<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 25, 1999
(REGISTRATION NO. 333- )
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
STOCKWALK.COM GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MINNESOTA 41-1756256
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
SUITE 800
5500 WAYZATA BOULEVARD
MINNEAPOLIS, MINNESOTA 55416
(763) 542-6000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
(NAME OF AGENT)
PHILIP T. COLTON
SUITE 800
5500 WAYZATA BOULEVARD
MINNEAPOLIS, MINNESOTA 55416
(763) 542-6000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
<TABLE>
<S> <C>
ALBERT A. WOODWARD ALAN J. BOGDANOW
Maun & Simon, PLC Hughes & Luce, L.L.P.
2000 Midwest Plaza Building West 1717 Main Street
801 Nicollet Mall Suite 2800
Minneapolis, Minnesota 55402 Dallas, Texas 75201
(612) 904-7400 (214) 939-5500
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box: [ ]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, 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(c)
under the Securities Act, 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. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM
OF SECURITIES TO AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
BE REGISTERED REGISTERED(1) PER UNIT PRICE(1) REGISTRATION FEE
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<S> <C> <C> <C> <C>
% Convertible Subordinated Notes
due 2005........................ $34,500,000 $1,000.00 $34,500,000 $9,108
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Common Stock $.04 par value....... (2) N/A N/A N/A
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</TABLE>
(1) Includes $4,500,000 aggregate principal amount of Convertible Notes issuable
upon exercise of an option granted to the underwriters to cover
over-allotments.
(2) Includes an indeterminate number of shares of the Company's common stock,
par value $.04 per share, issuable without additional consideration upon
conversion of the Convertible Notes being registered hereunder.
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 THE 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
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS
NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE
OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION. DATED , 2000.
PRELIMINARY PROSPECTUS
$30,000,000
[STOCKWALK.COM LOGO]
% Convertible Subordinated Notes due 2005
------------------------
We are offering Subordinated Convertible Notes which are redeemable upon
certain conditions and convertible into shares of our common stock. If you
convert the Convertible Notes into shares of our common stock, you will receive
shares for each $1,000 of Convertible Notes that you convert (equivalent to
a conversion price of approximately $ per share). The number of shares of
common stock to be issued upon conversion is subject to certain adjustments.
You will earn interest at an annual rate of %, payable every six
months on January 15 and July 15, for as long as you own the Convertible Notes.
The Convertible Notes will mature on July 15, 2005. We may, at our option,
redeem some or all of the Convertible Notes at any time on or after July 15,
2003, at the declining redemption prices listed under "Description of
Convertible Notes." Upon certain specific kinds of change of control events
relating to us, we will be required to make an offer to purchase the Convertible
Notes from you at a purchase price equal to 101% of their aggregate principal
amount on the date of purchase, plus accrued interest, if any. The Convertible
Notes are subordinated in right of payment to all of our existing and future
senior indebtedness. We intend to list the Convertible Notes on the Nasdaq
SmallCap Market.
Our common stock is listed on the Nasdaq NMS under the symbol "STOK." On
April 24, 2000, the last-reported sale price of our common stock was $10.00 per
share.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 11 TO READ ABOUT CERTAIN FACTORS YOU
SHOULD CONSIDER BEFORE BUYING ANY OF THE CONVERTIBLE NOTES.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
<TABLE>
<CAPTION>
PER NOTE TOTAL
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<S> <C> <C>
Public offering price....................................... 100% $30,000,000
Underwriting discount.......................................
Proceeds, before expenses, to Stockwalk.com Group...........
</TABLE>
The public offering price set forth above does not include accrued
interest, if any. Interest on the Convertible Notes will accrue from ,
2000, and must be paid by the purchaser if the Convertible Notes are delivered
after , 2000.
To the extent that the underwriters sell more than $30,000,000 principal
amount of Convertible Notes, the underwriters have the option to purchase up to
an additional $4,500,000 principal amount of Convertible Notes from us at the
public offering price less the underwriting discount.
------------------------
The underwriters expect to deliver the Convertible Notes in book-entry form
only through the facilities of The Depository Trust Company against payment in
New York, New York on , 2000.
SOUTHWEST SECURITIES MILLER, JOHNSON & KUEHN, INCORPORATED
Prospectus dated , 2000
<PAGE> 3
[INSIDE COVER]
[CAPTION: TWO SEPARATE LOGO PHOTOS FOR EACH OF STOCKWALK.COM AND MILLER, JOHNSON
& KUEHN, INC. ENCAPTIONED AS FOLLOWS: STOCKWALK.COM(TM) THE ONLINE BROKERAGE FOR
ALL WALKS OF LIFE AND MILLER, JOHNSON & KUEHN, INC.]
STOCKWALK.COM IS A REGISTERED TRADEMARK OF STOCKWALK.COM, INC. THIS PROSPECTUS
ALSO CONTAINS TRADEMARKS OF OTHER COMPANIES.
<PAGE> 4
SUMMARY
Because this is only a summary, it does not contain all of the information
that may be important to you. You should read the entire prospectus, especially
"Risk Factors," beginning on page 11, and our consolidated financial statements
and the related notes, before deciding to invest in the Convertible Notes.
Unless otherwise indicated, all information contained in this prospectus assumes
that the underwriters will not exercise the option to purchase additional
Convertible Notes described on the cover of this prospectus.
OUR COMPANY
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 ("MJK") subsidiary offers traditional securities brokerage,
securities trading, investment banking and research services. Our niche market
for investment banking includes small capitalization, emerging and start-up
businesses and public finance clients located principally in the upper midwest.
In September 1999, our Stockwalk.com, Incorporated ("Stockwalk.com") 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 now also being offered to customers
of small to medium-sized financial institutions and affinity groups and Internet
portals through a private label program.
Our principal executive offices are located at 5500 Wayzata Boulevard,
Suite 800, Minneapolis, Minnesota 55416, and our telephone number is (763)
542-6000. Our website is located at www.stockwalk.com. Information contained on
our website should not be considered a part of this prospectus.
OUR SERVICES
We provide a full range of retail brokerage services, including full
service, discount securities brokerage and transaction clearing services for
ourselves and approximately 50 other brokerage firms. Our MJK retail brokerage
business operates nine offices in six states with approximately 160 licensed
sales representatives, a trading desk with four equity and five fixed income
traders and a research department specializing in public finance issues and
emerging companies located principally in the upper midwest. The retail
brokerage division also acts as a market maker for approximately 60 Nasdaq
companies. MJK's investment banking group consists of corporate finance, public
finance and research divisions. The public finance division underwrites taxable
and tax exempt municipal bond offerings, serves as a market maker for municipal
bond issues, and provides financial advisory services to public entities. The
corporate finance division specializes in private placements of equity and debt
securities and public offerings of emerging companies. The research division
provides research coverage on approximately 20 companies. We believe that MJK is
also one of the largest brokers of federally insured certificate of deposit
participations in the United States.
Our online brokerage business started in September 1999 with the
inauguration of our Stockwalk.com online business. Through Stockwalk.com we
offer a complete online
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brokerage service including order placement, portfolio tracking, account
information, market information and news 24 hours a day, seven days a week. When
we started Stockwalk.com, we launched a regional advertising campaign in the
Minneapolis-St. Paul area to create name recognition in that market and acquired
two discount and online brokerage firms to provide an initial customer account
base. Our business plan for growth in the online brokerage business focuses on
private label arrangements with small to medium-sized financial institutions and
affinity groups and Internet portals. Our private label program allows a
financial institution's customers or affinity group's or Internet portal's
members to open a Stockwalk.com account through the financial institution's or
affinity group's or Internet portal's website. As of April 15, 2000, we have
agreements with 11 online bank service providers. We also have direct agreements
with 11 financial institutions and two affinity groups and Internet portals. In
total, these agreements provide Stockwalk.com with exposure to approximately
4,100 financial institutions, affinity groups and Internet portals serving
approximately 4 million customers. We expect that we will capture a small
percentage of these customers for our own website, which would result in an
increase in our customer base.
OUR INDUSTRY
The securities industry is represented by over 5,000 brokerage firms in
North America that provide a variety of financial services. Many of the recent
changes in the industry resulted from loosened restrictions on relationships
between financial institutions and broker-dealers which are leading to increased
competition and consolidation in the industry. Additionally, the introduction of
the Internet as a means to trade securities dramatically changed the industry.
In 1997, approximately 4.1 million Internet trading accounts existed. By the end
of 1999, that number grew to approximately 13 million accounts representing
approximately $900 billion in assets. Industry sources predict that by the year
2003, the amount of assets in online accounts will total more than $3 trillion,
and that more than 20 million households will conduct securities trading online.
We expect that traditional full service brokerage services will continue to
grow; however, we believe that most of the future growth opportunity lies in the
online trading industry.
OUR STRATEGY
Our strategy is to expand our Stockwalk.com online trading business while
continuing to offer and expand our full service brokerage businesses to
complement our online business. We plan to seek additional strategic
acquisitions of brokerage firms and companies with technologies or businesses to
complement our traditional and online brokerage divisions. Our Internet growth
strategy is to offer a turn-key online brokerage service to financial
institutions and affinity groups and Internet portals. This service, which we
call our private label program, provides small to medium-sized financial
institutions and affinity groups and Internet portals an additional product for
their customers. To date, we have focused on strategic alliances with online
bank service providers, small to medium-sized financial institutions and
affinity groups and Internet portals. To market our private label services, we
intend to capitalize on these organizations' pre-existing client relationships.
We believe that this will allow us to gain exposure to a large number of
potential customers without incurring the expense of national advertising
campaigns. While we offer our online brokerage service principally under private
label agreements, a stand-alone "Stockwalk.com" service is also available.
Financial institutions and affinity groups and Internet portals can offer our
Stockwalk.com online brokerage services to their clients
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and members without incurring the large capital costs associated with developing
in-house technology. Each financial institution and group has the option of
marketing the online brokerage service as "Stockwalk.com" or to private label
the product under its own name.
RECENT DEVELOPMENTS
In recent months, we have raised funds and entered into agreements to
facilitate growth and expansion of our business. In March 2000, we completed a
private placement of common stock which raised approximately $11.7 million net
of offering expenses for approximately 1.6 million shares of our common stock
and approximately 160,000 warrants to purchase our common stock at $10.00 per
share. In March, we purchased a three-year renewable license to use certain of
Telescan, Inc.'s proprietary technology and investment analytical tools.
Telescan is a leading provider of proprietary analytical tools and online
financial content to investors. Under the agreement, we are able to private
label Telescan's online financial analytical tools with our online brokerage
services to certain financial institutions. As a part of the March 2000 private
placement, Telescan purchased 309,000 shares of our common stock for
approximately $2.3 million and received a three-year warrant to purchase 30,900
shares at $10.00 per share. Approximately $1,750,000 of this amount was applied
to eliminate obligations related to the license. In April 2000, we acquired the
brokerage assets of Concord Services, LLC, a Chicago, Illinois, registered
broker-dealer. Concord services approximately 1,100 primarily individual
accounts holding assets totaling approximately $800 million.
THE OFFERING
Convertible Subordinated
Notes Offered................... $30,000,000.
Additional Securities........... We have granted the underwriters an option
for 45 days to purchase up to an additional
$4,500,000 in principal amount of
Convertible Notes to cover over-allotments.
See "Underwriting."
Issue Price..................... We are offering the Convertible Notes for
$1,000 per Convertible Note purchased.
Maturity........................ July 15, 2005.
Interest........................ We will pay interest on the Convertible
Notes at an annual rate of %.
Interest Payment Dates.......... We will pay the interest due on the
Convertible Notes every six months on
January 15 and July 15. We will make the
first payment on January 15, 2001.
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Conversion Rights............... You may convert the Convertible Notes into
shares of our common stock at any time. If
you convert the Convertible Notes into
shares of our common stock, you will receive
shares for each $1,000 of
Convertible Notes that you convert
(equivalent to a conversion price of
approximately $ per share). The
number of shares of our common stock to be
issued upon conversion is subject to certain
adjustments which are described in more
detail under "Description of Convertible
Notes -- Conversion Rights."
Subordination................... The Convertible Notes are subordinated to
all of our existing debts and future
indebtedness, except trade payables, any
indebtedness or obligation we owe to any of
our direct and indirect subsidiaries, and
indebtedness that expressly provides that it
ranks equal or subordinate in right of
payment to the Convertible Notes ("Senior
Debt"). The Convertible Notes are also
effectively subordinated to all of the
existing debts and future indebtedness of
our subsidiaries, including trade payables.
As of March 31, 2000, we had approximately
$40 million of debt outstanding on a
consolidated basis which would be entitled
to payment prior to the Convertible Notes.
See "Description of Convertible Notes --
Subordination."
Optional Redemption............. We may, at our option, redeem some or all of
the Convertible Notes at any time on or
after July 15, 2003, at the prices listed
under "Description of Convertible
Notes -- Optional Redemption," plus any
interest that is accrued to the date we
redeem the Convertible Notes. See
"Description of Convertible
Notes -- Optional Redemption."
Repurchase at Option of Holders
Upon a Change of Control........ Upon certain specified kinds of change of
control events relating to us, we are
required to make an offer to purchase the
Convertible Notes from you at a purchase
price equal to 101% of their aggregate
principal amount on the date of purchase,
plus accrued interest, if any. See
"Description of Convertible
Notes -- Repurchase at Option of Holders
Upon a Change of Control."
Financial Covenants............. The indenture for the Convertible Notes does
not limit our ability, or that of any of our
subsidiaries, to incur Senior Debt, other
indebtedness or liabilities.
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Events of Default............... Events of default include the following:
failure to pay the principal of or premium,
if any, on any Convertible Note when due,
including our failure to purchase any
Convertible Note when required upon a Change
of Control, whether or not the subordination
provisions of the Indenture prohibit such
payment;
default for 30 days in payment of any
installment of interest on the Convertible
Notes, whether or not the subordination
provisions of the Indenture prohibit such
payment;
failure to provide notice of a Change of
Control, whether or not the subordination
provisions of the Indenture prohibit such
payment;
failure to perform any of our other material
covenants in the Indenture for 60 days after
the Trustee or holders of 25% in aggregate
principal amount provide us with written
notice; and
certain events involving our bankruptcy,
insolvency or reorganization.
Global Note; Book Entry
System.......................... The Convertible Notes will be issued only in
fully registered form without coupons and in
minimum denominations of $1,000 and integral
multiples of $1,000. The Convertible Notes
will be evidenced by a global note deposited
with the trustee for the notes, as custodian
for The Depository Trust Company. Beneficial
interests in the global note will be shown
on, and transfers of those interests will be
effected only through, records maintained by
The Depository Trust Company and its
participants and indirect participants.
Use of Proceeds................. We intend to apply the net proceeds of this
Offering to expand our online securities
business, to make acquisitions of businesses
which will complement both our full service
and online divisions, and for general
corporate purposes.
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Common Stock.................... Our common stock is listed on the Nasdaq NMS
under the symbol "STOK."
Convertible Notes............... We intend to list the Convertible Notes on
the Nasdaq SmallCap Market.
-------------------------
RISK FACTORS
You should refer to the section entitled "Risk Factors," beginning on page
11 for a discussion of certain factors you should consider before purchasing our
Convertible Notes.
-------------------------
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data for each of the five
years in the periods ended March 31, 1995, through March 31, 1999, have been
derived from the audited consolidated financial statements of MJK Holdings, Inc.
(MJK's parent) and MJK. Revenues and expenses of discontinued operations
relating to NM Holdings, Inc., the former name of our company, are not
considered to be material to an understanding of our business and have been
omitted from all financial data in this prospectus. The summary consolidated
financial data for the nine months ended December 31, 1998 and 1999, have been
derived from our unaudited consolidated financial statements. In our opinion,
such unaudited data include all adjustments (consisting of only normal recurring
adjustments) necessary for a fair presentation of the information set forth
therein. The results of operations for the nine months ended December 31, 1999,
are not necessarily indicative of results to be expected for any future period.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT RATIO AND PER SHARE DATA)
NINE MONTHS
ENDED
FISCAL YEAR ENDED MARCH 31, DECEMBER 31,
----------------------------------------------- -----------------
1995 1996 1997 1998 1999 1998 1999
------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Total revenues......... $15,739 $26,944 $32,607 $47,093 $55,590 $41,485 $44,567
Total operating
expenses............. 15,340 26,085 32,383 48,916 53,332 39,352 50,134
Income (loss) before
income taxes......... 399 859 224 (1,823) 2,258 2,133 (5,567)
Net income (loss)...... $ 296 $ 525 $ 190 $(1,224) $ 1,273 $ 1,334 $(3,300)
Basic earnings (loss)
per share............ $ 0.02 $ 0.03 $ 0.01 $ (0.08) $ 0.08 $ 0.08 $ (0.17)
Diluted earnings (loss)
per share............ $ 0.02 $ 0.03 $ 0.01 $ (0.08) $ 0.08 $ 0.08 $ (0.17)
Ratio of earnings to
fixed charges........ 1.20x 1.18x 1.03x 0.85x 1.17x 1.22x 0.53x
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------
MARCH 31, PRO FORMA
1999 ACTUAL AS ADJUSTED
--------- -------- -----------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 3,201 $ 3,556 $
Total assets................................... 322,353 427,269
Total debt..................................... 48,113 55,753
Shareholders' equity........................... 7,011 11,415
</TABLE>
The amounts in the tables should be read with the following points in mind:
- The ratio of earnings to fixed charges has been computed by dividing
earnings available for fixed charges (income or loss from continuing
operations before interest expense and income taxes plus fixed charges)
by fixed charges. Fixed charges consists of interest expense (including
amortization of deferred financing costs) and an estimate of the portion
of rental expense that is representative of the interest factor
(currently deemed to be one-third of all rental expense). As a result
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of losses incurred in 1998 and for the nine months ended December 31,
1999, fixed charges exceeded earnings available for fixed charges in
those periods by approximately $1.8 million and $5.5 million,
respectively.
- The pro forma as adjusted consolidated balance sheet data includes the
net proceeds of $11.4 million from the sale of 1.3 million shares of our
common stock completed in March 2000. An additional $287,000 from this
private placement is reflected in the actual December 31, 1999, figures.
The pro forma as adjusted data also reflects the sale of the Convertible
Notes and application of the net proceeds we will receive from that sale.
You should refer to the section entitled "Use of Proceeds" for a
discussion of how we intend to use the net proceeds and the section
entitled "Description of the Convertible Notes" for a description of
these securities and the terms of conversion.
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RISK FACTORS
An investment in the Convertible Notes offered by this prospectus involves
various risks. Before making an investment, you should carefully review and
consider the risk factors set forth below, as well as the other information
contained in this prospectus.
COMPANY RISKS
WE EXPERIENCED OVERALL LOSSES IN RECENT OPERATING PERIODS, AND THESE LOSSES MAY
CONTINUE
We experienced after-tax losses of $1,259,400 and $996,000 in the second
and third quarters of our last fiscal year. We are depending on our online
brokerage business, particularly our private label growth strategy, to provide a
significant portion of our future revenues. However, we cannot assure you that
our growth strategy will prove to be successful or that we will be profitable in
future operating periods. If we experience substantial operating losses in the
future, we may be unable to make interest and/or principal payments on the
Convertible Notes when they are due.
OUR ONLINE BROKERAGE BUSINESS IS IN AN EARLY STAGE OF DEVELOPMENT AND MAY NOT
BECOME PROFITABLE
We began offering our online brokerage services to the public in September
1999 and incurred substantial losses due to start-up costs and a limited revenue
base. We 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 operating losses in the future.
WE EXPECT SIGNIFICANT FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS
We expect 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 us or our 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 our pricing policies or in our 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 our 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 our future quarterly
operating results from time-to-time will not
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meet the expectations of securities analysts or investors, which could adversely
affect the market value of our common stock.
BECAUSE OUR ONLINE BROKERAGE BUSINESS IS IN AN EARLY STAGE, WE CANNOT GUARANTEE
THAT CUSTOMERS WILL ACCEPT OR USE OUR ONLINE SERVICES OR THAT WE WILL BE ABLE TO
EFFECTIVELY MANAGE OUR EXPANSION
We are in an early stage of development of our 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 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 we expect, our
business, financial condition and operating results could be materially and
adversely affected.
WE 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 unmarketable. Our future success will depend,
in part, on our ability to accomplish the following:
- develop and incorporate leading technologies;
- enhance our existing services and products;
- develop new services and products that address the increasingly
sophisticated and varied needs of our customers and prospective
customers; and
- respond to technological advances and emerging industry standards and
practices on a timely and cost-effective basis.
The development of new services or products or enhanced versions of existing
services and products may require substantial capital to cover related
expenditures. We cannot assure you that we will be successful in effectively
implementing and using new technologies, adapting our services and products to
emerging industry standards, or developing, introducing and marketing service
and product enhancements or new services and products. Additionally, we may
experience difficulties that could delay or prevent the successful development,
introduction or marketing of these services and products, or our new services
and product enhancements may fail to adequately meet the requirements of the
marketplace and achieve market acceptance. Our 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 our new
services and products, could adversely and materially affect our business,
financial condition and operating results.
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WE RELY UPON THIRD PARTIES TO PROVIDE CRITICAL TRANSACTION FUNCTIONS
All of our servers are leased from or housed at Digital Island, Inc. under
an agreement whereby Digital Island provides turn-key maintenance of our servers
that route all of our transaction traffic. Under an oral agreement, Automated
Financial Systems, Inc. currently provides the software systems that manage our
online securities brokerage activity. We also have an agreement with Securities
Industries Software Corporation, a division of ADP, to run our back office
system. Finally, we contract with other vendors to produce, batch and mail our
confirmations and customer reports. As our business grows, we cannot be assured
that the technology and services we require from third parties will be
available. A third party contractor's inability to meet our needs could cause us
to be unable to timely and accurately process our customers' transactions or
maintain complete and accurate records of such transactions. In such event, we
may be forced to slow the expansion of our customer base or risk the loss of
customers. Our long-term objective is to develop our own systems to replace
certain of these functions provided by critical third party vendors. However,
for the next several years, we will continue to be dependent upon third party
vendors, and there is no assurance that we will be able to successfully develop
and install internal systems to provide such services, or that our systems will
be cost-effective or as dependable as those of our third party vendors.
IF THE EQUIPMENT AND SYSTEMS WE RELY UPON FAIL OR PERFORM POORLY, OUR CUSTOMERS
COULD SUFFER DELAYS IN TRADING, WHICH COULD SUBJECT US TO CLAIMS FOR THOSE
LOSSES AND LOST ACCOUNTS
Our 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 our system in a short period of time
prior to the opening of the stock markets. During peak trading times, our
systems will be subject to heavy volume that could cause them to operate at
unacceptable speeds or to fail. Any significant degradation or failure of our
systems or any other systems in the trading process (e.g., online service
providers, our 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 us to
claims or litigation for those losses or to the loss of dissatisfied customers.
WE RELY ON STRATEGIC ALLIANCES WITH THIRD PARTIES TO DEVELOP AND MAINTAIN OUR
PRIVATE LABEL CUSTOMER BASE, AND WE CANNOT GUARANTEE THAT WE WILL BE ABLE TO
ATTRACT CUSTOMERS THROUGH THESE RELATIONSHIPS
A major facet of our growth strategy involves developing relationships with
online bank service providers, small to medium-sized financial institutions and
affinity groups and Internet portals. We rely on these third parties to market
our services, and we expect that a large portion of our online customer base
will come from persons and entities that have pre-existing customer or
membership relationships with these entities and organizations. If we fail to
maintain existing relationships with these online bank service providers, small
to medium-sized financial institutions or affinity groups and Internet portals,
or if we fail to develop new relationships, our ability to attract new customers
may be impaired. We cannot assure you that our current relationships with these
organizations will continue to exist, nor can we assure you that we will be able
to draw customers out of these
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relationships. Our inability to maintain such relationships or to acquire
customers from these relationships could adversely and materially affect our
business, financial condition and operating results.
THE EXTENSION OF CREDIT TO OUR CUSTOMERS IN MARGIN AND CASH TRANSACTIONS EXPOSES
US TO CREDIT LOSSES IF CUSTOMERS BREACH THEIR OBLIGATIONS TO US
We lend funds to our customers and customers of our 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 us to credit risk
during the period between the execution of a trade and the settlement of such
transaction by the customer.
If our 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, we may incur losses. There is no assurance that the
customer or correspondent firm will satisfy obligations to us or that the
collateral securing margin loans will cover the losses. In such an event, we
would be required to absorb the loss.
Our business is also subject to the risk that market declines will reduce
the value of margin collateral below required coverage levels. Our agreements
with margin and short account clients permit us to liquidate or buy securities
if the amount of our collateral becomes insufficient. However, we 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 December 31, 1999, margin loans owed to us totaled approximately $163
million. As of March 31, 2000, margin loans owed to us totaled approximately
$216 million.
OUR FAILURE TO COMPLY WITH NET CAPITAL REQUIREMENTS COULD RESULT IN TERMINATION
OF OUR 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 we increase the
amount of margin credit extended to our customers, our net capital requirements
increase. If our broker-dealer subsidiaries fail to maintain required net
capital levels, we may be subject to suspension or revocation of our license,
which could ultimately lead to our liquidation. If the net capital rules are
changed or expanded, or if we incur an unusually large charge against net
capital, we might be required to limit or discontinue those portions of our
business that require intensive use of capital. A large operating loss or charge
against net capital could adversely affect our ability to expand or even
maintain our present levels of business. Failure to meet our regulatory minimum
net capital requirements could require us to cease business.
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WE MAY INCUR SIGNIFICANT LOSSES FROM OUR TRADING AND INVESTMENT ACTIVITIES DUE
TO MARKET FLUCTUATIONS AND VOLATILITY
We generally maintain trading and investment positions in the fixed income,
currency and equity markets. To the extent that we own securities (have 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 we have sold securities that we do not own (have short
positions) in any of those markets, an upturn in those markets could expose us
to potentially unlimited losses as we attempt to cover our short positions by
acquiring assets in a rising market. We 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 we expect 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 we did not anticipate, or against
which we are not hedged, we might realize a loss in those paired positions. In
addition, we maintain 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.
OUR SUCCESS DEPENDS UPON THE SERVICES OF KEY PERSONNEL
For the foreseeable future, we 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, President; and Todd W. Miller, Chief
Financial Officer. The loss of services of any of these individuals likely would
materially and adversely affect our business, financial condition and operating
results. We cannot assure you that we would be able to find an appropriate
replacement for any of these individuals if the need should arise.
WE CANNOT GUARANTEE THAT WE WILL BE ABLE TO RETAIN EXISTING PERSONNEL AND
ATTRACT AND RETAIN ADDITIONAL PERSONNEL TO SUPPORT THE GROWTH OF OUR BUSINESS
Our success is dependent upon our ability to retain and hire highly skilled
personnel. As our business grows, we will need to hire many additional
employees. We face intense competition from other broker-dealers in hiring
experienced and licensed personnel. Additionally, we face a tight and expensive
employment market in general, particularly for skilled programmers, customer
service representatives and systems maintenance personnel. We cannot assure you
that we will be able to retain such personnel or hire and retain additional
qualified and skilled personnel.
OUR MANAGEMENT EXERCISES SUBSTANTIAL CONTROL OVER OUR BUSINESS
As of March 31, 2000, our directors and executive officers beneficially
owned, in the aggregate, approximately 16.2 million shares of our common stock,
representing approximately 75% of our common stock outstanding. Eldon C. Miller,
David B. Johnson, Paul R. Kuehn and Stanley D. Rahm directly or indirectly own
approximately 68% of our common stock. Accordingly, they control matters
requiring approval of our shareholders, including the election of our Board of
Directors.
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THE SECURITIES AND EXCHANGE COMMISSION AND THE NATIONAL ASSOCIATION OF
SECURITIES DEALERS COULD REQUIRE US TO CHANGE OR DISCONTINUE OUR METHOD OF
COMPENSATING ENTITIES
Many of the third parties with which we contract to provide access to our
online trading services are not currently registered with the Securities and
Exchange Commission (the "SEC") as broker-dealers under the Securities and
Exchange Act of 1934, as amended. If we compensate these 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 National Association
of Securities Dealers ("NASD") interpretations, we believe we may compensate
financial institutions based on the value of the transactions. However, we
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, we compensate 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, we may
be required to discontinue this marketing strategy.
In 1996, the SEC granted no-action relief from broker-dealer registration
to Internet portals such as America Online, Compuserve, and the Microsoft
website and permitted them to provide a hyperlink to a broker-dealer's website
and still receive order-based compensation. This no-action letter provided the
standard for arrangements between broker-dealers and Internet service providers.
Some of the limitations include that the Internet service provider may only
receive a nominal flat fee for each order transmitted, the broker-dealer must be
responsible for all advertising and sales material, the Internet service
provider cannot recommend or endorse specific securities, and the Internet
service providers cannot participate in the financial services offered by the
broker-dealer. We believe that our current method of compensating Internet
service portals is consistent with the current position of the SEC as reflected
in its no-action letter. However, the possibility exists that the SEC could
determine that our method of compensating portals does not meet the standards of
its no-action letter, 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 our business, financial
condition and operating results.
WE CANNOT GUARANTEE THAT WE WILL BE FINANCIALLY OR OTHERWISE ABLE TO MAKE
NECESSARY ACQUISITIONS TO FULFILL OUR GROWTH STRATEGY OR THAT THE ACQUISITIONS
WE DO MAKE WILL BE SUCCESSFUL
We plan to make strategic acquisitions of complementary brokerage and
technology companies serving the securities industry to help our business grow.
We cannot guarantee that we will have the financial resources to make
acquisitions when they become available, nor can we guarantee that satisfactory
acquisition alternatives will always be available. When we do 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. We cannot guarantee that we 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 our
business, financial condition or operating results.
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WE CANNOT GUARANTEE THE SUCCESS OF OUR ENCRYPTION TECHNOLOGY
The secure transmission of confidential information over public networks
places a significant barrier to online commerce and communication. We rely on
encryption and authentication technology, including public key cryptography
technology licensed from third parties, to provide the security and
authentication necessary to effect secure transmission of confidential
information. We 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 us to
protect customer transaction data. Any such compromise of our security could
adversely and materially affect our business, financial condition and operating
results.
OUR BUSINESS PLAN MAY REQUIRE MORE CAPITAL, AND WE CANNOT GUARANTEE THAT WE WILL
OBTAIN ADDITIONAL FINANCING TO MEET FUTURE CAPITAL NEEDS
Our business plan may require additional capital. If we issue equity
securities to raise additional capital, the percentage ownership of our
shareholders will be reduced, shareholders may experience dilution in net book
value per share, or such equity securities may have rights, preferences or
privileges senior to holders of our common stock. If we receive any additional
debt financing, it is likely that such debt will be senior to the Convertible
Notes issued in this offering. We cannot assure you that additional financing
will be available when needed on terms favorable to us, if at all, or that it
will not be senior to the Convertible Notes. If adequate funds are not available
on acceptable terms, we may be forced to slow our growth plan and unable to take
advantage of future opportunities or respond to competitive pressures or
unanticipated requirements. Our inability to do so could materially and
adversely affect our business, financial condition and operating results.
EMPLOYEE MISCONDUCT IS DIFFICULT TO DETECT AND COULD HARM OUR BUSINESS
We run the risk that employee misconduct could occur, including binding us
to transactions that exceed authorized limits or present unacceptable risks, or
hiding unauthorized or unsuccessful activities. This type of misconduct could
result in unknown and unmanaged losses. Employee misconduct could also involve
the improper use of confidential information, which could result in the loss of
confidential and proprietary information, regulatory sanctions or harm to our
reputation. We may not be able to detect, deter or prevent any of these types of
employee misconduct.
