<PAGE> 1
FILED PURSUANT TO RULE 424(B)(1)
PROSPECTUS
$20,000,000
[STOCKWALK.COM LOGO]
10% 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
approximately 111 shares for each $1,000 of Convertible Notes that you convert
(equivalent to a conversion price of $9.00 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 10%, payable every six months
on February 1 and August 1, for as long as you own the Convertible Notes. The
Convertible Notes will mature on August 1, 2005. We may, at our option, redeem
some or all of the Convertible Notes at any time on or after August 1, 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 American Stock Exchange.
Our common stock is listed on the Nasdaq NMS under the symbol "STOK." On
July 31, 2000, the last-reported sale price of our common stock was $7.63 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
-------- -----
<S> <C> <C>
Public offering price....................................... 100% $20,000,000
Underwriting discount....................................... 6% $ 1,200,000
Proceeds, before expenses, to Stockwalk.com Group........... 94% $18,800,000
</TABLE>
The public offering price set forth above does not include accrued
interest, if any. Interest on the Convertible Notes will accrue from August 1,
2000.
To the extent that the underwriters sell more than $20,000,000 principal
amount of Convertible Notes, the underwriters have the option to purchase up to
an additional $3,000,000 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 August 8, 2000.
SOUTHWEST SECURITIES MILLER, JOHNSON & KUEHN, INCORPORATED
R.J. STEICHEN & COMPANY
Prospectus dated August 3, 2000
<PAGE> 2
[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> 3
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. Stockwalk.com's services are now also being offered to customers of
small to medium-sized financial institutions and affinity groups through our
private label program. We recently renamed our Arnold Securities, Inc.
broker-dealer subsidiary Online Brokerage Solutions, Inc. Through this
wholly-owned subsidiary, we will focus our efforts to market our private label
Stockwalk.com online brokerage services to Internet portals, small to
medium-sized financial institutions and affinity groups. Stockwalk.com will
continue to service existing and new retail brokerage accounts.
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.
ACQUISITIONS
On June 6, 2000, we announced that we executed definitive agreements to
acquire the brokerage and investment banking firms of R.J. Steichen & Company
("Steichen") and Kinnard Investments, Inc. ("Kinnard"). Steichen and Kinnard,
through its wholly-owned broker-dealer subsidiary, John G. Kinnard and Company,
Incorporated ("JGK"), are full service securities brokerage and financial
services firms headquartered in Minneapolis, Minnesota. The combination of these
firms will increase our total retail sales force from approximately 160 licensed
sales representatives to over 400. After completing these transactions, we will
have 34 offices in eight states. Our combined revenues for the 12 months ended
March 31, 2000, on a pro forma basis, were approximately $185.4 million, or
approximately 250% of approximately $70.9 million in revenues we recorded for
the year ended March 31, 2000. Financial information with respect to
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Steichen and Kinnard and pro forma combined financial information appears in
more detail in the attached financial statements. See Index to Financial
Statements.
Steichen and Kinnard, through JGK, emphasize traditional retail brokerage
services. Their investment banking activities are similar to ours with an
emphasis on small capitalization, emerging and start-up businesses. We believe
that combining our businesses will allow us to provide a broader and deeper
array of financial products and services to our customers and strengthen our
ability to attract and retain talented sales personnel. Both Kinnard and
Steichen will continue to operate under their existing names for the immediate
future.
We completed the Steichen merger on August 1, 2000. The Steichen
shareholders received approximately 4,300,000 shares of our restricted common
stock in exchange for all the outstanding shares of Steichen's common stock. An
additional 2,000,000 shares may be issued upon the achievement of certain
agreed-upon pre-tax earnings during the two years following closing of the
transaction.
Completion of the Kinnard transaction is subject to Kinnard shareholder
approval and the satisfaction of certain conditions which are customary in
merger transactions. We expect the Kinnard transaction to close in September
2000. Subject to certain adjustments, Kinnard shareholders will receive $6.00 in
cash and approximately one-half of a share of our common stock in exchange for
each outstanding share of Kinnard common stock, or approximately 2,400,000
shares of our common stock in the aggregate. The shares issued to Kinnard
shareholders will be registered and freely tradable, except for shares received
by certain Kinnard affiliates. We expect to issue a total of approximately
8,735,000 shares of our common stock and pay approximately $32.4 million in cash
in both acquisitions.
The terms of each merger are explained in more detail under "Business --
Acquisitions."
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 55 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 brokerage service including order placement, portfolio
tracking, account information, market information and news 24 hours a day, seven
days a week. When we started
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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 includes our
private label arrangements with small to medium-sized financial institutions and
affinity groups and Internet portals through our Online Brokerage Solutions
subsidiary. 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. Currently, Online Brokerage Solutions has agreements with 12 online
bank service providers and also has direct agreements with 25 financial
institutions and an affinity group and Internet portal. In total, these
agreements provide Online Brokerage Solutions with exposure to approximately
5,800 financial institutions, affinity groups and Internet portals serving
approximately 3.0 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 legislative 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 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 and members without incurring the large
capital costs associated with developing in-house
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technology. Each financial institution and group has the option of marketing the
online brokerage service as "Online Brokerage Solutions" or to private label the
product under its own name. The Steichen and Kinnard acquisitions will
complement our strategy in that they increase our presence in the
Minneapolis-St. Paul market. In addition, we will, upon completion of the
transactions, have an increased customer base and sales force and have
additional cash to fund our online initiatives.
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 1,600,000 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. Telescan's content is incorporated
into our recently released new version of the Stockwalk.com website. 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 $1.8 million 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 serves approximately 1,100 primarily
individual accounts holding assets totaling approximately $800 million. In June
2000, we renamed our Arnold Securities, Inc. broker-dealer subsidiary Online
Brokerage Solutions, Inc. to focus its business on our private label online
brokerage services.
On July 25, 2000, we announced our results of operations for the quarter
ended June 30, 2000, which included revenues of $20.8 million and a net loss of
$1.2 million, or $.05 per diluted share, compared to revenues of $13.2 million
and a loss of $1.0 million, or $.07 per diluted share, for the same period in
1999. The current year quarterly loss was primarily attributable to our online
trading operations, as Stockwalk.com continued to invest heavily in personnel,
technology and marketing. Our online trading operations had revenue of $1.3
million for the quarter ended June 30, 2000. Results for the quarter ended June
30, 2000 reflect lower stock market trading activity than the quarter ended
March 31, 2000.
THE OFFERING
Convertible Subordinated
Notes Offered................... $20,000,000.
Additional Securities........... We have granted the underwriters an option
for 45 days to purchase up to an additional
$3,000,000 in principal amount of
Convertible Notes to cover over-allotments.
See "Underwriting."
Purchases by Affiliates......... Certain of our officers, directors and
employees, and certain officers, directors
and employees of our subsidiaries, Kinnard
and Steichen, including certain of
Steichen's independent contractor
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brokers, have indicated an interest in
purchasing a portion of the Convertible
Notes offered hereby on the same terms and
conditions as are set forth herein. Such
purchases are not expected to exceed 15% of
the Convertible Notes offered hereby,
excluding notes sold pursuant to the
underwriters' over-allotment option.
Issue Price..................... We are offering the Convertible Notes for
$1,000 per Convertible Note purchased.
Maturity........................ August 1, 2005.
Interest........................ We will pay interest on the Convertible
Notes at an annual rate of 10%.
Interest Payment Dates.......... We will pay the interest due on the
Convertible Notes every six months on
February 1 and August 1. We will make the
first payment on February 1, 2001.
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
approximately 111 shares for each $1,000 of
Convertible Notes that you convert
(equivalent to a conversion price of
approximately $9.00 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
$55.6 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 August 1, 2003, at the prices listed
under "Description of Convertible
Notes -- Optional
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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.
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 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
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by The Depository Trust Company and its
participants and indirect participants.
Use of Proceeds................. We intend to apply approximately $11.0
million of the estimated net proceeds of
this Offering to fund the Kinnard merger.
The balance of the estimated net proceeds
will be used to expand our online securities
business and for working capital.
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 American Stock Exchange. We have
reserved "SKC.A" as a symbol for the
Convertible Notes on the American Stock
Exchange.
-------------------------
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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STOCKWALK.COM GROUP, INC.
SUMMARY CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for each of the five
fiscal years ended March 31, 1996, through March 31, 2000, have been derived
from our audited consolidated financial statements and the audited consolidated
financial statements of MJK for the fiscal year ended March 31, 1996, MJK
Holdings, Inc. (MJK's parent) for the fiscal years ended March 31, 1997, 1998
and 1999 and Stockwalk.com Group, Inc. for the fiscal year ended March 31, 2000.
The unaudited pro forma financial data present annual operating results for the
year ended March 31, 2000, giving effect to the acquisitions of Steichen and
Kinnard and the assumed receipt of the net proceeds from the sale of the
Convertible Notes as if they had occurred on April 1, 1999, and balance sheet
data as of March 31, 2000, giving effect to the acquisitions of Steichen and
Kinnard and the assumed receipt of the net proceeds from the sale of the
Convertible Notes as if they had occurred on March 31, 2000.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
--------------------------------------------------------------
PRO FORMA
1996 1997 1998 1999 2000 2000
------- ------- ------- ------- ------- -----------
(IN THOUSANDS, EXCEPT RATIO AND PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Total revenues............... $26,944 $32,607 $47,093 $55,590 $70,970 $185,381
Total expenses............... 26,085 32,383 48,916 53,332 73,509 176,160
Income (loss) before
income taxes............... 859 224 (1,823) 2,258 (2,539) 9,221
Net income (loss)............ $ 525 $ 190 $(1,224) $ 1,273 $(1,700) $ 3,542
Basic and diluted earnings
(loss) per share........... $ 0.03 $ 0.01 $ (0.08) $ 0.08 $ (0.09) $ 0.10
Ratio of earnings to
fixed charges.............. 1.18x 1.03x 0.85x 1.17x 0.86x 1.31x
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 2000
MARCH 31, -----------------------
1999 ACTUAL PRO FORMA
--------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 3,201 $ 5,534 $ 9,546
Total assets.................................... 322,353 538,875 791,678
Total debt...................................... 48,113 55,619 88,962
Shareholders' equity............................ 7,011 24,652 89,515
</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 of
losses incurred in 1998 and 2000, fixed charges exceeded earnings
available for fixed charges in those periods by approximately $1.8
million and $2.5 million, respectively.
- The pro forma data assume that the underwriters' over-allotment option is
not exercised.
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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 an after-tax loss of $1.7 million during our fiscal year
ended on March 31, 2000. The loss was primarily related to start-up costs
associated with our online brokerage business that commenced operations in
September 1999. For the quarter ended June 30, 2000, we experienced a net loss
of $1.2 million. This loss was primarily attributable to expenses incurred in
our online trading operations, as Stockwalk.com continued to invest heavily in
personnel, technology and marketing. While our recently announced Steichen and
Kinnard acquisitions significantly expand our traditional full service brokerage
business, we are depending on our online brokerage business, particularly our
private label growth strategy, to provide a significant portion of our future
revenue growth. However, we cannot assure you that our growth strategy will
prove to be successful. 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 expect to spend substantial additional amounts to ramp-up Online
Brokerage Solutions, and these amounts may not be recovered. In addition, 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.
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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
results will fluctuate from time-to-time, 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, banks or discount brokers may be slow to convert to online brokerage
services for a variety of reasons, including security and privacy concerns. If
the market for private label online brokerage services does not develop as 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 in a timely and cost-effective manner.
The development of new services or products or enhanced versions of
existing services and products may require substantial capital to cover related
expenditures. 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
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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.
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. 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. We do not have long-term agreements with any of these third
parties, including Digital Island. 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
inadequate 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
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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 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 March 31, 2000, customer margin loans owed to us totaled approximately
$216 million. If the Steichen and Kinnard transactions had been completed on
March 31, 2000, customer margin loans owed to us would have totaled
approximately $403.1 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. Furthermore, we will, following the closing of the Kinnard and
Steichen transactions, be subject to additional net capital requirements for
each of these new broker-dealer subsidiaries. If our broker-dealer subsidiaries
fail to maintain required net capital levels, we may be subject to suspension or
revocation of our license,
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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.
