damages arising out of
any such matters. Our analyses performed in connection with this opinion were
going concern analyses of an entity. We were not requested to opine, and no
opinion is hereby rendered, as to whether any analysis of an entity, other than
as a going concern, is appropriate in the circumstance and, accordingly, we have
performed no such analyses.
Our opinion is necessarily based upon information available to us, facts
and circumstances and economic, market and other conditions as they exist, and
is subject to evaluation on the date hereof. Events occurring after the date
hereof could materially affect the assumptions used in preparing this opinion.
We have not undertaken to reaffirm or revise this opinion or otherwise comment
upon any events occurring after the date hereof. We express no opinion herein as
to the prices at which shares of the Company's or the Acquiror's common stock
have traded or may trade at any future time.
This opinion is directed to the Board of Directors of the Company and shall
not be published or otherwise used, nor shall any public references to U.S.
Bancorp Piper Jaffray be made, except in accordance with our engagement letter.
The opinion is not intended to be and does not constitute a recommendation to
any shareholder of the Company. In connection with this opinion, we were not
requested to opine as to, and this opinion does not address, the merits of the
basic business decision to proceed with or effect the Merger or to compare the
Merger to, or consider, alternative transactions that may have been available to
the Company.
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<PAGE> 227
Based upon and subject to the foregoing, and based upon such other factors
as we consider relevant, it is our opinion that the consideration to be received
by the shareholders of the Company other than the Acquiror and its affiliates in
the Merger pursuant to the Agreement is fair, from a financial point of view, to
such shareholders as of the date hereof.
Sincerely,
U.S. BANCORP PIPER JAFFRAY INC.
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<PAGE> 228
ANNEX C
SECTIONS 302A.471 AND 302A.473 OF THE
MINNESOTA BUSINESS CORPORATION ACT -- DISSENTERS'
APPRAISAL RIGHTS
302A.471. Rights of dissenting shareholders.
Subdivision 1. Actions creating rights. A shareholder of a corporation may
dissent from, and obtain payment for the fair value of the shareholder's shares
in the event of, any of the following corporate actions:
(a) An amendment of the articles that materially and adversely affects
the rights or preferences of the shares of the dissenting shareholder in
that it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the
redemption of the shares, including a provision respecting a sinking
fund for the redemption or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of the
shares to acquire shares, securities other than shares, or rights to
purchase shares or securities other than shares;
(4) excludes or limits the right of a shareholder to vote on a
matter, or to cumulate votes, except as the right may be excluded or
limited through the authorization or issuance of securities of an
existing or new class or series with similar or different voting rights;
except that an amendment to the articles of an issuing public
corporation that provides that section 302A.671 does not apply to a
control share acquisition does not give rise to the right to obtain
payment under this section;
(b) A sale, lease, transfer, or other disposition of all or
substantially all of the property and assets of the corporation, but not
including a transaction permitted without shareholder approval in section
302A.661, subdivision 1, or a disposition in dissolution described in
section 302A.725, subdivision 2, or a disposition pursuant to an order of a
court, or a disposition for cash on terms requiring that all or
substantially all of the net proceeds of disposition be distributed to the
shareholders in accordance with their respective interests within one year
after the date of disposition;
(c) A plan of merger, whether under this chapter or under chapter
322B, to which the corporation is a party, except as provided in
subdivision 3;
(d) A plan of exchange, whether under this chapter or under chapter
322B, to which the corporation is a party as the corporation whose shares
will be acquired by the acquiring corporation, if the shares of the
shareholder are entitled to be voted on the plan; or
(e) Any other corporate action taken pursuant to a shareholder vote
with respect to which the articles, the bylaws, or a resolution approved by
the board directs that dissenting shareholders may obtain payment for their
shares.
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Subdivision 2. Beneficial owners. (a) A shareholder shall not assert
dissenters' rights as to less than all of the shares registered in the name of
the shareholder, unless the shareholder dissents with respect to all the shares
that are beneficially owned by another person but registered in the name of the
shareholder and discloses the name and address of each beneficial owner on whose
behalf the shareholder dissents. In that event, the rights of the dissenter
shall be determined as if the shares as to which the shareholder has dissented
and the other shares were registered in the names of different shareholders.
(b) The beneficial owner of shares who is not the shareholder may assert
dissenters' rights with respect to shares held on behalf of the beneficial
owner, and shall be treated as a dissenting shareholder under the terms of this
section and section 302A.473, if the beneficial owner submits to the corporation
at the time of or before the assertion of the rights a written consent of the
shareholder.
Subdivision 3. Rights not to apply. (a) Unless the articles, the bylaws, or
a resolution approved by the board otherwise provide, the right to obtain
payment under this section does not apply to a shareholder of the surviving
corporation in a merger, if the shares of the shareholder are not entitled to be
voted on the merger.