OUR MANAGEMENT HAS BROAD DISCRETION AS TO THE USE OF THE NET PROCEEDS OF THIS
OFFERING
We are allocating the net proceeds of this offering to expansion of our
online brokerage business and to other general corporate purposes. Also, we are
seeking acquisitions of brokerage firms and companies with technologies or
businesses to complement our full service and online brokerage services
divisions. Any acquisition could require the application of a significant
portion of these net proceeds, which would reduce funds available for expansion
of our online brokerage business and could require us to raise additional funds
sooner than anticipated. In addition, our management may apply our net proceeds
to purposes different from those currently contemplated or change the allocation
of our net proceeds among these purposes. Thus, our management will have
substantial discretion with regard to the ultimate use of the net proceeds of
this offering.
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SECURITIES INDUSTRY RISKS
UNPREDICTABLE ECONOMIC AND MARKET CONDITIONS CAUSE UNCERTAINTY IN THE SECURITIES
INDUSTRY
The securities business is, by its nature, subject to various risks,
particularly in volatile or illiquid securities markets, including the risk of
losses resulting from the underwriting or ownership of securities, customer
fraud, employee errors and misconduct, failures in connection with the
processing of securities transactions and litigation. Our business and its
profitability is affected by many factors, including the following:
- the volatility and price level of the securities markets;
- the volume, size and timing of securities transactions;
- the demand for investment banking services;
- the level and volatility of interest rates;
- the availability of credit; and
- legislation affecting the business, financial communities, and the
economy in general.
Any one of the above factors could adversely affect our financial condition and
operating results.
IF STOCK PRICES DECREASE, OR IF TRADING VOLUMES DECREASE, COMMISSIONS,
INVESTMENT BANKING AND MARGIN INTEREST REVENUE, WILL DECLINE
A market downturn could lead to a decline in the volume of transactions
that we execute for our customers and, therefore, to a decline in commission and
clearing revenue. A market downturn could also reduce customer margin balances
which would, in turn, result in reduced margin interest revenue. Similarly,
unfavorable financial or economic conditions would likely reduce the number and
size of transactions in which we provide underwriting, mergers and acquisitions
advisory and other services. Our investment banking revenue, in the form of
financial advisory and underwriting fees, are directly related to the number and
size of the transactions in which we participate and would, therefore, be
adversely affected by a sustained market downturn.
WE PERFORM UNDERWRITING, BROKERAGE AND TRADING SERVICES FOR SMALL
CAPITALIZATION, EMERGING AND START-UP COMPANIES, WHOSE SECURITIES MAY BE
PARTICULARLY VOLATILE AND SUBJECT TO GREATER RISKS THAN LARGER, ESTABLISHED
COMPANIES
A large portion of our business focuses on the underwriting, brokerage and
trading of securities of small capitalization, emerging and start-up companies,
which may be subject to greater risks than the equity markets as a whole and,
consequently, may be marketable to only a limited segment of the investing
public. We believe that many small capitalization, emerging and start-up
companies have significant potential for growth, although such companies
generally have limited product lines, markets, market shares and financial
resources, and their securities may trade less frequently and in more limited
volume than those of more established companies. Additionally, in recent years,
the stock market has experienced a high degree of price and volume volatility
for the securities of many small capitalization, emerging and start-up
companies. In particular, small
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capitalization, emerging and start-up companies that trade in the
over-the-counter market have experienced wide price fluctuations not necessarily
related to the operating performance of such companies.
OUR INVESTMENT BANKING ACTIVITIES SUBJECT OUR CAPITAL TO RISKS
The potential risks of our investment banking activities include market,
credit and liquidity risks, which risks arise primarily when underwritten
securities cannot be resold, for any reason, at anticipated price levels.
Further, under applicable securities laws and court decisions regarding
underwriters' liability and limitations on indemnification by issuers, an
underwriter may be exposed to substantial claims by securities purchasers or
sellers arising out of public and private offerings of equity and debt
instruments.
OUR CLEARING OPERATIONS EXPOSE US TO ADDITIONAL POTENTIAL LOSSES
Our clearing division provides clearing and execution services for all of
our brokerage businesses, as well as for our correspondent firms. Clearing
services include the confirmation, receipt, settlement and delivery functions
involved in securities transactions. As a clearing broker, our 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. We risk losses if correspondent firms fail
to reimburse us if their customers fail or refuse to perform their obligations
to us. Additionally, as a self-clearing securities firm, we are subject to
substantially more regulatory control and examination than brokers that rely on
others to perform those functions, such as many of our competitors. Errors in
performing clearing functions, including clerical and other errors related to
the handling of funds and securities held by us on behalf of customers and
introducing brokers, could lead to civil penalties imposed by regulatory
authorities as well as claims brought by customers and others.
WE ARE SUBJECT TO INCREASING GOVERNMENTAL AND ORGANIZATIONAL REGULATION
Our business, and the securities industry generally, is subject to
extensive regulation at both the federal and state levels. In addition,
self-regulatory organizations, such as the NASD, require strict compliance with
their rules and regulations. Among other things, these regulatory authorities
impose restrictions on sales methods, trading practices, use and safekeeping of
customer funds and securities, record keeping and the conduct of principals and
employees. The extensive regulatory framework applicable to broker-dealers, the
purpose of which is to protect customers and the integrity of the securities
markets, imposes significant compliance burdens on us. Failure to comply with
any of the laws, rules or regulations of any independent, state or federal
regulatory authority could result in a fine, injunction, suspension or expulsion
from the industry, which could materially and adversely impact us. Furthermore,
amendments to existing state or federal statutes and regulations or the adoption
of new statutes and regulations could require us to alter our methods of
operation at costs which could be substantial.
WE ARE SUBJECT TO AN INCREASED RISK OF LEGAL PROCEEDINGS
Many aspects of our business involve substantial risks of potential
liability and regulatory enforcement by state and federal regulators.
Additionally, participants in the securities industry face an increasing amount
of litigation and arbitration proceedings. Underwriters and selling agents may
be liable if they make material misstatements or omit
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material information in prospectuses and other communications regarding
underwritten offerings of securities. Dissatisfied customers regularly make
claims against securities firms and stockbrokers for fraud, unauthorized
trading, suitability, churning, mismanagement and breach of fiduciary duty. We
cannot assure you that these types of proceedings will not materially and
adversely affect us. Further, while certain legal proceedings may be settled or
otherwise resolved without a material adverse economic effect on us, those
proceedings may still result in adverse publicity which could affect our
operations.
THE NASDAQ MARKET CONTINUES TO IMPLEMENT REFORMS TO MONITOR TRADING, WHICH COULD
CAUSE INCREASED COMPLIANCE REQUIREMENTS AND COSTS
NASD, the trade organization supervising the Nasdaq market, conducts
policing of Nasdaq-listed companies. In recent years, the NASD boosted its
internal compliance and monitoring programs. In addition, loosened restrictions
on relationships between financial institutions and securities firms are leading
to increased competition and consolidation in the industry. We face the risk
that the NASD will implement further changes. For example, if the NASD's
regulatory unit, NASD Regulation, Inc. ("NASDR") combines with the New York
Stock Exchange regulatory unit, we could face additional compliance
requirements. We cannot fully anticipate the effects of any further Nasdaq
restructuring on our operations. The cost of compliance with any new rules,
regulations and procedures instituted by the NASDR could be significant.
Increased compliance costs or our inability to attain or maintain the listing of
underwriting clients on the Nasdaq system could adversely affect our
performance.
WE FACE SUBSTANTIAL COMPETITION WITHIN THE SECURITIES INDUSTRY
In all aspects of our business, and at both the national and regional
level, we compete with numerous other securities firms, commercial banks,
investment banking firms, insurance companies, asset management firms, trust
companies and others. Our competitors have substantially greater access to
capital and other resources not available to us. In addition, many of these
competitors offer a wider range of services and financial products than we do
and possess greater name recognition and more extensive customer bases than we
do. These competitors may be able to respond more quickly to new or changing
opportunities, technologies and customer requirements. These competitors may
also be able to undertake more extensive promotional activities and offer more
attractive terms and prices to their customers, possibly even sparking a price
war within the brokerage business. Finally, current and potential competitors
may continue to establish cooperative relationships among themselves or with
third parties to enhance their services and products. Accordingly, it is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share.
The general financial success of companies within the securities industry
over the past several years, and the elimination of barriers between financial
institutions and securities firms through the Gramm-Leach-Bliley Act, is
expected to continue to attract new competitors to the industry, including
banks, insurance companies, providers of online
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financial and information services and others, as such companies expand their
product lines. Many of these companies now offer their customers certain
corporate and individual financial services traditionally provided by securities
firms. Due to the current trend toward consolidation in the securities industry,
our competitors' success in attracting and retaining customers drawn to the
convenience of one-stop shopping could adversely affect our business and our
ability to grow.
We also expect the intensely competitive market for online brokerage
services to continue to evolve rapidly. We will encounter direct competition
from other brokerage firms providing either telephone or online brokerage
services, or both. Additionally, we compete for customer investment dollars with
financial institutions, mutual fund sponsors and other organizations, some of
which provide electronic brokerage services.
The clearing business has become considerably more competitive over the
past few years, and there are numerous large, highly visible and well-financed
securities firms that either have begun offering clearing services or have
attempted to increase their share of the market. Despite our efforts to remain
competitive, our clearing customers may decide to discontinue using our
services. In addition, there has been consolidation within the financial
services industry by securities firms and other financial institutions having
financial resources far greater than us. These developments have increased
competition from firms with greater capital resources and possibly greater
operating efficiencies than ours. We run the risk that one of our clearing
competitors could create a private label solution for clients, which could
result in fewer clearing customers for us.
We cannot assure you that we will be able to compete effectively with
current or future competitors. Likewise, we cannot assure you that the
competitive pressures we face will not materially or adversely affect our
business, financial condition and operating results.
LOSSES DUE TO CUSTOMER FRAUD COULD ADVERSELY AFFECT OUR BUSINESS
We are exposed to potential losses resulting from fraud and other
misconduct by customers, such as fraudulent trading (including access to
legitimate customer accounts, or the use of a false identity to open an account)
or the use of forged or counterfeit checks for payment. These types of fraud may
be difficult to prevent or detect. We may not be able to recover the losses
caused by these activities. Any of these losses could materially and adversely
affect our business, financial condition and operating results.
NEW LAWS REGARDING THE INTERNET MAY BE PASSED, WHICH COULD HINDER OUR ABILITY TO
DELIVER OUR 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 our costs of
doing business and prevent us from delivering our products and services over the
Internet, which could adversely affect our customer base and our 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.
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WE ARE DEPENDENT ON INTERNET INFRASTRUCTURE IN CONDUCTING OUR BUSINESS
The successful implementation of our 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 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, we 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. We cannot assure you that the Internet infrastructure
will continue to be able to support the demands placed on it. Furthermore, the
performance or reliability of the Internet could be adversely affected by this
continued growth.
RISKS ASSOCIATED WITH THE CONVERTIBLE NOTES
THE CONVERTIBLE NOTES ISSUED IN THIS OFFERING ARE SUBORDINATED TO ALL EXISTING
AND FUTURE SENIOR DEBT AND EFFECTIVELY SUBORDINATED TO ALL INDEBTEDNESS AND
OTHER LIABILITIES OF OUR SUBSIDIARIES
The Convertible Notes will be unsecured and subordinated in right of
payment to all of our existing and future Senior Debt. Because the Convertible
Notes are subordinate to our Senior Debt, if we experience
- a bankruptcy, liquidation or reorganization;
- an acceleration of the Convertible Notes due to an event of default under
the indenture; or
- certain other events,
we will not be permitted to make payments on the Convertible Notes until we have
satisfied all of our Senior Debt obligations. Therefore, we may not have
sufficient assets remaining to pay amounts due on any or all of the Convertible
Notes. In addition, the Convertible Notes effectively will be subordinate to all
liabilities, including trade payables, of our subsidiaries and any subsidiaries
that we may in the future acquire or establish. Consequently, our right to
receive assets of any subsidiaries upon their liquidation or reorganization, and
the rights of the holders of the notes to share in those assets, would be
subordinate to the claims of the subsidiaries' creditors. The Indenture provides
that, in the event of our insolvency, funds which we would otherwise use to pay
the holders of the Convertible Notes will be used to pay the holders of Senior
Debt to the extent necessary to pay the Senior Debt in full. As a result, our
general creditors may recover less, ratably, than the holders of our Senior
Debt. Additionally, such general creditors may recover more, ratably, than
holders of the Convertible Notes or other subordinated indebtedness. Finally,
the holders of our Senior Debt may, under certain circumstances, restrict or
prohibit us from making payments on the Convertible Notes.
THERE ARE NO RESTRICTIONS ON US INCURRING FUTURE DEBT, AND IF WE INCUR
ADDITIONAL DEBT, WE MAY BE UNABLE TO MAKE PAYMENTS ON THE CONVERTIBLE NOTES
The Indenture does not limit our ability, or that of any of our presently
existing or future subsidiaries, to incur Senior Debt, other indebtedness and
liabilities. We may have difficulty paying our obligations under the Convertible
Notes if we, or any of our
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subsidiaries, incur additional indebtedness or other liabilities. As of March
31, 2000, we had approximately $40 million of debt outstanding on a consolidated
basis that would be entitled to payment prior to the Convertible Notes. From
time-to-time, we and our subsidiaries may incur additional indebtedness,
including Senior Debt, which could adversely affect our ability to pay our
obligations under the Convertible Notes.
WE MAY BE UNABLE TO REPURCHASE THE CONVERTIBLE NOTES
At maturity, the entire outstanding principal amount of the Convertible
Notes will become due and payable. In addition, if a change of control, as
defined, occurs, the holders of the Convertible Notes may require us to
repurchase some or all of the Convertible Notes. We cannot assure you that we
will have sufficient financial resources at such time or will be able to arrange
financing to repurchase the Convertible Notes. Our ability to repurchase the
Convertible Notes in cash in such event may be limited by law, by the Indenture,
by the terms of other agreements relating to our Senior Debt and by indebtedness
and agreements which may be entered into, replaced, supplemented or amended from
time to time. We may be required to refinance our Senior Debt in order to make
such payments. We may not have the financial ability to repurchase the
Convertible Notes in cash if payment for our Senior Debt is accelerated.
INVESTORS IN THE CONVERTIBLE NOTES FACE ADDITIONAL RISK BECAUSE WE ARE A HOLDING
COMPANY
Because we are a holding company, we depend on dividends, distributions and
other payments from our subsidiaries to fund all payments on our debt
obligations, including our obligations to make payments on the Convertible
Notes. Our right to participate in a distribution of assets of any of our
subsidiaries, whether on liquidation, reorganization or otherwise, however, will
be subject to the prior claims of the creditors of that subsidiary. The ability
of holders of the Convertible Notes to benefit from distributions of assets from
our subsidiaries will also be subject to those prior claims.
OUR REGULATED SUBSIDIARIES MAY BE UNABLE TO MAKE PAYMENTS TO US TO ENABLE US TO
MEET OUR CASH PAYMENT OBLIGATION ON THE CONVERTIBLE NOTES
Stockwalk.com, MJK and Arnold Securities, Inc. are regulated broker-dealers
and have statutory minimum capital requirements. These regulations may restrict
the ability of those subsidiaries to make payments to us. In addition, future
indebtedness of our subsidiaries may impose limitations on their ability to make
cash payments and distributions to us.
WE MAY BE ABLE TO OBTAIN WAIVERS OF SOME OF OUR COVENANTS UNDER THE CONVERTIBLE
NOTES WITHOUT YOUR APPROVAL
The Indenture governing the Convertible Notes permits us to enter into a
supplemental indenture for certain limited purposes without the consent of the
holders. If we want to make some types of changes to the Indenture or obtain a
waiver of compliance with our covenants under it, we must obtain the approval of
the holders of a majority in principal amount of the Convertible Notes
outstanding at that time. In many cases, the approval of those holders will be
sufficient for us to make the change or to obtain the waiver. For a description
of provisions governing consents and waivers, see "Description of Convertible
Notes -- Modification, Amendments and Waiver."
23
<PAGE> 25
THE INDENTURE FOR THE CONVERTIBLE NOTES DOES NOT CONTAIN ANY FINANCIAL COVENANTS
RESTRICTING OUR ACTIVITIES
The Indenture for the Convertible Notes does not contain any financial
covenants or restrictions on our payment of dividends or our issuance or
repurchase of securities. Additionally, the Indenture does not contain any
covenants or other provisions to protect holders of the Convertible Notes in the
event of a highly leveraged transaction or a change in control of our company,
except to the extent described under "Description of Convertible
Notes -- Repurchase at Option of Holders upon a Change of Control."
OUR COMMON STOCK PRICE MAY BE VOLATILE
The market price of our common stock could fluctuate significantly in
response to quarterly operating results and other factors, including many over
which we have no control and that may not be directly related to us. The stock
market has from time-to-time experienced extreme price and volume fluctuations,
which have often been unrelated or disproportionate to the operating performance
of particular companies. Fluctuations or decreases in the trading price of our
common stock may adversely affect your ability to trade any shares of our common
stock you may receive through conversion of the Convertible Notes. In addition,
these fluctuations could adversely affect our ability to raise capital through
future equity financings.
FUTURE SALES OF LARGE AMOUNTS OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD
DEPRESS OUR STOCK PRICE
Sales of substantial amounts of our common stock in the public market
following this offering, or the appearance that a large number of our shares are
available for sale, could adversely affect the market price for our common stock
and, indirectly, the Convertible Notes. During the year ended March 31, 2000, we
sold approximately 1.9 million shares of our 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.
Shares of restricted common stock totaling are eligible for
immediate sale in the public market without restriction, with the exception of
shares held by "affiliates," as defined by Rule 144 of the SEC. Shares sold in
our recent previous private placements will also be eligible for sale during the
next year, pursuant to Rule 144. Specifically, in August 2000, an additional
440,000 shares will be available for sale, and between December 2000 and March
2001, an aggregate of 1,796,480 shares will be available for sale. Shareholders
who purchased our restricted stock in March and August 1999 are required to
execute lock up agreements which prohibit the sale of their shares of common
stock for a period of 90 and 120 days, respectively, following this offering.
Upon expiration of that time period, certain of those shares could be sold under
Rule 144.
We have adopted two stock option plans and have reserved 1,525,000 shares
of common stock for issuance under those plans. As of March 31, 2000, options to
purchase 1,062,463 shares of common stock had been granted, of which options to
purchase 222,876 shares are currently 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.
In connection with private placements during the year ended March 2000, we
issued warrants to purchase 223,619 shares of our common stock. The warrants are
immediately
24
<PAGE> 26
exercisable at an initial price of $10.00 per share. An additional 124,278
warrants to purchase our 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 us, unless the shares may otherwise be sold under Rule 144,
or if the underwriter of the offering proposed by us is of the opinion that
registration of such shares would have a significant adverse effect on the
offering proposed by us. The underwriters have made such a determination in
connection with the offering of the Convertible Notes if such rights are
applicable to this offering. However, it is possible that these warrant shares
may be sold in a future offering or under Rule 144.
CERTAIN PROVISIONS OF MINNESOTA LAW, AND THE FACT THAT WE ARE AUTHORIZED TO
ISSUE PREFERRED STOCK, COULD AFFECT THE VOTING POWER AND RIGHTS OF HOLDERS OF
OUR COMMON STOCK
Our authorized and unissued capital stock includes 50,000,000 undesignated
shares. The Board of Directors, without any action by our 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 our common stock.
Our Articles of Incorporation and Bylaws do not contain any anti-takeover
provisions. However, we are 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 our
corporation and limit the price of our securities. See "Description of Company
Securities -- Minnesota Anti-Takeover Law."
WE DO NOT EXPECT TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE
We intend to retain all earnings in the foreseeable future for our
continued growth and, thus, do not expect to declare or pay any cash dividends
in the foreseeable future. Additionally, our ability to pay dividends in the
future may be restricted by our brokerage subsidiaries' obligations to comply
with the net capital rules applicable to broker-dealers.
25
<PAGE> 27
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 our financial position, business strategy and other plans and
objectives for future operations, and assumptions and predictions about future
demand for our services, costs, marketing and pricing factors are all
forward-looking statements. When we use words like "intend," "anticipate,"
"believe," "estimate," "plan" or "expect," we are making forward-looking
statements. We believe that the assumptions and expectations reflected in such
forward-looking statements are reasonable, based on information available to us
on the date of this prospectus, but we cannot assure you that these assumptions
and expectations will prove to have been correct or that we will take any action
that we may presently be planning. We have disclosed certain important factors
that could cause our actual results to differ materially from our 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." We are not undertaking to
publicly update or revise any forward-looking statement if we obtain new
information or upon the occurrence of future events.
26
<PAGE> 28
USE OF PROCEEDS
The gross proceeds of the Convertible Notes will be $30 million. After we
deduct the underwriting discount and pay the offering expenses, we will receive
net proceeds of approximately $27,995,000. If the underwriters' over-allotment
is exercised in full, we will receive additional net proceeds of approximately
$4,230,000.
We intend to use $ of the net proceeds of this offering to expand our
Stockwalk.com online business. Approximately $ is expected to be used for
marketing and new account originations through our online bank service provider,
financial institution and affinity group and Internet portal network.
Approximately $ will be spent on new information systems, software and
personnel directly related to our online business technology, and $ will
be devoted to expansion of our sales and marketing staff. The balance of the net
proceeds, approximately $ , will be used for general corporate purposes,
including possible strategic acquisitions. We intend to consider acquisitions
that are presented to us and to continue making strategic acquisitions of
brokerage firms and companies with technologies or businesses to complement our
full service and online divisions. Any proceeds of this offering applied to
complete an acquisition would reduce the net proceeds available to expand our
Stockwalk.com online business.
Depending on future events, we may determine to use our net proceeds for
different purposes or to allocate our net proceeds differently among the uses
described above. Pending these uses, we expect to either use these funds to pay
down short-term credit lines or invest in short-term, interest-bearing,
investment grade securities. Assuming that we do not make any acquisitions, we
believe that our current cash position, cash generated from operations,
availability of line of credit borrowings, and the proceeds of the Convertible
Notes will be adequate to meet our capital requirements for at least one year
following this offering.
PRICE RANGE OF COMMON STOCK
Our 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 our
common stock for the period from the completion of our merger with NM Holdings,
Inc. through April 24, 2000.
<TABLE>
<CAPTION>
HIGH LOW
----------- ---
<S> <C> <C>
Quarter Ended September 30, 1999..................... 16 1/2 8 5/8
Quarter Ended December 31, 1999...................... 10 3/8 7 1/4
Quarter Ended March 31, 2000......................... 15 7 1/8
Quarter Ended June 30, 2000 (through April 24,
2000).............................................. 14 1/8 10
</TABLE>
The last reported sale price of our common stock, as reported on the Nasdaq
NMS on April 24, 2000, was $10.00 per share.
DIVIDEND POLICY
We have never paid any cash dividends on our common stock and do not
anticipate paying cash dividends in the foreseeable future. Instead, we intend
to retain future earnings, if any, to finance the growth and development of our
business. Any future determination to pay cash dividends will be at the
discretion of the Board of Directors and will be dependent on our financial
condition, results of operations, capital requirements and such other factors as
the Board of Directors deems relevant. Additionally, our ability to declare or
pay dividends may be limited in the future by the terms of any then-existing
credit agreements which may contain covenants which restrict the payment of cash
dividends.
27
<PAGE> 29
CAPITALIZATION
The following table reflects our actual unaudited short-term debt and
capitalization as of December 31, 1999, and as adjusted to reflect the net
proceeds of our March 2000 private placement of common stock and the receipt and
application of the gross proceeds from sale of the % Convertible
Subordinated Notes due 2005 offered by us.
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1999
----------------------
PRO FORMA
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Notes payable............................................. $ 4,853 $
Liabilities subordinated to claims of general creditors... 16,800
% Convertible Subordinated Notes due 2005............ --
------- -------
Shareholders' equity:
Common stock, $.04 par value, 50,000,000 shares
authorized; 19,792,327 shares issued and
outstanding.......................................... 792
Paid-in capital......................................... 13,874
Retained earnings....................................... (3,251)
------- -------
Total shareholders' equity......................... 11,415
------- -------
Total capitalization...................................... $33,068 $
======= =======
</TABLE>
The amounts in the capitalization table above should be read with the
following points in mind:
- The "Pro Forma As Adjusted" column assumes that the underwriter's
overallotment option is not exercised; and
- The shares outstanding exclude shares of common stock reserved
for issuance upon conversion of the Convertible Notes, 1,062,463 shares
of common stock subject to stock options outstanding at March 31, 2000,
of which 222,876 shares are currently exercisable, an additional 462,537
shares of common stock which are reserved for issuance under our stock
option plans, and an additional 314,258 shares issuable upon the exercise
of outstanding warrants.
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<PAGE> 30
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth the ratio of our earnings to fixed charges
for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED MARCH 31, DECEMBER 31,
---------------------------------------------------------------- -------------------------
1995 1996 1997 1998 1999 1998 1999
---------- ---------- ---------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Pre-tax income....... $ 399,600 $ 858,900 $ 223,803 $(1,823,300) $ 2,257,586 $ 2,132,700 $(5,566,600)
Plus: fixed
charges............ 2,039,400 4,780,400 8,083,600 12,156,486 12,903,130 9,887,900 11,841,800
---------- ---------- ---------- ----------- ----------- ----------- -----------
Earnings............. $2,439,000 $5,639,300 $8,307,403 $10,333,186 $15,160,716 $12,020,600 $ 6,275,200
========== ========== ========== =========== =========== =========== ===========
Interest............. $1,832,000 $4,429,200 $7,427,400 $11,027,386 $11,805,900 $ 9,006,000 $10,718,200
1/3 Rent............. 207,400 351,200 656,200 1,129,100 1,097,230 881,900 1,123,600
---------- ---------- ---------- ----------- ----------- ----------- -----------
Fixed charges........ $2,039,400 $4,780,400 $8,083,600 $12,156,486 $12,903,130 $ 9,887,900 $11,841,800
========== ========== ========== =========== =========== =========== ===========
Ratio................ 1.20x 1.18x 1.03x 0.85x 1.17x 1.22x 0.53x
========== ========== ========== =========== =========== =========== ===========
</TABLE>
The ratio of earnings to fixed charges has been computed by dividing
earnings available for fixed charges (income or loss from continuing operations
before interest expense and income taxes plus fixed charges) by fixed charges.
Fixed charges consists of interest expense (including amortization of deferred
financing costs) and an estimate of the portion of rental expense that is
representative of the interest factor (currently deemed to be one-third of all
rental expense).
As a result of losses incurred in 1998 and for the nine months ended
December 31, 1999, fixed charges exceeded earnings available for fixed charges
in those periods by $1,823,300 and $5,566,600, respectively.
29
<PAGE> 31
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for each of the five
years in the periods ended March 31, 1995, through March 31, 1999, have been
derived from the audited consolidated financial statements of MJK Holdings, Inc.
(MJK's parent) and MJK. The financial information with respect to NM Holdings,
Inc., which was effectively acquired by MJK Holdings, Inc. by merger on July 6,
1999, has been omitted because it discontinued business in 1998, and its
historic business is not material to our current business. The selected
consolidated financial data for the nine months ended December 31, 1998 and
1999, have been derived from our unaudited consolidated financial statements. In
our opinion, such unaudited data include all adjustments (consisting of only
normal recurring adjustments) necessary for a fair presentation of the
information set forth therein. The results of operations for the nine months
ended December 31, 1999, are not necessarily indicative of results to be
expected for any future period. You should read the financial data set forth
below in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and the related notes included in this prospectus, beginning on page F-1.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) NINE MONTHS ENDED
FISCAL YEAR ENDED MARCH 31, DECEMBER 31,
--------------------------------------------------- ----------------------
1995 1996 1997 1998 1999 1998 1999
------- -------- -------- -------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
REVENUES:
Trading profits..................... $ 7,998 $ 10,536 $ 9,856 $ 10,634 $ 15,063 $ 11,656 $ 9,146
Interest............................ 2,334 5,487 9,150 13,507 15,410 11,566 13,941
Commissions......................... 1,135 2,732 3,930 9,040 9,888 7,063 8,282
Investment banking.................. 3,746 6,932 7,716 9,656 8,389 6,013 6,938
Clearing fees....................... 400 567 785 1,902 3,105 2,119 3,471
Other income........................ 125 690 1,170 2,354 3,735 3,068 2,789
------- -------- -------- -------- -------- -------- --------
TOTAL REVENUES...................... $15,739 $ 26,944 $ 32,607 $ 47,093 $ 55,590 $ 41,485 $ 44,567
EXPENSES:
Employee compensation and
benefits.......................... $10,141 $ 16,807 $ 17,736 $ 25,950 $ 26,987 $ 19,537 $ 22,649
Clearing fees....................... 550 653 750 1,475 2,890 2,115 2,428
Occupancy and equipment rental...... 621 1,052 1,965 3,381 3,285 2,640 3,364
Communication....................... 1,100 1,655 2,298 3,938 5,251 3,806 5,321
Interest............................ 1,832 4,429 7,427 11,027 11,806 9,006 10,718
Other expense....................... 1,095 1,489 2,207 3,145 3,113 2,248 5,654
------- -------- -------- -------- -------- -------- --------
TOTAL EXPENSES...................... $15,340 $ 26,085 $ 32,383 $ 48,916 $ 53,332 $ 39,352 $ 50,134
NET INCOME (LOSS) BEFORE INCOME
TAXES............................. 399 859 224 (1,823) 2,258 2,133 (5,567)
INCOME TAX EXPENSE (BENEFIT)........ 103 334 34 (599) 985 799 (2,267)
------- -------- -------- -------- -------- -------- --------
Net income (loss)................... $ 296 $ 525 $ 190 $ (1,224) $ 1,273 $ 1,334 $ (3,300)
======= ======== ======== ======== ======== ======== ========
Basic and diluted earnings per
share............................. $ 0.02 $ 0.03 $ 0.01 $ (0.08) $ 0.08 $ 0.08 $ (0.17)
======= ======== ======== ======== ======== ======== ========
CONSOLIDATED BALANCE SHEET DATA:
Total assets........................ $44,830 $124,633 $181,042 $272,616 $322,353 $271,862 $427,269
Total debt.......................... 13,444 28,303 27,102 27,728 48,113 40,695 55,753
Total shareholders' equity.......... 1,889 2,392 2,583 1,358 7,011 2,693 11,415
</TABLE>
30
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve
assumptions and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of various
factors, including those set forth under "Risk Factors" and elsewhere in this
prospectus. You should read this section in conjunction with our consolidated
financial statements and the related notes, which begin on page F-1.
GENERAL
We have two principal operating subsidiaries, MJK and Stockwalk.com. MJK 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 clearing broker for approximately 50
correspondent brokerage firms. Stockwalk.com commenced online securities trading
in September 1999.
During the quarter ended December 31, 1999, we completed the acquisition of
two online brokerage firms. In October 1999, we acquired Arnold Securities, Inc.
of Minneapolis, Minnesota, which offers online and discount brokerage services
to customers across the upper Midwest. In November 1999, we completed the
acquisition of M.One Investment Securities, Inc. of San Francisco and Fremont,
California. M.One Investment Securities, Inc. offers online and discount
brokerage services in English, Cantonese and Mandarin.
SEGMENTS
Our reportable segments are as follows: clearing services, retail sales,
online brokerage, underwriting, and other.
Clearing Services
We serve as a clearing agent providing transaction execution, account
maintenance, including extension of credit, and record keeping services for
customers of our introducing brokers. We collect a clearing fee and charge
interest on the customers' margin accounts.