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.
WE MAY NOT COMPLETE THE KINNARD MERGER
While we have entered into a definitive agreement with respect to the
Kinnard transaction, we cannot assure you that this merger will be completed.
The Kinnard transaction requires approval by Kinnard's shareholders. Kinnard has
scheduled a shareholders' meeting on September 5, 2000 for this purpose. If this
merger is not completed, we will be required to absorb the expenses and costs
associated with the evaluation and negotiation of, and the preparation for
closing of, the merger. Additionally, we are obligated to release $1.0 million
currently held in escrow to Kinnard if we fail to complete that merger due to,
among other things, our knowing action or inaction.
FAILURE TO SUCCESSFULLY INTEGRATE THE STEICHEN AND KINNARD BUSINESSES WILL
NEGATIVELY AFFECT OUR ABILITY TO REALIZE POTENTIAL EFFICIENCIES
Although we intend to operate Steichen and Kinnard as separate entities
following the completion of the Kinnard and Steichen mergers, we will be
required to integrate the operations, technology and services of these
organizations into our business. This integration must occur in a timely and
efficient manner. Additionally, we will want to retain key personnel from both
organizations. Following integration of the organizations, we face the risk that
expected revenue growth and synergistic benefits may not materialize. Our
failure to successfully integrate these organizations or to successfully manage
the challenges presented during and following the integration process may result
in our not achieving the anticipated potential benefits of the acquisitions. Any
delay encountered in the transition process could materially and adversely
affect our business, financial condition and operating results.
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THE KINNARD AND STEICHEN MERGERS WILL RESULT IN A SIGNIFICANT AMOUNT OF GOODWILL
WHICH WILL BE A FINANCIAL STATEMENT CHARGE TO FUTURE REPORTED EARNINGS
Following the completion of the Kinnard and Steichen mergers, we will
recognize approximately $73.0 million in goodwill for financial reporting
purposes. This amount is expected to be amortized over a period of 20 years.
This amortization will result in a pre-tax charge to earnings of approximately
$3.6 million per year and could adversely affect the price of our stock.
IF THE KINNARD MERGER DOES NOT CLOSE, OUR PROJECTED CASH FLOW MAY BE ADVERSELY
AFFECTED
If we fail to complete the Kinnard merger, we may experience a reduction in
our projected cash flow. We intend to use cash flow generated by Kinnard in our
continuing operations. The loss of expected cash flow could force us to slow
down our expansion plans and could adversely affect our ability to service our
debt obligations, including the Convertible Notes.
OUR SUCCESS DEPENDS UPON RETAINING 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. In addition, we will be substantially dependent upon the continued
services of Messrs. John E. and John C. Feltl, the Chief Executive Officer and
Director of Corporate Finance, respectively, of Steichen. 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 August 1, 2000, our directors and executive officers beneficially
owned, in the aggregate, approximately 19,800,000 shares of our common stock,
representing approximately 75.0% of our common stock outstanding. Eldon C.
Miller, David B. Johnson, Paul R. Kuehn, Stanley D. Rahm, John E. Feltl and John
C. Feltl directly or indirectly own approximately 70.0% of our common stock,
excluding shares issuable to the former Steichen shareholders pursuant to the
earn-out described under "Business--Acquisitions." Accordingly, they will
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.
We believe that our current method of compensating Internet service portals
is consistent with the current position of the SEC as reflected in no-action
letters. However, the possibility exists that the SEC could determine that our
method of compensating portals does not meet the standards of its no-action
letters, or that the SEC could change its current policy and no longer allow
such compensation to non-broker-dealers. Any change in the SEC's current policy
could materially and adversely affect 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 additional 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.
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.
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OUR BUSINESS PLAN WILL REQUIRE MORE CAPITAL, AND WE CANNOT GUARANTEE THAT WE
WILL OBTAIN ADDITIONAL FINANCING TO MEET FUTURE CAPITAL NEEDS
Our business plan will require additional capital. Each of our
broker-dealer subsidiaries is required to maintain certain minimum regulatory
capital amounts. We have historically retained capital substantially in excess
of minimum regulatory requirements. To the extent these broker-dealers hold
customer funds, the capital requirement is much greater. In particular, growth
in our clearing and customer margin business will require increasing levels of
capital. Should the proportionate increase in customer margin balances outpace
earnings, we 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 or earnings 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.
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
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- 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, is 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 and the businesses of Kinnard, through JGK,
and Steichen focus 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
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.
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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.
Kinnard does not clear its own trades, and we expect to provide clearing
services to Kinnard upon completion of the Kinnard merger. On the other hand,
Steichen has its own proprietary clearing system. We intend to evaluate the
Steichen clearing system and make a determination whether its clearing system
can be incorporated into our system. In the meantime, Steichen will continue to
use its existing clearing system. We cannot provide any assurance that we will
be able to successfully integrate the Kinnard and Steichen businesses following
completion of the acquisitions.
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 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.
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THE NASDAQ MARKET CONTINUES TO IMPLEMENT REFORMS TO MONITOR TRADING, WHICH COULD
CAUSE INCREASED COMPLIANCE REQUIREMENTS AND COSTS
The 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 legislative
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 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
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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 successful 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.
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.
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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, among other things,
a bankruptcy, liquidation or reorganization or an acceleration of the
Convertible Notes due to an event of default under the indenture, 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 OUR 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 subsidiaries, incur additional indebtedness or other
liabilities. As of March 31, 2000, we had approximately $55.6 million of debt
outstanding 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.
23
<PAGE> 24
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, Online Brokerage Solutions, Steichen and JGK 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."
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
24
<PAGE> 25
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 2,200,000 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.
We currently have 25,900,843 shares of common stock outstanding, of which
24,595,334 were sold in private transactions. Currently, 19,278,961 of our
outstanding shares are freely saleable. An aggregate of 15,848,469 of these
freely saleable shares are held by affiliates and, as a result, are subject to
the volume limitations set forth in Rule 144. An additional 440,000 shares
become freely saleable in August 2000 and an additional 1,864,527 shares become
freely saleable between September 2000 and March 2001. Finally, 4,315,062 shares
become saleable on August 1, 2001, subject to the Rule 144 volume limitations.
We have received lock-up agreements from substantially all of the holders of our
restricted stock pursuant to which the holders of such shares have agreed not to
sell such shares for between 90 and 120 days after the effective date of this
prospectus. 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 August 1, 2000, options to
purchase 1,289,988 shares of common stock were outstanding, of which options to
purchase 297,181 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 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.
We also issued a warrant to purchase 300,000 shares of our common stock to
John E. Feltl in connection with the Steichen transaction. This warrant, which
is exercisable at $6.375 per share, is fully vested and expires on August 1,
2010.
25
<PAGE> 26
Upon completion of the Kinnard transaction, we will issue approximately
2,400,000 shares of our common stock to Kinnard shareholders, subject to certain
adjustments. These shares will be freely tradable, except for shares issued to
certain Kinnard affiliates. The approximately 4,300,000 shares of our common
stock we issued in connection with the Steichen transaction and contingent
shares that may be issued in the future pursuant to the Steichen agreement will
be restricted shares and generally may not be sold or transferred for one year
after issuance and then only in compliance with Rule 144 under the Securities
Act.
CERTAIN PROVISIONS OF MINNESOTA LAW, AND THE FACT THAT 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.
26
<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" and elsewhere in this prospectus.
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.
27
<PAGE> 28
USE OF PROCEEDS
The gross proceeds of the Convertible Notes will be $20 million. After we
deduct the underwriting discount and pay the offering expenses, we expect to
receive net proceeds of approximately $18,145,000. If the underwriters'
over-allotment is exercised in full, we expect to receive additional net
proceeds of approximately $2,760,000.
We intend to use approximately $11.0 million of the estimated net proceeds
of this offering to complete the Kinnard transaction. The balance of the
estimated offering proceeds will be used to provide working capital and to fund
expansion of our recently re-named Online Brokerage Solutions subsidiary and for
other general corporate purposes, including new information and technology
systems, software and personnel directly related to our online business
technology and expansion of our sales and marketing staff.
Depending on future events, we may determine to use a portion of the
estimated net offering proceeds for different purposes or to allocate such
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. Our current cash
position, cash generated from operations, availability of line of credit
borrowings, proceeds from operating leases and the proceeds from the Convertible
Notes are adequate to meet our present 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 July 31, 2000.
<TABLE>
<CAPTION>
HIGH LOW
----- ----
<S> <C> <C>
Quarter Ended September 30, 1999......................... 16.82 8.63
Quarter Ended December 31, 1999.......................... 11.75 7.25
Quarter Ended March 31, 2000............................. 17.13 6.50
Quarter Ended June 30, 2000.............................. 14.25 7.08
Quarter Ended September 30, 2000 (through July 31,
2000).................................................. 9.63 7.13
</TABLE>
The last reported sale price of our common stock, as reported on the Nasdaq
NMS on July 31, 2000, was $7.63 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.
28
<PAGE> 29
CAPITALIZATION
The following table reflects our actual capitalization as of March 31,
2000, and unaudited pro forma capitalization. The unaudited pro forma financial
data presents balance sheet data as of March 31, 2000, giving effect to the
acquisition of Steichen and Kinnard and the receipt of the net proceeds from the
sale of the Convertible Notes as if they had occurred on March 31, 2000.
<TABLE>
<CAPTION>
AS OF
MARCH 31, 2000
----------------------
ACTUAL PRO FORMA
------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Notes payable.............................................. $ 7,544 $ 7,544
Liabilities subordinated to claims of general creditors.... 18,575 21,575
10% Convertible Subordinated Notes due 2005................ -- 20,000
------- --------
Shareholders' equity:
Common stock, $.04 par value, 50,000,000 shares
authorized; 21,575,313 (actual); 30,311,159 (pro
forma) shares issued and outstanding.................. 863 1,212
Paid-in capital.......................................... 25,441 89,955
Retained earnings........................................ (1,652) (1,652)
------- --------
Total shareholders' equity.......................... 24,652 89,515
------- --------
Total capitalization....................................... $50,771 $138,634
======= ========
</TABLE>
The amounts in the capitalization table above should be read with the
following points in mind:
- The pro forma data assume that the underwriters' over-allotment option is
not exercised; and
- The shares outstanding exclude approximately 2,222,222 shares of common
stock reserved for issuance upon conversion of the Convertible Notes,
1,289,988 shares of common stock subject to stock options outstanding at
August 1, 2000, of which 297,181 shares are currently exercisable, an
additional 81,387 shares of common stock which are reserved for issuance
under our stock option plans, and an additional 639,270 shares issuable
upon the exercise of outstanding warrants. The pro forma outstanding
shares also exclude shares of our common stock that may be issued to
Steichen shareholders following completion of the merger in accordance
with the merger agreement.
29
<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>
FISCAL YEARS ENDED MARCH 31,
--------------------------------------------------------------
PRO FORMA
1996 1997 1998 1999 2000 2000
------ ------ ------- ------- ------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT RATIO DATA)
<S> <C> <C> <C> <C> <C> <C>
Pre-tax income........... $ 859 $ 224 $(1,823) $ 2,258 $(2,539) $ 9,221
Plus: fixed charges...... 4,780 8,084 12,156 12,903 17,950 29,392
------ ------ ------- ------- ------- -------
Earnings available for
fixed charges.......... $5,639 $8,308 $10,333 $15,161 $15,411 $38,613
====== ====== ======= ======= ======= =======
Interest................. $4,429 $7,427 $11,027 $11,806 $16,331 $25,716
1/3 Rent................. 351 656 1,129 1,097 1,618 3,676
------ ------ ------- ------- ------- -------
Fixed charges............ $4,780 $8,084 $12,156 $12,903 $17,950 $29,392
====== ====== ======= ======= ======= =======
Ratio.................... 1.18x 1.03x 0.85x 1.17x 0.86x 1.31x
====== ====== ======= ======= ======= =======
</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 2000, fixed charges exceeded
earnings available for fixed charges in those periods by approximately $1.8
million and $2.5 million, respectively.