(b) If a date is fixed according to section 302A.445, subdivision 1, for
the determination of shareholders entitled to receive notice of and to vote on
an action described in subdivision 1, only shareholders as of the date fixed,
and beneficial owners as of the date fixed who hold through shareholders, as
provided in subdivision 2, may exercise dissenters' rights.
Subdivision 4. Other rights. The shareholders of a corporation who have a
right under this section to obtain payment for their shares do not have a right
at law or in equity to have a corporate action described in subdivision 1 set
aside or rescinded, except when the corporate action is fraudulent with regard
to the complaining shareholder or the corporation.
302A.473. Procedures for asserting dissenters' rights.
Subdivision 1. Definitions. (a) For purposes of this section, the terms
defined in this subdivision have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action referred to in section 302A.471, subdivision 1 or the
successor by merger of that issuer.
(c) "Fair value of the shares" means the value of the shares of a
corporation immediately before the effective date of the corporate action
referred to in section 302A.471, subdivision 1.
(d) "Interest" means interest commencing five days after the effective date
of the corporate action referred to in section 302A.471, subdivision 1, up to
and including the date of payment, calculated at the rate provided in section
549.09 for interest on verdicts and judgments.
Subdivision 2. Notice of action. If a corporation calls a shareholder
meeting at which any action described in section 302A.471, subdivision 1 is to
be voted upon, the notice of the meeting shall inform each shareholder of the
right to dissent and shall include a copy
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of section 302A.471 and this section and a brief description of the procedure to
be followed under these sections.
Subdivision 3. Notice of dissent. If the proposed action must be approved
by the shareholders, a shareholder who is entitled to dissent under section
302A.471 and who wishes to exercise dissenters' rights must file with the
corporation before the vote on the proposed action a written notice of intent to
demand the fair value of the shares owned by the shareholder and must not vote
the shares in favor of the proposed action.
Subdivision 4. Notice of procedure; deposit of shares. (a) After the
proposed action has been approved by the board and, if necessary, the
shareholders, the corporation shall send to all shareholders who have complied
with subdivision 3 and to all shareholders entitled to dissent if no shareholder
vote was required, a notice that contains:
(1) The address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertificated shares that will
apply after the demand for payment is received;
(3) A form to be used to certify the date on which the shareholder, or
the beneficial owner on whose behalf the shareholder dissents, acquired the
shares or an interest in them and to demand payment; and
(4) A copy of section 302A.471 and this section and a brief
description of the procedures to be followed under these sections.
(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply with
any restrictions on transfer of uncertificated shares within 30 days after the
notice required by paragraph (a) was given, but the dissenter retains all other
rights of a shareholder until the proposed action takes effect.
Subdivision 5. Payment; return of shares. (a) After the corporate action
takes effect, or after the corporation receives a valid demand for payment,
whichever is later, the corporation shall remit to each dissenting shareholder
who has complied with subdivisions 3 and 4 the amount the corporation estimates
to be the fair value of the shares, plus interest, accompanied by:
(1) The corporation's closing balance sheet and statement of income
for a fiscal year ending not more than 16 months before the effective date
of the corporate action, together with the latest available interim
financial statements;
(2) An estimate by the corporation of the fair value of the shares and
a brief description of the method used to reach the estimate; and
(3) A copy of section 302A.471 and this section, and a brief
description of the procedure to be followed in demanding supplemental
payment.
(b) The corporation may withhold the remittance described in paragraph (a)
from a person who was not a shareholder on the date the action dissented from
was first announced to the public or who is dissenting on behalf of a person who
was not a beneficial owner on that date. If the dissenter has complied with
subdivisions 3 and 4, the corporation shall forward to the dissenter the
materials described in paragraph (a) a
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statement of the reason for withholding the remittance, and an offer to pay to
the dissenter the amount listed in the materials if the dissenter agrees to
accept that amount in full satisfaction. The dissenter may decline the offer and
demand payment under subdivision 6. Failure to do so entitles the dissenter only
to the amount offered. If the dissenter makes demand, subdivisions 7 and 8
apply.
(c) If the corporation fails to remit payment within 60 days of the deposit
of certificates or the imposition of transfer restrictions on uncertificated
shares, it shall return all deposited certificates and cancel all transfer
restrictions. However, the corporation may again give notice under subdivision 4
and require deposit or restrict transfer at a later time.
Subdivision 6. Supplemental payment; demand. If a dissenter believes that
the amount remitted under subdivision 5 is less than the fair value of the
shares plus interest, the dissenter may give written notice to the corporation
of the dissenter's own estimate of the fair value of the shares, plus interest,
within 30 days after the corporation mails the remittance under subdivision 5,
and demand payment of the difference. Otherwise, a dissenter is entitled only to
the amount remitted by the corporation.