Retail Sales
We charge a brokerage commission when acting as agent for the purchaser or
seller of a security. We also purchase securities from and sell securities to
customers on a principal basis and maintain inventories of securities for such
purposes. In principal transactions, we recognize income or loss on the spread
between our cost and the charge to the customer. We also recognize income or
loss on the inventory we maintain which must be marked to market daily. Our
retail business also includes federally insured certificate of deposit
participations.
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<PAGE> 33
Online Brokerage
We provide automated order placement, portfolio tracking and related market
information, news and other information services 24 hours a day, seven days a
week principally by means of the Internet which allows our customers the ability
to place orders for investment transactions directly, and at a lower, more
predictable transaction cost than traditional full-commission brokerage firms.
Further, we plan to adapt our technology to provide information and transaction
processing services related to other aspects of electronic commerce, such as the
processing of bond and certificate of deposit transactions, insurance
transactions and electronic cash transfers.
Underwriting
We also provide underwriting services to corporate and public entity
clients in planning to meet their financial needs and advising them on the most
advantageous means of raising capital or debt. Such plans are sometimes
implemented by managing or co-managing public offerings of securities or by
arranging private placements of securities with institutional or individual
investors. Our underwriting department coordinates the distribution of managed
and co-managed corporate and public finance underwritings on a public and
private basis, accepts invitations to participate in competitive or negotiated
underwritings managed by other investment banking firms, and allocates and
merchandises our underwriting positions to customers of 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 include 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 the broker-dealers.
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 its operating segments.
32
<PAGE> 34
Information concerning operations in these segments of business is as
follows:
<TABLE>
<CAPTION>
(INFORMATION IN THOUSANDS) NINE MONTHS ENDED
FISCAL YEAR ENDED MARCH 31, DECEMBER 31,
----------------------------- ------------------
1997 1998 1999 1998 1999
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE:
Clearing services................. $ 9,616 $15,969 $19,280 $14,342 $18,312
Retail sales...................... 21,577 28,009 30,672 22,526 21,776
Online brokerage.................. -- -- -- -- 814
Underwriting...................... 549 2,174 4,338 3,485 2,663
Other............................. 865 941 1,301 1,132 2,035
Eliminations...................... -- -- -- -- (1,033)
------- ------- ------- ------- -------
TOTAL REVENUE..................... $32,607 $47,093 $55,590 $41,485 $44,567
======= ======= ======= ======= =======
PRETAX INCOME (LOSS):
Clearing services................. $ (444) $ 1,080 $ 2,051 $ 1,410 $ 2,152
Retail sales...................... 641 (3,066) (272) 201 (3,403)
Online brokerage.................. -- -- -- -- (2,912)
Underwriting...................... -- 162 485 528 12
Other............................. 27 -- -- -- (1,116)
Eliminations...................... -- -- (6) (6) (300)
------- ------- ------- ------- -------
PRETAX INCOME (LOSS).............. $ 224 $(1,823) $ 2,258 $ 2,133 $(5,567)
======= ======= ======= ======= =======
</TABLE>
FISCAL YEARS ENDED MARCH 31, 1997, 1998 & 1999
Revenues from our clearing services increased $6.4 million from 1997 to
1998, and $3.3 million from 1998 to 1999, representing increases of 66.1% and
20.7% respectively. Expenses related to our clearing services increased $4.8
million or 48% from 1997 to 1998, and $2.3 million or 15.7% from 1998 to 1999.
The growth in our clearing service operations is driven by an increase in the
volume of transactions and an increase in the number of correspondents for which
we clear trades: from nine in 1997, to 22 in 1998 and 31 in 1999.
Retail sales revenues increased $6.4 million or 29.8% from 1997 to 1998.
This increase was primarily related to the acquisition of Juran & Moody in
January 1997, generating a full 12 months of commissions in the fiscal year
ending March 1998. The $2.7 million increase in retail sales from 1998 to 1999
was due to the significant rise in the United States equity markets during the
period, spurring increased transaction volumes.
Expenses related to retail sales increased $10.1 million or 48.4% from 1997
to 1998. This includes an increase of $6.4 million in sales commissions and $2.9
million of communication and rent expenditures primarily resulting from Juran &
Moody being included for the entire 12 month period in 1998. The 1998 loss in
retail sales resulted principally from increased administrative and professional
fees, one-time costs associated with specific arbitration and litigation
matters, as well as initial employee retention costs related to the acquisition
of Juran & Moody. The retail sales expenditures were consistent from 1998 to
1999.
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<PAGE> 35
Underwriting revenues increased $1.6 million or 295.6% from 1997 to 1998 as
a result of an increase in municipal bond deals and merger and acquisition fees.
Revenues from underwriting activities increased $2.2 million or 99.5% from 1998
to 1999. In fiscal year 1999, we realized another increase in municipal bond
deals and generated an $815,000 placement fee for locating a financial partner
of a power project. The timing of underwriting activity can vary significantly
from period to period based on market conditions resulting in fluctuations in
revenues and operating profits in this segment.
Other revenues were consistent in 1997 and 1998. The $359,700 increase in
other revenues in 1999 relates to $324,400 of fiscal consulting fees generated.
NINE MONTHS ENDED DECEMBER 31, 1998 & 1999
During the nine months ended December 31, 1999, our clearing fee revenue
was $18.3 million, an increase of $4.0 million or 27.7% from the nine months
ended December 31, 1998. During the nine months ended December 31, 1999, the
number of firms utilizing our clearing services increased to 47 from 33 for the
nine months ended December 31, 1998. Clearing fee expenses for the nine months
ended December 31, 1999, totaled $16.2 million, an increase of $3.2 million or
24.9% from the comparable period in 1998. The increase in clearing expenses is
directly related to its growth. During the nine months ended December 31, 1999
we processed 551,900 tickets compared to 357,700 tickets in the same period for
the previous year.
During the nine months ended December 31, 1999, retail sales revenue
totaled $21.8 million compared to $22.5 million for the nine month period ending
December 31, 1998. Retail sales activity incurred a pretax loss of $3.4 million
in the nine months ended December 31, 1999, compared to income of $201,300 in
the comparable period in 1998, resulting from a $2.8 million increase in
expenditures. The increase in 1999 expenses includes a $1.1 million increase in
data processing charges from an outside service vendor due to an increased
number of customers and employees, as well as a $1.4 million increase in
compensation, which includes officers' salaries. In 1998, our four principal
officer/shareholders received no salaries.
Our online brokerage business started to generate trading revenue in the
nine months ended December 31, 1999. During the period we completed the
acquisition of Arnold Securities, Inc. and M.One Investment Securities, Inc. The
$2.9 million loss from online brokerage in the nine months ended December 31,
1999 was due to start-up costs and significant costs incurred in advertising in
an attempt to create brand awareness for attracting new online customers and
generate our new private label business.
During the nine months ended December 31, 1999, underwriting revenues
decreased approximately $820,000 from the same period in 1998 due to an overall
decline in underwriting activity in our niche markets. Underwriting activity can
vary significantly from period to period based on market conditions resulting in
fluctuations in revenues and operating profits in this segment.
The $1.1 million loss from other operations 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 our technological
infrastructure that cannot be allocated equitably to the other segments of our
business.
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<PAGE> 36
LIQUIDITY AND CAPITAL RESOURCES
Our assets consist primarily of cash and assets readily convertible into
cash. Security inventories are reported at market value and are generally
readily marketable. Customer margin loans are collateralized by securities and
have floating interest rates. Other receivables and payables with customers and
other brokers and dealers usually settle within three days following the date of
transaction. Operations are financed by equity capital, bank lines of credit,
proceeds from sales of securities, non-interest bearing liabilities such as
checks and drafts payable, payables to customers and employee compensation
payable. The fluctuations in cash flows from financing activities are directly
related to our cash requirements in connection with our operating activities.
Our investing activities provided $337,600 of cash in the nine months ended
December 31, 1999, as a result of selling capital equipment under a
sale-leaseback financing agreement.
Our financing activities provided cash of $8.2 million in the nine months
ended December 31, 1999, primarily resulting from the issuance of 480,331 shares
of our common stock through private placements at a net price of $7.125 to $9.60
per share in addition to the recapitalization of our company in connection with
the merger with NM Holdings, Inc.
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 MJK maintain minimum net
capital equal to the greater of $250,000 or 2% of aggregate debit balances
arising from customer transactions, as defined. At December 31, 1999, MJK's net
capital of $14.9 million was 8.6% of aggregate debit balances and $11.4 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% of aggregate debits. Stockwalk.com and Arnold
Securities, Inc. each require a minimum of $50,000 net capital. At December 31,
1999, Stockwalk.com and Arnold Securities, Inc. had net capital of $180,300 and
$90,300 respectively.
At December 31, 1999, we had approximately $65.0 million in lines of
credit, of which $34.1 million was utilized. Of the $34.1 million in utilized
credit, approximately $24.1 million was collateralized by customers' securities,
and the balance was secured by firm-owned securities and customer securities
collateralizing liabilities subordinated to claims of general creditors having a
total value of $35.3 million.
Assuming that we do not make any acquisitions, we believe that our current
cash position, cash generated from operations, availability of line of credit
borrowings, and the proceeds of the Convertible Notes will be adequate to meet
our capital requirements for at least one year following this offering.
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BUSINESS
COMPANY OVERVIEW
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 MJK subsidiary
offers traditional securities brokerage, securities trading, investment banking
and research services. Our niche market for investment banking includes small
capitalization, emerging and start-up companies and public finance clients
located principally in the upper midwest. In September 1999, our Stockwalk.com
subsidiary began publicly 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 and affinity groups and Internet portals through a private label
program.
Our full service brokerage business offers a variety of financial services
to individuals, governments and corporations. We offer equity, fixed income and
mutual fund products through approximately 160 licensed sales representatives
located in nine offices in Minnesota, Florida, Texas, Arizona, Illinois and
California. We clear our own securities transactions, as well as those of
approximately 50 correspondent brokerage firms. Since we are a self-clearing
firm, we extend margin credit to our customers and to customers of our
correspondents. We also provide investment banking and advisory services to
governments, public companies and private companies, including underwriting
private and public debt and equity securities. In addition, we believe that we
are one of the largest brokers of federally insured certificates of deposit
participations in the United States. To support many of these activities, we
produce research on a select group of companies with an emphasis in small
capitalization, emerging and start-up companies located primarily in the upper
midwest.
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
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
and Arnold Securities, Inc. MJK, Stockwalk.com and Arnold Securities, Inc. are
registered as broker-dealers with the SEC and are members of the NASD. Our
common stock is listed on the Nasdaq NMS under the symbol "STOK."
In September 1999, following the creation of Stockwalk.com Group, Inc., we
launched Stockwalk.com as a direct-to-consumer online brokerage service. This
online brokerage product utilizes our expertise in traditional securities
brokerage and clearing, where we have provided online transaction services to
our correspondents since 1997. Our online business is intended to take advantage
of the technological changes occurring in the
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securities industry. We believe that investor acceptance of online brokerage
firms will continue to increase. Additionally, although we have recently seen
some success by large online brokerage firms, we believe that online investing
has yet to penetrate the mass market. To capture a portion of this market, we
are pursuing a strategy of offering online bank service providers, financial
institutions, and affinity groups and Internet portals a turn-key online
brokerage service. This service, which we call our private label program,
provides small to medium-sized financial institutions and affinity groups and
Internet portals an additional product for their customers and members. These
entities can use their existing websites to allow their customers and members
direct access to the Stockwalk.com online trading service.
OUR INDUSTRY
The securities brokerage industry is undergoing dramatic change. Loosened
restrictions on relationships between financial institutions and broker-dealers
are leading to increased competition and consolidation in the industry.
Consequently, the industry is seeing increased consolidation among firms as they
strive to maintain a competitive advantage in an industry represented by an
estimated 60 to 80 million online and traditional brokerage accounts in October
1999.
The increased presence of the Internet is also affecting the securities
industry as online trading of securities continues to gain acceptance among
investors. This online trading growth is evidenced by the fact that from 1997 to
1999, the number of online trading accounts grew from approximately 4 million to
approximately 13 million. This number of online accounts translated to
approximately $900 billion worth of assets held in online accounts at the end of
1999. Industry experts predict that by the year 2003, more than $3 trillion in
assets will be held in over 20 million online accounts. The Internet is one of
the primary methods by which investors have taken control of their own
portfolios. We believe that brokerage firms that are able to provide online
trading services to their customers as well as continue to provide traditional
full service brokerage services, particularly in areas not well suited to
Internet transactions, will be poised to capitalize on the changes occurring in
the securities industry.
PRODUCTS & SERVICES
ONLINE DIVISION (STOCKWALK.COM)
We launched Stockwalk.com, our online division, in September 1999. While
not providing investment advice, Stockwalk.com offers 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. We plan to adapt our technology
to other areas of electronic commerce, such as processing of bond and
certificate of deposit transactions, insurance transactions, and electronic cash
transfers.
When we started Stockwalk.com, we launched a regional advertising campaign
in the Minneapolis-St. Paul area to create name recognition in that market and
acquired two discount and online brokerage firms to provide an initial customer
account base. Our October 1999 acquisition of Arnold Securities, Inc. resulted
in the addition of approximately 12,000 accounts. Our November 1999 acquisition
of M.One Investment Securities, Inc. provided us with approximately 5,000
accounts, the majority of which are
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held by members of the Asian-American community, and a website specifically
tailored to the Asian-American community in that it utilizes several Chinese
languages.
Most of Stockwalk.com's customers are individuals with traditional retail
accounts. As of March 31, 2000, Stockwalk.com had approximately 14,000 customer
accounts. Monthly transactions increased from approximately 3,200 in October
1999 to approximately 33,000 in March 2000. A customer may open an account with
a minimum of $2,000 but, from time-to-time, the minimum deposit and transaction
fees have been reduced or waived for promotional purposes. Currently,
Stockwalk.com charges a flat fee of $18.95 per trade regardless of the size of
the trade.
Stockwalk.com intends to focus its marketing efforts on online bank service
providers, financial institutions and members of affinity groups and Internet
portals. Stockwalk.com's private label product allows the financial institution
or affinity group or Internet portal to give its customers or members access to
Stockwalk.com's online brokerage services through the financial institution's or
affinity group's or Internet portal's website. This allows the client to simply
add Stockwalk.com to the variety of online services it offers to its customers.
As of April 2000, we have agreements with approximately 11 online bank service
providers, such as Digital Insight Corporation, Regency Systems, Inc., Digital
Visions, Inc. (now Netzee, Inc.), Open Solutions, Inc. and Cavion.com. We also
have direct agreements with 11 financial institutions, including Community
Savings Bank, Arkansas National Bank and Capital Bank. Finally, we have
agreements with two affinity groups and Internet portals. All of these
organizations have agreed to market a private label version of our online
brokerage services to their clients. In total, all of these agreements provide
Stockwalk.com with exposure to approximately 4,100 financial institutions,
affinity groups and Internet portals serving approximately 4 million customers.
We expect that we will capture a small percentage of these customers for our own
website, which would increase our customer base. Generally, Stockwalk.com pays
the financial institution a per transaction fee, and it pays portals or affinity
groups a flat fee for each order.
Our agreement with Telescan, Inc., entered into in March 2000, will serve
to greatly enhance the online content we offer to our customers. Telescan
provides financial Internet content to many of the nation's largest financial
services and media companies, including America Online, American Express,
Fidelity Investments, Forbes, GlobalNetFinancial, NBC and Fortune. Under our
agreement with Telescan, we may private label Telescan's financial analytical
tools with our online brokerage website. Thus, along with an online trading
capability, financial institutions and affinity groups and Internet portals
using our private label program will be able to offer their clients data, news
and analysis tools for stocks, mutual funds and portfolios, educational tools,
discussion groups, portfolio management tools, research and analysis, charts,
technical analysis, market commentary and investment newsletters. Our agreement
with Telescan may also provide us with access to other financial websites and
Internet portals. Finally, we purchased a three-year renewable license from
Telescan to private label the content of its WallStreetCity.com website on an
exclusive basis to certain banks with less than $10 million in assets and to all
but the largest 150 broker-dealers in the United States. With respect to the
largest 150 broker-dealers, we purchased a non-exclusive license to private
label this same content, provided that we first obtain Telescan's prior approval
on a case-by-case basis. As a part of this agreement, Telescan made a
substantial investment in our company by purchasing 309,000 shares of our common
stock, along with 30,900 warrants to purchase our common stock, for
approximately $2.3 million, of which approximately $1,750,000 was applied to
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eliminate obligations related to the license. We utilized the remaining amount
to finalize the acquisition of the license.
Northwest Airlines recently agreed to allow Stockwalk.com to place
dedicated terminals in Northwest Airlines WorldClubs for a 90-day trial period.
During the trial period, the terminals will be placed in Northwest's hub markets
of Minneapolis, Detroit and Memphis. WorldClubs members will be able to obtain
investment and market information and may also open up a Stockwalk.com account
online and trade securities from the terminals. Following the trial period,
together with Northwest, we will determine whether to place the terminals in
additional WorldClub locations.
Stockwalk.com's computer center is located at our headquarters in
Minneapolis. All of our servers are leased from or housed at Digital Island,
Inc. under an agreement whereby Digital Island provides turn-key maintenance of
our servers that route all of our transaction traffic. Our trading software
systems are provided by Automated Financial Systems, Inc. in New York, New York.
This system manages all of our securities trading activity. The software
applications for our website are proprietary to Stockwalk.com and are designed
to efficiently interface with MJK's clearing systems. Stockwalk.com employed 82
persons as of March 31, 2000. Stockwalk.com has offices in Golden Valley and
Minneapolis, Minnesota; and San Francisco and Fremont, California.
FULL SERVICE BROKERAGE DIVISION
Our full service brokerage business is conducted through MJK and includes
retail brokerage, trading, investment banking, research and clearing activities.
The division offers services to clients in the following four areas:
- investment advice for individuals and institutions;
- financial advisory and underwriting services to governments in the upper
midwest;
- investment banking assistance to start-up and early stage regional
companies to access capital; and
- resale of bank and thrift certificates of deposit.
At March 31, 2000, MJK employed approximately 160 licensed sales
representatives in nine offices located in Golden Valley, Minneapolis and St.
Paul, Minnesota; Clearwater, Florida; Dallas and Houston, Texas; Scottsdale,
Arizona; Chicago, Illinois; and La Jolla, California. MJK currently has
approximately 40,000 active accounts. For the year ended March 31, 2000, the
division transacted an average of 3,665 trades per day. The average size of each
account is approximately $60,000.
We are a self-clearing firm, providing transaction clearing services for
MJK and Stockwalk.com clients, as well as for the clients of approximately 50
correspondent brokerage firms. As a clearing agent, we provide transaction
execution, account maintenance and record keeping services. Securities
Industries Software Corporation, a division of ADP, maintains our back office
system. We also contract with other vendors to produce, batch and mail our
confirmations and customer reports. We also extend credit to customers clearing
through MJK. Our correspondent brokerage firms are responsible to us for all
transactions in their customer accounts. We also lend securities to other firms
and customers.
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MJK is a dealer in corporate equity and corporate and governmental fixed
income securities and recognizes profits or losses on transactions in, or
fluctuations in, the value of securities held in inventory. We have established
internal guidelines which are periodically reviewed, limiting the size and risk
of inventories maintained. Additionally, MJK presently serves as a market maker
for approximately 60 Nasdaq companies. Many of these companies have been clients
of our investment banking group or are covered by our research analysts. As a
market maker we publish bid and ask prices for the securities in which we make
markets. We publish prices on our inventory of taxable and non-taxable municipal
bond issues and bid on municipal bond issues in the inter-dealer market.
As a securities broker, MJK acts as an agent in the purchase and sale of
securities, options, commodities and futures contracts traded on various
securities and commodities exchanges or in the over-the-counter market. MJK
charges a brokerage commission when acting as agent for the purchaser or seller
of a security. If the security is listed on an exchange, the transaction is
generally effected through a floor broker who is unaffiliated with MJK. If the
security is traded in the over-the-counter market, transactions are generally
effected with a market maker in the security. In addition to the foregoing, MJK
earns commissions from transactions involving various other financial products.
Individual investors are the primary source of MJK's commission business.
We derive a significant portion of our revenue from interest income, the
major portion of which relates to customer balances. We effect customers'
transactions on either a cash or margin basis. Purchases on a cash basis require
full payment by the designated settlement date, generally the third business day
following the transaction date, except in the case of options, which settle the
day following the transaction. When a purchase is made on a margin basis, MJK
extends credit to the customer for a portion of the purchase price. The amount
of the loan is subject to margin regulations of the Federal Reserve Board and
the internal policies of MJK, which are generally more stringent than applicable
regulations. Interest is charged at a floating rate on amounts borrowed by
customers to finance purchases on margin. The rate charged is dependent on the
average net debit balance in the customers' accounts and the activity level in
the accounts. As of March 31, 2000, our customers' aggregate margin debt was
approximately $216 million. This indebtedness was secured by customer securities
positions with a market value of approximately $1.0 billion at that date.
Customers will at times accumulate credit balances in their accounts. Such
balances result from payment of dividends, interest or principal on securities
held for such customers, from funds received in connection with sales of a
customer's securities and from cash deposits made by customers pending
investment. Pending investment of such funds or reimbursement upon the
customer's request, MJK pays interest on these credit balances. MJK uses
available credit balances to lend funds to customers purchasing securities on
margin. Excess customer credit balances are invested in short-term securities in
accordance with applicable regulations and are segregated for the exclusive
benefit of customers. MJK generates net interest income from the positive
interest rate spread between the rate earned from margin lending and alternative
short-term investments and the rate paid on customer credit balances.
Our investment banking group consists of a total of seven public finance
and corporate finance professionals. The investment banking department generates
income primarily from fees which are frequently based on the amount of capital
raised, but may include equity participation through the receipt of warrants.
The public finance division also includes an originations group and a fiscal
advisory group. The originations group participates in
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underwriting activities while the fiscal advisory group provides independent
advice to our public sector clients.
Our originations group concentrates primarily on revenue bond issues, many
of which are conduit issues where a municipality lends its name to provide
tax-exempt status to qualifying projects. Our underwriting areas include
501(c)(3) nonprofit healthcare projects, housing projects, industrial revenue
bond projects and school facilities. According to statistics compiled by
Securities Data Corporation, from April 1, 1999, to March 31, 2000, our
originations group underwrote and acted as lead manager on 158 municipal bond
issues worth approximately $306.1 million, ranking us 63rd in the United States.
Our fiscal advisory group advises municipalities on the structure and terms
of bond financings, particularly general obligation bond issues, throughout the
upper mid-western United States. The fiscal advisory group also acts as advisor
on municipal issues sold by competitive bid. According to Securities Data
Corporation, in 1999, the group served as advisor on 34 municipal issues worth
approximately $56.9 million. For the year ended March 31, 1999, we originated
approximately $318 million in tax-exempt and taxable municipal debt offerings.
Our corporate finance group assists small and emerging companies, including
start-ups, in raising capital from both public and private sources. The group
focuses on companies in the upper midwest. It provides financial advisory
services, manages or co-manages public offerings of equity and debt, and
arranges private placement of securities.
For the year ended March 31, 2000, we placed approximately $21 million in
offerings of equity securities of ten emerging companies. In 1999, we raised
approximately $20 million in capital for 11 companies; in 1998, we raised $10.4
million in capital for four companies; and in 1997, we raised $6.8 million in
capital for three companies. In private placements, we typically raise between
one and five million dollars per transaction. Prior to 1999, a majority of our
transactions were in the medical devices and technology industry. However, of
the four transactions completed in 1999, two were in the medical device and
technology area, one was in consumer products, and one was in the high
technology/ Internet industry.
We also maintain a research department that provides analysis, investment
recommendations and market information on emerging growth companies. As of March
31, 2000, we employed five research analysts covering approximately 20
companies. We also supplement internal research with research products from
independent organizations.
OUR STRATEGY
Our strategy is to expand our Stockwalk.com online trading business while
continuing to offer and expand our full service brokerage business to complement
our online business. Additionally, our online brokerage growth strategy is to
offer a turn-key online brokerage service to financial institutions and affinity
groups and Internet portals. This service, which we call our private label
program, provides small to medium-sized financial institutions and affinity
groups and Internet portals an additional product for their customers or
members. To date, we have focused on strategic alliances with online bank
service providers, small to medium-sized financial institutions and affinity
groups and other Internet portals. We hope to capitalize on all of these
organizations' pre-existing client relationships. Financial institutions and
affinity groups and Internet portals can offer our Stockwalk.com online
brokerage services to their clients and members without incurring the large
capital costs associated with developing in-house technology. These financial
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institutions and groups have the option of marketing the online brokerage
service as "Stockwalk.com" or to private label the product under their own
names. A stand-alone "Stockwalk.com" service is also available.
We plan to continue making strategic acquisitions of brokerage firms and
companies with technologies or businesses to complement our traditional and
online brokerage divisions. We will pursue three different types of firms in our
acquisition strategy:
- Online and traditional brokerage firms -- We intend to target online
brokerage firms as well as traditional brokerage firms that have not made
any significant commitment to the Internet. An ideal acquisition
candidate will not be self-clearing, will possess a broad and active
account base, substantial credit and debit balances, and will require the
technology that a self-clearing firm can provide.
- Niche brokerage firms -- We plan to take advantage of unique
opportunities to establish a position in niche markets. Our first such
acquisition involved the purchase of M.One Investment Securities, Inc., a
company whose customer base is almost entirely Chinese-American. This
demographic group is particularly attractive because 55% of
Asian-Americans own computers. Our purchase of M.One was the first step
in targeting Asian-American investors. We are also discussing private
label opportunities with financial institutions that serve the
Asian-American population.
- Technology companies -- We intend to target companies whose technology
strengthens our core competencies or whose unique technology is needed
for us to retain a competitive edge. One such area is unique user
interface technology. We will focus on technology that is robust,
scalable and extendible so that features may be added quickly.
We also plan to enter into strategic alliances to effectively private label
the Stockwalk.com brand. The majority of these alliances will be with online
bank service providers, small to medium-sized financial institutions and
affinity groups and Internet portals, with the goal of pulling the financial
institutions' customers and affinity group's and Internet portal's members
through to the Stockwalk.com website. Our private label program will allow
financial institutions and affinity groups and Internet portals to provide
online brokerage services to their customers or members without having to make
large capital expenditures to support online technology. At the same time, we
believe that we will benefit from these relationships because we will gain
exposure to a large number of potential customers without the use of expensive
national advertising campaigns.
RECENT DEVELOPMENTS
In March 2000, we completed a $11.7 million private placement, net of
offering expenses, of approximately 1.6 million shares of our 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.
Our license agreement with Telescan, Inc., completed in March 2000, allows
us to private label Telescan's online financial analytical tools with our online
brokerage services. Thus, both our direct customers and customers we obtain via
our private label agreements will have access to sophisticated financial
information. We 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, we issued Telescan 309,000 shares of our common stock at
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$7.50 per share, along with warrants to purchase 30,900 shares at $10.00 per
share. Approximately $1,750,000 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, we 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 us from transactions in the customer accounts
acquired.
COMPETITION
Our online brokerage services offer clients the opportunity to direct their
own investing activity without our advice. We offer 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.
We do not have the resources or market presence to compete directly with
the major online brokerage firms. Therefore, we have chosen to focus our efforts
on our private label business and thereby use online bank service providers,
financial institutions and affinity groups and Internet portals to market our
products to their customers and members.
We also compete for investor funds with traditional brokerage firms.
Traditional brokerage firms rely on a network of internal or affiliated brokers
to solicit customer accounts, provide investment advice to clients, and execute
transactions on their clients' behalf. Although there are many large national
brokerage firms, such as Merrill Lynch and Morgan, Stanley Dean Witter, Discover
& Company with which we compete, we more frequently encounter the following
firms in the normal course of competing for traditional brokerage account funds:
- American Express Service Corporation;
- AG Edwards & Sons, Inc.;
- Dain Rauscher Incorporated; and
- U S Bancorp Piper Jaffray, Inc.
At a local level our most intense competition is with other local
securities firms, such as R.J. Steichen & Company, John G. Kinnard & Co. and
Miller & Schroeder Financial, Inc. in the Minneapolis-St. Paul area. We not only
compete with the above firms for customers, but also in recruiting sales
personnel and in obtaining investment banking clients.
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We also face several competitors in the clearing business. Most of the
competition for our 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 our clearing competitors are substantially larger than us and may be
able to offer more favorable terms to their clearing customers.
REGULATION
The securities industry is subject to comprehensive regulation by federal
and state governments, the various securities exchanges and self-regulatory
bodies. The regulations cover all aspects of the securities business including
sales methods, trade practices among broker-dealers, uses and safekeeping of
customers' funds and securities, capital levels of securities firms, record
keeping and the conduct of employees. Violations of these rules and regulations
can result in censure, fines, suspensions and loss of the right to do business.
We have been in compliance with such rules and regulations in all material
respects.
UNIFORM NET CAPITAL RULE
As broker-dealers and member firms of the NASD, MJK, Stockwalk.com and
Arnold Securities are subject to the Uniform Net Capital Rule (the "Rule")
promulgated by the SEC. The Rule is designed to measure the general financial
integrity and liquidity of a broker-dealer and the minimum net capital deemed
necessary to meet the broker-dealer's continuing commitments to its customers.
The Rule provides for two methods of computing net capital, and MJK has adopted
what is generally referred to as the alternative method. Minimum net capital is
defined under this method to be equal to 2% of customer debit balances, as
defined. The NASD may also require a member organization to reduce its business
if net capital is less than 5% of such aggregate debit items and may prohibit a
member firm from expanding its business and declaring cash dividends of its net
capital is less than 5% of such aggregate debit items. In computing net capital,
various adjustments are made to exclude assets which are not readily convertible
into cash and to provide a conservative valuation of other assets such as a
company's trading securities. Failure to maintain the required net capital may
subject a firm to suspension or expulsion by the NASD, the SEC and other
regulatory bodies and may ultimately require its liquidation. All three of our
broker-dealer subsidiaries maintain compliance with net capital requirements.
EMPLOYEES
As of March 31, 2000, we had approximately 367 full-time employees. Of
these, 285 were employed by MJK, and 82 were employed by Stockwalk.com. None of
our employees is represented by a collective bargaining unit.
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PROPERTIES
Our principal executive offices are located at 5500 Wayzata Boulevard,
Minneapolis, Minnesota 55416 where we lease approximately 28,000 square feet of
office space. The leases for these premises expire in March 2004. We also have
leases for a total of approximately 32,000 square feet for our regional branch
offices, with month-to-month leases or term leases terminating as late as
February 2004. We are currently in negotiations to acquire additional space in
our headquarter facility in Minneapolis. However, our existing facilities are
adequate for the short-term future. As we outgrow our existing facilities, we
believe that additional space can be timely obtained on acceptable terms.
LEGAL PROCEEDINGS
Many aspects of our business involve substantial risks of liability,
including exposure under federal and state securities laws in connection with
the underwriting and distribution of securities. We do not presently maintain an
errors and omissions insurance policy insuring us against these risks. In recent
years, there has been an increasing incidence of litigation involving the
securities industry, including class actions which generally seek rescission and
substantial damages. Additionally, securities brokerage firms, including us,
become parties to arbitrations brought by dissatisfied customers in the general
course of business. At the present time, we are not a party to, nor is any
property subject to, any pending legal proceedings, other than routine
litigation or arbitration incidental to our business. We believe that we have
good factual and legal defenses to pending proceedings, and we do not expect
that losses related to any of these proceedings, in the aggregate, will be
material.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Eldon C. Miller... 59 Chief Executive Officer & Chairman of the Board
David B. 49 President & Director
Johnson.........