The pro forma financial data present annual results for the year ended
March 31, 2000, giving effect to the acquisitions of Steichen and Kinnard and
the receipt of the net proceeds from the sale of the Convertible Notes as if
they had occurred on April 1, 1999. The pro forma data assume that the
underwriters' over-allotment option is not exercised.
30
<PAGE> 31
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for each of the five
years ended March 31, 1996, through March 31, 2000, have been derived from our
audited consolidated financial statements and the audited consolidated financial
statements of MJK for the year ended March 31, 1996, MJK Holdings, Inc. (MJK's
parent) for the years ended March 31, 1997, 1998 and 1999 and Stockwalk.com
Group, Inc. for the fiscal year ended March 31, 2000. The unaudited pro forma
financial data present annual operating results for the year ended March 31,
2000, giving effect to the acquisitions of Steichen and Kinnard and the receipt
of the net proceeds from the sale of the Convertible Notes as if they had
occurred on April 1, 1999, and balance sheet data as of March 31, 2000, giving
effect to the acquisitions of Steichen and Kinnard and the receipt of the net
proceeds from the sale of Convertible Notes as if they had occurred on March 31,
2000.
The pro forma data assume that the underwriters' over-allotment option is
not exercised.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
------------------------------------------------------------------
PRO FORMA
1996 1997 1998 1999 2000 2000
-------- -------- -------- -------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
REVENUES:
Trading profits....... $ 10,536 $ 9,856 $ 10,634 $ 15,063 $ 16,073 $ 67,935
Interest.............. 5,487 9,150 13,507 15,410 20,988 35,823
Commissions........... 2,732 3,930 9,040 9,888 14,287 50,788
Investment banking.... 6,932 7,716 9,656 8,389 10,363 21,134
Clearing fees......... 567 785 1,902 3,105 5,248 5,248
Other income.......... 690 1,170 2,354 3,735 4,011 4,453
-------- -------- -------- -------- -------- --------
TOTAL REVENUES........ 26,944 32,607 47,093 55,590 70,970 185,381
EXPENSES:
Employee compensation
and benefits........ 16,807 17,736 25,950 26,987 34,163 102,608
Clearing fees......... 653 750 1,475 2,890 2,999 6,414
Occupancy and
equipment........... 1,052 1,965 3,381 3,285 4,854 11,007
Communication......... 1,655 2,298 3,938 5,251 8,017 10,816
Interest.............. 4,429 7,427 11,027 11,806 16,331 25,716
Other expense......... 1,489 2,207 3,145 3,113 7,145 19,599
-------- -------- -------- -------- -------- --------
TOTAL EXPENSES........ 26,085 32,383 48,916 53,332 73,509 176,160
INCOME (LOSS) BEFORE
INCOME TAXES........ 859 224 (1,823) 2,258 (2,539) 9,221
INCOME TAX EXPENSE
(BENEFIT)........... 334 34 (599) 985 (839) 5,679
-------- -------- -------- -------- -------- --------
Net income (loss)..... $ 525 $ 190 $ (1,224) $ 1,273 $ (1,700) $ 3,542
======== ======== ======== ======== ======== ========
Basic and diluted
earnings per
share............... $ 0.03 $ 0.01 $ (0.08) $ 0.08 $ (0.09) $ 0.10
======== ======== ======== ======== ======== ========
CONSOLIDATED BALANCE SHEET DATA:
Total assets.......... $124,633 $181,042 $272,616 $322,353 $538,875 $791,678
Total debt............ 28,303 27,102 27,728 48,113 55,619 88,962
Total shareholders'
equity.............. 2,392 2,583 1,358 7,011 24,652 89,515
</TABLE>
31
<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 such 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 and pro forma financial statements
and related notes, which begin on page F-1.
GENERAL
We have three principal subsidiaries: MJK, Stockwalk.com and Online
Brokerage Solutions. 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 fully disclosed
clearing broker for approximately 55 brokerage firms. In September 1999,
Stockwalk.com commenced online securities trading through its website.
During fiscal 2000, Stockwalk.com completed the acquisition of two online
brokerage firms. In October 1999, we acquired Arnold Securities, Inc. (renamed
Online Brokerage Solutions, Inc.). In November 1999, we completed the
acquisition of M-One Securities, which is headquartered in San Francisco,
California and maintains a branch office in Fremont, California. M-One
Securities offers online trading services for its customers through its website
which includes language alternatives in English, Cantonese and Mandarin.
If the pending mergers with Steichen and Kinnard are completed, they will
be accounted for using the purchase method. As purchases, the Steichen and
Kinnard operations will be included in our financial results from the respective
closing dates of the transactions, and the goodwill from the acquisitions will
be amortized over 20 years. See Index to Financial Statements for pro forma
financial information and the historical financial statements of Steichen and
Kinnard.
SEGMENTS
Our reportable segments are as follows: clearing services, retail sales,
internet 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 our customers' margin accounts and pay interest on cash in
customers' 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
inventory we maintain which is marked to market daily. Our retail business also
includes federally insured certificate of deposit participations.
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<PAGE> 33
Internet 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 by means of the Internet and direct modem access which allows our customers
the ability to place orders for stock trades and other investment transactions
directly, and at a lower, more predictable transaction cost than traditional
full-commission brokerage firms. Further, we expect that our technology will be
adapted to provide information and transaction processing services related to
other aspects of electronic commerce, such as processing insurance transactions
and electronic cash transfers. In addition, we have recently renamed our Arnold
Securities broker-dealer subsidiary Online Brokerage Solutions, Inc. We intend,
through this broker-dealer, to continue to offer privately-labeled Stockwalk.com
services to Internet portals, small to medium-sized financial institutions and
affinity groups.
Underwriting
We also provide capital finance planning services for our clients. Such
plans are implemented by managing or co-managing public offerings of securities
or by arranging private placements of securities with institutional or
individual investors. The capital finance department coordinates the
distribution of managed and co-managed corporate underwriting, accepts
invitations to participate in competitive or negotiated underwriting
arrangements managed by other investment banking firms, and allocates and
merchandises our underwriting positions to the firm, to institutional clients
and to other broker-dealers. The commission spread generated from sale of
securities is allocated between retail sales and underwriting.
Other
Other revenues consist of fiscal consulting fees and management fees
assessed to affiliates that are eliminated in consolidation. Other expenses
include general and administrative expenses for departments not directly related
to one of our broker-dealer subsidiaries.
Segment results are derived from our branch location profitability
reporting system. Intersegment transactions are measured on the same basis as if
the transactions occurred with external customers. In reviewing the segment
operating results, our operating decision-makers do not distinguish between
intersegment transactions and external customer transactions. Intersegment
revenue is eliminated to reconcile total segment revenue to consolidated
revenue. Income tax expense or benefit is not allocated to our operating
segments. We do not provide balance sheet data for segment reporting as this
data is not measured for our operating segments.
33
<PAGE> 34
Information concerning operations in our segments of business is as follows
for the years ended:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
-----------------------------------------
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE:
Clearing services........................ $15,968,700 $19,279,800 $28,102,800
Retail sales............................. 28,009,400 30,672,200 36,276,400
Internet brokerage....................... -- -- 2,717,500
Underwriting............................. 2,173,600 4,337,600 3,215,500
Other.................................... 940,900 1,300,700 1,483,600
Eliminations............................. -- -- (825,500)
----------- ----------- -----------
CONSOLIDATED REVENUE..................... $47,092,600 $55,590,300 $70,970,300
=========== =========== ===========
PRETAX INCOME (LOSS):
Clearing services........................ $ 1,080,300 $ 2,050,700 $ 4,210,900
Retail sales............................. (3,066,000) (272,300) (715,900)
Internet brokerage....................... -- -- (3,585,500)
Underwriting............................. 162,400 485,000 (142,200)
Other.................................... -- -- (1,855,900)
Eliminations............................. -- (5,800) (450,100)
----------- ----------- -----------
CONSOLIDATED PRETAX INCOME (LOSS)........ $(1,823,300) $ 2,257,600 $(2,538,700)
=========== =========== ===========
</TABLE>
Revenues from clearing services increased $3.3 million from 1998 to 1999
and $8.8 million from 1999 to 2000, representing increases of 20.7% and 45.8%,
respectively. Clearing fee expenses increased $2.3 million from 1998 to 1999 and
$6.7 million from 1999 to 2000, representing increases of 15.7% and 38.7%,
respectively. The significant increase in revenues is directly related to ticket
charges collected on the increased number of customers from our introducing
brokers. The number of introducing brokers for which we clear trades has
increased from 22 at March 31, 1998 to 31 at March 31, 1999 and 50 at March 31,
2000. We processed 314,600, 504,700 and 916,900 tickets in the fiscal years
ended March 1998, 1999 and 2000, respectively. The increase in clearing services
revenues is also impacted by interest income earned on the higher level of
customer margin loans. Clearing fee expenses have increased primarily because
staff additions are required to service the increasing number of trades and
because interest expense is charged on cash balances for the increased number of
customers from the new correspondent brokers.
Our retail sales revenues increased $2.7 million or 9.5% from 1998 to 1999,
and $5.6 million or 18.3% from 1999 to 2000. The commissions earned have
increased due to the volume of customer trades associated with the significant
rise in the United States equity markets. The fiscal 2000 results include record
activity in the fourth fiscal quarter generated by record fluctuations and
overall instability in certain markets, both of which generated a large number
of trades for which we act as an agent for our customers. Retail sales
expenditures have increased due to a growth in the administrative personnel,
rent and communications equipment required to enhance customer service and meet
regulatory requirements. The $3.1 million loss on retail sales in 1998 resulted
principally from increased administrative and professional fees, one-time costs
associated with specific arbitration and litigation matters, as well as initial
employee retention costs related to the acquisition of Juran & Moody in fiscal
year 1997.
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<PAGE> 35
For the fiscal year ended March 31, 2000, our Internet brokerage business
generated trading fee revenues of $2.7 million. In September 1999, Stockwalk.com
launched its website and completed the acquisition of Arnold Securities, Inc.
(renamed Online Brokerage Solutions, Inc.) and M-One Securities, Inc. The $3.6
million loss from internet brokerage in the year ended March 31, 2000 was
attributed to significant costs incurred in advertising designed to create brand
awareness for attracting new online customers and generating new private label
business.
Underwriting revenues increased $2.2 million from 1998 to 1999, and
declined $1.1 million from 1999 to 2000. The 1999 results include a $815,000
placement fee for locating a financial partner of an electricity project. No
similar transaction was completed during fiscal year 2000. The timing of
investment banking activity can vary significantly from period to period based
on market conditions, resulting in fluctuations in revenues and operating
profits in this segment.
The $1.9 million loss from other operations in the year ended March 31,
2000 is related to additional compensation for administrative personnel, legal
and accounting services and other incremental expenditures associated with being
a public company. The loss also includes expenses incurred for development of
our technological infrastructure that cannot be allocated equitably to the other
segments of our business.
LIQUIDITY AND CAPITAL RESOURCES
Our assets consist primarily of cash and assets readily convertible into
cash. Security inventories are stated at market value and are generally readily
marketable. Customer margin loans are collateralized by securities and have
floating interest rates. Other receivables and payables arising from
transactions with customers and other brokers and dealers usually settle within
three days following the date of transaction. Fluctuations in the customer
margin and cash balances result in changes in segregated investments per NASD
reserve requirements. Operations are financed by equity capital, bank lines of
credit and working capital. Due to the liquid nature of our balance sheet,
fluctuations in cash flows from financing activities are directly related to
operating activities.