Subdivision 7. Petition; determination. If the corporation receives a
demand under subdivision 6, it shall, within 60 days after receiving the demand,
either pay to the dissenter the amount demanded or agreed to by the dissenter
after discussion with the corporation or file in court a petition requesting
that the court determine the fair value of the shares, plus interest. The
petition shall be filed in the county in which the registered office of the
corporation is located, except that a surviving foreign corporation that
receives a demand relating to the shares of a constituent domestic corporation
shall file the petition in the county in this state in which the last registered
office of the constituent corporation was located. The petition shall name as
parties all dissenters who have demanded payment under subdivision 6 and who
have not reached agreement with the corporation. The corporation shall, after
filing the petition, serve all parties with a summons and copy of the petition
under the rules of civil procedure. Nonresidents of this state may be served by
registered or certified mail or by publication as provided by law. Except as
otherwise provided, the rules of civil procedure apply to this proceeding. The
jurisdiction of the court is plenary and exclusive. The court may appoint
appraisers, with powers and authorities the court deems proper, to receive
evidence on and recommend the amount of the fair value of the shares. The court
shall determine whether the shareholder or shareholders in question have fully
complied with the requirements of this section, and shall determine the fair
value of the shares, taking into account any and all factors the court finds
relevant, computed by any method or combination of methods that the court, in
its discretion, sees fit to use, whether or not used by the corporation or by a
dissenter. The fair value of the shares as determined by the court is binding on
all shareholders, wherever located. A dissenter is entitled to judgment in cash
for the amount by which the fair value of the shares as determined by the court,
plus interest, exceeds the amount, if any, remitted under subdivision 5, but
shall not be liable to the corporation for the amount, if any, by which the
amount, if any, remitted to the dissenter under subdivision 5 exceeds the fair
value of the shares as determined by the court, plus interest.
Subdivision 8. Costs; fees; expenses. (a) The court shall determine the
costs and expenses of a proceeding under subdivision 7, including the reasonable
expenses and compensation of any appraisers appointed by the court, and shall
assess those costs and expenses against the corporation, except that the court
may assess part or all of those costs and expenses against a dissenter whose
action in demanding payment under subdivision 6 is found to be arbitrary,
vexatious, or not in good faith.
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(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses of
any experts or attorneys as the court deems equitable. These fees and expenses
may also be assessed against a person who has acted arbitrarily, vexatiously, or
not in good faith in bringing the proceeding, and may be awarded to a party
injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an
attorney for the dissenters out of the amount awarded to the dissenters, if any.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Third Amended and Restated Articles of Incorporation of the registrant
provide that the registrant shall indemnify officers, directors, employees and
agents of the registrant to the fullest extent permitted by the Minnesota
Business Corporation Act. Pursuant to Minnesota law, the registrant generally
has the power to indemnify its present and former directors, officers, agents
and employees, or persons serving as such in another entity at the registrant's
request, against expenses (including attorneys' fees and disbursements) and
liabilities incurred by them in any threatened, pending, or completed civil,
criminal, administrative, arbitration or investigative proceeding (including a
proceeding by or in the right of the registrant) to which they are made or
threatened to be made a party by reason of their serving in such positions. This
indemnity applies so long as the individuals acted in good faith, have not been
indemnified by another organization, reasonably believed their conduct was in or
not opposed to the best interests of the registrant, or, in the case of a
criminal proceeding, had no reasonable cause to believe the conduct was
unlawful. Minnesota law also provides that a person made or threatened to be
made a party to a proceeding is entitled, upon written request to the
registrant, to payment or reimbursement of expenses in advance of the final
disposition of the proceeding. We have the power to purchase and maintain
insurance for indemnification of such persons.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits --
The exhibits to this Registration Statement appear on the Index to Exhibits
hereto.
(b) Financial Statement Schedules -- Not applicable.
(c) Report, Opinion or Appraisal -- See Exhibit 8.1.
ITEM 22. UNDERTAKINGS
UNDERTAKING PURSUANT TO ITEM 512(b)
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
UNDERTAKING PURSUANT TO ITEM 512(g)
(1) The undersigned registrant hereby undertakes as follows: That prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus
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<PAGE> 234
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other Items of the applicable form.
(2) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415 of Regulation C of the Securities
Act of 1933, will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act of 1933, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
UNDERTAKING PURSUANT TO ITEM 512(H)(3)
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
UNDERTAKINGS PURSUANT TO FORM S-4
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
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<PAGE> 235
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this amendment to the registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Minneapolis, State
of Minnesota, on July 25, 2000.
STOCKWALK.COM GROUP, INC.