Paul R. Kuehn..... 57 President of MJK and Director
Stanley D. Rahm... 68 Treasurer of MJK and Director
Robert J. 46 Chief Operating Officer
Vosburgh........
Todd W. Miller.... 36 Chief Financial Officer
Philip T. 40 Senior Vice President, General Counsel & Secretary
Colton..........
Andrew R. 49 Chief Information & Technology Officer
Guzman..........
Randy Nitzsche.... 36 Chief Executive Officer of Stockwalk.com
Frank H. Lallos... 29 President of Stockwalk.com
Thomas Luing...... 35 Executive Vice President of Stockwalk.com
N. Lee Wesley..... 59 Director
George E. Kline... 63 Director
</TABLE>
Eldon C. Miller founded Miller Securities, Inc., our predecessor, in
December 1980. He has served as Chairman of the Board and as Chief Executive
Officer since our 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, our President, has served as Executive Vice President and
as a Director of MJK since MJK 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 MJK since
MJK 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 MJK
since inception in 1989. Prior to 1981, Mr. Rahm was a Vice President of Miller
& Schroeder Municipals, Inc., a Minneapolis-based broker-dealer, for seven
years.
Robert J. Vosburgh joined us 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
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<PAGE> 48
Engineering) and completed his master's degree and Ph.D. coursework in
Astronautical Engineering at the University of Tennessee.
Todd W. Miller, Chief Financial Officer and Senior Vice President of MJK's
clearing division, has been employed by Miller, Johnson & Kuehn, Inc. since
1982. He is responsible for founding MJK's clearing division. 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 the
Company in September 1999. Mr. Colton has served as Secretary of the Company 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 previous 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 employed by 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.
Randy Nitzsche, Chief Executive Officer of the online brokerage division
(or Stockwalk.com), has been employed by MJK 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 MJK, from two in 1994 to
approximately 50 today. Prior to his work at MJK, Mr. Nitzsche was employed by
the Chicago Stock Exchange in a variety of roles, including product and sales
management.
Frank H. Lallos, President of Stockwalk.com, Inc., joined the Company 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.
Thomas Luing, Executive Vice President of Stockwalk.com, Inc., joined the
Company in May 1999. Prior to joining us, Mr. Luing was a Senior Vice President
for Norwest
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Investment Services, where he was in charge of Norwest Brokerage Direct, a unit
he helped found. Prior to that, he was Senior Vice President in charge of
Product Development for Packaged Products, Equities, Financial Planning, and
Retirement Products. He was also previously the Chief Financial Officer for
Norwest Brokerage Services, Inc. Mr. Luing has an MBA in strategic management
from the Carlson School of Management at the University of Minnesota, and a
Bachelor of Arts degree in financial economics and psychology from Gustavus
Adolphus College.
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.
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DESCRIPTION OF CONVERTIBLE NOTES
The Convertible Notes will be issued under an Indenture between us and
Firstar Minnesota Bank, N.A. as Trustee. The following summaries of key
provisions of the Indenture are not complete. Potential buyers of the
Convertible Notes should read the Indenture because it and not this summary
description defines the rights of holders of the Convertible Notes. A copy of
the Indenture is filed as an exhibit to the registration statement of which this
prospectus forms a part.
GENERAL
The Convertible Notes are our general obligations, subordinate in right of
payment to other obligations of the Company as described under "Subordination."
The total principal amount of Convertible Notes will be limited to $30 million
($34.5 million if the underwriters' over-allotment option is exercised in full)
and will mature on July 15, 2005.
The Indenture does not contain any financial covenants or any restrictions
on our payment of dividends, incurrence of Senior Debt or issuance or repurchase
of securities. The Indenture contains no covenants or other provisions to afford
protection to holders of the Convertible Notes in the event of a highly
leveraged transaction or a change in control of our company, except to the
extent described under "Repurchase at Option of Holders upon a Change of
Control."
The Convertible Notes will bear interest at the rate shown on the front
cover of this prospectus from (1) , 2000 or (2) the most recent
interest payment date to which interest has been paid or provided for. Interest
is payable semi-annually on July 15 and January 15 of each year, commencing
January 15, 2001 until the principal amount is paid or made available for
payment. Interest will be paid to the person or entity in whose name the
Convertible Note is registered at the close of business on the January 1 and
July 1 next preceding the Interest Payment Date. Interest on the Convertible
Notes at such rate will be computed on the basis of a 360-day year, comprised of
twelve 30-day months.
You may convert the Convertible Notes into shares of common stock initially
at the conversion rate stated on the front cover of this prospectus, subject to
adjustment upon the occurrence of the events described under "Conversion
Rights," at any time prior to the close of business on July 14, 2005, unless
previously redeemed or repurchased.
We may, at our option, redeem some or all of the Convertible Notes at any
time on or after July 15, 2003, at the declining redemption prices listed under
"Optional Redemption." Upon some specific kinds of change of control events
relating to us, we are required to make an offer to purchase the Convertible
Notes from you at a purchase price equal to 101% of their aggregate principal
amount on the date of purchase, plus accrued interest, if any, as described
below under "Repurchase at Option of Holders Upon a Change of Control."
The principal of, premium, if any, and interest on the Convertible Notes
will be payable and the Convertible Notes may be surrendered for registration of
transfer, exchange and conversion at the office or agency of the Trustee. In
addition, we may at our option pay interest by check mailed to the address of
the person or entity entitled thereto as it appears in the security register.
See "Payment and Conversion." Payments, transfers, exchanges and conversions
relating to beneficial interests in Convertible Notes issued in
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<PAGE> 51
book-entry form will be subject to the procedures applicable to Global
Convertible Notes described below.
We will initially appoint the Trustee at its corporate trust office as our
paying agent, transfer agent, registrar and conversion agent for the Convertible
Notes. In such capacities, the Trustee will be responsible for, among other
things:
(1) maintaining a record of the aggregate holdings of Convertible
Notes represented by the Global Convertible Notes and accepting Convertible
Notes for exchange and registration of transfer;
(2) ensuring that payments of principal, premium (if any) and interest
received from us by the Trustee in respect of the Convertible Notes are
duly paid to The Depository Trust Company ("DTC") or its nominees;
(3) transmitting to us any notices from holders of the Convertible
Notes;
(4) accepting conversion notices and related documents and
transmitting the relevant items to us; and
(5) delivering certificates for common stock issued upon conversion of
the Convertible Notes.
FORM, DENOMINATION, TRANSFER, EXCHANGE AND BOOK-ENTRY PROCEDURES
Convertible Notes will be issued only in fully registered form, without
interest coupons, in minimum denominations of $1,000 and integral multiples in
excess thereof. Convertible Notes sold in the offering will be issued only
against payment therefor in immediately available funds.
The Convertible Notes initially will be represented by one or more
Convertible Notes in registered, global form without interest coupons
(collectively, the "Global Convertible Notes" or "Global Convertible Note"). The
Global Convertible Notes will be deposited upon issuance with the Trustee as
custodian for DTC, in New York, New York, and registered in the name of DTC or
its nominee, in each case for credit to an account of a direct or indirect
participant in DTC as described below.
Transfers of beneficial interests in the Global Convertible Notes will be
subject to the applicable rules and procedures of DTC and its direct or indirect
participants, which may change from time to time.
Except as set forth below, the Global Convertible Notes may be transferred,
in whole and not in part, only to another nominee of DTC or to a successor of
DTC or its nominee. You may not exchange beneficial interests in the Global
Convertible Notes for Convertible Notes in certificated form except in the
limited circumstances described below under "Exchanges of Book-Entry Convertible
Notes for Certificated Convertible Notes."
We will not charge a service charge for registration of transfer or
exchange of Convertible Notes, but we may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
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EXCHANGES OF BOOK-ENTRY CONVERTIBLE NOTES FOR CERTIFICATED CONVERTIBLE NOTES
You may not exchange a beneficial interest in a Global Convertible Note for
a Convertible Note in certificated form unless:
(1) DTC either notifies us that it is unwilling or unable to continue
as depositary for the Global Convertible Note or has ceased to be a
clearing agency registered under the Securities Exchange Act of 1934, and
in either case we then fail to appoint a successor depositary;
(2) we, at our option, notify the Trustee in writing that we elect to
cause the issuance of the Convertible Notes in certificated form; or
(3) there shall have occurred and be continuing an event of default or
any event which after notice or lapse of time or both would be an event of
default with respect to the Convertible Notes.
In all cases, certificated Convertible Notes delivered in exchange for any
Global Convertible Note or beneficial interests therein will be registered in
the names, and issued in any approved denominations, requested by or on behalf
of the depositary (in accordance with its customary procedures).
CERTAIN BOOK-ENTRY PROCEDURES FOR GLOBAL CONVERTIBLE NOTES
The descriptions of the operations and procedures of DTC that follow are
provided solely as a matter of convenience. These operations and procedures are
solely within DTC's control and are subject to changes by DTC from time to time.
We take no responsibility for these operations and procedures and urge investors
to contact DTC or its participants directly to discuss these matters.
DTC has advised us that it is
(1) a limited purpose trust company organized under the laws of the
State of New York;
(2) a member of the Federal Reserve System;
(3) a "clearing corporation" within the meaning of the Uniform
Commercial Code; and
(4) a "Clearing Agency" registered pursuant to the provisions of
Section 17A of the Securities Exchange Act of 1934.
DTC was created to hold securities for its participants ("participants")
and facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical transfer and delivery of
certificates. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations and may include certain other organizations.
Indirect access to the DTC system is available to other entities such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly ("indirect
participants").
DTC has advised us that its current practice, upon the issuance of a Global
Convertible Note, is to credit, on its internal system, the respective principal
amount of the individual beneficial interests represented by such Global
Convertible Note to the accounts
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with DTC of the participants through which such interests are to be held.
Ownership of beneficial interests in the Global Convertible Note will be shown
on, and the transfer of that ownership will be effected only through, records
maintained by DTC or its nominees (with respect to interests of participants)
and the records of participants and indirect participants (with respect to
interests of persons other than participants).
AS LONG AS DTC, OR ITS NOMINEE, IS THE REGISTERED HOLDER OF A GLOBAL
CONVERTIBLE NOTE, DTC OR SUCH NOMINEE, AS THE CASE MAY BE, WILL BE CONSIDERED
THE SOLE OWNER AND HOLDER OF THE CONVERTIBLE NOTES REPRESENTED BY SUCH GLOBAL
CONVERTIBLE NOTE FOR ALL PURPOSES UNDER THE INDENTURE AND THE CONVERTIBLE NOTES.
Except in the limited circumstances described above under "Exchanges of
Book-Entry Convertible Notes for Certificated Convertible Notes," owners of
beneficial interests in a Global Convertible Note will not be entitled to have
any portions of such Global Convertible Note registered in their names, will not
receive or be entitled to receive physical delivery of Convertible Notes in
definitive form and will not be considered the owners or holders of the Global
Convertible Note (or any Convertible Notes represented thereby) under the
Indenture or the Convertible Notes.
Investors may hold their interests in the Global Convertible Note directly
through DTC, if they are participants in such system, or indirectly through
organizations that are participants in such system. All interests in a Global
Convertible Note will be subject to the procedures and requirements of DTC.
The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interests in a Global Convertible Note to such persons may
be limited to that extent. Because DTC can act only on behalf of its
participants, which, in turn, act on behalf of indirect participants and certain
banks, the ability of a person having beneficial interests in a Global
Convertible Note to pledge such interest to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
interests, may be affected by the lack of a physical certificate evidencing such
interests.
Payments of the principal of, premium, if any, and interest on the
Convertible Note will be made to DTC or its nominee, as the case may be, as the
registered owner of the Global Convertible Note. We, the Trustee and our agents
will not have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in a
Global Convertible Note or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
We expect that DTC or its nominee, upon receipt of any payment of principal
or interest in respect of a Global Convertible Note representing any Convertible
Notes held by it or its nominee, will immediately credit participants' accounts
with payments in amounts proportionate to their respective beneficial interests
in the principal amount of such Global Convertible Note for such Convertible
Notes as shown on the records of DTC or its nominee. We also expect that
payments by participants to owners of beneficial interests in such Global
Convertible Note held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in "street name." Such payments will be
the responsibility of such participants.
Interests in the Global Convertible Notes will trade in DTC's Same-Day
Funds Settlement System, and secondary market trading activity in such interests
therefore will
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settle in immediately available funds, subject in all cases to the rules and
procedures of DTC and its participants. Transfers between participants in DTC
will be effected in accordance with DTC's procedures, and will be settled in
same-day funds.
DTC has advised us that it will take any action permitted to be taken by a
holder of Convertible Notes (including the presentation of Convertible Notes for
exchange as described below and the conversion of Convertible Notes) only at the
direction of one or more participants to whose account with DTC interests in the
Global Subordinated Notes are credited and only in respect of such portion of
the aggregate principal amount of the Convertible Notes as to which such
participant or participants has or have given such direction. However, if there
is an Event of Default (as defined below) under the Convertible Notes, DTC
reserves the right to exchange the Global Convertible Notes for Convertible
Notes in certificated form, and to distribute such Convertible Notes to its
participants.
We, the Trustee and our agents will not have any responsibility for the
performance by DTC, its participants or indirect participants of its respective
obligations under the rules and procedures governing its operations, including
maintaining, supervising or reviewing the records relating to, or payments made
on account of, beneficial ownership interests in Global Convertible Notes.
PAYMENT AND CONVERSION
The principal of the Convertible Notes will be payable in U.S. dollars,
against surrender thereof at the office or agency of the Trustee. Payment of
interest on a Convertible Note may be made by check mailed to the address of the
person entitled thereto as such address shall appear in the security register.
Any payment on a Convertible Note due on any day that is not a Business Day
need not be made on such day, but may be made on the next succeeding Business
Day with the same force and effect as if made on such due date, and no interest
shall accrue on such payment for the period from and after such date. "Business
Day," when used with respect to any place of payment, place of conversion or any
other place, as the case may be, means each Monday, Tuesday, Wednesday, Thursday
and Friday that is not a day on which banking institutions in such place of
payment, place of conversion or other place, as the case may be, are authorized
or obligated by law or executive order to close.
Convertible Notes may be surrendered for conversion at our office or agency
in New York, New York, at any other office or agency we maintain for such
purpose. In the case of Global Convertible Notes, DTC will effect conversion
upon notice from the holder of a beneficial interest in a Global Convertible
Note in accordance with its rules and procedures. Convertible Notes surrendered
for conversion must be accompanied by a conversion notice and any payments in
respect of interest, as applicable, as described below under "Conversion
Rights."
CONVERSION RIGHTS
The holder of any Convertible Note will have the right, at the holder's
option, to convert any portion of the principal amount of a Convertible Note
that is an integral multiple of $1,000 into shares of common stock, unless
previously redeemed or repurchased, at a conversion rate equal to the number of
shares per $1,000 principal amount of Convertible Notes shown on the front cover
of this prospectus (the "Conversion
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Rate"), subject to adjustment as described below under "Anti-Dilution
Adjustments." The right to convert a Convertible Note called for redemption or
delivered for repurchase will terminate at the close of business on the
redemption date or repurchase date for such Convertible Note, unless we default
in making the payment due upon redemption or repurchase, as the case may be.
The right of conversion attaching to any Convertible Note may be exercised
by the holder by delivering the Convertible Note at our office or agency in New
York, New York, at any other office or agency we maintain for such purpose and
at the office or agency of any additional conversion agent appointed by us,
accompanied by a duly signed and completed notice of conversion. The Trustee or
any conversion agent will provide you with a copy of the notice of conversion.
The conversion date will be the date on which the Convertible Note and the duly
signed and completed notice of conversion are so delivered. As promptly as
practicable on or after the conversion date, we will issue and deliver to the
Trustee a certificate or certificates for the number of full shares of common
stock issuable upon conversion, together with payment in lieu of any fraction of
a share or, at our option, rounded up to the next whole number of shares. The
Trustee will send such certificate to the Conversion Agent for delivery to the
holder. Such shares of common stock issuable upon conversion of the Convertible
Notes, in accordance with the provisions of the Indenture, will be fully paid
and nonassessable and will also rank pari passu with the other shares of common
stock outstanding from time to time.
Holders that surrender Convertible Notes for conversion on a date that is
not an interest payment date are not entitled to receive any interest for the
period from the next preceding interest payment date to the date of conversion,
except as described below. However, holders of Convertible Notes on a regular
record date, including Convertible Notes surrendered for conversion after the
regular record date, will receive the interest payable on such Convertible Notes
on the next succeeding interest payment date. Accordingly, any Convertible Note
surrendered for conversion during the period from the close of business on a
regular record date to the opening of business on the next succeeding interest
payment date must be accompanied by payment of an amount equal to the interest
payable on such interest payment date on the principal amount of Convertible
Notes being surrendered for conversion; provided, however, that no such payment
will be required upon the conversion of any Convertible Note (or portion
thereof) that has been called for redemption or that is eligible to be delivered
for repurchase if, as a result, the right to convert such Convertible Note would
terminate during the period between such regular record date and the close of
business on the next succeeding interest payment date.
No other payment or adjustment for interest, or for any dividends in
respect of common stock, will be made upon conversion. Holders of common stock
issued upon conversion will not be entitled to receive any dividends payable to
holders of common stock as of any record date before the close of business on
the conversion date. No fractional shares will be issued upon conversion. In
lieu of fractional shares, we will calculate an appropriate amount to be paid in
cash on the basis set forth in the Indenture or, at our option, round up to the
next whole number of shares.
A holder delivering a Convertible Note for conversion will not be required
to pay any taxes or duties in respect of the issue or delivery of common stock
on conversion. However, we will not be required to pay any tax or duty that may
be payable in respect of any transfer involved in the issue or delivery of the
common stock in a name other than that of the holder of the Convertible Note.
Certificates representing shares of common stock will not be issued or delivered
unless the person requesting such issue has paid to us
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the amount of any such tax or duty or has established to our satisfaction that
such tax or duty has been paid.
ANTI-DILUTION ADJUSTMENTS
The Conversion Rate is subject to adjustment in certain events, including:
(1) dividends (and other distributions) payable in common stock on
shares of our capital stock;
(2) the issuance to all holders of our common stock of certain rights,
options or warrants entitling them to subscribe for or purchase common
stock at less than the then current market price (determined as provided in
the Indenture) of common stock as of the record date for holders entitled
to receive such rights, options or warrants;
(3) subdivisions, combinations and reclassifications of our common
stock;
(4) distributions to all holders of our common stock of evidences of
our indebtedness, shares of capital stock or other property (including
securities, but excluding those dividends, rights, options, warrants and
distributions referred to in clauses (1) and (2) above, dividends and
distributions paid exclusively in cash and distributions upon mergers or
consolidations to which the next succeeding paragraph applies);
(5) distributions consisting exclusively of cash (excluding any cash
portion of distributions referred to in clause (4) above, or cash
distributed upon a merger or consolidation to which the next succeeding
paragraph applies) to all holders of common stock in an aggregate amount
that, combined together with (a) other such all-cash distributions made
within the preceding 12 months in respect of which no adjustment has been
made and (b) any cash and the fair market value of other consideration
payable in respect of any tender offer by us or any of our subsidiaries for
common stock, to the extent that the cash and value of any other
consideration included in such payment per share of common stock exceeds
the current market price per share of common stock on the trading day next
succeeding the date of payment (the "Current Market Price"), concluded
within the preceding 12 months in respect of which no adjustment has been
made, exceeds 10% of our market capitalization (being the product of the
then current market price of the common stock and the number of shares of
common stock then outstanding) on the record date for such distribution;
and
(6) the successful completion of a tender offer made by us or any of
our subsidiaries for common stock, to the extent that the cash and value of
any other consideration included in such payment per share of common stock
exceeds the Current Market Price at such time, the aggregate amount of
which, together with (a) any cash and other consideration in excess of the
then current market price paid in a tender offer by us or any of our
subsidiaries for common stock expiring within the 12 months preceding the
expiration of such tender offer in respect of which no adjustment has been
made and (b) the aggregate amount of any such all-cash distributions
referred to in (1) above to all holders of common stock within the 12
months preceding the expiration of such tender offer in respect of which no
adjustments have been made, exceeds 10% of our market capitalization on the
expiration of such tender offer.
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We reserve the right to make such increases in the Conversion Rate in
addition to those required in the foregoing provisions as we consider to be
advisable in order that any event treated for income tax purposes as a dividend
or distribution of stock or issuance of rights or warrants to purchase or
subscribe for stock will not be taxable to the recipients. No adjustment of the
Conversion Rate will be required to be made until the cumulative adjustments
amount to 1.0% or more of the Conversion Rate. We shall compute any adjustments
to the conversion price and will give notice to the holders of any such
adjustments.
In case we consolidate or merge with or into another entity or another
entity merges into us (other than a merger which does not result in any
reclassification, conversion, exchange or cancellation of the common stock), or
in the case of any conveyance, sale, transfer or lease of all or substantially
all of our properties and assets, each Convertible Note then outstanding will,
without the consent of the holder of any Convertible Note, become convertible
only into the kind and amount of securities, cash and other property receivable
upon such consolidation, merger, sale, conveyance, lease or other transfer by a
holder of the number of shares of common stock into which such Convertible Note
was convertible immediately prior thereto (assuming such holder of Common Stock
failed to exercise any rights of election and that such Convertible Note was
then convertible).
We from time to time may increase the Conversion Rate by any amount for any
period of at least 20 days, in which case we shall give at least 15 days' notice
of such increase, if our board of directors has made a determination that such
increase would be in our best interests, which determination shall be
conclusive. No such increase will be taken into account for purposes of
determining whether the closing price of the common stock exceeds the Conversion
Price (as defined below) by 105% in connection with an event which otherwise
would be a Change of Control.
If at any time we make a distribution of property to our shareholders that
would be taxable to such shareholders as a dividend for federal income tax
purposes (e.g., distributions of evidences of our indebtedness or assets, but
generally not stock dividends on common stock or rights to subscribe for common
stock) and, pursuant to the anti-dilution provisions of the Indenture, the
number of shares into which Convertible Notes are convertible is increased, such
increase may be deemed for federal income tax purposes to be the payment of a
taxable dividend to holders of Convertible Notes. See "Certain Federal Tax
Considerations."
SUBORDINATION
The payment of the principal of, premium, if any, and interest on the
Convertible Notes (including amounts payable on any redemption or repurchase)
will be subordinated in right of payment to the extent set forth in the
Indenture to the prior full and final payment of all of our Senior Debt. "Senior
Debt" means the principal of (and premium, if any) and interest (including all
interest accruing subsequent to the commencement of any bankruptcy or similar
proceeding, whether or not a claim for post-petition interest is allowable as a
claim in any such proceeding) on, and all fees and other amounts (including
collection expenses, attorney's fees and late charges) owing with respect to,
the following, whether direct or indirect, absolute or contingent, secured or
unsecured, due or
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to become due, outstanding at the date of execution of the Indenture or
thereafter incurred, created or assumed:
(1) our indebtedness for money borrowed or evidenced by bonds, notes
or similar instruments;
(2) our reimbursement obligations with respect to letters of credit,
bankers' acceptances and similar facilities issued for our account;
(3) every obligation we issue or assume as the deferred purchase price
of property or services purchased by us, excluding any trade payables and
other accrued current liabilities incurred in the ordinary course of
business;
(4) our obligations as lessee under leases required to be capitalized
on the balance sheet of the lessee under generally accepted accounting
principles;
(5) our obligations under interest rate and currency swaps, caps,
floors, collars or similar arrangements intended to protect us against
fluctuations in interest or currency exchange rates;
(6) others' indebtedness of the kinds described in the preceding
clauses (1) through (5) that we have assumed, guaranteed or otherwise
assured the payment thereof, directly or indirectly; and
(7) deferrals, renewals, extensions and refundings of, or amendments,
modifications or supplements to, any indebtedness or obligation described
in the preceding clauses (1) through (6) whether or not there is any notice
to or consent of the holders of Convertible Notes.
Despite the above, the following will not constitute Senior Debt:
(1) any particular indebtedness or obligation that we owe to any of
our direct and indirect subsidiaries;
(2) any indebtedness incurred for the purchase of goods or materials
or for services obtained in the ordinary course of business (other than
with proceeds of money borrowed); and
(3) any particular indebtedness, deferral, renewal, extension or
refunding if it is expressly stated in the governing terms or in the
assumption thereof that the indebtedness involved is not senior in right of
payment to the Convertible Notes or that such indebtedness is equal with or
junior to the Convertible Notes.
No payment on account of principal of or premium, if any, or interest on
the Convertible Notes may be made if:
(1) there shall have occurred and be continuing (a) a default in the
payment of any Senior Debt or (b) any other default with respect to any
Senior Debt permitting the holders thereof to accelerate the maturity
thereof, provided that, in the case of this clause (b), such default shall
not have been cured or waived or ceased to exist after written notice of
such default shall have been given to us and the Trustee by any holder of
Senior Debt, or
(2) in the event any judicial proceeding shall be pending with respect
to any such default in payment or event of default.
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Upon any acceleration of the principal due on the Convertible Notes or
payment or distribution of our assets to creditors upon any dissolution, winding
up, liquidation or reorganization, whether voluntary or involuntary, or in
bankruptcy, insolvency, receivership or other proceedings, all amounts due on
all Senior Debt must be paid in full before the holders of the Convertible Notes
are entitled to receive any payment. By reason of such subordination, in the
event of our insolvency, our creditors who are holders of Senior Debt may
recover more, ratably, than the holders of the Convertible Notes, and such
subordination may result in a reduction or elimination of payments to the
holders of the Convertible Notes. As of March 31, 2000, we had approximately $40
million of debt outstanding on a consolidated basis which would be entitled to
payment prior to the Convertible Notes.
In addition, the Convertible Notes will be effectively subordinated to all
indebtedness and other liabilities (including trade payables and lease
obligations) of our subsidiaries.
The Indenture does not limit our ability or the ability of any of our
subsidiaries to incur indebtedness, including Senior Debt.
OPTIONAL REDEMPTION
On or after July 15, 2003, we may redeem the Convertible Notes, in whole or
in part at our option, upon not less than 30 nor more than 60 days' prior notice
as provided under "Notices" below, at the redemption prices set forth below.
Such redemption prices (expressed as a percentage of principal amount) are as
follows for the 12-month period beginning on July 15 of the following years:
<TABLE>
<CAPTION>
YEAR PRICE
---- -----
<S> <C>
2003...................................................... %
2004...................................................... %
2005...................................................... 100%
</TABLE>
in each case together with accrued interest to the redemption date.
REPURCHASE AT OPTION OF HOLDERS UPON A CHANGE OF CONTROL
If a Change of Control (as defined below) occurs, each holder of
Convertible Notes shall have the right, at the holder's option, to require us to
repurchase all of such holder's Convertible Notes, or any portion of the
principal amount thereof that is equal to $1,000 or an integral multiple of
$1,000 in excess thereof, on the date that is 45 days after the date of the
Company Notice (as defined below), at a price in cash equal to 101% of the
principal amount of the Convertible Notes to be repurchased, together with
interest accrued to the repurchase date (the "Repurchase Price").
We may, at our option, in lieu of paying the Repurchase Price in cash, pay
the Repurchase Price by issuing shares of common stock. The number of shares of
common stock tendered in payment shall be determined by dividing the Repurchase
Price by the value of the common stock, which for this purpose shall be equal to
95% of the average of the closing sale prices of the common stock for the five
consecutive trading days ending on and including the third trading day preceding
the repurchase date. Such payment may not be made in common stock unless we
satisfy certain conditions with respect thereto prior to the repurchase date as
provided in the Indenture.
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On or before the 30th day after the occurrence of a Change of Control, we
are obligated to give to all holders of the Convertible Notes notice, as
provided in the Indenture (the "Company Notice"), of the occurrence of such
Change of Control and of the repurchase right arising as a result thereof. To
exercise the repurchase right, a holder of Convertible Notes must deliver on or
before the fifth day prior to the repurchase date irrevocable written notice to
the Trustee of the holder's exercise of such right, together with the
Convertible Notes with respect to which the right is being exercised. After the
Convertible Notes are issued, the following events will be deemed to be Changes
in Control:
(1) any entity's acquisition of beneficial ownership, directly or
indirectly, through a purchase, merger or other acquisition transaction or
series of transactions, of shares of our capital stock entitling such
entity to exercise 50% or more of the total voting power of all shares of
our capital stock entitled to vote generally in elections of directors,
other than any such acquisition by us or any of our employee benefit plans;
or
(2) our consolidation or merger with or into any other entity, any
merger of another entity into us, or any conveyance, transfer, sale, lease
or other disposition of all or substantially all of our properties and
assets to another entity (other than (a) any such transaction that does not
result in any reclassification, conversion, exchange or cancellation of
outstanding shares of our common stock and pursuant to which holders of our
common stock immediately prior to the transaction have the entitlement to
exercise, directly or indirectly, 50% or more of the total voting power of
all shares of capital stock entitled to vote generally in the election of
directors of the continuing or surviving entity immediately after such
transaction and (b) any merger which is effected solely to change our
jurisdiction of incorporation and results in a reclassification, conversion
or exchange of outstanding shares of common stock solely into shares of
common stock of the surviving entity).
A Change of Control will not be deemed to have occurred if the closing sale
price per share of our common stock for any five trading days within the period
of 10 consecutive trading days ending immediately after the later of the date of
the Change of Control or the date of public announcement of the Change of
Control (in the case of a Change of Control under clause (1) above) or ending
immediately before the Change of Control (in the case of a Change of Control
under clause (2) above) equals or exceeds 105% of the Conversion Price of the
Convertible Notes in effect on each such trading day.
We may, to the extent permitted by applicable law, at any time purchase
Convertible Notes in the open market or by tender at any price or by private
agreement. Subject to certain limitations imposed by the underwriting agreement
with the underwriters, any Convertible Note so purchased by us may be reissued
or resold or may, at our option, be surrendered to the Trustee for cancellation.
Any Convertible Notes surrendered as aforesaid may not be reissued or resold and
will be cancelled promptly.
The foregoing provisions would not necessarily afford holders of the
Convertible Notes protection in the event of highly leveraged or other
transactions involving us that may adversely affect holders.
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CONSOLIDATION, MERGER AND SALE OF ASSETS
We may not consolidate with or merge into any other entity or, directly or
indirectly, convey, transfer, sell or lease all or substantially all of our
properties and assets to any entity, and we may not permit any entity to
consolidate with or merge into us or convey, transfer, sell or lease all or
substantially all of its properties and assets to us, unless:
(1) the entity formed by such consolidation or into or with which we
are merged or the entity to which our properties and assets are so
conveyed, transferred, sold or leased, expressly assumes the due and
punctual payment of the principal of and, premium, if any, and interest on
the Convertible Notes and the performance of our other covenants under the
Indenture and has provided for conversion rights as described above under
"Conversion Rights"; provided that a transaction that results in us
becoming a non-United States entity will be deemed to be a "Change of
Control" for purposes of the holders' option to require us to repurchase
the Convertible Notes described above;
(2) immediately after giving effect to such transaction, no Event of
Default, and no event which, after notice or lapse of time or both, would
become an Event of Default, has occurred and is continuing; and
(3) we have provided to the Trustee an officer's certificate and
opinion of counsel as provided in the Indenture.
EVENTS OF DEFAULT
The following will be Events of Default under the Indenture:
(1) our failure to pay principal of or premium, if any, on any
Convertible Note when due, including our failure to purchase any
Convertible Note when required upon a Change of Control, whether or not the
subordination provisions of the Indenture prohibit such payment;
(2) our failure to pay any interest on any Convertible Note when due,
continuing for 30 days, whether or not the subordination provisions of the
Indenture prohibit such payment;
(3) our failure to provide notice of a Change of Control, whether or
not the subordination provisions of the Indenture prohibit such payment;
(4) our failure to perform any of our other material covenants in the
Indenture, continuing for 60 days after the Trustee or the holders of at
least 25% in aggregate principal amount of outstanding Convertible Notes
give us written notice; and
(5) certain events of our bankruptcy, insolvency or reorganization.