The $17.7 million increase in deposits during fiscal 2000 at clearing
organizations is the result of the purchase of additional government notes and
bonds for collateral on deposits required by the option clearing corporation for
increased levels of customer positions.
Our investing activities used $9.5 million of cash in the year ended March
31, 2000 as a result of the acquisitions of certain assets of M-One Securities,
Inc., Arnold Securities, Inc. (renamed Online Brokerage Solutions, Inc.) and the
Telescan software license. We funded these acquisitions through the issuance of
notes payable and common stock.
Our financing activities provided cash of $17.9 million in the year ended
March 31, 2000, primarily resulting from the issuance of approximately 2,200,000
shares of our common stock through private placements at a net price of $7.125
per share and options and warrants exercised to purchase 63,875 shares of our
common stock. Notes payable were issued in connection with the acquisitions
completed in the year ended March 31, 2000. The increase in short-term
borrowings at March 31, 1999 and subsequent decline in March 31, 2000 is the
result of fluctuating operating balances at each respective year-end.
At March 31, 2000, we had approximately $70.0 million in discretionary
credit agreements, of which $29.5 million was utilized. The extended credit was
collateralized
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with approximately $20.9 million of firm-owned securities and cash and
approximately $14.2 million was collateralized by customer securities
collateralizing liabilities subordinated to claims of general creditors.
Our current cash position, cash generated from future operations,
availability of line of credit borrowings, proceeds from operating leases and
the proceeds from the Convertible Notes are adequate to meet the present capital
requirements for the combined entity for at least one year.
QUALITATIVE AND QUANTITATIVE DISCLOSURE OF MARKET RISK
Our primary market risk exposure is the impact that equity market pricing
and interest rate fluctuations may have on the value of financial securities we
hold. We manage this risk exposure through a process of internal controls and
management review. Position limits for trading and investments are established
and monitored on an on-going basis. The trading inventory is turned over
frequently throughout the year. Our customers' credit standing is reviewed by
management and we maintain collateral to support customer margin loans.
Our equity price risk results from the risk of loss from price movements,
volatility or liquidity over which we have no control. We have significantly
reduced our corporate equity holdings from long positions of $6.3 million at
March 31, 1999 to $3.5 million at March 31, 2000. The potential loss in fair
value, using a hypothetical 25% decline in equity prices on the March 31, 2000
holdings, is estimated to be $875,000. A 25% hypothetical decline was used to
represent a significant yet plausible market change.
Our primary exposure to interest rate risk arises from our interest earning
assets held primarily for deposits to meet clearing organizations and NASD
reserve requirements. We mitigate this risk by holding primarily high-grade
government obligations with short term maturities.
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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. Stockwalk.com's services are now also being
offered to customers of small to medium-sized financial institutions and
affinity groups through our private label program. We recently renamed our
Arnold Securities, Inc. broker-dealer subsidiary Online Brokerage Solutions,
Inc. Through this wholly-owned subsidiary, we will focus our efforts to market
our private label Stockwalk.com online brokerage services to Internet portals,
small to medium-sized financial institutions and affinity groups.
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 55 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. NM Holdings had sold its operating
assets prior to the merger. The surviving entity changed its name to
Stockwalk.com Group, and is today the ultimate holding company of MJK, MJK
Capital Corporation, MJKH, MJK Management Services, Stockwalk.com and Online
Brokerage Solutions. MJK, Stockwalk.com, Online Brokerage Solutions, Kinnard and
Steichen 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."
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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 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 through our
Online Brokerage Solutions subsidiary. 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.
ACQUISITIONS
On June 6, 2000, we announced that we had entered into definitive merger
agreements with each of Kinnard and Steichen. Following is a discussion of each
of these transactions, including a description of the material terms of each
merger agreement.
Steichen
Steichen is a privately-owned full-service investment brokerage firm that
has been in continuous operation since 1929. Steichen, a self-clearing firm,
offers a complete range of financial products to individual investors, as well
as services in the areas of corporate finance, equity research, sales and
trading, and tax-exempt bonds. Similar to our research department, Steichen's
equity research focuses on emerging growth companies typically headquartered in
the upper midwest. As of March 31, 2000, Steichen had 282 full-time employees
and 185 independent licensed sales representatives, and recorded total revenues
of approximately $52.5 million. Steichen's principal office is in Minneapolis,
and it operates 11 additional offices in the Minneapolis-St. Paul metropolitan
area, in addition to seven other branch offices.
On August 1, 2000 we issued an aggregate of 4,315,062 shares of our
unregistered common stock in exchange for all of the issued and outstanding
shares of Steichen's capital. Under the terms of the Steichen agreement, the
Steichen entity will continue to operate as a separate corporate subsidiary for
at least two years after completion of the merger. Additional material terms of
the Steichen agreement are as follows:
- the shareholders of Steichen may earn up to an additional 2,000,000
shares of our restricted common stock pursuant to an earn-out provision,
which contains the following principal terms:
- Steichen must have pre-tax earnings of $2.0 million per year ($4.0
million in the aggregate) during the two years following completion of
the merger. The earn-out is subject to a sliding scale, which provides
that all shares will be issued if Steichen earns 90% of the $4.0 million
targeted amount set forth above;
- if cumulative pre-tax earnings are less than 90% of the target earnings,
the number of additional shares to be issued will be ratably reduced,
e.g., if Steichen earns 63% of
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the targeted earnings, 73% of the additional shares will be issued. We
are obligated to issue at least 25% of the additional shares, unless
there are no cumulative earnings or there is a cumulative loss during
the two-year earn-out period, in which case we would not have to issue
any additional shares;
- we cannot strip profit centers from or add expenses to Steichen without
its consent;
- no shares will be issued under the earn-out until the end of the
earn-out period, i.e., two years from closing of the transaction,
provided that all of such shares will be issued if there is a change in
control of our company; and
- litigation and arbitration costs and expenses, any amounts paid by
Steichen to Mr. John E. Feltl and his son, Mr. John C. Feltl, and the
cost of any capital loaned by us to Steichen in addition to capital
which may be borrowed for the purpose of satisfying Steichen's minimum
net capital requirements will be deducted from the targeted pre-tax
earnings.
- Mr. John E. Feltl withdrew approximately $21.0 million in cash from
Steichen, in the form of a dividend;
- Mr. John E. Feltl agreed to leave $3.0 million of capital in Steichen for
a period of two years. At the end of the two-year period, he will have
the option to be repaid $3.6 million or to convert such amount into
shares of our common stock at a per share price equal to the lesser of
85% of the then-current fair market value of such stock or $10.00, but
not less than $5.00 per share;
- we entered into a five-year employment/noncompete agreement with Mr. John
E. Feltl pursuant to which he will be responsible for the Steichen
operations and will receive a salary of $1.0 million per year. The salary
will be deducted when determining Steichen's pre-tax earnings;
- we also entered into a two-year employment agreement with Mr. John C.
Feltl pursuant to which we paid him a signing bonus of $100,000 and he
will receive a salary of $200,000 per year for two years, with all such
amounts being deducted when determining Steichen's pre-tax earnings;
- Mr. John E. Feltl will receive a percentage of warrants issued in
connection with the corporate finance activities of our various
subsidiaries equal to the percentage of such warrants issued to our
Executive Vice President, Mr. David B. Johnson;
- Mr. John E. Feltl also received a five-year warrant to purchase 300,000
additional shares of our common stock at $6.375 per share. This warrant
does not contain cashless exercise provisions, but it does contain
piggyback registration rights; and
- in connection with the Steichen transaction, Messrs. John E. and John C.
Feltl were appointed to our board.
In addition to the foregoing, our agreement with Steichen contains other
customary terms and conditions, including representations and warranties from
Steichen. However, neither Steichen nor its shareholders are required to
indemnify us for claims, including related losses or expenses, arising out of a
breach of the representations and warranties, except to the extent that the
claim or expense would reduce pre-tax earnings of Steichen, for the purpose of
calculating the number of additional shares issued to Mr. Feltl. A copy of the
Steichen agreement is filed as an exhibit to the registration statement of which
this
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prospectus is a part, and you are encouraged to review such agreement in its
entirety prior to making an investment in the Convertible Notes.
Kinnard
Kinnard is a publicly held holding company that provides financial products
and services, primarily through its broker-dealer subsidiary, JGK. JGK is a
member of the Chicago Stock Exchange and the NASD, and is a registered
investment advisor under the Investment Advisors Act of 1940. As of July 26,
2000, we owned approximately 6.8% of Kinnard's outstanding shares of common
stock primarily acquired in 1999. As of December 31, 1999, Kinnard had 248
full-time employees. As of March 31, 2000, Kinnard employed 111 registered
representatives, had total annualized revenues of approximately $62.1 million,
and was a market maker for 136 equity securities. Pursuant to the Kinnard
agreement, Kinnard will merge with and into our wholly-owned subsidiary, SW
Acquisition, Inc., with SW Acquisition, Inc. being the surviving entity.
The Kinnard agreement requires us to pay $6.00 in cash and to issue
one-half of a share of our common stock, so long as the average daily price is
between $9.00 and $15.00 per share, for each issued and outstanding share of
Kinnard common stock, subject to the following exceptions:
- if the average closing price of our stock during the 20 trading days
prior to the day on which all of the conditions to closing the merger are
met is less than $9.00 per share, the number of our shares to be issued
by us at the closing for each share of Kinnard stock will be equal to
$4.50 in value; and
- if the average closing price of our stock during such period is greater
than $15.00 per share, the number of shares of our common stock to be
issued by us for each share of Kinnard stock will be equal to $7.50 in
value.
Subject to certain limitations, the Kinnard agreement also provides that
each outstanding warrant and option to purchase shares of Kinnard's common
stock, whether or not such securities are fully vested, will be exchanged at
closing for a cash amount equal to $6.00 in cash plus the cash value of the
stock that would have been issued had the option or warrant been exercised prior
to the merger, less the per share exercise price of the option or warrant. The
Kinnard agreement also calls for us, in conjunction with Kinnard, to establish a
retention program to be used to retain various company and Kinnard employees. We
expect to pay approximately $3.5 million in retention bonuses. In accordance
with the Kinnard agreement, we also deposited $1.0 million in an escrow account.
This deposit, together with any accrued interest, must be distributed to Kinnard
in the event that, among other things, we fail to consummate the Kinnard
transaction due to our knowing action or inaction. The escrow amount is not a
limitation of any remedy available to Kinnard for breach of the merger agreement
by us. Finally, pursuant to contractual obligations that exist between Kinnard
and its Chief Executive Officer, Mr. William Farley, we will make payments
aggregating approximately $2.0 million to Mr. Farley, a portion of which is
allocated to a non-compete agreement, excluding consideration issued in
connection with outstanding shares of Kinnard common stock owned by him for the
merger consideration and consideration received in connection with payment for
the exchange of outstanding options and warrants owned by him.
Kinnard may terminate the merger agreement if its board approves an
agreement for Kinnard to be acquired by another party for consideration to
Kinnard shareholders that it
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has determined in good faith to be superior to the consideration to be received
by Kinnard shareholders under the merger agreement so long as (a) Kinnard
notifies us of the superior proposal, (b) we have an opportunity to respond, and
(c) Kinnard pays us a termination fee of $1.0 million.
A copy of the Kinnard agreement is filed as an exhibit to the registration
statement of which this prospectus is a part, and you are encouraged to review
such agreement in its entirety prior to making an investment in the Convertible
Notes.
The shares of our stock issued in connection with the Kinnard transaction
will be registered, i.e., they will be freely tradable, except for shares issued
to certain Kinnard affiliates. The terms of the Kinnard transaction are subject
to approval by the shareholders of Kinnard. A special meeting of the Kinnard
shareholders has been scheduled for September 5, 2000 to consider approval of
the merger. Kinnard and we have previously filed the notifications under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976.
Combined, we, Kinnard and Steichen would have had revenues in excess of
$185 million for the 12 months ended March 31, 2000, which is our fiscal year
end. Combined we will have more than 400 registered representatives and
approximately 850 employees. Outside of Minneapolis, we will operate 34 branch
offices in eight states.