By: /s/ ELDON C. MILLER
------------------------------------------
Eldon C. Miller
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this amendment
has been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<C> <S> <C>
/s/ ELDON C. MILLER
---------------------------------------------
Eldon C. Miller Chief Executive Officer & Director
(Principal Executive Officer) July 25, 2000
/s/ DAVID B. JOHNSON
---------------------------------------------
David B. Johnson President & Director July 25, 2000
*
---------------------------------------------
Paul R. Kuehn Director July 25, 2000
*
---------------------------------------------
Stanley D. Rahm Director July 25, 2000
/s/ TODD W. MILLER
---------------------------------------------
Todd W. Miller Chief Financial Officer
(Principal Financial Officer) July 25, 2000
*
---------------------------------------------
N. Lee Wesley Director July 25, 2000
*
---------------------------------------------
George E. Kline Director July 25, 2000
*
---------------------------------------------
Richard J. Nigon Director July 25, 2000
/s/ JEFFREY L. HOUDEK
---------------------------------------------
Jeffrey L. Houdek Principal Accounting Officer July 25, 2000
</TABLE>
By: /s/ ELDON C. MILLER
-------------------------------------------------
Attorney-in-Fact
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<PAGE> 236
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <C> <S>
2.1 Agreement and Plan of Merger, dated June 5, 2000, by and
between Kinnard Investments, Inc., Stockwalk.com Group, Inc.
and SW Acquisition, Inc. (included as Annex A to the proxy
statement/prospectus which is a part of this registration
statement) (1)
2.2 Agreement and Plan of Merger, dated June 5, 2000, by and
between R.J. Steichen & Company, Stockwalk.com Group, Inc.
and SCG Acquisition Corporation (2)
3.1 Third Amended and Restated Articles of Incorporation (3)
3.2 Restated Bylaws (4)
5.1 Opinion of Maun and Simon, PLC
8.1 Opinion of KPMG LLP*
10.1 Employment Agreement, dated August 1, 1999, by and between
Stockwalk.com Group, Inc. and Robert J. Vosburgh (5)
10.2 Employment Agreement, dated September 1, 1999, by and
between Stockwalk.com Group, Inc. and Andrew R. Guzman (6)
10.3 Employment Agreement, dated September 27, 1999, by and
between Stockwalk.com Group, Inc. and Philip T. Colton (7)
10.4 Amendment No. 1 to Employment Agreement, dated November 12,
1999, by and between Stockwalk.com Group, Inc. and Robert J.
Vosburgh (8)
10.5 Employment Agreement, dated February 7, 2000, by and between
Stockwalk.com Group, Inc. and Frank H. Lallos (9)
11.1 Statement re Computation of Per Share Earnings*
12.1 Statement re Computation of Ratios
21.1 Subsidiaries of the Registrant (10)
23.1 Consent of Ernst & Young LLP
23.2 Consent of KPMG LLP
23.3 Consent of KPMG LLP
23.4 Consent of Maun & Simon, PLC (included in Exhibit 5.1)
23.5 Consent of U.S. Bancorp Piper Jaffray
24.1 Power of Attorney*
27.1 Financial Data Schedule*
99.1 Form of Proxy for Special Meeting of Kinnard Shareholders
</TABLE>
-------------------------
* Previously filed.
(1) Incorporated by reference to Exhibit 2.7 to the Registration Statement on
Form S-2 (Registration No. 333-35544) filed on June 23, 2000.
(2) Incorporated by reference to Exhibit 2.6 to the Registration Statement on
Form S-2 (Registration No. 333-35544) filed on June 23, 2000.
(3) Incorporated by reference to the Definitive Schedule 14A (Proxy Statement)
(Commission File No. 0-22247) filed on June 14, 1999.
Exhibit Index-1
<PAGE> 237
(4) Incorporated by reference to Exhibit 3.2 to the Registration Statement on
Form S-2 (Registration No. 333-09999) filed on August 12, 1996.
(5) Incorporated by reference to Exhibit 10.1 to Stockwalk's Quarterly Report
on Form 10-Q (Commission File No. 0-22247) for the quarter ended September
30, 1999.
(6) Incorporated by reference to Exhibit 10.2 to Stockwalk's Quarterly Report
on Form 10-Q (Commission File No. 0-22247) for the quarter ended September
30, 1999.
(7) Incorporated by reference to Exhibit 10.3 to Stockwalk's Quarterly Report
on Form 10-Q (Commission File No. 0-22247) for the quarter ended September
30, 1999.
(8) Incorporated by reference to Exhibit 10.1 to Stockwalk's Quarterly Report
on Form 10-Q (Commission File No. 0-22247) for the quarter ended December
31, 1999.
(9) Incorporated by reference to Exhibit 10.5 to the Registration Statement on
Form S-2 (Registration No. 333-35544) filed on June 23, 2000.
(10) Incorporated by reference to Exhibit 21.1 to the Registration Statement on
Form S-2 (Registration No. 333-35544) filed on June 23, 2000.
Exhibit Index-2