Subject to the provisions of the Indenture relating to the duties of the
Trustee in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the holders, unless such holders
have offered the Trustee reasonable indemnity. Subject to such provisions for
the indemnification of the Trustee, the holders of a majority in aggregate
principal amount of the outstanding Convertible Notes will have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee.
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If an Event of Default (other than an Event of Default specified in clause
(5) above) occurs and is continuing, either the Trustee or the holders of not
less than 25% in aggregate principal amount of the outstanding Convertible Notes
may accelerate the maturity of all Convertible Notes. If an Event of Default
specified in clause (5) occurs and is continuing, the principal of and any
accrued interest on all of the Convertible Notes then outstanding will become
due and payable immediately without any act on the part of the Trustee or any
holder.
At any time after a declaration of acceleration has been made but before a
judgment or decree based on acceleration has been issued, the holders of a
majority in aggregate principal amount of outstanding Convertible Notes may,
under certain circumstances as set forth in the Indenture, rescind and annul
such acceleration if all Events of Default, other than the nonpayment of
accelerated principal and interest, have been cured or waived as provided in the
Indenture. For information as to waiver of defaults, see "Modification,
Amendments and Waiver."
No holder of any Convertible Note will have any right to institute any
proceeding with respect to the Indenture or for any remedy thereunder, unless
such holder shall have previously given to the Trustee written notice of a
continuing Event of Default and unless also the holders of at least 25% in
aggregate principal amount of the outstanding Convertible Notes shall have made
written request, and offered reasonable indemnity, to the Trustee to institute
such proceeding as trustee, and the Trustee shall not have received from the
holders of a majority in aggregate principal amount of the outstanding
Convertible Notes a direction inconsistent with such request and the Trustee has
failed to institute such proceeding within 90 days. However, such limitations do
not apply to a suit instituted by a holder of a Convertible Note for the
enforcement of payment of the principal of or premium, if any, or interest on
such Convertible Note on or after the respective due dates expressed in such
Convertible Note or of the right to convert such Convertible Note in accordance
with the Indenture.
We will be required to furnish to the Trustee annually a statement as to
our performance of some of our obligations under the Indenture and as to any
default in such performance.
MODIFICATION, AMENDMENTS AND WAIVER
The Indenture will contain provisions permitting us and the Trustee to
enter into a supplemental indenture for certain limited purposes without the
consent of the holders. Generally, modifications and amendments of the Indenture
can only be made with the written consent of the holders of not less than a
majority in principal amount of the Convertible Notes at the time outstanding.
However, no such modification or amendment may, without the consent of the
holder of each outstanding Convertible Note affected thereby,
(1) change the stated maturity of the principal of, or any installment
of interest on, any Convertible Note;
(2) reduce the principal amount of any Convertible Note, or the
premium, if any on any Convertible Note, or reduce the rate of interest on,
any Convertible Note;
(3) change the place or currency of payment of principal of, premium,
if any, or interest on any Convertible Note;
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(4) impair the right to institute suit for the enforcement of any
payment on or with respect to, or the right to convert, any Convertible
Note;
(5) except as otherwise permitted or contemplated by provisions
concerning consolidation, merger, conveyance, transfer, sale or lease of
all or substantially all of our property and assets, adversely affect the
right to convert Convertible Notes;
(6) modify the subordination provisions in a manner adverse to the
holders of the Convertible Notes;
(7) reduce the above-stated percentage of aggregate principal amount
of outstanding Convertible Notes necessary for waiver of compliance with
certain provisions of the Indenture or for waiver of certain defaults;
(8) waive a default or Event of Default in the payment of principal
of, or premium, if any, on the Convertible Notes, other than a rescission
of acceleration by holders of at least a majority in aggregate principal
amount of the Convertible Notes and a waiver of the payment default
resulting from the acceleration; or
(9) amend any provision of the Indenture relating to waivers of past
defaults or the rights of holders to receive payments of principal of or
interest on the Convertible Notes.
The holders of a majority in aggregate principal amount of outstanding
Convertible Notes may waive our compliance with certain restrictive provisions
of the Indenture. The holders of a majority in aggregate principal amount of the
outstanding Convertible Notes may waive any past default by us under the
Indenture, except a default in the payment of principal, premium, if any, or
interest or a default in any covenant or provision which under the Indenture
cannot be modified or amended without the consent of each holder of outstanding
Convertible Notes.
NOTICES
Notice to holders of the Convertible Notes will be given by mail to the
addresses of such holders as they appear in the security register. Such notices
will be deemed to have been given on the date of mailing of the notice.
Notice of an optional redemption of Convertible Notes will be given at
least once not less than 30 nor more than 60 days prior to the redemption date
(which notice shall be irrevocable) and will specify the redemption date and the
redemption price.
PAYMENT OF STAMP AND OTHER TAXES
We will pay all stamp and other duties, if any, which may be imposed by the
United States or any political subdivision thereof or taxing authority thereof
or therein with respect to the issuance of the Convertible Notes. We will not be
required to make any payment with respect to any other tax, assessment or
governmental charge imposed by any government or any political subdivision
thereof or taxing authority therein.
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GOVERNING LAW
The Indenture and the Convertible Notes will be governed by, and construed
in accordance with, the laws of the State of Minnesota without regard to
conflict of laws provisions.
THE TRUSTEE
The Trustee for the holders of Convertible Notes issued under the Indenture
will be Firstar Bank Minnesota, N.A.
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CERTAIN FEDERAL TAX CONSIDERATIONS
The following is a summary of certain material United States federal income
tax consequences, as of the date hereof, relating to the purchase, ownership and
disposition of the Convertible Notes and of the common stock into which the
Convertible Notes may be converted, but does not purport to be a complete
analysis of all the potential tax considerations relating thereto. This summary
is based on current provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), applicable Treasury Regulations, judicial authority, and current
administrative rulings and pronouncements of the Internal Revenue Service (the
"Service"), all of which are subject to change, possibly with retroactive
effect. We have not sought any ruling from the Service with respect to the
statements made and the conclusions reached in the following summary, and there
can be no assurance that the Service will agree with such statements and
conclusions.
This summary deals only with holders that will hold the Convertible Notes
and the common stock into which the Convertible Notes may be converted as
"capital assets" (within the meaning of Section 1221 of the Code), and does not
address all tax aspects that may be relevant to particular holders of the
Convertible Notes and the common stock into which the Convertible Notes may be
converted in light of their personal investment or tax circumstances, or to
certain types of investors (including, individual retirement accounts and other
tax-deferred accounts, insurance companies, financial institutions,
broker-dealers, tax-exempt organizations, holders holding the Convertible Notes
as part of a hedge, straddle or conversation transaction, holders whose
functional currency is not the United States dollar, or holders who are not
United States Holders) subject to special treatment under the United States
federal income tax laws. This summary discusses the tax considerations
applicable to an initial purchaser of the Convertible Notes who purchases the
Convertible Notes at their issue price in this offering and does not discuss the
tax considerations applicable to subsequent purchasers of the Convertible Notes.
Moreover, the effect of any applicable state, local or foreign tax law is not
discussed.
As used herein, the term "United States Holder" means a beneficial holder
of Convertible Notes or common stock received on conversion of the Convertible
Notes that is for United States federal income tax purposes a citizen or
resident of the United States, a corporation, limited liability company or
partnership organized under the laws of the United States or any political
subdivisions thereof, an estate the income of which is includable in gross
income for United States federal income tax purposes regardless of its source,
or a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United States
persons have the authority to control all of the substantial decisions of the
trust.
THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION ONLY. THE TAX TREATMENT
MAY VARY DEPENDING UPON AN INVESTOR'S PARTICULAR SITUATION. INVESTORS
CONSIDERING THE PURCHASE OF CONVERTIBLE NOTES SHOULD CONSULT THEIR OWN TAX
ADVISORS WITH RESPECT TO THE APPLICATION OF THE UNITED STATES FEDERAL INCOME TAX
LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES ARISING
UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION OR UNDER ANY
APPLICABLE TAX TREATY.
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PAYMENT OF INTEREST
Interest on a Convertible Note generally will be includable in the income
of a United States Holder as ordinary income at the time such interest is
received or accrued, in accordance with such holder's method of accounting for
United States federal income tax purposes.
MANDATORY AND OPTIONAL REDEMPTION
In the event of a change of control, we will be required to offer to redeem
all of the Convertible Notes at a redemption price equal to 101% of their
aggregate principal amount on the date of purchase. Under Treasury Regulations
issued under provisions of the Code relating to original issue discount (the
"OID Regulations"), computation of yield and maturity of the Convertible Notes
is not affected by such redemption rights and obligations if, based on all the
facts and circumstances as of the issue date, payments on the Convertible Notes
are significantly more likely than not to occur in accordance with the stated
payment schedule of the Convertible Notes (which does not reflect a change in
control). We believe, based on all the facts and circumstances as of the issue
date, it is significantly more likely than not that the Convertible Notes will
be paid according to their stated schedule. Therefore, we will not take the
redemption rights and obligations into account in determining the yield and
maturity of the Convertible Notes.
We may redeem the Convertible Notes, in whole or in part, at any time after
July 15, 2003, at prices specified elsewhere herein, plus accrued and unpaid
interest to the date of redemption. The OID Regulations contain rules for
determining yield and maturity of any instrument that may be redeemed prior to
its stated maturity date at the option of the issuer. Under the OID Regulations,
solely for purposes of the accrual of OID, it is assumed that the issuer will
exercise any option to redeem a debt instrument if such exercise will lower the
yield-to-maturity of the debt instrument. We believe that we will not be
presumed to redeem the Convertible Notes prior to their stated maturity under
the foregoing rules because the exercise of such option would not lower the
yield-to-maturity of the Convertible Notes.
SALE, EXCHANGE OR REDEMPTION OF THE CONVERTIBLE NOTES
Upon the sale, exchange or redemption of a Convertible Note (other than the
conversion of a Convertible Note into common stock), a United States Holder
generally will recognize capital gain or loss equal to the difference between
(i) the amount of cash and the fair market value of any other property received
on the sale, exchange or redemption (except to the extent such amount is
attributable to accrued interest income not previously included in income, which
is taxable as ordinary income) and (ii) such holder's adjusted tax basis in the
Convertible Note. A United States Holder's adjusted tax basis in a Convertible
Note generally will equal the cost of the Convertible Note to such holder.
Generally, such gain or loss will be capital gain or loss and will be long-term
capital gain or loss if the United States Holder's holding period in the
Convertible Note is more than one year at the time of sale, exchange or
redemption. Long-term capital gain of a non-corporate United States Holder is
generally subject to a maximum tax rate of 20%. The characterization of income
as capital gain or loss is also relevant for purposes of, among other things,
limitations with respect to the deductibility of capital losses.
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CONSTRUCTIVE DISTRIBUTIONS
The conversion price of the Convertible Notes may change under certain
circumstances. Section 305 of the Code and applicable Treasury Regulations
provide that under certain circumstances, adjustments in the conversion price of
convertible securities (including the failure to adjust the conversion rate) may
be treated as a constructive distribution of stock taxable as a dividend (to the
extent of our current or accumulated earnings and profits) if, as a result of
such adjustment, the proportionate interest of the holder of such convertible
security in the assets or earnings and profits of the issuer is increased.
Adjustments in the conversion price (or the failure to make such adjustments) of
the Convertible Notes may result in constructive distributions to United States
Holders if, and to the extent that, the adjustment in the conversion price
increases any such holder's proportionate interest in our assets or earnings and
profits. Any such constructive distribution will be taxed as ordinary income
(subject to a possible dividends-received deduction for corporate holders) to
the extent of our current or accumulated earnings and profits.
CONVERSION OF THE CONVERTIBLE NOTES
A United States Holder generally will not recognize any income, gain or
loss upon conversion of a Convertible Note into common stock except to the
extent of cash, if any, received in lieu of a fractional share of common stock
and for shares of common stock that are attributable to accrued interest not
previously included in income. A holder's tax basis in the common stock received
on conversion of a Convertible Note will be the same as such holder's adjusted
tax basis in the Convertible Note at the time of conversion (reduced by any
basis allocable to a fractional share interest for which cash is received), and
the holding period for the common stock received on conversion will generally
include the holding period of the Convertible Note converted. However, a
holder's tax basis in shares of common stock considered attributable to any
accrued interest generally will equal the amount of such accrued interest
included in income, and the holding period for such shares will begin on the day
following the date of conversion.
Cash received in lieu of a fractional share of common stock upon conversion
will be treated as a payment in exchange for the fractional share. Accordingly,
cash received in lieu of a fractional share of common stock generally will
result in capital gain or loss (measured by the difference between the cash
received for the fractional share and the holder's adjusted tax basis in the
fractional share).
DISTRIBUTIONS ON COMMON STOCK
The gross amount of a distribution with respect to the common stock
received upon a conversion of Convertible Notes will be treated as a dividend
taxable as ordinary income on the date of receipt, to the extent of our current
or accumulated earnings and profits as determined for United States federal
income tax purposes. Distributions in excess of such current or accumulated
earnings and profits will first constitute a non-taxable return of capital to
the extent of a holder's adjusted tax basis in the common stock and then will be
treated as a capital gain realized on the disposition of the common stock. The
portion of any distribution treated as a non-taxable return of capital will
reduce such United States Holder's tax basis in such common stock.
Subject to numerous limitations, to the extent distributions we make are
treated as dividends, a United States Holder that is taxed as a domestic
corporation and that meets
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the applicable holding period and taxable income requirements of the Code may be
entitled to a deduction under Section 243 of the Code in an amount equal to 70%
of such dividend (the "Dividends-Received-Deduction"). With respect to common
stock considered to be "portfolio stock," as defined in Section 246A of the
Code, the Dividends-Received-Deduction will be reduced to the extent that the
common stock constitutes "debt financed portfolio stock." In addition, under
certain circumstances, the receipt of a dividend on the common stock determined
to be an "extraordinary dividend" may cause the holder's tax basis in the common
stock to be reduced by the "untaxed portion" of the dividend and could result in
gain recognition pursuant to Section 1059 of the Code.
SALE OF COMMON STOCK
Upon the sale or exchange of common stock, a United States Holder generally
will recognize capital gain or loss equal to the difference between (i) the
amount of cash and the fair market value of any other property received upon the
sale or exchange and (ii) such holder's adjusted tax basis in the common stock.
Such capital gain or loss will be subject to the rules relating to tax rates and
holding periods discussed above under "-- Sale, Exchange or Redemption of the
Convertible Notes." A United States Holder's basis and holding period in common
stock received upon conversion of a Convertible Note are determined as discussed
above under "-- Conversion of the Convertible Notes."
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
In general, information reporting requirements will apply to payments to
certain non-corporate United States Holders of (i) principal and interest on a
Convertible Note, (ii) dividends on Common Stock, (iii) proceeds of the sale of
a Convertible Note and (iv) proceeds of the sale of Common Stock. In addition, a
31% backup withholding tax may apply to such payments if the United States
Holder (i) fails to furnish or certify his correct taxpayer identification
number to the payor in the manner required, or (ii) does not otherwise establish
his entitlement to an exemption. Any amounts withheld under the backup
withholding rules from a payment to a United States Holder will be allowed as a
credit against such holder's United States federal income tax and may entitle
the United States Holder to a refund, provided that the required information is
furnished to the Service.
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DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
We are 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 March 31, 2000, 21,575,273
shares of our common stock were outstanding, and there were no other classes of
shares outstanding.
Holders of our common stock are entitled to one vote for each share on all
matters submitted to a vote of our shareholders, including the election of
directors. Our 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 ratably dividends, if any, declared from time to time by our Board of
Directors, and will be entitled to receive ratably all of our assets available
for distribution to them upon liquidation. Holders of common stock have no
preemptive, subscription or redemption rights. All the currently outstanding
shares of our common stock are fully paid and nonassessable.
STOCK OPTIONS
We have authorized up to 1,500,000 shares of common stock to be reserved
for granting either nonqualified or incentive stock options to officers and key
employees under our 1995 Long-Term Incentive and Stock Option Plan. As of March
31, 2000, options to purchase a total of 1,062,463 shares of common stock under
this plan were granted and outstanding, of which 222,876 are currently
exercisable.
Under our 1996 Non-Employee Director Stock Option Plan, we have authorized
up to 25,000 shares of common stock to be reserved for granting options. As of
March 31, 2000, options to purchase a total of 5,625 shares of common stock
under this plan were granted and outstanding.
WARRANTS
In connection with private placements during the year ended March 2000, we
issued warrants to purchase 189,980 shares of our common stock. The warrants are
immediately exercisable at an initial price of $10.00 per share. An additional
124,278 warrants to purchase our 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 us, unless the shares may otherwise be sold
under Rule 144, or if the underwriter of the offering proposed by us is of the
opinion that registration of such shares would have a significant adverse effect
on the offering proposed by us. The underwriters have made such a determination
in connection with the offering of the Convertible Notes if such rights are
applicable to this offering. However, it is possible that these warrant shares
may be sold in a future offering or under Rule 144.
68
<PAGE> 70
MINNESOTA ANTI-TAKEOVER LAW
We are 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 our common stock is Norwest Shareowner Services,
P.O. Box 64854, St. Paul, Minnesota 55164-0854.
69
<PAGE> 71
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, we have
agreed to sell to each of the underwriters named below, and each of such
underwriters, for whom Southwest Securities, Inc., and Miller, Johnson & Kuehn,
Incorporated are acting as representatives, has severally agreed to purchase
from us the respective aggregate principal amount of Convertible Notes set forth
opposite its name below:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITER OF NOTES
----------- -------------------
<S> <C>
Southwest Securities, Inc......................
Miller, Johnson & Kuehn, Incorporated..........
-----------
Total................................... $30,000,000
===========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
underwriters are committed to take and pay for all of the Convertible Notes
offered hereby, if any are taken.
The underwriters propose to offer the Convertible Notes in part directly to
the public at the initial public offering price set forth on the cover page of
this prospectus and in part to certain securities dealers at such price less a
concession of % of the principal amount of the Convertible Notes. The
underwriters may allow, and such dealers may reallow, a concession not in excess
of % of the principal amount of the Convertible Notes to certain brokers
and dealers. After the Convertible Notes are released for sale to the public,
the offering price and other selling terms may from time to time be varied by
the Representatives.
We have granted the underwriters an option exercisable for 45 days after
the date of this prospectus to purchase up to an aggregate of $4,500,000
principal amount of additional Convertible Notes to cover over-allotments, if
any. If the underwriters exercise their over-allotment option, the underwriters
have severally agreed, subject to certain conditions, to purchase approximately
the same percentage thereof that the principal amount of Convertible Notes to be
purchased by each of them, as shown in the foregoing table, bears to the
$30,000,000 principal amount of the Convertible Notes offered.
Southwest Securities, Inc. will receive a financial advisory fee equal to
1% of the aggregate proceeds from this offering.
One of the underwriters, Miller, Johnson & Kuehn, Incorporated, is our
indirect wholly owned subsidiary. Rule 2720 of the Conduct Rules of the National
Association of Securities Dealers, Inc. imposes certain requirements when an
NASD member, such as Miller, Johnson & Kuehn, Incorporated, distributes the
securities of an "affiliate," such as us. The rule requires that the minimum
yield at which the Convertible Notes may be offered can be no lower than that
recommended by a qualified independent underwriter. Southwest Securities, Inc.
has advised us that this offering will comply with the applicable requirements
of Rule 2720.
We, our officers and directors and certain shareholders, have agreed,
during the period beginning from the date of this prospectus and continuing to
and including the date 120 days after the date of this prospectus, not to (1)
offer, pledge, sell, contract to sell or
70
<PAGE> 72
otherwise dispose of, directly or indirectly, any shares of our common stock,
any of our securities which are substantially similar to the Convertible Notes
or which are convertible or exchangeable for securities which are substantially
similar to the Convertible Notes (other than pursuant to employee stock option
plans existing, or on the conversion or exchange of convertible or exchangeable
securities outstanding, on the date of this prospectus) or (2) enter into any
swap or other arrangement that transfers all or a portion of the economic
consequences associated with the ownership of any shares of our common stock,
without the prior written consent of Southwest Securities, Inc., except for the
Convertible Notes offered in connection with the offering.
In connection with this offering, the underwriters may purchase and sell
Convertible Notes and our common stock in the open market. These transactions
may include over-allotment and stabilizing transactions, "passive" market making
and purchases to cover syndicate short positions created in connection with this
offering. Stabilizing transactions consist of certain bids or purchases for the
purpose of preventing or retarding a decline in the market price of our common
stock or the Convertible Notes; and syndicate short positions involve the sale
by the underwriters of a greater principal amount of Convertible Notes than they
are required to purchase from us in this offering. The underwriters may also
impose a penalty bid, whereby selling concessions allowed to syndicate members
or other broker-dealers in respect of the Convertible Notes sold in this
offering for their account may be reclaimed by the syndicate if such Convertible
Notes are repurchased by the syndicate in stabilizing or covering transactions.
These activities may stabilize, maintain or otherwise affect the market price of
our common stock or the Convertible Notes, which may be higher than the price
that might otherwise prevail in the open market; and these activities, if
commenced, may be discontinued at any time. These transactions may be effected
on the Nasdaq NMS, in the over-the-counter market or otherwise. The underwriters
are not required to engage in these activities and may end any of these
activities at any time.
As permitted by Rule 103 of Regulation M under the Exchange Act, certain
underwriters (and selling group members, if any) that are market makers
("passive market makers") in our common stock may make bids for or purchases of
our common stock on the Nasdaq NMS until such time, if any, when a stabilizing
bid for such securities has been made. Rule 103 generally provides that (1) a
passive market maker's net daily purchases of the common stock may not exceed
30% of its average daily trading volume in such securities for the two full
consecutive calendar months (or any 60 consecutive days ending within the 10
days) immediately preceding the filing date of the registration statement of
which this prospectus forms a part, (2) a passive market maker may not effect
transactions or display bids for the common stock at a price that exceeds the
highest independent bid for the common stock by persons who are not passive
market makers and (3) bids made by passive market makers must be identified as
such. Underwriters and selling group members are not required to engage in
passive market making and may end passive market making activities at any time.
We have agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
71
<PAGE> 73
LEGAL MATTERS
The legality of the Convertible Notes offered hereby is being passed upon
for us by Maun & Simon, PLC, Minneapolis, Minnesota. Certain legal matters are
being passed upon for the underwriters by Hughes & Luce, L.L.P., Dallas, Texas,
who will rely as to matters of Minnesota law on the opinion of Maun & Simon,
PLC.
EXPERTS
Our consolidated financial statements as of March 31, 1997, 1998 and 1999,
included in this prospectus were audited by Ernst & Young LLP, Minneapolis,
Minnesota, as stated in their reports appearing herein and are included in
reliance upon the reports of that firm given upon their authority as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of a registration statement we filed with the SEC.
We 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 them, 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
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 (File No. 0-22247).
Form 10-KSB (NM Holdings, Inc.) for the year ended December 31, 1998.
Form 10-QSB (NM Holdings, Inc.) for the quarter ended March 31, 1999.
Form 8-K (NM Holdings, Inc.), filed on January 7, 1999.
Form 8-K/A (NM Holdings, Inc.), filed on March 3,1999.
Form 10-QSB for the three months ended June 30, 1999.
Form 10-Q for the six months ended September 30, 1999.
Form 10-Q for the nine months ended December 31, 1999.
Form 8-K, filed on July 22, 1999.
You may request a copy of these filings, at no cost, by writing or
telephoning our Chief Financial Officer at the following address:
Stockwalk.com Group, Inc.
Suite 800
5500 Wayzata Boulevard
Minneapolis, Minnesota 55416
(800) 537-7829
72
<PAGE> 74
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors (MJK Holdings, Inc.)......... F-2
Report of Independent Auditors (Miller, Johnson & Kuehn,
Incorporated)............................................. F-3
Statements of Financial Condition as of March 31, 1998 and
1999...................................................... F-4
Statements of Income for the years ended March 31, 1997,
1998 and 1999............................................. F-5
Statements of Shareholders' Equity for the years ended March
31, 1997, 1998 and 1999................................... F-6
Statements of Cash Flows for the years ended March 31, 1997,
1998 and 1999............................................. F-7
Notes to Financial Statements............................... F-8
Condensed Unaudited Statements of Financial Condition as of
December 31, 1998 and 1999................................ F-20
Condensed Unaudited Statements of Income for the Nine Months
Ended
December 31, 1998 and 1999................................ F-21
Condensed Unaudited Statements of Cash Flows for the Nine
Months Ended December 31, 1998 and 1999................... F-22
Notes to Condensed Unaudited Financial Statements........... F-23
</TABLE>
F-1
<PAGE> 75
REPORT OF INDEPENDENT AUDITORS
Board of Directors
MJK Holdings, Inc.
We have audited the accompanying consolidated statements of financial
condition of MJK Holdings, Inc. as of March 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years then ended. 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 consolidated financial position of MJK Holdings,
Inc. as of March 31, 1999 and 1998 and the consolidated results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
May 21, 1999
F-2
<PAGE> 76
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Miller, Johnson & Kuehn, Incorporated
We have audited the accompanying statements of income, shareholders' equity
and cash flows of Miller, Johnson & Kuehn, Incorporated for the year ended March
31, 1997. 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 audit.
We conducted our audit 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 audit provides 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 Miller, Johnson & Kuehn,
Incorporated at March 31, 1997 and the results of its operations and its cash
flows for the period then ended in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
May 15, 1997, except for Notes 17, 18 and 19,
as to which the date is April 27, 1999
F-3
<PAGE> 77
MJK HOLDINGS, INC.
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH 31,
----------------------------
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents........................... $ 3,282,884 $ 3,200,661
Cash and investments segregated under federal and
other regulations (primarily U.S. government
obligations)...................................... 95,646,109 73,130,503
Receivable from customers........................... 142,021,964 139,910,839
Receivable from brokers and dealers................. 6,183,230 69,616,726
Receivable from clearing organization............... 802,934 733,580
Trading securities owned, at market................. 3,486,824 15,265,814
Secured demand notes receivable, collateralized by
securities........................................ 10,475,000 9,675,000
Furniture, equipment and leasehold improvements,
net............................................... 2,461,436 2,200,912
Other assets........................................ 8,255,793 8,618,815
------------ ------------
Total assets................................... $272,616,174 $322,352,850
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings............................... $ 12,000,000 $ 33,900,000
Payable to customers................................ 194,225,936 203,313,836
Payable to brokers and dealers...................... 4,998,591 43,388,593
Payable to clearing broker.......................... 31,608,020 9,975,000
Trading securities sold but not yet purchased, at
market............................................ 4,193,405 812,212
Notes payable....................................... 5,252,521 4,538,114
Liabilities subordinated to claims of general
creditors......................................... 10,475,000 9,675,000
Other liabilities................................... 8,504,443 9,738,951
------------ ------------
Total liabilities.............................. 271,257,916 315,341,706
Shareholders' equity:
Common Stock, $.01 par value:
Authorized shares: 1999 -- 50,000,000; 1998 --
50,000,000...................................
Issued and outstanding shares:
1999 -- 4,255,971; 1998 -- 4,255,971......... 42,560 42,560
Preferred stock
Authorized shares: 1999 -- 5,000,000; 1998 --
5,000,000
Issued and outstanding shares: 1999 -- 558,000;
1998 -- 0.................................... -- 4,380,300
Paid-in capital................................... 2,539,966 2,539,966
Retained earnings................................. (1,224,268) 48,318
------------ ------------
Total shareholders' equity..................... 1,358,258 7,011,144
------------ ------------
Total liabilities and shareholders' equity..... $272,616,174 $322,352,850
============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 78
MJK HOLDINGS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Trading profits.......................... $ 9,855,461 $10,634,085 $15,063,093
Interest................................. 9,149,917 13,506,682 15,410,255
Commissions.............................. 3,930,256 9,039,869 9,888,209
Investment banking....................... 7,716,272 9,656,221 8,388,876
Clearing fees............................ 785,213 1,902,345 3,105,376
Other income............................. 1,170,199 2,353,385 3,734,514
----------- ----------- -----------
Total revenues...................... 32,607,318 47,092,587 55,590,323
EXPENSES:
Employee compensation and benefits....... 17,736,553 25,950,355 26,986,849
Clearing fees............................ 749,812 1,474,517 2,890,129
Occupancy and equipment.................. 1,964,819 3,380,638 3,285,121
Communication............................ 2,298,041 3,937,930 5,251,422
Interest................................. 7,427,375 11,027,386 11,805,926
Other expense............................ 2,206,915 3,145,029 3,113,290
----------- ----------- -----------
Total expenses...................... 32,383,515 48,915,855 53,332,737
----------- ----------- -----------
Income (loss) before income taxes.......... 223,803 (1,823,268) 2,257,586
Income tax expense (benefit)............... 33,700 (599,000) 985,000
----------- ----------- -----------
Net income (loss).......................... $ 190,103 $(1,224,268) $ 1,272,586
=========== =========== ===========
Basic and diluted earnings per share....... $0.05 $(0.29) $0.30
Weighted average common shares
outstanding.............................. 4,195,795 4,255,971 4,255,971
</TABLE>
See accompanying notes.
F-5
<PAGE> 79
MJK HOLDINGS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED COMMON PAID-IN RETAINED
STOCK STOCK CAPITAL EARNINGS TOTAL
---------- ------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1996........... $ -- $42,560 $1,226,981 $ 1,122,883 $ 2,392,424
Issuance of common stock.......... -- 2,092 130,948 -- 133,040
Redemption of common stock........ -- (2,092) (60,663) (70,286) (133,041)
Net income........................ -- -- -- 190,103 190,103
---------- ------- ---------- ----------- -----------
Balance at March 31, 1997........... -- 42,560 1,297,266 1,242,700 2,582,526
Exchange of Miller, Johnson &
Kuehn, Inc. common stock for
MJK Holdings, Inc. common
stock.......................... -- -- 1,242,700 (1,242,700) --
Net loss.......................... -- -- -- (1,224,268) (1,224,268)
---------- ------- ---------- ----------- -----------
Balance at March 31, 1998........... -- 42,560 2,539,966 (1,224,268) 1,358,258
Issuance of preferred stock....... 4,380,300 -- -- -- 4,380,300
Net income........................ -- -- -- 1,272,586 1,272,586
---------- ------- ---------- ----------- -----------
Balance at March 31, 1999........... $4,380,300 $42,560 $2,539,966 $ 48,318 $ 7,011,144
========== ======= ========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 80
MJK HOLDINGS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).......................... $ 190,103 $ (1,224,268) $ 1,272,586
Adjustments to reconcile net income (loss)
to net cash (used in)/provided by
operating activities:
Depreciation and amortization............ 418,315 919,191 1,013,913
Changes in operating assets and
liabilities:
Cash and securities segregated under
federal and other regulations....... (5,473,867) (60,772,242) 22,515,606
Customer receivables and payables..... 7,019,666 35,621,774 11,199,025
Broker and dealer receivables and
payables............................ (19,134,560) (190,464) (25,043,494)
Clearing organization receivables and
payables............................ 28,653,274 236,274 (21,563,666)
Trading securities and securities sold
but not yet purchased............... 4,909,592 9,724,080 (15,160,183)
Other assets and liabilities........ (1,083,739) 5,103,662 763,238
------------ ------------ ------------
Net cash (used in)/provided by operating
activities............................... 15,498,784 (10,581,993) (25,002,975)
INVESTING ACTIVITIES
Acquisition of certain assets and
assumption of certain liabilities of
Private Brokers Clearing Corporation..... -- 15,400,448 --
Acquisition of certain assets and
assumption of certain liabilities of
Juran & Moody, Inc....................... (9,629,020) -- --
Increase in goodwill due to completion of
acquisition of certain assets and
assumption of certain liabilities of
Juran & Moody, Inc....................... -- (481,903) --
Net purchases of furniture, equipment and
leasehold improvements................... (906,585) (1,356,883) (645,141)
------------ ------------ ------------
Net cash (used in)/provided by investing
activities............................... (10,535,605) 13,561,662 (645,141)
FINANCING ACTIVITIES
Increase (decrease) in short-term
borrowings............................... (4,900,000) (5,000,000) 21,900,000
Issuance of notes payable.................. 1,214,382 5,100,000 --
Payments on notes payable.................. (200,824) (969,037) (714,407)
Issuance of preferred stock................ -- -- 4,380,300
Issuance of common stock................... 133,040 -- --
Redemption of common stock................. (133,041) -- --
------------ ------------ ------------
Net cash provided by/(used in) financing
activities............................... (3,886,443) (869,037) 25,565,893
------------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents.............................. 1,076,736 2,110,632 (82,223)
Cash and cash equivalents at beginning of
year..................................... 95,516 1,172,252 3,282,884
------------ ------------ ------------
Cash and cash equivalents at end of year... $ 1,172,252 $ 3,282,884 $ 3,200,661
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid (received) during the year for:
Interest................................. $ 7,458,652 $ 11,188,091 $ 11,297,207
------------ ------------ ------------
Income taxes (refunds)................... $ 374,532 $ 38,800 $ (373,407)
============ ============ ============
</TABLE>
See accompanying notes.