We believe the acquisitions of Kinnard and Steichen will assist us in
broadening our full-service business. The mergers will significantly increase
our presence in the Minneapolis-St. Paul regional brokerage market, making us
the third largest broker-dealer headquartered in the Twin Cities. Additionally,
these mergers will bolster our position in our niche market of small
capitalization, emerging and start-up businesses. Finally, the mergers will
result in significant growth for our clearing division, as we will take over the
clearing functions of Kinnard and add Steichen's clearing business. We plan to
use clearing profits and related cash flow to help fund our online business.
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.
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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 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. (renamed,
Online Brokerage Solutions, 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
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. Currently, Stockwalk.com has approximately 12,100 active customer
accounts. Monthly transactions increased from approximately 3,200 in October
1999 to approximately 17,600 in May 2000. A customer may open an account with a
minimum of $1,000 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 equity trade, up to 5,000 shares.
Online Brokerage Solutions intends to focus its marketing efforts on online
bank service providers, financial institutions and members of affinity groups
and Internet portals. Online Brokerage Solutions' private label product allows
the financial institution or affinity group or Internet portal to give its
customers or members access to Online Brokerage Solutions' online brokerage
services through the financial institution's or affinity group's or Internet
portal's website. This allows the client to simply add Online Brokerage
Solutions to the variety of online services it offers to its customers.
Currently, Online Brokerage Solutions has agreements with approximately 12
online bank service providers, such as Digital Insight Corporation, Regency
Systems, Inc., Digital Visions, Inc. (now a part of Netzee, Inc.), Open
Solutions, Inc. and Cavion.com. Online Brokerage Solutions also has direct
agreements with 25 financial institutions, including Northwest Airlines Credit
Union, Community Savings Bank, Arkansas National Bank and Capital Bank. Finally,
Online Brokerage Solutions has an agreement with an affinity group and Internet
portal. 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 Online Brokerage Solutions with exposure to approximately
5,800 financial institutions, affinity groups and Internet portals serving
approximately 3.0 million customers. We expect that we will capture a small
percentage of these customers for our Online Brokerage Solutions website, which
would increase Online Brokerage Solutions' customer base. Generally, Online
Brokerage Solutions 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
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America Online, American Express, Fidelity Investments, Forbes,
GlobalNetFinancial, CNBC 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. In addition, our
three-year renewable license with Telescan allows us 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 $1.8 million was applied to eliminate
obligations related to 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 have been placed in Northwest's hub
markets of Minneapolis, Detroit and Memphis. WorldClubs members are 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 facilitates 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 system. Stockwalk.com employed 384
persons as of May 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.
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At June 30, 2000, MJK employed approximately 138 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 31,000 active accounts. For the six-month period ended June 30,
2000, the division transacted an average of 5,000 trades per day. The average
size of each account is approximately $45,000.
We are a self-clearing firm, providing transaction clearing services for
MJK and Stockwalk.com clients, as well as for the clients of approximately 55
correspondent brokerage firms. As soon as possible following the completion of
the Kinnard merger, we will also provide its clearing functions. Steichen
currently uses its own proprietary clearing system. We will be evaluating
Steichen's system after completion of the Steichen merger to determine how best
to move forward with our overall clearing operation. 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.
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
federal interest rates generally, 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
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approximately $216 million. This indebtedness was secured by customer securities
positions with a market value of approximately $700 million 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. As of
March 31, 2000, our customers had free cash balances of approximately $280.0
million.
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 underwriting activities
while the fiscal advisory group provides independent advice to our public sector
clients. Steichen and Kinnard each have investment banking groups that employ a
total of 23 people.
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.
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.
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.
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OUR STRATEGY
Our strategy is to continue to expand our online trading business while
continuing to offer and expand our full service brokerage business to increase
our presence in our niche markets. By improving and enhancing the products and
services offered through our full service brokerage business, we will continue
to increase our customer base. 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 online brokerage services
to their clients and members without incurring the large capital costs
associated with developing in-house technology. These financial institutions and
groups have the option of marketing the online brokerage service as "Online
Brokerage Solutions" or to private label the product under their own names. A
stand-alone "Stockwalk.com" service is also available.
To pursue our strategy, we plan to continue making strategic acquisitions
of brokerage firms and companies with technologies or businesses to complement
our traditional and online brokerage businesses. 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 private label our online
trading 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 Online
Brokerage Solutions 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
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benefit from these relationships because we will gain exposure to a large number
of potential customers without the use of expensive national advertising
campaigns.
Our planned mergers with Kinnard and Steichen constitute major steps in our
growth strategy. Both of these traditional brokerage firms have a solid presence
in the Minneapolis-St. Paul market, and both serve the same types of companies
and investors that make up our current clientele. Along with providing active
account bases and significant additional licensed representatives, these firms
will assist us in continuing to generate business from small capitalization and
emerging start-up companies. Additionally, because Kinnard is not a
self-clearing firm, we will be gaining additional business for our clearing
division.
RECENT DEVELOPMENTS
In March 2000, we completed a $11.7 million private placement, net of
offering expenses, of approximately 1,600,000 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
$7.50 per share, along with warrants to purchase 30,900 shares at $10.00 per
share. Approximately $1.8 million of this amount was applied to eliminate
obligations related to the license. A portion of these shares were allocated to
full payment of monthly license service fees.
In April 2000, our MJK subsidiary acquired the brokerage assets of Concord
Services, LLC, a Chicago, Illinois, registered broker-dealer. Concord services
approximately 1,100 primarily individual accounts holding assets of
approximately $800 million. The entire purchase price is payable over a
five-year period out of future commissions earned by us from transactions in the
customer accounts acquired.
In June 2000, we renamed our Arnold Securities broker-dealer subsidiary
Online Brokerage Solutions, Inc. This subsidiary will focus exclusively on
offering our private label Stockwalk.com online brokerage services to Internet
portals, small to medium-sized financial institutions and affinity groups.
COMPETITION
We compete for investor funds with traditional brokerage firms and banks,
insurance companies and mutual funds. 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 &
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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.
Our planned mergers with Kinnard and Steichen will significantly enhance our
competitive presence among traditional brokerage firms in the Minneapolis-St.
Paul area, including our ability to attract and retain brokers.
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 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
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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, Online
Brokerage Solutions, Steichen and JGK 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 of our broker-dealer subsidiaries are in compliance with all 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. As of the same
date, Steichen employed approximately 282 full-time employees and had
approximately 200 independent licensed sales representatives, and Kinnard
employed approximately 264 employees.
PROPERTIES
Our principal executive offices are located at 5500 Wayzata Boulevard,
Minneapolis, Minnesota 55416 where we lease approximately 67,000 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. Our existing facilities are adequate for the short-term future,
especially if we complete the Steichen and Kinnard acquisitions. If we outgrow
our existing facilities, we believe that additional space can be timely obtained
on acceptable terms. Steichen leases approximately 24,000 square feet of space
at its principal Minneapolis office and leases a total of approximately 29,000
square feet in its branch offices, exclusive of offices where Steichen is not
the lessee. Kinnard leases approximately 78,580 square feet of space at its
principal Minneapolis office and leases a total of approximately 24,000 square
feet in its branch offices.
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
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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.
In December 1999, Kinnard received a binding arbitration award of
approximately $16.6 million against Dain Rauscher Incorporated in conjunction
with the wrongful recruiting of certain investment executives by Dain from
Kinnard. Confirmation of the award has been sought from the Hennepin County
District Court in Minneapolis, and Dain Rauscher has asked the court to vacate
the award. See footnote 2 to Kinnard's financial statements.
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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 and Chairman of the Board
David B. 49 President and Director
Johnson.........
Paul R. Kuehn..... 57 President of MJK and Director
Stanley D. Rahm... 68 Treasurer of MJK and Director
Todd W. Miller.... 36 Chief Financial Officer
Philip T. 41 Senior Vice President, General Counsel and
Colton.......... Secretary
John E. Feltl..... 61 Director and President and Chief Executive Officer
of R.J. Steichen
John C. Feltl..... 29 Director and Senior Vice President of Stockwalk
and Executive Vice President and Director of
Corporate Finance of R.J. Steichen
Andrew R. 49 Chief Information and Technology Officer
Guzman..........
Robert J. 46 Chief Executive Officer of Online Brokerage
Vosburgh........ Solutions
Frank H. Lallos... 29 President of Stockwalk.com
Randy Nitzsche.... 36 Chief Executive Officer of Stockwalk.com
N. Lee Wesley..... 59 Director
George E. Kline... 63 Director
Richard J. 52 Director
Nigon...........
</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, 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 1989, Mr. Rahm was a Vice President of Miller
& Schroeder Municipals, Inc., a Minneapolis-based broker-dealer, for seven
years.
Todd W. Miller, Chief Financial Officer and Senior Vice President of 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
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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.
John E. Feltl, director, has been the President and Chief Executive Officer
of R.J. Steichen since Steichen merged with Stockwalk on August 1, 2000. Mr.
Feltl was the principal shareholder and Chief Executive Officer of R.J. Steichen
between 1986 and August 2000.
John C. Feltl, director, has been the Director of Corporate Finance and
Executive Vice President of R.J. Steichen and the Senior Vice President of
Stockwalk since Steichen merged with Stockwalk on August 1, 2000. Mr. Feltl has
been employed by Steichen in various capacities since 1994, most recently as a
principal and the director of corporate finance. John C. Feltl is the son of
John E. Feltl.
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.
Robert J. Vosburgh joined us as Chief Operating Officer on August 1, 1999.
In June 2000, Mr. Vosburgh was named the Chief Executive Officer of Online
Brokerage Solutions. He comes from Wells Fargo's (formerly Norwest Financial)
Private Client Services Group, where he was Senior Vice President for the Twin
Cities area. He also managed sales for the brokerage, portfolio management,
trust and private banking operations. In addition, he led Norwest's Investments
& Insurance merger team and held the post of Senior Vice President, Strategic
Programs, for the Investments and Insurance group. Mr. Vosburgh's seven years at
Norwest also included five years managing the institutional sales groups in Iowa
and Nebraska. Mr. Vosburgh is a graduate of Iowa State University (Aerospace
Engineering) and completed his master's degree and Ph.D. coursework in
Astronautical Engineering at the University of Tennessee.
Frank H. Lallos, President of Stockwalk.com, Inc., joined 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
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Investments' customer marketing and development group. He holds a master's
degree in business administration from the William E. Simon Graduate School of
Business Administration at the University of Rochester (NY). He also holds a
bachelor's degree in economics and political science from the same university.
Additionally, he has a Chartered Financial Analyst (CFA) designation and is a
member of the Phi Beta Kappa society.
Randy Nitzsche, Chief Executive Officer of the online brokerage division
(or Stockwalk.com), has been employed by 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 55 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.
N. Lee Wesley, director, has been a private investor in real estate and
securities for more than five years. He is the general partner of Standard Mill
Limited Partnership, the owner of the Whitney Hotel, a 97 room luxury hotel
located in Minneapolis, Minnesota. He was formerly the Vice-Chairman of
Wesley-Jesson, Inc., a contact lens company, and is currently a director of the
National Eye Research Foundation. Mr. Wesley has a Doctor of Ministry from the
Chicago Theological Seminary, an MBA from the University of Chicago and a
Bachelor of Science degree in industrial engineering from the University of
Michigan.
George E. Kline, director, is a private investor. Mr. Kline has more than
30 years of experience in venture capital related fields. He has been a director
of more than 55 publicly owned companies, and an investor in over 160 companies.
During this period, he has conducted many of his activities through his
business, Venture Management. Through Venture Management, Mr. Kline has assisted
companies in the areas of raising private investment capital, negotiating and
arranging public and private stock offerings, bank term loans and lines of
credit, merger and acquisition activity, and internal management consulting on
financial matters.