F-7
<PAGE> 81
NOTES TO FINANCIAL STATEMENTS
MARCH, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
MJK Holdings, Inc. (MJKH) is the holding company of Miller, Johnson, &
Kuehn, Incorporated (MJKI), MJKH's primary subsidiary, and two other
wholly-owned subsidiaries whose activities are not significant to MJKH's
financial information on a consolidated basis. MJKI is a securities
broker-dealer headquartered in Minneapolis, Minnesota, with branch offices in
Saint Paul, Minnesota; Scottsdale, Arizona; LaJolla, California; Clearwater,
Florida; Chicago, Illinois; and Dallas and Houston, Texas. MJKI is a member of
the National Association of Securities Dealers, Inc. (NASD), the Securities
Investor Protection Corporation (SIPC) and the Chicago Stock Exchange. MJKI's
primary business involves a combination of retail, principal and agency
transactions along with corporate and public financing originations. In
addition, MJKI provides a broad range of securities transaction processing
services to other broker-dealers. MJKH and MJKI are hereinafter collectively
referred to as the "Company."
BASIS OF PRESENTATION
The consolidated financial statements as of and for the years ended March
31, 1999 and 1998 include the accounts of the MJKH and its subsidiaries. All
subsidiaries are wholly owned, and all intercompany balances and transactions
have been eliminated in consolidation. The consolidated financial statements as
of and for the year ended March 31, 1998 are presented as if the June 9, 1997
exchange of MJKH shares for all of the outstanding shares of MJKI shares
occurred on April 1, 1997. MJKH had no operations from April 1, 1997 to June 9,
1997. MJKI accounts represent substantially all of the consolidated financial
statements as of and for the years ended March 31, 1999 and 1998.
The financial statements for the year ended March 31, 1997 represent only
the accounts of MJKI and are provided for comparative purposes. Certain amounts
in the 1997 and 1998 financial statements have been reclassified to conform to
the 1999 presentation.
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-8
<PAGE> 82
NOTES TO 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.
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, equipment and leasehold improvements are stated at cost less
accumulated depreciation and amortization. Furniture and equipment are
depreciated using an accelerated method over estimated useful lives of five to
seven years. Leasehold improvements are amortized over the shorter of the
economic useful life of the improvements or the life of the lease.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments, including reverse
repurchase agreements, with a maturity of three months or less when purchased to
be cash equivalents.
Cash and cash equivalents of $73,130,503 and $95,646,109 were segregated in
special reserve bank accounts for the benefit of customers under rule 15c3-3 of
the SEC at March 31, 1999 and 1998, respectively. The cash and cash equivalents
segregated in special reserve bank accounts included $8,730,200 and $4,000,000
of reverse repurchase agreements at March 31, 1999 and 1998, 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 loss and tax
credit carryforwards.
EARNINGS PER SHARE
Basic earnings per share is based upon the weighted average number of
common shares outstanding during the reporting period. Dilutive earnings per
share take into account the dilutive effect, if any, of potential dilutive
securities outstanding during the period.
2. ACCOUNTING CHANGES
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, is effective for financial statements for periods beginning after
December 15, 1997. This Statement requires financial and descriptive information
about an entity's operating segments to be included in the annual financial
statements.
F-9
<PAGE> 83
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. ACCOUNTING CHANGES (CONTINUED)
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
is effective for financial statements for periods beginning after June 15, 1999.
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 the Company.
3. BUSINESS COMBINATIONS AND INVESTING ACTIVITIES
On March 25, 1999, the Company entered into an Agreement and Plan of
Reorganization with NM Holdings, Inc. The merger transaction will be accounted
for as a business combination utilizing the reverse acquisition method with the
Company being the accounting acquirer. As such, the merger will be treated as an
acquisition using the purchase method of accounting with no change in the
recorded amount of the Company's assets and liabilities. The assets and
liabilities of NM Holdings, Inc. that are acquired as a result of the merger
will be recorded at their fair market values.
In December 1997, the Company entered into clearing agreements with 16
former correspondents of Private Brokers Clearing Corporation ("PBCC"). At the
same time, pursuant to an asset purchase agreement, the Company purchased
certain assets of PBCC and PBCC transferred approximately $15,400,000 of net
correspondents' deposits and correspondents' customer balances. In connection
with these transactions, the Company assumed no other liabilities of PBCC.
In January 1997, the Company acquired certain assets and assumed certain
liabilities of Juran and Moody, Inc. (a regional broker-dealer and NASD member
firm registered under state and federal securities laws) in exchange for
approximately $9,629,000 in cash. The excess cost over fair value of the net
assets acquired (goodwill) arising from this transaction is being amortized on a
straight-line basis over a 15-year period.
4. BROKER, DEALER, AND CLEARING ORGANIZATION RECEIVABLES AND PAYABLES
Broker, dealer, and clearing organization receivables and payables at March
31 consisted of the following:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Receivable from brokers and dealers................... $ 1,831,030 $18,333,276
Receivable from clearing organization................. 802,934 733,580
Securities borrowed................................... 4,352,200 51,283,450
----------- -----------
Total receivables..................................... $ 6,986,164 $70,350,306
=========== ===========
Payable to brokers and dealers........................ $ 2,871,258 $ 5,440,078
Payable to clearing broker............................ 31,608,020 9,975,000
Payable to introducing brokers........................ 1,941,933 2,398,315
Securities loaned..................................... 185,400 35,550,200
----------- -----------
Total payables........................................ $36,606,611 $53,363,593
=========== ===========
</TABLE>
F-10
<PAGE> 84
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. BROKER, DEALER, AND CLEARING ORGANIZATION RECEIVABLES AND PAYABLES
(CONTINUED)
Broker, dealer, and clearing organization receivables and payables arise
from securities transactions executed for customers or the Company. The
receivables are generally collected within 30 days and are collateralized by
securities in physical possession, on deposit or receivable from customers or
other brokers and dealers.
Broker and dealer payables represent amounts due upon the receipt of
securities. Should the broker, dealer, or clearing organization fail to deliver
the securities to the Company, the Company may be required to purchase identical
securities on the open market. The market value of such securities at March 31,
1999 and 1998 approximates the amounts owed.
Securities borrowed and securities loaned are stated in the statements of
financial condition at the amounts of collateral advanced and received in
connection with the transactions. The Company measures 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.
5. CUSTOMER RECEIVABLES, PAYABLES AND SECURITIES
Receivables from and payables to customers arise from cash and margin
transactions executed by the Company on behalf of its customers. Receivables are
generally collateralized by securities with market values in excess of the
amounts due. It is the policy of the Company to monitor the market value of the
collateral and request additional collateral when required. Such collateral is
not reflected in the accompanying financial statements.
The Company is 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, the Company
may have to purchase or sell securities at prevailing market rates to obtain
such possession or control.
The Company pays interest on customers' free credit balances based on
prevailing market rates.
6. 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 the Company's policy to take
possession of securities purchased under agreements to resell.
The Company's agreements with third parties specify its rights to request
additional collateral if the fair value of the underlying security, including
accrued interest, decreases in comparison to the related receivable.
F-11
<PAGE> 85
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. TRADING SECURITIES
Trading securities owned and trading securities sold but not yet purchased
at March 31 consisted of the following:
<TABLE>
<CAPTION>
1998 1999
---------- -----------
<S> <C> <C>
Owned:
Corporate equities................................... $1,843,086 $ 6,318,760
State and municipal obligations...................... 1,301,263 2,952,975
U.S. government obligations.......................... 342,475 5,989,367
Corporate obligations................................ -- 4,712
---------- -----------
$3,486,824 $15,265,814
========== ===========
Sold but not yet purchased:
Corporate equities................................... $ 121,409 $ 40,236
State and municipal obligations...................... 454,344 147,996
U.S. government obligations.......................... 3,617,652 246,495
Corporate obligations................................ -- 377,485
---------- -----------
$4,193,405 $ 812,212
========== ===========
</TABLE>
The Company's trading securities sold but not yet purchased represent
obligations of the Company 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 Company's ultimate obligation to satisfy the sale of
securities sold but not yet purchased may exceed the amount recorded in the
statements of financial condition at March 31, 1999 and 1998.
8. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, equipment and leasehold improvements at March 31 consisted of
the following:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Furniture and equipment................................. $3,669,044 $4,216,512
Leasehold improvements.................................. 534,004 631,677
---------- ----------
4,203,048 4,848,189
Less accumulated depreciation and amortization.......... 1,741,612 2,647,277
---------- ----------
$2,461,436 $2,200,912
========== ==========
</TABLE>
9. FINANCING ARRANGEMENTS
The Company had discretionary lines of credit totaling $60,000,000 at March
31, 1999 and 1998 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 6.48% and 7.55% as of March 31, 1999 and 1998, respectively. As
of March 31, 1999 and 1998, there were $26,100,000 and $48,000,000 available
under these
F-12
<PAGE> 86
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. FINANCING ARRANGEMENTS (CONTINUED)
lines of credit, respectively. The March 31, 1999 outstanding balances totaling
$33,900,000 were collateralized by approximately $10,800,000 of firm-owned
securities, $9,000,000 of customer securities collateralizing liabilities
subordinated to claims of general creditors and $14,100,000 of unpaid customer
securities. The March 31, 1998 outstanding balances totaling $12,000,000 were
collateralized by approximately $3,500,000 of firm-owned securities and
$10,475,000 of customer securities collateralizing liabilities subordinated to
claims of general creditors. The lines of credit require the Company to comply
with certain financial debt covenants. A compensating balance arrangement
totaling $575,000 exists with respect to one of the Company's discretionary
lines of credit.
At March 31, 1999, the Company had a note payable of $3,600,000 which was
secured by the Company's ownership interest in MJKI. The note bears an interest
rate of the bank's reference rate unless the Company's investment account at the
bank is less than the principal balance of the note. If the Company's 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, 1999 was 7.75%. The note
matures in installments through July 31, 2000.
The Company also has various notes payable at March 31, 1999 and 1998 of
$938,114 and $1,252,521, respectively, which were secured by all furniture and
equipment. Borrowings bear interest at either a fixed rate or various rates over
the bank's cost of funds; such rates generally vary daily. The interest rates
ranged from 7.00% to 8.75% as of March 31, 1999 and 7.00% to 9.50% as of March
31, 1998. The notes mature at various dates through October 10, 2002.
The Company's notes payable at March 31, 1999 mature as follows:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31:
---------------------
<S> <C>
2000............................................... $ 919,773
2001............................................... 3,226,959
2002............................................... 243,366
2003............................................... 148,016
----------
$4,538,114
==========
</TABLE>
10. LIABILITIES SUBORDINATED TO CLAIMS OF GENERAL CREDITORS
Liabilities subordinated to claims of general creditors at March 31, 1999
represent 36 secured demand notes receivable which are collateralized by
securities with market values in excess of their respective face amounts. The
notes bear interest at rates from 5.00% to 6.25% and mature as follows:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31:
---------------------
<S> <C>
2000............................................... $2,850,000
2001............................................... 6,075,000
2002............................................... 750,000
----------
$9,675,000
==========
</TABLE>
F-13
<PAGE> 87
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. SHAREHOLDERS' EQUITY
COMMON STOCK
The Company has authorization to issue up to 50,000,000 shares of common
stock. On June 9, 1997, MJKH exchanged 4,255,971 shares of common stock for all
of the issued and outstanding shares of common stock of MJKI. As a result, the
Company became the sole shareholder of MJKI.
During fiscal 1997, MJKI redeemed 209,182 shares of common stock from a
shareholder and later reissued these shares to the remaining common stock
shareholders on a pro rata basis.
PREFERRED STOCK
The Company has authorization to issue up to 5,000,000 shares of preferred
stock. In March 1999, the Company issued 558,000 shares of Series I Non-Voting
Convertible Preferred Stock at $7.85 per share. The Series I Non-Voting
Convertible Preferred Stock has no dividend rights and is convertible to common
stock if the Company consolidates or merges with another company. The Company's
Board of Directors may issue one or more series of preferred stock and fix the
voting rights, liquidation preferences, dividend rights, repurchase rights,
conversion rights, and redemption rights and terms of the preferred stock.
12. NET CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS
The Company is subject to the SEC's Uniform Net Capital Rule (Rule 15c3-1)
which requires the maintenance of minimum net capital. The Company has elected
to use the alternative method permitted by Rule 15c3-1 which requires that the
Company maintain minimum net capital equal to the greater of $250,000 or 2% of
aggregate debit balances arising from customer transactions, as defined. At
March 31, 1999, the Company's net capital of $11,201,974 was 7% of aggregate
debit balances and $7,996,849 in excess of required net capital. The net capital
rule also provides that equity capital may not be withdrawn or cash dividends
paid if resulting net capital would be less than 5% of aggregate debits.
Under the provisions of financing arrangements entered into during fiscal
1998, the Company may not declare or pay dividends on any of its outstanding
capital stock.
13. EMPLOYEE BENEFIT PLANS
The Company has a qualified profit-sharing plan and a 401(k) plan, which
cover all employees with six months of continuous employment who are at least 21
years old. 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 the Company's Board of Directors. The Company contributed $100,000
to the profit-sharing plan in fiscal 1999. There were no contributions to the
profit-sharing plan in fiscal years 1998 or 1997.
F-14
<PAGE> 88
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
14. COMMITMENTS AND CONTINGENCIES
The Company is obligated for the rental of office space, automobiles and
equipment under noncancelable operating leases which expire at various dates
from 1999 to 2005. 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, 1999 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31:
---------------------
<S> <C>
2000...................................................... $1,815,000
2001...................................................... 1,752,000
2002...................................................... 1,690,000
2003...................................................... 1,503,000
2004...................................................... 378,000
Thereafter................................................ 307,000
----------
Total minimum future rental payments........................ $7,445,000
==========
</TABLE>
Rent expense charged to operations under operating leases, including taxes
and operating expenses of the leased premises, was approximately $1,648,000,
$1,583,000 and $983,000 for the years ended March 31, 1999, 1998 and 1997,
respectively.
The Company is involved in various litigation and arbitration matters
arising in the normal course of business. In the opinion of management, the
ultimate resolution of such matters will not have a material adverse effect on
the financial position of the Company. During 1998, the Company expended
approximately $150,000 to satisfy arbitration decisions and other amounts in
defense of certain matters of litigation. No material amounts were expended in
1999 or 1997. The Company aggressively defends these matters to reduce the
expected amount of related legal fees in future periods.
15. RELATED PARTY TRANSACTIONS
Liabilities subordinated to claims of general creditors included two
secured demand notes as of March 31, 1999 and 1998 entered into by shareholders
of the Company. The notes totaled $600,000 and mature at various dates through
2001 and 1999 for 1999 and 1998, respectively. The notes are considered equity
for the purpose of the net capital computation debt to debt/equity total
computed in accordance with Rule 15c3-1(d).
The Company also had $1,484,119 and $1,438,544 of notes receivable from
employees which are included in other assets as of March 31, 1999 and 1998,
respectively. The amounts consist of 33 and 24 notes which bear various interest
rates and mature at various dates through 2003 at March 31, 1999 and 1998,
respectively.
16. 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-15
<PAGE> 89
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
16. INCOME TAXES (CONTINUED)
used for income tax purposes. Significant components of the Company's deferred
tax assets as of March 31 are as follows:
<TABLE>
<CAPTION>
1998 1999
--------- --------
<S> <C> <C>
Deferred tax assets:
Amortization of leasehold improvements.................. $ 41,756 $ 70,133
Amortization of notes receivable........................ 30,600 41,244
Deferred rent........................................... 17,114 17,114
Accrued bonuses......................................... -- 11,400
Other................................................... 3,808 --
--------- --------
93,278 139,891
Alternative minimum tax credit carryforwards............ 12,499 --
Net operating loss carryforwards........................ 481,293 172,812
--------- --------
493,792 172,812
--------- --------
Total deferred tax assets............................... 587,070 312,703
Valuation allowance..................................... (125,154) (29,838)
--------- --------
Net deferred tax assets................................. $ 461,916 $282,865
========= ========
</TABLE>
The income tax expense (benefit) for the years ended March 31 included the
following:
<TABLE>
<CAPTION>
1997 1998 1999
------- --------- --------
<S> <C> <C> <C>
Federal.......................................... $ 5,613 $(344,710) $705,995
State............................................ 25,513 5,000 99,954
Deferred......................................... 2,574 (259,290) 179,051
------- --------- --------
$33,700 $(599,000) $985,000
======= ========= ========
</TABLE>
Reconciliations of the provisions for income taxes and the amounts that
would be computed using statutory federal income tax rates for the years ended
March 31 are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- --------- --------
<S> <C> <C> <C>
Tax at statutory rate........................... $ 76,093 $(620,359) $769,733
Tax-exempt interest, net of related expenses.... (64,211) (30,828) 22,794
State taxes, net of federal tax benefit......... 16,839 (63,988) 128,683
Non-deductible life insurance................... 28,539 40,623 52,872
Non-deductible meals and entertainment.......... 21,781 31,312 29,685
Change in valuation allowance................... (47,658) -- (95,316)
Other........................................... 2,317 44,240 76,549
-------- --------- --------
$ 33,700 $(599,000) $985,000
======== ========= ========
</TABLE>
At March 31, 1999, the Company has a net operating loss (NOL) carryforward
of approximately $432,000 for 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.
F-16
<PAGE> 90
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
17. EARNINGS PER SHARE
The components of earnings per share at March 31 were:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ----------- ----------
<S> <C> <C> <C>
Net income................................. $ 190,103 $(1,224,268) $1,272,586
Weighted average shares outstanding........ 4,195,795 4,255,971 4,255,971
---------- ----------- ----------
Basic earnings per share................... $0.05 $(0.29) $0.30
========== =========== ==========
Net income................................. $ 190,103 $(1,224,268) $1,272,586
Weighted average shares outstanding........ 4,195,795 4,255,971 4,255,971
Effect of dilutive securities:
Convertible preferred stock.............. -- -- 1,529
---------- ----------- ----------
4,195,795 4,255,971 4,257,500
========== =========== ==========
Diluted earnings per share................. $0.05 $(0.29) $0.30
========== =========== ==========
</TABLE>
18. SEGMENTS
The Company's reportable segments are as follows: clearing services, retail
sales, investment banking, and other. The clearing services segment consists of
clearing services provided on a fully-disclosed basis to approximately 30 other
broker-dealers. The retail segment consists of various retail branch locations
which conduct security transactions for individual and institutional investors.
The investment banking segment consists of the management, co-management, and
participation by the Company in the underwriting of corporate equity and debt
securities. Other consists of general corporate, administrative support
functions, and net gains or losses on the investment account.
Segment results are derived from the Company's branch location
profitability reporting system. Intersegment transactions are measured on the
same basis as if the transactions occurred with external customers. In reviewing
the segment operating results, the Company's operating decision makers do not
distinguish between intersegment transactions and external customer
transactions. Intersegment revenue is eliminated to reconcile total segment
revenue to consolidated revenue. Income tax expense or benefit is not allocated
to the Company's operating segments. The Company does not provide balance sheet
data for segment reporting as this data is not measured for its operating
segments.
F-17
<PAGE> 91
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
18. SEGMENTS (CONTINUED)
Information concerning operations in these segments of business is as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
-----------------------------
1997 1998 1999
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue:
Clearing Services................................. $ 9,722 $17,141 $21,692
Retail Sales...................................... 19,787 28,009 30,672
Investment Banking................................ 2,340 2,174 4,338
Other............................................. 865 941 1,301
------- ------- -------
$32,714 $48,265 $58,003
======= ======= =======
Pretax income/(loss):
Clearing Services................................. $ 340 $ 1,080 $ 2,051
Retail Sales...................................... (375) (3,065) (272)
Investment Banking................................ 233 162 485
Other............................................. 26 -- (6)
------- ------- -------
$ 224 $(1,823) $ 2,258
======= ======= =======
</TABLE>
Reconciliation of segment revenue to consolidated revenue:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
-----------------------------
1997 1998 1999
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Segment revenue..................................... $32,714 $48,265 $58,003
Intersegment eliminations........................... (107) (1,172) (2,413)
------- ------- -------
Consolidated revenue................................ $32,607 $47,093 $55,590
======= ======= =======
</TABLE>
F-18
<PAGE> 92
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected unaudited data reflecting the Company'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 which the Company 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
---------------------------------------------------------
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
FISCAL YEAR 1999
Revenues..................... $13,662,387 $13,832,950 $13,989,816 $14,105,170
Net income (loss)............ 392,315 442,310 499,768 (61,807)
Basic income (loss) per
share...................... $.09 $.10 $.12 $(.01)
FISCAL YEAR 1998
Revenues..................... $10,776,229 $10,915,452 $11,664,330 $13,736,576
Net loss..................... (41,512) (95,383) (525,719) (561,654)
Basic loss per share......... $(.01) $(0.02) $(0.13) $(0.13)
</TABLE>
20. YEAR 2000 (UNAUDITED)
Similar to other financial and business organizations and individuals
around the world, the Company could be affected if the computer systems used by
it and its service providers do not properly process and calculate date-related
information relating to the year 2000. The Company is taking steps that it
believes are reasonably designed to address year 2000 compliance with respect to
the computer systems that it uses and to obtain satisfactory assurances that
comparable steps are being taken by each of its major service providers. At this
time, however, there can be no assurance that these steps will be sufficient to
avoid any impact on the Company.
F-19
<PAGE> 93
STOCKWALK.COM GROUP, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Cash................................................ $ 3,440,800 $ 3,555,500
Cash and investments -- segregated.................. 83,240,500 100,434,900
Receivables from customers.......................... 128,387,500 163,471,300
Receivables from brokers and dealers................ 18,337,000 94,519,700
Receivables from clearing organizations............. -- 446,300
Trading securities owned, at market................. 19,710,400 30,809,600
Secured demand notes receivable..................... 9,975,000 16,800,000
Furniture and equipment............................. 2,189,900 1,325,700
Other assets........................................ 6,580,700 15,905,500
------------ ------------
Total assets................................... $271,861,800 $427,268,500
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings............................... $ 29,700,000 $ 34,100,000
Payables to customers............................... 196,015,000 243,524,900
Payables to brokers and dealers..................... 7,033,400 92,076,500
Payables to clearing organizations.................. 12,500,000 11,435,500
Trading securities sold but not yet purchased, at
market............................................ 1,774,200 755,600
Notes payable....................................... 1,019,500 4,852,700
Liabilities subordinated to claims of general
creditors......................................... 9,975,000 16,800,000
Other liabilities................................... 11,152,000 12,308,000
------------ ------------
Total liabilities.............................. 269,169,100 415,853,200
Shareholders' equity
Common stock, $.04 par value;
Authorized shares: 1999 -- 50,000,000; 1998 --
50,000,000...................................
Issued and outstanding shares:
1999 -- 19,792,327; 1998 -- 4,255,971........ 42,600 791,700
Paid-in capital................................... 2,540,000 13,874,600
Retained earnings................................. 110,100 (3,251,000)
------------ ------------
Total shareholders' equity..................... 2,692,700 11,415,300
------------ ------------
Total liabilities and shareholders' equity..... $271,861,800 $427,268,500
============ ============
</TABLE>
See accompanying notes.
F-20
<PAGE> 94
STOCKWALK.COM GROUP, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
REVENUES:
Trading profits..................................... $11,655,700 $ 9,146,400
Interest............................................ 11,565,700 13,941,000
Commissions......................................... 7,063,400 8,282,100
Investment banking.................................. 6,013,400 6,938,100
Clearing fees....................................... 2,118,700 3,470,900
Other income........................................ 3,068,200 2,789,400
----------- -----------
Total revenues................................. 41,485,100 44,567,900
EXPENSES:
Employee compensation and benefits.................. 19,536,800 22,648,800
Clearing fees....................................... 2,115,100 2,428,300
Occupancy and equipment............................. 2,640,500 3,363,900
Communication....................................... 3,805,900 5,321,000
Interest............................................ 9,006,000 10,718,200
Other expense....................................... 2,248,100 5,654,300
----------- -----------
Total expenses................................. 39,352,400 50,134,500
----------- -----------
Income (loss) before income taxes..................... 2,132,700 (5,566,600)
Income tax expense (benefit).......................... 798,300 (2,267,000)
----------- -----------
Net income (loss)..................................... $ 1,334,400 $(3,299,600)
=========== ===========
Basic earnings per share.............................. $0.08 $(0.17)
Weighted average share outstanding -- basic........... 15,848,500 19,534,600
=========== ===========
Diluted earnings per share............................ $0.08 $(0.17)
Weighted average shares outstanding -- diluted........ 15,848,500 19,675,300
=========== ===========
</TABLE>
See accompanying notes.
F-21
<PAGE> 95
STOCKWALK.COM GROUP, INC.
CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
----------------------------
1998 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................... $ 1,334,400 $ (3,299,600)
Adjustments to reconcile net income (loss) to net
cash (used in)/provided by operating activities:
Depreciation and amortization..................... 740,100 715,700
Changes in operating assets and liabilities:
Cash and investments segregated................... 12,405,600 (27,304,400)
Customer receivables and payables................. 15,423,500 16,650,600
Broker and dealer receivables and payables........ (10,118,900) 23,784,900
Clearing organization receivables and payables.... (18,305,100) 1,747,800
Trading securities and securities sold but not yet
purchased...................................... (18,642,800) (15,600,400)
Other assets and liabilities...................... 4,214,600 (4,895,500)
------------ ------------
Net cash used for operating activities.............. (12,948,600) (8,200,900)
INVESTING ACTIVITIES
(Purchase) sale of equipment and office furniture... (360,400) 337,600
------------ ------------
Net cash provided by (used for) investing
activities........................................ (360,400) 337,600
FINANCING ACTIVITIES
Increase in short-term borrowings................... 17,700,000 200,000
Net payments on notes payable....................... (4,233,100) 314,600
Issuance of capital................................. 0 7,703,500
------------ ------------
Net cash provided by financing activities........... 13,466,900 8,218,100
Net increase (decrease) in cash and cash
equivalents....................................... 157,900 354,800
Cash at beginning of period......................... 3,282,900 3,200,700
------------ ------------
Cash at end of period............................... $ 3,440,800 $ 3,555,500
============ ============
</TABLE>
See accompanying notes.
F-22
<PAGE> 96
STOCKWALK.COM GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
A subsidiary of Stockwalk.com Group, Inc. f/k/a NM Holdings, Inc. merged
with MJK Holdings Inc. on July 7, 1999. NM Holdings Inc. sold its nutrition
business in December 1998 and had no remaining active business operations. Based
in Minneapolis, Minnesota, Stockwalk.com Group, Inc, principal assets are
Miller, Johnson, & Kuehn Incorporated (MJKI), a full service brokerage, and
Stockwalk.com, Inc., an online securities brokerage company. Both subsidiary
companies are members of the National Association of Securities Dealers (NASD)
and the Securities Investors Protection Corporation (SIPC).
2. MANAGEMENT'S INTERIM FINANCIAL STATEMENT REPRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Rule
10-01 of Regulation S-X. In the opinion of management, all adjustments
(consisting solely of normal recurring accruals) considered necessary for a fair
presentation have been included. Although the Company believes that the
disclosures are adequate to make the information presented not misleading, it is
suggested that these condensed financial statements be read in conjunction with
the audited financial statements and the notes thereto.
3. FINANCING ARRANGEMENTS
The Company had discretionary lines of credit totaling $65.0 million at
December 31, 1999, which are secured by firm-owned securities, customer
securities collateralizing liabilities subordinated to claims of general
creditors and unpaid customer securities. These lines are payable on demand.
Borrowings on the lines bear interest at various rates over the bank's cost of
funds; such rates generally vary daily. The weighted average interest rate on
the lines was 6.1% as of December 31, 1999. As of December 31, 1999 and 1998,
there were $30.9 million and $29.7 million available under these lines of
credit, respectively. The December 31, 1999 outstanding balances totaling $34.1
million were collateralized by approximately $22.3 million of firm-owned
securities, $13.0 million of customer securities collateralizing liabilities
subordinated to claims of general creditors and $24.1 million of unpaid customer
securities. The December 31, 1998 outstanding balances totaling $29.7 million
were collateralized by approximately $19.7 million of firm-owned securities,
$10.0 million of customer securities collateralizing liabilities subordinated to
claims of general creditors and $1.0 million of unpaid customer securities.
F-23
<PAGE> 97
NOTES TO CONDENSED CONSOLIDATED UNAUDITED
FINANCIAL STATEMENTS -- (CONTINUED)
4. SHAREHOLDER'S EQUITY
STATEMENT RE: COMPUTATION WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
The Company calculates net income per share in accordance with FASB
Statement No. 128 by dividing net income by the weighted average number of
shares of common stock outstanding to arrive at the Net Income Per Common
Share -- Basic. The Company calculates Net Income Per Share -- Dilutive by
diving net income by the weighted average number of shares of common stock and
dilutive stock equivalents from the exercise of stock options and warrants using
the treasury stock method.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
------------------------
1998 1999
---------- ----------
<S> <C> <C>
Weighted average shares outstanding -- basic............ 15,848,500 19,534,600
Dilutive effect of stock options and warrants after
application of the treasury stock method.............. -- 140,700
---------- ----------
Weighted average shares outstanding -- diluted.......... 15,848,500 19,675,300
========== ==========
</TABLE>
5. NET CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS
The Company's three broker dealers are subject to the SEC's Uniform Net
Capital Rule (Rule 15c3-1) which requires the maintenance of minimum net
capital. Miller, Johnson, & Kuehn, Inc. has elected to use the alternative
method permitted by Rule 15c3-1 which requires that MJKI maintain minimum net
capital equal to the greater of $250,000 or 2% of aggregate debit balances
arising from customer transactions, as defined. At December 31, 1999, MJKI's net
capital of $14.9 million was 8.6% of aggregate debit balances and $11.4 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% of aggregate debits. Stockwalk.com Inc. and Arnold
Securities, Inc. each require a minimum of $50,000 net capital. At December 31,
1999, Stockwalk.com and Arnold Securities had net capital of $180,300 and
$90,300 respectively.