Richard J. Nigon, director, is Chief Financial Officer of Dantis, Inc., a
company formed in January 2000 for the purpose of developing an extensive Web
hosting business. Prior to joining Dantis, Inc., Mr. Nigon was with Ernst &
Young LLP for 30 years, most recently as a partner for the past 18 years. For a
three-year period at Ernst & Young LLP, Mr. Nigon was head of the Minneapolis
Entrepreneurial Services Group, and focused on securing financing for
venture-backed start-up organizations as well as retail and consumer product
manufacturing companies. Mr. Nigon is a graduate of Saint John's University of
Minnesota.
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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 $20 million
($23.0 million if the underwriters' over-allotment option is exercised in full)
and will mature on August 1, 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 August 1, 2000. Interest is payable semi-annually
on February 1 and August 1 of each year, commencing February 1, 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 February 1 and August 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 31, 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 August 1, 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 book-entry form
will be subject to the procedures applicable to Global Convertible Notes
described below.
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<PAGE> 55
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.
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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 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
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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 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 immediately 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
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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 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 penultimate paragraph on this page 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 penultimate
paragraph on this page 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 (5) above to all holders of common stock within the 12
months preceding the expiration of such tender offer in respect of which no
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adjustments have been made, exceeds 10% of our market capitalization on the
expiration of such tender offer.
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) 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 to
become due,
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outstanding at the date of execution of the indenture or thereafter incurred,
created or assumed:
(1) our indebtedness for money borrowed or evidenced by credit or loan
agreements, debentures, 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 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).
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:
- we default in our obligations to pay principal, premium, interest or
other amounts on our Senior Debt, including a default under any
redemption or repurchase obligation (a "Payment Default"), and the
default continues beyond any grace period that we may have to make those
payments; or
- a default (other than a Payment Default) occurs and is continuing on any
Designated Senior Debt, as defined below, and (1) the default permits the
holders of the Designated Senior Debt to accelerate its maturity and (2)
the Trustee has received a notice (a "Payment Blockage Notice") of the
default from a holder of
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the Designated Senior Debt (or, in the case of a syndicated credit
facility, the agent or representative of the lenders thereunder).
If payments of the Notes have been blocked by a Payment Default, payments
on the Notes may resume (including missed payments, if any) when the Payment
Default has been cured or waived. If payments on the Notes have been blocked by
a default (other than a Payment Default) payments on the Notes may resume
(including missed payments, if any) on the earlier of (1) the date on which such
default is cured or waived, or (2) 179 days after the date on which the Trustee
receives the Payment Blockage Notice.
No nonpayment default that existed on the day a Payment Blockage Notice as
delivered to the Trustee can be used as the basis for any subsequent Payment
Blockage Notice. In addition, once a holder of Designated Senior Debt has
blocked payment on the Notes by giving a Payment Blockage Notice, no new period
of payment blockage can be commenced until both of the following are satisfied:
- 365 days have elapsed since the effectiveness of the immediately prior
Payment Blockage Notice; and
- all scheduled payments of principal, any premium and interest on the
Notes that have come due have been paid in full in cash.
"Designated Senior Debt" means our obligations under any particular Senior
Debt in which the instrument creating or evidencing the debt, or the assumption
or guarantee of the debt, or related agreements or documents to which we are a
party, expressly provides that the indebtedness will be "Designated Senior Debt"
for purposes of the Indenture. That instrument, agreement or other document may
place limitations and conditions on the right of that Senior Debt to exercise
the rights of Designated Senior Debt.
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
$55.6 million of debt outstanding 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 August 1, 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
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(expressed as a percentage of principal amount) are as follows for the 12-month
period beginning on August 1 of the following years:
<TABLE>
<CAPTION>
YEAR PRICE
---- -----
<S> <C>
2003...................................................... 101%
2004...................................................... 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 no later than 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.
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 third 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
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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.
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
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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.
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
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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;
(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
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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.
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, N.A. Firstar will also act as payment agent and transfer
agent for the Convertible Notes.
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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, traders in securities that elect mark-to-market accounting,
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, some expatriates of the United States,
non-resident alien individuals who have made valid elections to be treated as
United States residents, 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.
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.
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 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-
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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 "nontaxed 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 August 1, 2000, 25,900,843
shares of our common stock were outstanding, and there were no other classes of
shares outstanding. In connection with the Steichen and Kinnard transactions, we
anticipate issuing approximately an aggregate of 8,750,000 shares of our common
stock, subject to certain adjustments, approximately 2,400,000 shares of which
will be issued to Kinnard shareholders and will be freely tradable, except for
shares issued to certain Kinnard affiliates.
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 August
1, 2000, options to purchase a total of 1,284,363 shares of common stock under
this plan were granted and outstanding, of which 291,556 are currently
exercisable. We plan to increase the number of shares reserved for issuance of
stock options under this plan to 3,000,000 shares.
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
August 1, 2000, options to purchase a total of 13,125 shares of common stock
have been issued under this plan, of which 5,625 remain outstanding and
exercisable. We intend to increase the number of shares reserved for issuance of
stock options under this plan to 500,000 shares.
WARRANTS
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 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
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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.
In connection with the Steichen merger, we issued John E. Feltl a five-year
warrant to purchase an aggregate of 300,000 shares of our common stock at $6.375
per share. Mr. Feltl will also have the right to convert $3.6 million into
shares of our common stock two years after completion of the Steichen merger.
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 Wells Fargo Shareowner Services,
P.O. Box 64854, St. Paul, Minnesota 55164-0854.
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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. is acting as representative,
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........................ $ 9,000,000
Miller, Johnson & Kuehn, Incorporated............ 9,000,000
R.J. Steichen & Company.......................... 2,000,000
-----------
Total..................................... $20,000,000
===========
</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.
Certain of our officers, directors and employees, and certain officers,
directors and employees of our subsidiaries, Kinnard and Steichen, including
certain of Steichen's independent contractor brokers, have indicated an interest
in purchasing a portion of the Convertible Notes offered hereby on the same
terms and conditions as are set forth herein. Such purchases are not expected to
exceed 15% of the Convertible Notes offered hereby, excluding notes sold
pursuant to the underwriters' over-allotment option.
The underwriters propose to offer the Convertible Notes in part directly to
the public at the 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 up to 4% of the principal amount of the Convertible Notes. The
underwriters may allow, and such dealers may reallow, a concession not in excess
of .5% 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 $3,000,000
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
$20,000,000 principal amount of the Convertible Notes offered.
Southwest Securities, Inc. will receive a financial advisory fee equal to
2% of the aggregate proceeds from this offering, not to exceed $500,000,
$100,000 of which has been previously paid.
One of the underwriters, Miller, Johnson & Kuehn, Incorporated, is our
indirect wholly owned subsidiary. The other underwriter, R.J. Steichen &
Company, has entered into a merger agreement with us. See "Business --
Acquisitions." 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
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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 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, the American Stock Exchange, 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.
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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 at March 31, 1999 and 2000 and for
each of the three years in the period ended March 31, 2000, included in this
Prospectus and Registration Statement were audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
The consolidated financial statements of Kinnard Investments, Inc. as of
December 31, 1998 and 1999 and for each of the years in the three-year period
ended December 31, 1999, included herein, were audited by KPMG LLP, independent
certified public accountants. Such consolidated financial statements are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
The consolidated financial statements of R.J. Steichen & Company as of
September 30, 1998 and 1999 and for each of the years in the three-year period
ended September 30, 1999, included herein, were audited by KPMG LLP, independent
certified public accountants. Such consolidated financial statements are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
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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 document
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 (Commission File No. 0-22247).
Annual Report on Form 10-K for the year ended March 31, 2000.
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
Kinnard also files annual, quarterly and current reports, proxy statements
and other information with the SEC. You can read and obtain copies of such
information at the SEC's address and website listed above.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
STOCKWALK.COM GROUP, INC.
Report of Independent Auditors.............................. F-3
Consolidated Statements of Financial Condition as of March
31, 1999 and 2000......................................... F-4
Consolidated Statements of Operations for the years ended
March 31, 1998, 1999 and 2000............................. F-5
Consolidated Statements of Shareholders' Equity for the
years ended March 31, 1998, 1999 and 2000................. F-6
Consolidated Statements of Cash Flows for the years ended
March 31, 1998, 1999 and 2000............................. F-7
Notes to Consolidated Financial Statements.................. F-8
R.J. STEICHEN & COMPANY
Independent Auditors' Report................................ F-20
Statements of Financial Condition as of September 30, 1998
and 1999.................................................. F-21
Statements of Operations for the years ended September 30,
1997, 1998 and 1999....................................... F-22
Statements of Stockholders' Equity for the years ended
September 30, 1997, 1998 and 1999......................... F-23
Statements of Cash Flows for the years ended September 30,
1997, 1998 and 1999....................................... F-24
Notes to Financial Statements for the years ended September
30, 1997, 1998 and 1999................................... F-25
Statements of Financial Condition as of September 30, 1999
and March 31, 2000 (unaudited)............................ F-31
Unaudited Statements of Operations for the six-month periods
ended March 31, 1999 and 2000............................. F-32
Unaudited Statement of Stockholders' Equity for the
six-month period ended March 31, 2000..................... F-33
Unaudited Statements of Cash Flows for the six-month periods
ended March 31, 1999 and 2000............................. F-34
Notes to Unaudited Financial Statements..................... F-35
</TABLE>
F-1
<PAGE> 80
<TABLE>
<S> <C>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
Independent Auditors' Report................................ F-36
Consolidated Statements of Financial Condition as of
December 31, 1998 and 1999................................ F-37
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999.......................... F-38
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1997, 1998 and 1999.............. F-39
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999.......................... F-40
Notes to Consolidated Financial Statements.................. F-41
Consolidated Statements of Financial Condition as of
December 31, 1999 and March 31, 2000 (unaudited).......... F-53
Unaudited Consolidated Statements of Operations for the
three-month periods ended March 31, 1999 and 2000......... F-54
Unaudited Consolidated Statement of Shareholders' Equity for
the three-month period ended March 31, 2000............... F-55
Unaudited Consolidated Statements of Cash Flows for
three-month periods ended March 31, 1999 and 2000......... F-56
Notes to Unaudited Consolidated Financial Statements........ F-58
UNAUDITED PRO FORMA FINANCIAL INFORMATION
Unaudited Consolidated Condensed Pro Forma Statement of
Financial Condition as of March 31, 2000.................. F-61
Unaudited Consolidated Condensed Pro Forma Statement of
Operations for the year ended March 31, 2000.............. F-62
Unaudited Consolidated Condensed Pro Forma Footnotes to
Financial Statements...................................... F-63
</TABLE>
F-2
<PAGE> 81
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Stockwalk.com Group Inc.