6. RELATED PARTY TRANSACTIONS
The Company also had $1.7 million and $1.6 million of notes receivable from
employees which are included in other assets as of December 31, 1999 and 1998,
respectively. The amounts consist of 30 notes which bear various interest rates
and mature at various dates through 2003.
F-24
<PAGE> 98
[INSIDE BACK COVER]
[CAPTION: PHOTO LOGO FOR STOCKWALK.COM,(TM) "THE ONLINE BROKERAGE FOR ALL WALKS
OF LIFE" PRIVATE LABEL SERVICES]
<PAGE> 99
------------------------------------------------------
------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED IN THIS
PROSPECTUS. WE AND THE UNDERWRITERS HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU
WITH INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. WE ARE
OFFERING TO SELL, AND SEEKING OFFERS TO BUY, THE CONVERTIBLE NOTES ONLY IN THE
JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN
THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS
OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR ANY SALE OF CONVERTIBLE NOTES.
------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary............................. 3
Risk Factors........................ 11
Disclosure Regarding Forward-Looking
Statements........................ 26
Use of Proceeds..................... 27
Price Range of Capital Stock........ 27
Dividend Policy..................... 27
Capitalization...................... 28
Ratio of Earnings to Fixed
Charges........................... 29
Selected Consolidated Financial
Data.............................. 30
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 31
Business............................ 36
Management.......................... 46
Description of Convertible Notes.... 49
Certain Federal Tax
Considerations.................... 64
Description of Capital Stock........ 68
Underwriting........................ 70
Legal Matters....................... 72
Experts............................. 72
Where You Can Find More
Information....................... 72
Index to Consolidated Financial
Statements........................ F-1
</TABLE>
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
$30,000,000
[STOCKWALK.COM LOGO]
% CONVERTIBLE SUBORDINATED
NOTES DUE 2005
--------------------
PROSPECTUS
--------------------
SOUTHWEST SECURITIES
MILLER, JOHNSON & KUEHN,
INCORPORATED
, 2000
------------------------------------------------------
------------------------------------------------------
<PAGE> 100
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses payable by the Company in connection with the
offering described in this Registration Statement (other than underwriters'
discounts and expenses and financial advisory fees) are as follows:
<TABLE>
<S> <C>
SEC registration fee................................... $ 9,108
Nasdaq filing fee...................................... 5,000
NASD filing fee........................................ 3,950
Printing, engraving and Edgar expenses................. 50,000
Legal fees and expenses................................ 50,000
Accounting fees and expenses........................... 80,000
Transfer agent's fees.................................. 5,000
Other.................................................. 1,942
--------
Total............................................. $205,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Third Amended and Restated Articles of Incorporation of the Company
provide that the Company shall indemnify officers, directors, employees and
agents of the Company to the fullest extent permitted by the Minnesota Business
Corporation Act. Pursuant to Minnesota law, the Company 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 Company'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 Company) 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 Company, 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 Company, 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 16. EXHIBITS
The exhibits to this Registration Statement appear on the Index to Exhibits
hereto.
ITEM 17. UNDERTAKINGS
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
II-1
<PAGE> 101
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.
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 SEC 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.
II-2
<PAGE> 102
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Minneapolis, State of Minnesota, on April 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
registration statement has been signed by the following persons in the
capacities and on the dates indicated. Each person whose signature appears below
constitutes and appoints Eldon C. Miller and David B. Johnson, and each of them
individually, his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him and his name, place and stead, in
any and all capacities, to sign any and all amendments and any and all post-
effective amendments and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or either of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
<TABLE>
<C> <S> <C>
/s/ ELDON C. MILLER Chief Executive Officer & Director April 25, 2000
- ---------------------------------------------
Eldon C. Miller
/s/ DAVID B. JOHNSON President & Director April 25, 2000
- ---------------------------------------------
David B. Johnson
/s/ PAUL R. KUEHN Director April 25, 2000
- ---------------------------------------------
Paul R. Kuehn
/s/ STANLEY D. RAHM Director April 25, 2000
- ---------------------------------------------
Stanley D. Rahm
/s/ TODD W. MILLER Chief Financial Officer April 25, 2000
- ---------------------------------------------
Todd W. Miller
/s/ N. LEE WESLEY Director April 25, 2000
- ---------------------------------------------
N. Lee Wesley
/s/ GEORGE E. KLINE Director April 25, 2000
- ---------------------------------------------
George E. Kline
/s/ JEFFREY L. HOUDEK Principal Accounting Officer April 25, 2000
- ---------------------------------------------
Jeffrey L. Houdek
</TABLE>
II-3
<PAGE> 103
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <C> <S>
1 Form of Underwriting Agreement
4.1 * Form of Convertible Note
4.2 * Indenture
5 * Opinion Letter of Maun & Simon, PLC
10.1 = Employment Agreement dated August 1, 1999, between the
Registrant and Robert J. Vosburgh
10.2 = Employment Agreement dated September 1, 1999, between
Registrant and Andrew R. Guzman
10.3 = Employment Agreement dated September 27, 1999, between the
Registrant and Philip T. Colton
10.4 + Amendment to Employment Agreement -- Robert J. Vosburgh,
dated November 12, 1999
10.5 + Asset Purchase Agreement between and among Registrant,
William Yang, and M.One Investment Securities, Inc.
10.6 = Stock Acquisition Agreement by and among Arnold Securities,
Inc., John Arnold, Jerry W. Mulder, Cindy Pederson and
Registrant
10.7 # Agreement and Plan of Reorganization between MJK Holdings,
Inc., NM Holdings, Inc. and a wholly-owned subsidiary of NM.
11 Computation of Per Share Earnings
12 Computation of Ratio of Earnings to Fixed Charges
23 Consent of Ernst & Young LLP
24 Power of Attorney (included on the signature page hereof)
25 * Statement of Eligibility of Trustee
27 Financial Data Schedule
</TABLE>
- -------------------------
* To be filed by amendment
= Incorporated by reference to Form 10-Q for Quarter Ended September 30, 1999,
filed on November 12, 1999
+ Incorporated by reference to Form 10-Q for Quarter Ended December 31, 1999,
filed on February 14, 2000
# Incorporated by reference to Form 8-K, filed on July 22, 1999
<PAGE> 1
Exhibit 1
STOCKWALK.COM
__% CONVERTIBLE SUBORDINATED NOTES DUE 2005
------------------
UNDERWRITING AGREEMENT
----------------------
------------------
______________, 2000
Southwest Securities, Inc.,
Miller, Johnson & Kuehn, Inc.,
As representatives of the several
Underwriters named in Schedule I hereto,
c/o Southwest Securities, Inc.
1201 Elm Street, Suite 3500
Dallas, Texas 75270
Dear Sirs:
Stockwalk.com Group, Inc., a Minnesota corporation (the "Company"),
proposes, subject to the terms and conditions stated herein, to issue and sell
to the Underwriters named in Schedule I hereto (the "Underwriters") an aggregate
of $30,000,000 principal amount and, at the election of the Underwriters, up to
$4,500,000 additional principal amount of __% Convertible Subordinated Notes due
2005, convertible into shares of Common Stock, par value $0.04 per share
("Stock") of the Company. The aggregate of $30,000,000 principal amount to be
sold by the Company is herein called the "Firm Notes" and the aggregate of
$4,500,000 additional principal amount to be sold by the Company is herein
called the "Optional Notes". The Firm Notes and the Optional Notes that the
Underwriters elect to purchase pursuant to Section 2 hereof are herein
collectively called the "Notes".
1. The Company represents and warrants to, and agrees with, each of the
Underwriters that:
(i) A registration statement on Form S-2 (File No. _____) (the
"Initial Registration Statement") in respect of the Notes has been filed
with the Securities and Exchange Commission (the "Commission"); such
Initial Registration Statement and any post-effective amendment thereto,
each in the form heretofore delivered to you, and, excluding exhibits
thereto but including all documents incorporated by reference in the
prospectus contained therein, to you for each of the other Underwriters,
have been declared effective by the Commission in such form; other than a
registration statement, if any, increasing the size of the offering (a
"Rule 462(b) Registration Statement"), filed pursuant to Rule 462(b) under
the Securities Act of 1933, as amended (the "Act"), which became effective
upon filing, no other document with respect to the Initial Registration
Statement or
<PAGE> 2
such documents incorporated by reference therein has heretofore been filed
with the Commission; and no stop order suspending the effectiveness of such
Initial Registration Statement, any post-effective amendment thereto, or
the Rule 462(b) Registration Statement, if any, has been issued and no
proceeding for that purpose has been initiated or threatened by the
Commission (any preliminary prospectus included in such Initial
Registration Statement or filed with the Commission pursuant to Rule 424(a)
of the rules and regulations of the Commission under the Act, is
hereinafter called a "Preliminary Prospectus"); the various parts of the
Initial Registration Statement and the Rule 462(b) Registration Statement,
if any, including all exhibits thereto but excluding Form T-1 and including
(i) the information contained in the form of final prospectus filed with
the Commission pursuant to Rule 424(b) under the Act in accordance with
Section 5(a) hereof and deemed by virtue of Rule 430A under the Act to be
part of the registration statement at the time it was declared effective
and (ii) the documents incorporated by reference in the prospectus
contained in the registration statement at the time such part of the
registration statement became effective, each as amended at the time such
part of the Initial Registration Statement became effective, or such part
of the Rule 462(b) Registration Statement, if any, became or hereafter
becomes effective, are hereinafter collectively called the "Registration
Statement"; and such final prospectus, in the form first filed pursuant to
Rule 424(b) under the Act, is hereinafter called the "Prospectus"; any
reference herein to any Preliminary Prospectus or the Prospectus shall be
deemed to refer to and include the documents incorporated by reference
therein pursuant to Item 12 of Form S-2 under the Act, as of the date of
such Preliminary Prospectus or Prospectus, as the case may be; any
reference to any amendment or supplement to any Preliminary Prospectus or
the Prospectus shall be deemed to refer to and include any documents filed
after the date of such Preliminary Prospectus or Prospectus, as the case
may be, under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and incorporated by reference in such Preliminary
Prospectus or Prospectus, as the case may be; and any reference to any
amendment to the Registration Statement shall be deemed to refer to and
include any report of the Company filed pursuant to Section 13(a) or 15(d)
of the Exchange Act after the effective date of the Registration Statement
that is incorporated by reference in the Registration Statement);
(ii) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material
respects to the requirements of the Act and the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act") and the rules and regulations
of the Commission thereunder, and did not contain an 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; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter through
Southwest Securities, Inc. expressly for use therein;
(iii) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of
the Act and the rules and regulations of the
<PAGE> 3
Commission thereunder and do not and will not, as of the applicable
effective date as to the Registration Statement and any amendment thereto
and as of the applicable filing date as to the Prospectus and any amendment
or supplement thereto, contain an 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 not misleading; provided, however, that this
representation and warranty shall not apply to any statements or omissions
made in reliance upon and in conformity with information furnished in
writing to the Company by an Underwriter through Southwest Securities, Inc.
expressly for use therein;
(iv) There are no subsidiaries of the Company that are material to the
financial condition, business or results of operations of the Company other
than the subsidiaries listed on Schedule II (each, a "Material
Subsidiary");
(v) Neither the Company nor any of its subsidiaries has sustained
since the date of the latest audited financial statements included in the
Prospectus any material loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance, or
from any labor dispute or court or governmental action, order or decree,
otherwise than as set forth or contemplated in the Prospectus; and, since
the respective dates as of which information is given in the Registration
Statement and the Prospectus, there has not been any change in the capital
stock, short-term debt or long-term debt of the Company or any of its
subsidiaries or any material adverse change, or any development involving a
prospective material adverse change, in or affecting the general affairs,
business, management, financial position, shareholders' equity or results
of operations of the Company and its subsidiaries, taken as a whole,
otherwise than as set forth or contemplated in the Prospectus;
(vi) The Company and its subsidiaries have good and marketable title
in fee simple to all real property and good and marketable title to all
personal property owned by them which is material to the business of the
Company and its subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus or
such as do not materially affect the value of such property and do not
interfere with the use made and proposed to be made of such property by the
Company and its subsidiaries; and any real property and buildings held
under lease by the Company and its subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made of
such property and buildings by the Company and its subsidiaries;
(vii) The Company and the Material Subsidiaries have been duly
incorporated and each is validly existing as a corporation in good standing
under the laws of the state of its incorporation, each with power and
authority (corporate and other) to own its properties and conduct its
business as described in the Prospectus, and each has been duly qualified
as a foreign corporation for the transaction of business and is in good
standing under the laws of each other jurisdiction in which it owns or
leases properties or conducts any business so as to require such
qualification, or is subject to no material liability or disability by
reason of failure to be so qualified in any such jurisdiction; and each
other subsidiary of the Company
<PAGE> 4
has been duly incorporated and is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation;
(viii) The Company has an authorized capitalization as set forth in
the Prospectus, and all of the issued shares of capital stock of the
Company have been duly and validly authorized and issued are fully paid and
non-assessable, are not subject to any preemptive or similar rights, have
not been issued in violation of federal or state securities laws, and
conform to the description thereof contained in the Prospectus; all of the
issued shares of capital stock of each subsidiary of the Company have been
duly and validly authorized and issued, are fully paid and non-assessable
and (except for directors' qualifying shares) are owned directly or
indirectly by the Company, free and clear of all liens, encumbrances,
equities or claims except as described in the Prospectus and there are no
outstanding subscriptions, rights warrants, options, calls, convertible
securities, commitments of sale or liens granted or issued by the Company
or any of its subsidiaries relating to or entitling any person to purchase
or otherwise to acquire any shares or capital stock of the Company or any
of its subsidiaries, except as otherwise disclosed in the Prospectus;
(ix) The Notes have been duly authorized and, when issued and
delivered, against payment therefor, pursuant to this Agreement, will have
been duly executed, authenticated, issued and delivered and will constitute
valid and legally binding obligations of the Company entitled to the
benefits provided by the indenture to be dated as of _________, 2000 (the
"Indenture") between the Company and Firststar Bank Minnesota, N.A., as
Trustee (the "Trustee"), under which they are to be issued, which will be
substantially in the form filed as an exhibit to the Registration
Statement; the Indenture has been duly authorized and duly qualified under
the Trust Indenture Act and, when executed and delivered by the Company and
the Trustee, will constitute a valid and legally binding agreement,
enforceable in accordance with its terms, subject, as to enforcement, to
bankruptcy, insolvency, reorganization and other laws of general
applicability relating to or affecting creditors' rights and to general
equity principles; and the Notes and the Indenture will conform to the
descriptions thereof in the Prospectus;
(x) The issue and sale of the Notes and the compliance by the Company
with all of the provisions of the Notes, the Indenture and this Agreement
and the consummation of the transactions herein contemplated will not
conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture, mortgage, deed
of trust, loan agreement or other agreement or instrument to which the
Company or any of its subsidiaries is a party or by which the Company or
any of its subsidiaries is bound or to which any of the property or assets
of the Company or any of its subsidiaries is subject, except for any such
conflict, breach, violation or default which would not have a material
adverse effect on the Company and it subsidiaries taken as a whole, nor
will such action result in any violation of the provisions of the Articles
of Incorporation, as amended, or By-laws of the Company or any statute or
any order, rule or regulation of any court or government agency or body
having jurisdiction over the Company or any of its subsidiaries or any of
their properties; and no consent, approval, authorization, order,
registration or qualification of or with any such court or governmental
agency or body is required for the issue and sale of the Notes or the
consummation by the Company of the transactions
<PAGE> 5
contemplated by this Agreement, except the registration under the Act of
the Notes and such consents, approvals, authorizations, registrations or
qualifications as may be required under state or foreign securities or Blue
Sky laws in connection with the purchase and distribution of the Notes by
the Underwriters;
(xi) Neither the Company nor any of its subsidiaries is in violation
of its Articles of Incorporation, as amended, or By-laws or in default in
the performance or observance of any material obligation, agreement,
covenant or condition contained in any indenture, mortgage, deed of trust,
loan agreement, lease or other agreement or instrument to which it is a
party or by which it or any of its properties may be bound;
(xii) The statements set forth in the Prospectus under the caption
"Description of Convertible Notes" and "Description of Capital Stock",
insofar as they purport to constitute a summary of the terms of the Notes
and the Stock, under the caption "Certain Federal Tax Considerations" and
under the capital "Underwriting", insofar as they purport to describe the
provisions of the laws and documents referred to therein, are accurate,
complete and fair in all material respects;
(xiii) Other than as set forth in the Prospectus, there are no legal
or governmental proceedings pending to which the Company or any of its
subsidiaries is a party or of which any property of the Company or any of
its subsidiaries is the subject which, if determined adversely to the
Company or any of its subsidiaries, would individually or in the aggregate
have a material adverse effect on the current or future business, financial
position, shareholders' equity or results of operations of the Company and
its subsidiaries taken as a whole; and, to the best of the Company's
knowledge, no such proceedings are threatened or contemplated by
governmental authorities or threatened by others;
(xiv) Each of the Company and each subsidiary is not and, after giving
effect to the offering and sale of the Notes, will not be an "investment
company" or an entity "controlled" by an "investment company", as such
terms are defined in the Investment Company Act of 1940, as amended (the
"Investment Company Act");
(xv) Neither the Company nor any of its affiliates does business with
the government of Cuba or with any person or affiliate located in Cuba
within the meaning of Section 517.075, Florida Statutes;
(xvi) Ernst & Young LLP, who has audited certain financial statements
of the Company and its subsidiaries, are independent accountants as
required by the Act and the rules and regulations of the Commission
thereunder;
(xvii) The consolidated financial statements included in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto), together with related schedules and notes, present fairly the
consolidated financial position, results of operations and changes in
financial position of the Company and its subsidiaries on the basis stated
therein at the respective dates or for the respective periods to which they
apply, except as otherwise stated in the Registration Statement; such
statements and related schedules and
<PAGE> 6
notes have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved, except as
disclosed therein; the supporting schedules, if any, included in the
Registration Statement present fairly in accordance with generally accepted
accounting principles the information required to be stated therein; and
the other financial and statistical information and data set forth in the
Registration and the Prospectus (and any amendment or supplement thereto)
are, in all material respects, accurately presented and prepared on a basis
consistent with such financial statements and the books and records of the
Company;
(xviii) Other than as set forth in the Prospectus, the Company and
each of its subsidiaries have obtained all material environmental permits,
licenses and other authorizations required by Federal, state and local law
in order to conduct their businesses as described in the Prospectus; the
operations of the Company and each of its subsidiaries are at all times,
and all times have been, in compliance with all federal, regional, state
county or local laws, statutes, ordinances decisional law, rules,
regulations, codes, orders, decrees, directives and judgements relating to
public health or safety, pollution, damage to or protection of the
environment or hazardous or toxic materials, pollutants or contaminants
("Environmental Laws") then applicable to the business of the Company or
its subsidiaries or any real property owned or leased by the Company or its
subsidiaries, except where the failure to be in compliance would not have a
material adverse effect on the financial position, shareholders' equity or
results of operations of the Company and its subsidiaries taken as a whole;
and, except as described in the Prospectus, the Company has not received
any notice that it, or any of the real property owned or leased by it; (A)
is in violation of the requirements of any Environmental Laws; (B) is the
subject of any suit, claim, proceeding, demand, order, investigation or
request or demand for information arising under any Environmental Laws; or
(C) has actual or potential liability under any Environmental Laws;
(xix) The Company and each of its subsidiaries have all licenses,
franchises, permits, authorizations, approvals and orders and other
concessions of and from all governmental or regulatory authorities that are
necessary to own or lease their properties and conduct their businesses as
described in the Prospectus, except for such licenses, franchises, permits,
authorizations, approvals and orders the failure to obtain which will not,
individually or in the aggregate, have a material adverse effect on the
business, financial position, shareholders' equity, results of operations
or financial prospects of the Company or its subsidiaries taken as a whole;
(xx) The Company and each of its subsidiaries is conducting business
in compliance with all applicable statutes, rules, regulations, standards,
guides and orders administered or issued by any governmental or regulatory
authority in the jurisdictions in which it is conducting business, except
where the failure to be so in compliance would not have a material adverse
effect on the business, financial position, shareholders' equity, results
of operations or financial prospects of the Company or its subsidiaries
taken as a whole;
(xxi) Except as set forth in the Prospectus or disclosed on Schedule
IV, no person has any right to require the Company to register any
securities under the Act;
<PAGE> 7
(xxii) Each of the Company and each Material Subsidiary carries, or is
covered by, insurance as is customary for companies similarly situated and
engaged in similar businesses in similar industries;
(xxiii) No labor disturbances by employees of either the Company or
any Material Subsidiary exists or, to the knowledge of the Company, is
imminent which might be expected to have a material adverse effect on the
business, financial condition, results of operations or prospects of the
Company or any Material Subsidiary;
(xxiv) To its knowledge, after due investigation, all of the software
products used by the Company or any of its subsidiaries, are Year 2000
Compliant (as defined below). "Year 2000 Compliant" means, as applied to a
software product, that: (A) such software product will operate and
correctly store, represent and process (including sort) all dates
(including single and multi-century formulas and leap year calculations),
such that errors will not occur when the date being used is in the Year
2000, or in a year preceding or following the Year 2000; (B) such software
product has been written and tested to support numeric and date transitions
from the twentieth century to the twenty-first century, and back (including
without limitation all calculations, aging, reporting, printing, displays
reversals, disaster and vital records recoveries) without error, corruption
or impact to current and/or future operations; and (C) such software
product will function without error or interruption related to any date
information, specifically including errors or interruptions from functions
which may involve date information from more than one century, in each case
except where the same could not reasonably be expected to have a material
adverse effect on the financial position, shareholders' equity or results
of operations of the Company and its subsidiaries taken as a whole;
(xxv) There are no contracts or other documents which are required to
be described in the Prospectus or to be filed as exhibits to the Initial
Registration Statement by the Act which are not so described or filed; and
(xxvi) Each of the Company and each Material Subsidiary owns, or
possesses adequate rights to use, all material trademarks, service marks,
trade names, service names, brand names, logos, trade dress, trademark
registrations, service mark registrations, Internet domain names and
copyrights necessary for the conduct of its business and has no reason to
believe that the conduct of its business will conflict with, and has not
received any notice of any claim of conflict with any such rights or others
except as would not have a material adverse effect on the business,
financial condition, results of operations or prospects of the Company or
its subsidiaries; and, to the best of the Company's knowledge after
reasonable investigation, neither the Company nor any of its subsidiaries
have infringed or are infringing any trademarks, service marks, trade
names, trademark registrations, service mark registrations, domain names or
copyrights, which infringement could reasonably be expected to have a
material adverse effect on the business, financial condition, results of
operations or prospects of the Company or its subsidiaries.
<PAGE> 8
(xxvii) Each of the Company and each Material Subsidiary owns, or
possesses adequate rights to use, all material patents necessary for the
conduct of its business; no valid United States patent is, or to the
knowledge of the Company would be, infringed by the activities of either
the Company or any Material Subsidiary, except as would not have a material
adverse effect on the business, financial condition, results of operations
or prospects of either the Company or any Material Subsidiary; there are no
actions, suits or judicial proceedings pending relating to patents or
proprietary information to which either the Company or any Material
Subsidiary is a party or of which any property of either the Company or any
Material Subsidiary is subject, and, to the knowledge of the Company, no
actions, suits or judicial proceedings are threatened by governmental
authorities or, except as set forth in the Prospectus, others, in each case
as would not have a material adverse effect on the business, financial
condition, results of operations or prospects of either the Company or any
Material Subsidiary, the Company is not aware of any claim by others that
either the Company or any Material Subsidiary is infringing or otherwise
violating the patents or other intellectual property of others and is not
aware of any rights of third parties to any of either the Company's or any
Material Subsidiary's patent applications, licenses which could affect
materially the use thereof by the Company or its subsidiaries.
(xxviii) The Company does not have any obligation or commitment to,
directly or indirectly, purchase or otherwise acquire from any person any
of its capital stock or other securities, whether by firm commitment or
contingent upon the occurrence of any condition.
2. Subject to the terms and conditions herein set forth, (a) the Company
agrees to sell to each of the Underwriters, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Company, at a purchase price of
__% of the principal amount thereof, plus accrued interest, if any, from _____,
2000 to the Time of Delivery hereunder, the principal amount of Notes set forth
opposite the name of such Underwriter in Schedule I hereto and (b) in the event
and to the extent that the Underwriters shall exercise the election to purchase
Optional Notes as provided below, the Company agrees to issue and sell to each
of the Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from the Company, at the same purchase price set forth in
clause (a) of this Section 2, that portion of the aggregate principal amount of
the Optional Notes as to which such election shall have been exercised (to be
adjusted by you so as to eliminate fractions of $1,000) determined by
multiplying such aggregate principal amount of Optional Notes by a fraction the
numerator of which is the maximum aggregate principal amount of Optional Notes
which such Underwriter is entitled to purchase as set forth opposite the name of
such Underwriter in Schedule I hereto and the denominator of which is the
maximum aggregate principal amount of Optional Notes that all of the
Underwriters are entitled to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to $4,500,000 aggregate principal amount of Optional Notes, at
the purchase price of ___% of the principal amount thereof, for the sole purpose
of covering overallotments in the sale of the Firm Notes. Any such election to
purchase Optional Notes may be exercised only by written notice from you to the
Company, given within a period of 45 calendar days after the date of this
Agreement and setting forth the aggregate principal amount of Optional Notes to
be purchased and the date on which such Optional Notes are to be delivered, as
determined by you but in no event earlier than the
<PAGE> 9
First Time of Delivery (as defined in Section 4 hereof) or, unless you and the
Company otherwise agree in writing, earlier than two or later than ten business
days after the date of such notice.
3. Upon the authorization by you of the release of the Firm Notes, the
several Underwriters propose to offer the Firm Notes for sale upon the terms and
conditions set forth in the Prospectus.
4. (a) The Notes to be purchased by each Underwriter hereunder will be
represented by one or more definitive global Notes in book-entry form which will
be deposited by or on behalf of the Company with The Depository Trust Company
("DTC") or its designated custodian. The Company will deliver the Notes to
Southwest Securities, Inc., for the account of such Underwriter, against payment
by or on behalf of such Underwriter of the purchase price therefor by wire
transfer of immediately available funds to the Company, by causing DTC to credit
the Notes to the account of Southwest Securities, Inc. at DTC. The Company will
cause the certificate(s) representing the Notes to be made available for
checking at least 24 hours prior to the Time of Delivery (as defined below) with
respect thereto at the office of Southwest Securities, Inc., 1201 Elm Street,
Suite 3500, Dallas, Texas 75270 (the "Designated Office"). The time and date of
such delivery and payment shall be, with respect to the Firm Notes, 9:00 a.m.,
Dallas time, on ___________ __, 2000 or such other time and date as Southwest
Securities, Inc. and the Company may agree upon in writing, and with respect to
the Optional Notes, 9:00 a.m., Dallas time, on the date specified by Southwest
Securities, Inc. in the written notice given by Southwest Securities, Inc. of
the Underwriters' election to purchase such Optional Notes, or such other time
and date as Southwest Securities, Inc. and the Company may agree upon in
writing. Such time and date for delivery of the Firm Notes is herein called the
"First Time of Delivery", such time and date for delivery of the Optional Notes,
if not the First Time of Delivery, is herein called the "Second Time of
Delivery", and each such time and date for delivery is herein called a "Time of
Delivery".
(b) The documents and Notes to be delivered at each Time of Delivery by or
on behalf of the parties hereto pursuant to Section 7 hereof, including the
cross-receipt for the Notes and any additional documents requested by the
Underwriters pursuant to Section 7(k) hereof, will be delivered at the offices
of Hughes & Luce, L.L.P., 1717 Main Street, Suite 2800, Dallas, Texas 75201 (the
"Closing Location"), and the Notes will be delivered at the Designated Office,
all at each Time of Delivery. A meeting will be held at the Closing Location at
3 p.m., Dallas time, on the Business Day next preceding each Time of Delivery,
at which meeting the final drafts of the documents to be delivered pursuant to
the preceding sentence will be available for review by the parties hereto. For
the purposes of this Section 4, "Business Day" shall mean each Monday, Tuesday,
Wednesday, Thursday and Friday which is not a day on which banking institutions
in the United States are generally authorized or obligated by law or executive
order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to file
such Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this Agreement, or, if applicable, such earlier
time as may be required by Rule 430A(a)(3) under the Act; to make no
further amendment or any supplement to the Registration Statement or
<PAGE> 10
Prospectus which you object promptly after reasonable notice thereof; to
advise you, promptly after it receives notice thereof, of the time when any
amendment to the Registration Statement has been filed or becomes effective
or any supplement to the Prospectus or any amended Prospectus has been
filed and to furnish you copies thereof; to advise you, promptly after it
receives notice thereof, of the issuance by the Commission of any stop
order or of any order preventing or suspending the use of any Preliminary
Prospectus or Prospectus, of the suspension of the qualification of the
Notes for offering or sale in any jurisdiction, of the initiation or
threatening of any proceeding for any such purpose, or of any request by
the Commission for the amending or supplementing of the Registration
Statement or Prospectus or for additional information; and, in the event of
the issuance of any stop order or of any order preventing or suspending the
use of any Preliminary Prospectus or Prospectus or suspending any such
qualification, promptly to use its reasonable best efforts to obtain the
withdrawal of such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Notes and the shares of Stock issuable
upon conversion of the Notes for offering and sale under the securities
laws of such jurisdictions as you may reasonably request and to comply with
such laws so as to permit the continuance of sales and dealings therein in
such jurisdictions for as long as may be necessary to complete the
distribution of the Notes, provided that in connection therewith the
Company shall not be required to qualify as a foreign corporation, to
submit to taxation, or to file a general consent to service of process in
any jurisdiction;
(c) Prior to 10:00 a.m., Dallas time, on the Business Day next
succeeding the date of this Agreement to furnish the Underwriters with
copies of the Prospectus in such quantities as you may reasonably request,
and, if the delivery of a prospectus is required at any time prior to the
expiration of nine months after the time of the issue of the Prospectus in
connection with the offering or sale of the Notes and if at such time any
events shall have occurred as a result of which the Prospectus as then
amended or supplemented would include an untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made when such Prospectus is delivered, not misleading, or, if for any
other reason it shall be necessary during such same period to amend or
supplement the Prospectus or to file under the Exchange Act any document
incorporated by reference in the Prospectus in order to comply with the Act
or the Exchange Act, to notify you and upon your request to prepare and
furnish without charge to each Underwriter and to any dealer in securities
as many copies as you may reasonably request of an amended Prospectus or a
supplement to the Prospectus which will correct such statement or omission
or effect such compliance, and in case any Underwriter is required to
deliver a prospectus in connection with sales of any of the Notes at any
time nine months or more after the time of issue of the Prospectus, upon
your request but at the expense of such Underwriter, to prepare and deliver
to such Underwriter as many copies as you may request of an amended or
supplemented Prospectus complying with Section 10(a)(3) of the Act;
(d) If the Company elects to rely upon Rule 462(b), the Company shall
file a Rule 462(b) Registration Statement with the Commission in compliance
with Rule 462(b)
<PAGE> 11
by 10:00 p.m., Washington, D.C. time, on the date of this Agreement, and
the Company shall at the time of filing either pay to the Commission the
filing fee for the Rule 462(b) Registration Statement or give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the
Act;
(e) To make generally available to its securityholders as soon as
practicable, but in any event not later than 18 months after the effective
date of the Registration Statement (as defined in Rule 158(c)) under the
Act, an earnings statement of the Company and its subsidiaries (which need
not be audited) complying with Section 11(a) of the Act and the rules and
regulations thereunder of the Commission (including, at the option of the
Company, Rule 158);
(f) During the period beginning from the date hereof and continuing to
and including the date 180 days after the effective date of the Prospectus,
not to (A) offer, pledge, sell, contract to sell or otherwise dispose of,
directly or indirectly, except as provided hereunder, the Stock, Notes or
any securities of the Company that are substantially similar to the Notes,
including but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, Stock, Notes or
any such substantially similar securities, without your prior written
consent (other than pursuant to stock option and restricted stock plans
existing on, or upon the conversion, exchange or exercise of convertible,
exchangeable or exercisable securities outstanding as of, the date of this
Agreement), or (B) enter into any swap or other arrangement that transfers
all or a portion of the economic consequences associated with the ownership
of any Stock or Notes, without your prior written consent, except to the
Underwriters pursuant to this Agreement for issuances of capital stock by
the Company in connection with potential future acquisitions provided that
the shares issuable pursuant to any such acquisitions shall not be
transferrable prior to the end of the 180-day period;
(g) To furnish to the holders of the Notes as soon as practicable
after the end of each fiscal year an annual report (including a balance
sheet and statements of income, shareholders' equity and cash flow of the
Company and its consolidated subsidiaries certified by independent public
accountants) and, as soon as practicable after the end of each of the first
three quarters of each fiscal year (beginning with the fiscal quarter
ending after the effective date of the Registration Statement),
consolidated summary financial information of the Company and its
subsidiaries for such quarter in reasonable detail;
(h) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to shareholders, and deliver
to you (i) as soon as they are available, copies of any reports and
financial statements furnished to or filed with the Commission or any
national securities exchange on which any class of securities of the
Company is listed; and (ii) such additional information concerning the
business and financial condition of the Company as you may from time to
time reasonably request (such financial statements to be on a consolidated
basis to the extent the accounts of the Company and its subsidiaries are
consolidated in reports furnished to its shareholders generally or to the
Commission);
<PAGE> 12
(i) To use the net proceeds received by it from the sale of the Notes
pursuant to this Agreement in the manner specified in the Prospectus under
the caption "Use of Proceeds"; and
(j) To use its best efforts to list for quotation, subject to notice
of issuance, the Notes on the Nasdaq National Market ("Nasdaq") and to
maintain the listing of the Notes for a period of three years after the
date of this Agreement.