We have audited the accompanying consolidated statements of financial
condition of Stockwalk.com Group, Inc. and subsidiaries as of March 31, 2000 and
1999 and the related consolidated statements of operations, shareholders' equity
and cash flows for each of the three years in the period ended March 31, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards required that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Stockwalk.com
Group, Inc. and subsidiaries at March 31, 2000 and 1999 and the consolidated
results of their operations and their cash flows for the each of the three years
in the period ended March 31, 2000, in conformity with accounting principles
generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Minneapolis, MN
May 3, 2000, except for Note 12,
as to which the date is June 7, 2000
F-3
<PAGE> 82
STOCKWALK.COM GROUP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH 31,
----------------------------
1999 2000
------------ ------------
<S> <C> <C>
ASSETS
Cash................................................ $ 3,200,700 $ 5,533,500
Cash and cash equivalents-segregated................ 73,130,500 83,009,400
Receivables from customers.......................... 139,910,800 216,216,100
Receivables from brokers and dealers................ 70,350,300 160,230,300
Deposits at clearing organizations.................. 8,492,200 26,234,900
Trading securities owned, at market................. 9,274,300 8,320,100
Secured demand notes receivable..................... 9,675,000 18,575,000
Goodwill, less accumulated amortization of $243,600
and $489,400...................................... 1,380,200 10,284,900
Other assets........................................ 6,938,800 10,471,100
------------ ------------
Total assets................................... $322,352,800 $538,875,300
============ ============
LIABILITIES
Short-term borrowings............................... $ 33,900,000 $ 29,500,000
Payables to customers............................... 203,313,800 280,364,200
Payables to brokers and dealers..................... 53,363,600 160,153,400
Trading securities sold but not yet purchased, at
market............................................ 812,200 1,339,000
Notes payable....................................... 4,538,100 7,544,400
Liabilities subordinated to claims of general
creditors......................................... 9,675,000 18,575,000
Other liabilities................................... 9,738,900 16,747,000
------------ ------------
Total liabilities.............................. 315,341,600 514,223,000
SHAREHOLDERS' EQUITY
Common stock, 1999 -- $.01 par value; 2000 -- $.04
par value
Authorized shares: 50,000,000
Issued and outstanding 1999 -- 4,255,971; 2000 --
21,575,313..................................... 42,600 863,000
Preferred stock -- no par
Authorized shares: 1999 -- 5,000,000; 2000 -- 0
Issued and outstanding 1999 -- 558,000;
2000 -- 0...................................... 4,380,300 --
Paid-in capital..................................... 2,540,000 25,440,900
Retained earnings (deficit)......................... 48,300 (1,651,600)
------------ ------------
Total shareholders' equity........................ 7,011,200 24,652,300
------------ ------------
Total liabilities and shareholders' equity........ $322,352,800 $538,875,300
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE> 83
STOCKWALK.COM GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
-----------------------------------------
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Trading profits.......................... $10,634,100 $15,063,100 $16,073,000
Interest................................. 13,506,700 15,410,200 20,988,500
Commissions.............................. 9,039,900 9,888,200 14,287,200
Investment banking....................... 9,656,200 8,388,900 10,362,900
Clearing fees............................ 1,902,300 3,105,400 5,247,600
Other income............................. 2,353,400 3,734,500 4,011,100
----------- ----------- -----------
Total revenues...................... 47,092,600 55,590,300 70,970,300
EXPENSES:
Employee compensation and benefits....... 25,950,400 26,986,900 34,163,000
Clearing fees............................ 1,474,500 2,890,100 2,998,900
Occupancy and equipment.................. 3,380,600 3,285,100 4,853,800
Communication............................ 3,937,900 5,251,400 8,016,500
Interest................................. 11,027,400 11,805,900 16,331,400
Other expense............................ 3,145,100 3,113,300 7,145,400
----------- ----------- -----------
Total expenses...................... 48,915,900 53,332,700 73,509,000
Income (loss) before income taxes.......... (1,823,300) 2,257,600 (2,538,700)
Income tax expense (benefit)............... (599,000) 985,000 (838,800)
----------- ----------- -----------
Net income (loss).......................... $(1,224,300) $ 1,272,600 $(1,699,900)
=========== =========== ===========
Basic earnings (loss) per share............ $(0.08) $0.08 $(0.09)
=========== =========== ===========
Weighted average shares
outstanding -- basic..................... 15,848,500 15,848,500 18,849,200
=========== =========== ===========
Diluted earnings (loss) per share.......... $(0.08) $0.08 $(0.09)
=========== =========== ===========
Weighted average shares
outstanding -- diluted................... 15,848,500 15,848,500 18,998,400
=========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-5
<PAGE> 84
STOCKWALK.COM GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31, 1998, 1999 AND 2000
-----------------------------------------------------------------------------
COMMON STOCK ADDITIONAL RETAINED
PREFERRED --------------------- PAID IN EARNINGS
STOCK SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
----------- ---------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1997.......... -- 4,255,971 $ 42,600 $ 1,297,300 $ 1,242,700 $ 2,582,600
Exchange of MJK common stock
for MJK Holdings............. -- -- -- 1,242,700 (1,242,700) --
Net loss....................... -- -- -- -- (1,224,300) (1,224,300)
----------- ---------- -------- ----------- ----------- -----------
Balance, March 31, 1998.......... -- 4,255,971 $ 42,600 $ 2,540,000 $(1,224,300) $ 1,358,300
Issuance of preferred stock.... 4,380,300 -- -- -- 4,380,300
Net income..................... -- -- -- -- 1,272,600 1,272,600
----------- ---------- -------- ----------- ----------- -----------
Balance, March 31, 1999.......... 4,380,300 4,255,971 $ 42,600 $ 2,540,000 $ 48,300 $ 7,011,200
Issuance of preferred stock.... 101,800 -- -- -- -- 101,800
Recapitalization in connection
with merger of NM Holdings,
Inc.......................... (4,482,100) 14,959,670 726,000 6,380,100 -- 2,624,000
Exercise of options and
warrants..................... 63,875 2,600 165,200 167,800
Issued shares of common stock
through private placements... -- 2,239,500 89,600 15,910,600 -- 16,000,200
Issued in connection with
acquisition of Arnold
Securities, Inc.............. -- 10,000 400 71,900 -- 72,300
Issued in connection with
acquisition of M-One
Securities................... -- 40,000 1,600 318,400 -- 320,000
Issued in connection with
marketing agreement.......... -- 6,297 200 54,700 -- 54,900
Net loss....................... -- -- -- -- (1,699,900) (1,699,900)
----------- ---------- -------- ----------- ----------- -----------
Balance, March 31, 2000.......... -- 21,575,313 $863,000 $25,440,900 $(1,651,600) $24,652,300
=========== ========== ======== =========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-6
<PAGE> 85
STOCKWALK.COM GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
------------------------------------------
1998 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).......................... $ (1,224,300) $ 1,272,600 $ (1,699,900)
Adjustments to reconcile net income (loss)
to net cash used for operating
activities:
Depreciation and amortization............ 919,200 1,013,900 946,600
Changes in assets and liabilities:
Cash and investments segregated....... (60,772,200) 22,515,600 (9,878,900)
Customer receivables and payables..... 35,621,800 11,199,000 745,100
Broker and dealer receivables and
payables............................ (190,500) (47,410,100) 16,909,800
Deposits at clearing organizations.... 236,300 (7,689,300) (17,742,700)
Trading securities.................... 9,724,000 (9,168,700) 1,481,000
Other assets and liabilities........ 5,103,700 3,264,000 3,113,500
------------ ------------ ------------
Net cash used for operating activities..... $(10,582,000) $(25,003,000) $ (6,125,500)
INVESTING ACTIVITIES
Acquisition of certain assets of broker
dealers and license agreements........... $ 15,400,400 $ -- $ (9,150,500)
Increase in goodwill due to completion of
acquisition of assets and assumption of
liabilities of Juran & Moody............. (481,900) -- --
Purchase of equipment and office furniture,
net...................................... (1,356,900) (645,100) (338,500)
------------ ------------ ------------
Net cash provided by (used for) investing
activities............................... $ 13,561,600 $ (645,100) $ (9,489,000)
FINANCING ACTIVITIES
Increase (decrease) in short-term
borrowings............................... $ (5,000,000) $ 21,900,000 $ (4,400,000)
Issuance of notes payable.................. 5,100,000 -- 4,667,400
Payments on notes payable.................. (969,000) (714,400) (1,661,100)
Issuance of preferred stock................ -- 4,380,300 101,800
Issuance of common stock................... -- -- 19,239,200
------------ ------------ ------------
Net cash provided by (used for) financing
activities............................... $ (869,000) $ 25,565,900 $ 17,947,300
Net increase (decrease) in cash and cash
equivalents.............................. $ 2,110,600 $ (82,200) $ 2,332,800
Cash at beginning of period................ 1,172,300 3,282,900 3,200,700
------------ ------------ ------------
Cash at end of period...................... $ 3,282,900 $ 3,200,700 $ 5,533,500
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid (received) during the year for:
Interest................................. $ 11,188,100 $ 11,297,200 $ 15,333,500
============ ============ ============
Income taxes............................. $ 38,800 $ (373,400) $ 798,600
============ ============ ============
</TABLE>
See accompany notes to the consolidated financial statements.
F-7
<PAGE> 86
STOCKWALK.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Our history began in 1980 with the incorporation of Miller Securities, a
specialized municipal bond firm. Miller Securities eventually broadened its
business to include a variety of financial services, including securities
clearing, and changed its name to Miller, Johnson & Kuehn, Incorporated ("MJK").
MJK Holdings, Inc. ("MJKH") was formed in June 1997 as a holding company for MJK
and MJK's clearing division. On July 7, 1999, then privately-owned MJKH and
publicly-held NM Holdings, Inc. completed a merger whereby MJKH became a
wholly-owned subsidiary of NM Holdings, Inc. The surviving entity changed its
name to Stockwalk.com Group, Inc., and is today the ultimate holding company of
MJK, MJK Capital Corporation, MJKH, MJK Management Services, Inc.,
Stockwalk.com, Inc. and Arnold Securities, Inc. MJK, Stockwalk.com, Inc. and
Arnold Securities, Inc. are registered as broker-dealers with the SEC and are
members of the NASD and SIPC. Our stock trades on the NASDAQ under the ticker
symbol "STOK."
We are a technologically-driven regional securities firm headquartered in
Minneapolis, Minnesota. Through our operating subsidiaries, we provide a broad
range of investment services to individual, corporate and public clients. These
services include both traditional and online securities brokerage, investment
banking and research services and the processing of securities transactions for
correspondent brokerage firms and financial institutions. Our Miller, Johnson &
Kuehn, Incorporated subsidiary offers traditional securities brokerage,
securities trading, investment banking and research services. Our niche market
includes small capitalization, emerging and start-up businesses and public
finance clients located principally in the upper midwest. In 1999, our
Stockwalk.com, Inc. subsidiary began offering a secure online brokerage service
that provides order placement, portfolio tracking and related market
information, news and other information to investors 24 hours a day, seven days
a week, by means of the Internet and telephone. These Stockwalk.com services are
offered to our customers and to customers and members of small to medium-sized
financial institutions, affinity groups and Internet portals through a private
label program.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION AND SECURITIES TRANSACTIONS
Purchases and sales of securities are recorded on a settlement date basis,
which is generally the third business day following the transaction date. The
impact of unsettled transactions on trading securities owned, trading securities
sold but not yet purchased, and income, net of related expenses, is not
material.
F-8
<PAGE> 87
STOCKWALK.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
VALUATION OF FINANCIAL INSTRUMENTS
Trading securities owned and trading securities sold but not yet purchased
are carried at fair value. The fair values of the financial instruments are
generally based on listed market prices. If listed market prices are not
available, fair value is based on other relevant factors, including dealer price
quotations.
GOODWILL
Excess of cost over fair value of net assets acquired ("goodwill") is
amortized using the straight-line method over periods not exceeding 20 years.
Goodwill is evaluated periodically for impairment, in accordance with the
requirements of generally accepted accounting principles.
CUSTOMER RECEIVABLES, PAYABLES AND SECURITIES
Receivables from and payables to customers arise from cash and margin
transactions executed on behalf of our customers. Receivables are generally
collateralized by securities with market values in excess of the amounts due. It
is our policy to monitor the market value of the collateral and request
additional collateral when required. Such collateral is not reflected in the
accompanying financial statements.
We are required to maintain possession or control, as defined, of all fully
paid securities and excess margin securities of customers. To the extent such
control cannot be obtained from various counterparties, we may have to purchase
or sell securities at prevailing market rates to obtain such possession or
control.
We charge interest on our customer margin accounts and pay interest on
customers' free credit balances based on prevailing market rates. We recorded
interest revenue of approximately $11.1 million, $10.1 million and $9.7 million
on customer margin accounts in the fiscal years ended March 31, 2000, 1999, and
1998, respectively, and interest expense of approximately $9.3 million, $7.7
million and $6.8 million in the same periods.
REVERSE REPURCHASE AGREEMENTS
Securities purchased under agreements to resell (reverse repurchase
agreements) are recorded at the contract amount at which the securities will be
subsequently resold plus accrued interest. These financial instruments are
collateralized by U.S. government securities. It is our policy to take
possession of securities purchased under agreements to resell.