6. The Company covenants and agrees with the several Underwriters that,
except as provided below, the Company will pay or cause to be paid the
following: (i) the fees, disbursements and expenses of the Company's counsel and
accountants in connection with the registration of the Notes under the Act and
all other expenses in connection with the preparation, printing and filing of
the Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or producing
any Agreement among Underwriters, this Agreement, the Blue Sky Memorandum,
closing documents (including any compilations thereof) and any other documents
in connection with the offering, purchase, sale and delivery of the Notes; (iii)
all expenses in connection with the qualification of the Notes for offering and
sale under state securities laws as provided in Section 5(b) hereof, including
the fees and disbursements of counsel for the Underwriters in connection with
such qualification and in connection with the Blue Sky survey; (iv) all fees and
expenses in connection with listing the Notes on Nasdaq; (v) if applicable, any
fees charged by Securities Rating Services for rating the Notes; (vi) the filing
fees incident to, and the fees and disbursements of counsel for the Underwriters
in connection with, securing any required review by the National Association of
Securities Dealers, Inc. of the terms of the sale of the Notes; (vii) the cost
of preparing the Notes; (viii) the fees and expenses of the Trustee and any
agent of the Trustee and the fees and disbursements of counsel for the Trustee
in connection with the Indenture and the Notes; and (ix) all other costs and
expenses incident to the performance of its obligations hereunder which are not
otherwise specifically provided for in this Section. It is understood that
except as provided in this Section, and Sections 8 and 11 hereof, the
Underwriters will pay all of their own costs and expenses, including the fees of
their counsel, transfer taxes on resale of any of the Notes by them and any
advertising expenses connected with any offers they may make.
7. The obligations of the Underwriters hereunder, as to the Notes to be
delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company herein are, at and as of such Time of Delivery, true and correct,
the condition that the Company shall have performed all of its and their
obligations hereunder theretofore to be performed and the following additional
conditions:
(a) The Prospectus shall have been filed with the Commission pursuant
to Rule 424(b) within the applicable time period prescribed for such filing
by the rules and regulations under the Act and in accordance with Section
5(a) hereof; if the Company has elected to rely upon Rule 462(b), the Rule
462(b) Registration Statement shall have become effective by 10:00 p.m.,
Washington, D.C. time, on the date of this Agreement; no stop order
suspending the effectiveness of the Registration Statement or any part
thereof shall have been issued and no proceeding for that purpose shall
have been initiated or threatened
<PAGE> 13
by the Commission; and all requests for additional information on the part
of the Commission shall have been complied with to your reasonable
satisfaction.
(b) Hughes & Luce, L.L.P., counsel for the Underwriters, shall have
furnished to you their written opinion or opinions, dated such Time of
Delivery, with respect to the matters covered in paragraphs (vi), (vii),
(viii), (xii) and (xvi) of subsection (c) below as well as such other
related matters as you may reasonably request, and such counsel shall have
received such papers and information as they may reasonably request to
enable them to pass upon such matters. In giving such opinion or opinions,
Hughes & Luce, L.L.P. may rely as to all matters of Minnesota law on the
opinion of Maun & Simon, PLC referenced below.
(c) Maun & Simon, PLC, counsel for the Company, shall have furnished
to you their written opinion, dated such Time of Delivery, in form and
substance satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Minnesota, with corporate power and authority to own its properties
and conduct its business as described in the Prospectus;
(ii) The Company has an authorized capitalization as set forth in
the Prospectus, and all of the issued shares of capital stock of the
Company have been duly authorized and validly issued and are fully
paid and non-assessable and not subject to any preemptive or similar
rights; the shares of Stock initially issuable upon conversion of the
Notes have been duly and validly authorized and reserved for issuance
and, when issued and delivered in accordance with the provisions of
the Notes and the Indenture, will be duly and validly issued and fully
paid and non-assessable; and the Stock conforms to the description of
the Stock contained in the Prospectus; and all issuances of securities
of the Company since January 1, 1999 which were not registered under
the Act or Blue Sky or state securities laws were exempt from such
registration, provided that in rendering such opinion, counsel may, as
to factual matters, rely upon certificates of officers of the Company,
filings by the Company with the Commission and representations of
purchasers of securities of the Company contained in any subscription
documents without independent investigation;
(iii) Each of the Company and each Material Subsidiary has been
duly qualified as a foreign corporation for the transaction of
business and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties, or conducts any
business so as to require such qualification, or is subject to no
material liability or disability by reason of failure to be so
qualified in any such jurisdiction (such counsel being entitled to
rely in respect of the opinion in this clause upon opinions of local
counsel and/or certificates of Secretaries of State or other
appropriate public officials and in respect of matters of fact upon
certificates of officers of either the Company or the appropriate
Material Subsidiary, provided that such counsel shall state that they
believe that both you and such counsel are justified
<PAGE> 14
in relying upon such opinions and certificates and that such counsel
furnishes such opinions and certificates to the representatives);
(iv) Each Material Subsidiary has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
its jurisdiction of incorporation; and all of the issued shares of
capital stock of each such subsidiary have been duly authorized and
validly issued, are fully paid and non-assessable, and (except for
directors' qualifying shares) are owned directly or indirectly by the
Company, free and clear of all liens, encumbrances, equities or
claims, other than those described in the Prospectus (such counsel
being entitled to rely in respect of the opinion in this clause upon
opinions of local counsel and certificates of Secretaries of State or
other appropriate public officials and in respect of matters of fact
upon certificates of officers of the Company or its subsidiaries,
provided that such counsel shall state that they believe that both you
and they are justified in relying upon such opinions and certificates
and that such counsel furnishes such opinions and certificates to
you);
(v) To the best of such counsel's knowledge and other than as set
forth in the Prospectus, there are no legal or governmental
proceedings pending to which the Company or any of its subsidiaries is
a party or of which any property of the Company or any of its
subsidiaries is the subject which, if determined adversely to the
Company or any of its subsidiaries, would individually or in the
aggregate have a material adverse effect on the current or future
consolidated financial position, shareholders' equity or results of
operations of the Company and its subsidiaries taken as a whole; and,
to the best of such counsel's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or threatened
by others;
(vi) This Agreement has been duly authorized, executed and
delivered by the Company;
(vii) The Notes delivered by the Company at the Time of Delivery
have been duly authorized, and will be, when issued and delivered
against payment therefor in accordance with this Agreement, validly
issued, and authenticated and constitute valid and legally binding
obligations of the Company entitled to the benefits provided by the
Indenture; and the Notes and the Indenture conform in all material
respects to the descriptions thereof in the Prospectus;
(viii) The Indenture has been duly authorized, executed and
delivered by the Company and (assuming the due authorization,
execution and delivery thereof by the Trustee) constitutes a valid and
legally binding agreement, enforceable against the Company in
accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, reorganization and other laws of general applicability
relating to or affecting creditors' rights and to general equity
principles; and the Indenture has been duly qualified under the Trust
Indenture Act;
<PAGE> 15
(ix) The issue and sale to you of the Notes being delivered at
such Time of Delivery to be sold by the Company and the compliance by
the Company with all of the provisions of the Notes, the Indenture and
this Agreement and the consummation of the transactions herein
contemplated will not conflict with or result in a breach or violation
of any of the terms or provisions of, or constitute a default under,
any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument known to such counsel to which the Company or
any of its subsidiaries is a party or by which the Company or any of
its subsidiaries is bound or to which any of the property or assets of
the Company or any of its subsidiaries is subject, nor will such
action result in any violation of the provisions of the Articles of
Incorporation, as amended, or By-laws of the Company or any statute or
any order, rule or regulation of any court or governmental agency or
body having jurisdiction over the Company or any of its subsidiaries
or any of their properties;
(x) No consent, approval, authorization, order, registration or
qualification of or with any such court or governmental agency or body
is required to be obtained by or on behalf of the Company for the
issue and sale of the Notes or the consummation by the Company of the
transactions contemplated by this Agreement or the Indenture, except
such as have been obtained under the Act and the Trust Indenture Act,
such as may be required under the Act or by the National Association
of Securities Dealers, Inc. in connection with the shares of Stock
issuable upon conversion of the Notes, and such consents, approvals,
authorizations, registrations or qualifications as may be required
under state or foreign securities or Blue Sky laws in connection with
the purchase and distribution of the Notes by the Underwriters;
(xi) Neither the Company nor any of its subsidiaries is in
violation of its Articles of Incorporation, as amended or By-laws or
in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any
indenture, mortgage, deed of trust, loan agreement, lease or other
agreement or instrument known to such counsel to which it is a party
or by which it or any of its properties may be bound;
(xii) The statements set forth in the Prospectus under the
caption "Description of Convertible Notes" and "Description of Capital
Stock", insofar as they purport to constitute a summary of the terms
of the Notes and the Stock, under the caption "Certain Federal Tax
Considerations", and under the caption "Underwriting", insofar as they
purport to summarize the provisions of the laws and documents referred
to therein, are accurate summaries in all material respects;
(xiii) Each of the Company and each subsidiary is not an
"investment company" or an entity "controlled" by an "investment
company", as such terms are defined in the Investment Company Act;
(xiv) To the best of such counsel's knowledge, except as have
been waived at such Time of Delivery, there are no persons with
registration or similar rights to
<PAGE> 16
have any securities of the Company registered pursuant to the
Registration Statement;
(xv) To the best of such counsel's knowledge and without
independent investigation, the Company and each of its subsidiaries
have obtained all environmental permits, licenses and other
authorizations required by federal, state and local law in order to
conduct their businesses except as described in the Prospectus; the
Company and each of its subsidiaries are conducting their businesses
in compliance with such permits, licenses and authorizations and with
applicable environmental laws, except where the failure to be in
compliance would not have a material adverse effect on the financial
position, shareholders' equity or results of operations of the Company
and its subsidiaries, taken as a whole, and, except as described in
the Prospectus, the Company is not in violation of any Federal or
state law or regulation relating to the storage, handling, disposal,
release or transportation of hazardous or toxic materials;
(xvi) The Registration Statement and the Prospectus and any
further amendments and supplements thereto made by the Company prior
to such Time of Delivery (other than the financial statements and
related schedules and financial and statistical data therein, as to
which such counsel need express no opinion) comply as to form in all
material respects with the requirements of the Act and the rules and
regulations thereunder; although they do not assume any responsibility
for the accuracy, completeness or fairness of the statements contained
in the Registration Statement or Prospectus, except for those referred
to in the opinion in paragraph (xii) of this subsection (c), they have
no reason to believe that, as of its effective date, the Registration
Statement or any further amendment thereto made by the Company prior
to such Time of Delivery (other than the financial statements and
related schedules and financial and statistical data therein, as to
which such counsel need express no opinion) contained an untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading or that, as of its date, the Prospectus or any
further amendment or supplement thereto made by the Company prior to
such Time of Delivery (other than the financial statements and related
schedules and financial and statistical data therein, as to which such
counsel need express no opinion) contained an untrue statement of a
material fact or omitted to state a material fact necessary to make
the statements therein, in light of the circumstances under which they
were made, not misleading or that, as of such Time of Delivery, the
Prospectus or any further amendment or supplement thereto made by the
Company prior to such Time of Delivery (other than the financial
statements and related schedules therein, as to which such counsel
need express no opinion) contains an untrue statement of a material
fact or omits to state a material fact necessary to make the
statements therein, in light of the circumstances under which they
were made, not misleading; and they do not know of any contracts or
other documents of a character required to be filed as an exhibit to
the Registration Statement or required to be described in the
Registration Statement or the Prospectus which are not filed or
described as required; and
<PAGE> 17
(xvii) The documents incorporated by reference in the Prospectus
(other than the financial statements and related schedules and
financial and statistical data therein, as to which such counsel need
express no opinion), when they were filed with the Commission,
complied as to form in all material respects with the requirements of
the Exchange Act and the rules and regulations of the Commission
thereunder; and such counsel has no reason to believe that any of such
documents, when such documents were so filed, contained an untrue
statement of material fact or omitted to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made when such documents were so
filed, not misleading.
In rendering such opinion, such counsel may state that they express no
opinion as to the laws of any jurisdiction other than the laws of the State
of Minnesota (excluding conflict of law rules) and the federal laws of the
United States.
(d) On the date of the Prospectus at a time prior to the execution of
this Agreement, at 9:00 a.m., Dallas time, on the effective date of any
post-effective amendment to the Registration Statement filed subsequent to
the date of this Agreement and also at each Time of Delivery, Ernst & Young
LLP shall have furnished to you a letter or letters, dated the respective
dates of delivery thereof, in form and substance satisfactory to you, to
the effect set forth in Annex I hereto.
(e) (i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements
included in the Prospectus any loss or interference with its business from
fire, explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action, order
or decree, otherwise than as set forth or contemplated in the Prospectus,
and (ii) since the respective dates as of which information is given in the
Prospectus there shall not have been any change in the capital stock,
short-term debt or long-term debt of the Company or any of its subsidiaries
or any change, or any development involving a prospective change, in or
affecting the general affairs, business, management, financial position,
shareholders' equity or results of operations of the Company and its
subsidiaries, otherwise than as set forth or contemplated in the
Prospectus, the effect of which, in any such case described in clause (i)
or (ii), is in the judgment of the representative(s) so material and
adverse as to make it impracticable or inadvisable to proceed with the
public offering or the delivery of the Notes being delivered at such Time
of Delivery on the terms and in the manner contemplated in the Prospectus.
(f) On or after the date hereof there shall not have occurred any of
the following: (i) a suspension or material limitation in trading in
securities generally on the New York Stock Exchange or Nasdaq; (ii) a
suspension or material limitation in trading in the Company's securities;
(iii) a general moratorium on commercial banking activities declared by
either Federal or New York state authorities; or (iv) the outbreak or
escalation of hostilities involving the United States or the declaration by
the United States of a national emergency or war, if the effect of any such
event specified in this clause (iv) in the judgment
<PAGE> 18
of the representative(s) makes it impracticable or inadvisable to proceed
with the public offering or delivery of the Notes being delivered at such
Time of Delivery on the terms and in the manner contemplated in the
Prospectus.
(g) The Company has obtained and delivered to the Underwriters
executed copies of an agreement from those persons named on Schedule III
hereto to the effect set forth in Annex II.
(h) The Company shall have furnished or caused to be furnished to you
at such Time of Delivery certificates of officers of the Company
satisfactory to you as to the accuracy of the representations and
warranties of the Company herein at and as of such Time of Delivery, as to
the performance by the Company of all of its obligations hereunder to be
performed at or prior to such Time of Delivery, and as to such other
matters as you may reasonably request, and the Company shall have furnished
or caused to be furnished certificates as to the matters set forth in
subsections (a) and (d) of this Section and as to such other matters as you
may reasonably request; and
(i) The Company shall have complied with the provisions of Section
5(c) hereof with respect to the furnishing of prospectuses on the Business
Day next succeeding the date of this Agreement.
8. (a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such action or claim as such expenses are
incurred; provided, however, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the Registration Statement
or the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through Southwest Securities, Inc. expressly for use therein.
(b) Each Underwriter will indemnify and hold harmless the Company against
any losses, claims, damages or liabilities to which the Company may become
subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in any Preliminary
Prospectus, the
<PAGE> 19
Registration Statement or the Prospectus or any such amendment or supplement in
reliance upon and in conformity with written information furnished to the
Company by such Underwriter through you expressly for use therein; and will
reimburse the Company for any legal or other expenses reasonably incurred by the
Company in connection with investigating or defending any such action or claim
as such expenses are incurred.
(c) Promptly after receipt by an indemnified party under subsection (a) or
(b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against an indemnifying party
under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve it from any liability which it may have to any indemnified party
otherwise than under such subsection. In case any such action shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and,
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such subsection for any legal expenses of
other counsel or any other expenses, in each case subsequently incurred by such
indemnified party, in connection with the defense thereof other than reasonable
costs of investigation. No indemnifying party shall, without the written consent
of the indemnified party, effect the settlement or compromise of, or consent to
the entry of any judgment with respect to, any pending or threatened action or
claim in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified party is an actual or potential party
to such action or claim) unless such settlement, compromise or judgment (i)
includes an unconditional release of the indemnified party from all liability
arising out of such action or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act, by or on behalf of
any indemnified party.
(d) If the indemnification provided for in this Section 8 is unavailable to
or insufficient to hold harmless an indemnified party under subsection (a) or
(b) above in respect of any losses, claims, damages or liabilities (or actions
in respect thereof) referred to therein, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities (or actions in respect thereof)
in such proportion as is appropriate to reflect the relative benefits received
by the Company on the one hand and the Underwriters on the other from the
offering of the Notes. If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law or if the indemnified
party failed to give the notice required under subsection (c) above, then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company on the one hand and
the Underwriters on the other in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities (or actions in
respect thereof), as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the Underwriters
on the other shall be deemed to be in the same proportion as the total net
proceeds from the offering of the Notes (before deducting expenses) received by
the Company bear to the total underwriting discounts and commissions received by
the Underwriters with respect to
<PAGE> 20
the Notes, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or the Underwriters on the other and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and the Underwriters
agree that it would not be just and equitable if contributions pursuant to this
subsection (d) were determined by pro rata allocation (even if the Underwriters
were treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations referred
to above in this subsection (d). The amount paid or payable by an indemnified
party as a result of the losses, claims, damages or liabilities (or actions in
respect thereof) referred to above in this subsection (d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (d), no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Notes underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) The obligations of the Company under this Section 8 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 8 shall be in addition to any liability which
the respective Underwriters may otherwise have and shall extend, upon the same
terms and conditions, to each officer and director of the Company (including any
person who, with his or her consent, is named in the Registration Statement as
about to become a director of the Company) and to each person, if any, who
controls the Company within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to purchase the
Notes which it has agreed to purchase hereunder at the Time of Delivery, you may
in your discretion arrange for you or another party or other parties to purchase
such Notes on the terms contained herein. If within 36 hours after such default
by any Underwriter you do not arrange for the purchase of such Notes, then the
Company shall be entitled to a further period of 36 hours within which to
procure another party or other parties satisfactory to you to purchase such
Notes on such terms. In the event that, within the respective prescribed
periods, you notify the Company that you have so arranged for the purchase of
such Notes, or the Company notifies you that they have so arranged for the
purchase of such Notes, you or the Company shall have the right to postpone such
Time of Delivery for a period of not more than seven days, in order to effect
whatever changes may thereby be made necessary in the Registration Statement or
the Prospectus, or in any other documents or arrangements, and the Company
agrees to file promptly any amendments to the Registration Statement or the
Prospectus which in your opinion may thereby be made necessary. The term
"Underwriter" as used in this Agreement shall include any person substituted
under this Section with like effect as if such person had originally been a
party to this Agreement with respect to such Notes.
<PAGE> 21
(b) If, after giving effect to any arrangements for the purchase of the
Notes of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate principal amount of such Notes
which remains unpurchased does not exceed one-eleventh of the aggregate
principal amount of all the Notes to be purchased at such Time of Delivery, then
the Company shall have the right to require each non-defaulting Underwriter to
purchase the principal amount of Notes which such Underwriter agreed to purchase
hereunder at such Time of Delivery and, in addition, to require each
non-defaulting Underwriter to purchase its pro rata share (based on the
principal amount of Notes which such Underwriter agreed to purchase hereunder)
of the Notes of such defaulting Underwriter or Underwriters for which such
arrangements have not been made; but nothing herein shall relieve a defaulting
Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the purchase of the
Notes of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate principal amount of such Notes
which remains unpurchased exceeds one-eleventh of the aggregate principal amount
of all the Notes to be purchased at such Time of Delivery, or if the Company
shall not exercise the right described in subsection (b) above to require
non-defaulting Underwriters to purchase Notes of a defaulting Underwriter or
Underwriters, then this Agreement or, with respect to the Second Time of
Delivery, the obligations of the Underwriters to purchase and of the Company to
sell the Optional Notes shall thereupon terminate, without liability on the part
of any non-defaulting Underwriter or the Company, except for the expenses to be
borne by the Company and the Underwriters as provided in Section 6 hereof and
the indemnity and contribution agreements in Section 8 hereof; but nothing
herein shall relieve a defaulting Underwriter from liability for its default.
10. The respective indemnities, agreements, representations, warranties and
other statements of the Company and the several Underwriters, as set forth in
this Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of any Underwriter or any controlling person of any Underwriter, or the Company,
or any officer or director or controlling person of the Company, and shall
survive delivery of and payment for the Notes.
11. If this Agreement shall be terminated pursuant to Section 9 hereof, the
Company shall not then be under any liability to any Underwriter except as
provided in Section 6 and Section 8 hereof; but, if for any other reason any
Notes are not delivered by or on behalf of the Company as provided herein, the
Company will reimburse the Underwriters through you for all out-of-pocket
expenses approved in writing by you, including fees and disbursements of
counsel, reasonably incurred by the Underwriters in making preparations for the
purchase, sale and delivery of the Notes not so delivered, but the Company shall
then be under no further liability to any Underwriter in respect of the Notes
not so delivered except as provided in Section 6 and Section 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement
<PAGE> 22
on behalf of any Underwriter made or given by you jointly or by Southwest
Securities, Inc. on behalf of you as the representative.
All statements, requests, notices, and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Southwest
Securities, Inc. at 1201 Elm Street, Suite 3500, Dallas, Texas 75270, Attention:
Corporate Syndicate Department; and if to the Company shall be delivered or sent
by mail, telex or facsimile transmission to the address of the Company set forth
in the Registration Statement, Attention: President; provided, however, that any
notice to an Underwriter pursuant to Section 8(c) hereof shall be delivered or
sent by mail, telex or facsimile transmission to such Underwriter at its address
set forth in its Underwriters' Questionnaire or telex constituting such
Questionnaire, which address will be supplied to the Company by you upon
request. Any such statements, requests, notices or agreements shall take effect
upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriters and the Company and, to the extent provided in Sections 8
and 10 hereof, the officers and directors of the Company and each person who
controls the Company or any Underwriter, and their respective heirs, executors,
administrators, successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. No purchaser of any of the
Notes from any Underwriter shall be deemed a successor or assign by reason
merely of such purchase.
14. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is not open for business.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF TEXAS.
16. This Agreement may be executed by any one or more of the parties hereto
in any number of counterparts, each of which shall be deemed to be an original,
but all such counterparts shall together constitute one and the same instrument.
17. Southwest Securities, Inc. hereby agrees to act as a "qualified
independent underwriter," as such term is defined in Section (b)(15) of Rule
2720 of the NASD Conduct Rules, in connection with the offering contemplated by
this Agreement. As a "qualified independent underwriter," Southwest Securities,
Inc. shall recommend the minimum yield at which the Notes can be offered to the
public and the maximum initial conversion price at which the Notes can be
converted into shares of Stock. The Company and Miller, Johnson & Kuehn, Inc.
agree that they shall not offer the Notes at a lower yield than such minimum
yield or at a conversion price higher than such maximum initial conversion
price. Southwest Securities, Inc. represents and warrants that it meets the
applicable requirements under Section (b)(15) of Rule 2720 to act as a
"qualified independent underwriter" in connection with the offering contemplated
by this Agreement.
If the foregoing is in accordance with your understanding, please sign and
return to us one counterpart hereof for the Company and for each of the
representatives plus one counterpart hereof for each counsel and the Custodian,
if any, and upon the acceptance hereof by you, on behalf of
<PAGE> 23
each of the Underwriters, this letter and such acceptance hereof shall
constitute a binding agreement among each of the Underwriters and the Company.
It is understood that your acceptance of this letter on behalf of each of the
Underwriters is pursuant to the authority set forth in a form of Agreement among
Underwriters, the form of which shall be submitted to the Company for
examination, upon request, but without warranty on your part as to the authority
of the signers thereof.
Very truly yours,
STOCKWALK.COM GROUP, INC.
By:___________________________
Name:_________________________
Title:________________________
Accepted as of the date hereof:
SOUTHWEST SECURITIES, INC.
MILLER, JOHNSON & KUEHN, INC.
By: Southwest Securities, Inc.
On behalf of each of the Underwriters
By:___________________________
Name:_________________________
Title:________________________
<PAGE> 1
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
We calculated net income per share in accordance with FASB Statement No.
128 by dividing net income by the weighted average number of shares of common
stock outstanding to arrive at the Net Income Per Common Share -- Basic. We
calculated Net Income Per Common Share -- Diluted 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 of 1999 and prior reflect the conversion of MJK shares
into Stockwalk.com Group, Inc. shares at a rate of 3.72382 to 1.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED MARCH 31, DECEMBER 31,
-------------------------------------------------------------- -----------------------
1995 1996 1997 1998 1999 1998 1999
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Weighted average shares outstanding --
basic................................ 13,428,000 15,103,700 15,848,500 15,848,500 15,848,500 15,848,500 19,534,600
Dilutive effect of stock options and
warrants after application of the
treasury stock method................ -- -- -- -- -- -- 140,700
---------- ---------- ---------- ---------- ---------- ---------- ----------
Weighted average shares outstanding --
diluted.............................. 13,428,000 15,103,700 15,848,500 15,848,500 15,848,500 15,848,500 19,675,300
========== ========== ========== ========== ========== ========== ==========
</TABLE>
<PAGE> 1
EXHIBIT 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31, DECEMBER 31,
---------------------------------------------------------------- -------------------------
1995 1996 1997 1998 1999 1998 1999
---------- ---------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Pre-tax income....... $ 399,600 $ 858,900 $ 223,803 $(1,823,300) $ 2,257,586 $ 2,132,700 $(5,566,600)
Plus: fixed
charges............ 2,039,400 4,780,400 8,083,600 12,156,486 12,903,130 9,887,900 11,841,800
---------- ---------- ---------- ----------- ----------- ----------- -----------
Earnings............. $2,439,000 $5,639,300 $8,307,403 $10,333,186 $15,160,716 $12,020,600 $ 6,275,200
========== ========== ========== =========== =========== =========== ===========
Interest............. $1,832,000 $4,429,200 $7,427,400 $11,027,386 $11,805,900 $ 9,006,000 $10,718,200
1/3 Rent............. 207,400 351,200 656,200 1,129,100 1,097,230 881,900 1,123,600
---------- ---------- ---------- ----------- ----------- ----------- -----------
Fixed charges........ $2,039,400 $4,780,400 $8,083,600 $12,156,486 $12,903,130 $ 9,887,900 $11,841,800
========== ========== ========== =========== =========== =========== ===========
Ratio................ 1.20x 1.18x 1.03x 0.85x 1.17x 1.22x 0.53x
========== ========== ========== =========== =========== =========== ===========
</TABLE>
The ratio of earnings to fixed charges has been computed by dividing
earnings available for fixed charges (income or loss from continuing operations
before interest expense and income taxes plus fixed charges) by fixed charges.
Fixed charges consists of interest expense (including amortization of deferred
financing costs) and an estimate of the portion of rental expense that is
representative of the interest factor (currently deemed to be one-third of all
rental expense). As a result of losses incurred in 1998 and for the nine months
ended December 31, 1999, fixed charges exceeded earnings available for fixed
charges in those periods by $1,823,300 and $5,566,600, respectively.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated May 21, 1999 related to the financial statements of
MJK Holdings, Inc. and May 15, 1997, except for Notes 17, 18 and 19, as to which
the date is April 27, 1999, related to the financial statements of Miller,
Johnson & Kuehn, Incorporated in the Registration Statement (Form S-2) and
related Prospectus of Stockwalk.com Group, Inc. for the registration of
$30,000,000 in Convertible Subordinated Notes.
/s/ ERNST & YOUNG LLP
Minneapolis, Minnesota
April 24, 2000
<TABLE> <S> <C>
<ARTICLE> BD
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1999
<PERIOD-END> DEC-31-1998 DEC-31-1999
<CASH> 86,681,200 103,990,400
<RECEIVABLES> 131,185,600 166,464,200
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 15,538,900 91,973,100
<INSTRUMENTS-OWNED> 19,710,400 30,809,600
<PP&E> 2,189,900 1,325,700
<TOTAL-ASSETS> 271,861,800 427,268,500
<SHORT-TERM> 29,700,000 34,100,000
<PAYABLES> 255,171,800 257,222,500
<REPOS-SOLD> 0 0
<SECURITIES-LOANED> 1,505,600 89,814,400
<INSTRUMENTS-SOLD> 1,774,200 755,600
<LONG-TERM> 1,019,500 4,852,700
0 0
0 0
<COMMON> 42,600 791,700
<OTHER-SE> 2,650,100 10,623,600
<TOTAL-LIABILITY-AND-EQUITY> 271,861,800 427,268,500
<TRADING-REVENUE> 11,655,700 9,146,400
<INTEREST-DIVIDENDS> 11,565,700 13,941,000
<COMMISSIONS> 7,063,400 8,282,100
<INVESTMENT-BANKING-REVENUES> 6,013,400 6,938,100
<FEE-REVENUE> 2,118,700 3,470,900
<INTEREST-EXPENSE> 9,006,000 10,718,200
<COMPENSATION> 19,536,800 22,648,800
<INCOME-PRETAX> 2,132,700 (5,566,600)
<INCOME-PRE-EXTRAORDINARY> 2,132,700 (5,566,600)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,334,400 (3,299,600)
<EPS-BASIC> 0.08 (0.17)
<EPS-DILUTED> 0.08 (0.17)
</TABLE>