CASH AND CASH EQUIVALENTS
We consider all highly liquid investments, including reverse repurchase
agreements, with a maturity of three months or less when purchased to be cash
equivalents.
F-9
<PAGE> 88
STOCKWALK.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash and investments segregated consist of funds segregated in special
reserve bank accounts for the benefit of customers under rule 15c3-3 of the
Securities and Exchange Commission. The cash and cash equivalents segregated in
special reserve bank accounts included $17.1 million and $8.7 million of reverse
repurchase agreements at March 31, 2000 and 1999, respectively.
INCOME TAXES
Deferred income taxes are recorded to reflect the tax consequences of
differences between the tax and financial reporting bases of assets and
liabilities. Recorded amounts relate primarily to net operating losses and tax
credit carryforwards.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Stockwalk.com
Group, Inc. and its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation. We do not present a
statement of comprehensive income as there are no items.
SEGMENT REPORTING
Segment results are derived from our branch location profitability
reporting system. Intersegment transactions are measured on the same basis as if
the transactions occurred with external customers. In reviewing the segment
operating results, our operating decision-makers do not distinguish between
intersegment transactions and external customer transactions. Intersegment
revenue is eliminated to reconcile total segment revenue to consolidated
revenue. Income tax expense or benefit is not allocated to our operating
segments. We do not provide balance sheet data for segment reporting as this
data is not measured for our operating segments.
Information concerning operations in our segments of business is detailed
in the Management's Discussion and Analysis of Financial Condition and Results
of Operations.
ADVERTISING EXPENDITURES
Our advertising costs of $1.5 million in fiscal 2000 have been expensed as
incurred. No significant advertising expenses were incurred in fiscal 1998 or
1999.
INVESTMENT BANKING
Investment banking revenues include gains, losses and fees arising from
securities offerings in which we act as an underwriter or agent. Investment
banking management fees are recorded on offering date, sales concessions on
settlement date, and underwriting fees at the time the underwriting is completed
and the income is reasonably determinable.
F-10
<PAGE> 89
STOCKWALK.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACCOUNTING CHANGES
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
is effective for financial statements for periods beginning after June 15, 2000.
This statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize all
derivative instruments as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The adoption of
SFAS No. 133 is not expected to have a material impact on our financial results.
3. BROKER-DEALER RECEIVABLES AND PAYABLES
Broker-dealer receivables and payables at March 31, consisted of the
following:
<TABLE>
<CAPTION>
1999 2000
----------- ------------
<S> <C> <C>
Securities borrowed.................................. $51,283,400 $148,564,800
Securities failed-to-deliver......................... 17,859,900 6,608,200
Receivable from introducing broker................... 473,400 2,632,200
Other................................................ 733,600 2,425,100
----------- ------------
Total receivables.................................... $70,350,300 $160,230,300
=========== ============
Securities loaned.................................... $35,550,200 $147,089,600
Securities failed-to-receive......................... 5,440,100 5,605,300
Payable to introducing broker........................ 2,398,300 4,347,900
Payable to clearing broker........................... 9,975,000 3,110,600
----------- ------------
Total payables....................................... $53,363,600 $160,153,400
=========== ============
</TABLE>
Broker-dealer receivables and payables arise from securities transactions
executed for our customers. The receivables are generally collected within 30
days and collateralized by securities in physical possession, on deposit or
receivable from customers or other broker-dealers.
Broker-dealer payables represent amounts due upon the receipt of
securities. Should the broker-dealer fail to deliver the securities to us, we
may be required to purchase identical securities on the open market. The market
value of such securities at March 31, 1999 and 2000 approximates the amount
owed.
Securities borrowed and loaned are stated in the Consolidated Statements of
Financial Condition at the amounts of collateral advanced and received in
connection with the transactions. We measure the fair value of the securities
borrowed and loaned against the cash collateral on a daily basis. Additional
collateral is obtained as necessary to ensure such transactions are adequately
collateralized.
4. TRADING SECURITIES
Our trading securities represent investments in fixed income securities,
publicly traded equity securities and privately placed equity securities. The
value of certain trading
F-11
<PAGE> 90
STOCKWALK.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. TRADING SECURITIES (CONTINUED)
securities can fluctuate significantly, with the resulting valuation changes
being reported as net gains or losses. Trading securities at March 31, consisted
of the following:
<TABLE>
<CAPTION>
1999 2000
---------- ----------
<S> <C> <C>
Trading securities owned, at market
Corporate equities.................................... $6,318,800 $2,346,200
State and municipal obligations....................... 2,950,800 4,372,900
U.S. government obligations........................... -- 938,900
Corporate obligations................................. 4,700 662,100
---------- ----------
$9,274,300 $8,320,100
========== ==========
</TABLE>
Our trading securities sold but not yet purchased represent our obligations
to deliver a specified security at the contracted price and thereby create a
liability to purchase the security in the market at prevailing prices.
Accordingly, these transactions result in off-balance-sheet market risk as the
ultimate obligations to satisfy the sale of securities sold but not yet
purchased may exceed the amount recorded in the Consolidated Statements of
Financial Condition at March 31, 1999 and 2000. Trading securities sold but not
yet purchased at March 31, consisted of the following:
<TABLE>
<CAPTION>
1999 2000
-------- ----------
<S> <C> <C>
Trading securities sold but not yet purchased, at market
Corporate equities..................................... $ 40,200 $ 688,600
State and municipal obligations........................ 148,000 370,100
U.S. government obligations............................ 246,500 156,100
Corporate obligations.................................. 377,500 124,200
-------- ----------
$812,200 $1,339,000
======== ==========
</TABLE>
5. FINANCING ARRANGEMENTS
We had discretionary lines of credit totaling $60.0 million at March 31,
1999 and $70.0 million at March 31, 2000 which are secured by firm-owned
securities, customer securities collateralizing liabilities subordinated to
claims of general creditors and unpaid customer securities. These lines are
payable on demand. Borrowings on the lines bear interest at various rates over
the banks' cost of funds; such rates generally vary daily. The weighted average
interest rates on the lines were 7.55%, 6.48% and 7.55% on March 31, 1998, 1999,
and 2000, respectively. The March 31, 1999 balance outstanding of $33.9 million
was collateralized by approximately $10.8 million of firm-owned securities, $9.0
million of customer securities collateralizing liabilities subordinated to
claims of general creditors and $14.1 million of unpaid customer securities. The
March 31, 2000 balance outstanding of $29.5 million was collateralized by
approximately $20.9 million of firm owned securities and cash, and $14.2 million
of customer securities collateralizing liabilities subordinated to claims of
general creditors. The lines of credit require us to comply with certain
financial debt covenants. A compensating balance arrangement totaling $575,000
exists with respect to one of our discretionary lines of credit.
F-12
<PAGE> 91
STOCKWALK.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. FINANCING ARRANGEMENTS (CONTINUED)
At March 31, 2000, we had a note payable of $3.0 million, which was secured
by our ownership interest in MJKI. The note bears an interest rate of the bank's
reference rate unless our investment account at the bank is less than the
principal balance of the note. If our investment account balance at the bank is
less than the principal balance of the note, the note bears an interest rate of
the bank's reference rate plus one-half of one percent. The interest rate on the
note at March 31, 2000 was 9.00%. The note matures in installments through March
2005.
We also had various notes payable at March 31, 1999 and 2000 of $938,100
and $4.5 million, respectively, which were secured by certain assets. Borrowings
bear interest at either a fixed rate or various rates over the bank's cost of
funds; such rates generally vary daily. The interest rates ranged from 7.00% to
8.75% as of March 31, 1999 and 5.25% to 10.16% as of March 31, 2000.
Notes payable at March 31, 2000 mature as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING MARCH 31,:
-----------------------------
<S> <C>
2001............................................. $3,689,000
2002............................................. 1,217,500
2003............................................. 1,132,700
2004............................................. 891,200
2005............................................. 614,000
----------
$7,544,400
==========
</TABLE>
We had liabilities subordinated to claims of general creditors at March 31,
2000 representing 73 secured demand notes receivable, which are collateralized
by securities with market values in excess of their respective face amounts. The
notes bear interest at 5% and mature as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING MARCH 31,:
-----------------------------
<S> <C>
2001............................................. $11,275,000
2002............................................. 7,300,000
-----------
$18,575,000
===========
</TABLE>
6. SHAREHOLDERS' EQUITY
EFFECTS OF THE REORGANIZATION
Pursuant to the terms of the reorganization agreement, all outstanding
shares of NM Holdings, Inc.'s merger subsidiary corporation held by us were
converted into one share of common stock, $.01 par value, of the surviving
corporation, each share of MJK common stock and MJK Series I Preferred Stock
outstanding (other than shares owned by us, such merger subsidiary or MJK)
converted into 3.72382 shares of common stock. Each share of MJK common stock or
MJK Series I Preferred Stock owned by us, MJK, or such merger subsidiary
immediately prior to the effective time were canceled and extinguished without
any conversion thereof.
F-13
<PAGE> 92
STOCKWALK.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
All shares of MJK common stock and MJK Series I Preferred Stock converted
into shares of common stock in the merger were canceled and retired and ceased
existence. As of May 28, 1999, there were 4,255,971 shares of MJK common stock
outstanding and 571,000 shares of MJK Series I Preferred Stock outstanding.
Based upon the exchange ratio and the number of shares of common stock, MJK
common stock and MJK Series I Preferred Stock outstanding as of the record date.
COMPUTATION OF WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
We calculate earnings per share in accordance with FASB Statement No. 128
by dividing net income by the weighted average number of shares of common stock
outstanding to arrive at the basic earnings per common share. We calculate
diluted earnings per share by dividing net income by the weighted average number
of shares of common stock and dilutive stock equivalents from the exercise of
stock options and warrants using the treasury stock method. The results for
March 31, 1999 and 1998 reflect the conversion of MJK shares into Stockwalk.com
Group, Inc. shares at a rate of 3.72382 to 1.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
--------------------------------------
1998 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average shares
outstanding -- basic...................... 15,848,500 15,848,500 18,849,200
Dilutive effect of stock options and
warrants after application of the treasury
stock method.............................. -- -- 149,200
---------- ---------- ----------
Weighted average shares
outstanding -- diluted.................... 15,848,500 15,848,500 18,998,400
========== ========== ==========
</TABLE>
STOCK OPTION PLAN
The 1995 Stock Option Plan (the "1995 Plan") adopted by NM Holdings, Inc.
provided for a maximum of 200,000 shares of authorized common stock issuable
upon exercise of options or other awards granted or issued under the 1995 Plan.
Following the merger, the 1995 Plan was amended in July 1999 by increasing to
1,500,000 the maximum number of shares of authorized common stock issuable upon
exercise of options or other awards granted or issued under the 1995 Plan.
Twenty-Five Thousand shares of our common stock are reserved for option grants
under our 1996 Non-Employee Director Stock Option Plan.
F-14
<PAGE> 93
STOCKWALK.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
Stock options granted, exercised and forfeited under the plans are as
follows:
<TABLE>
<CAPTION>
SHARES AVAILABLE NUMBER OF WEIGHTED AVERAGE
FOR GRANT SHARES EXERCISE PRICE
---------------- --------- ----------------
<S> <C> <C> <C>
Outstanding at March 31, 1997......... 53,437 169,563 $ 7.88
Granted............................. (28,500) 28,500 11.88
Exercised........................... 2,000 (2,000) 4.00
Forfeited........................... 30,000 (30,000) 9.04
--------- --------- ------
Outstanding at March 31, 1998......... 56,937 166,063 $ 8.52
Granted............................. (125,000) 125,000 1.17
Exercised........................... -- (89,625) 1.81
Forfeited........................... 87,500 (87,500) 8.85
--------- --------- ------
Outstanding at March 31, 1999......... 19,437 113,938 $ 5.16
Granted............................. (969,050) 969,050 9.02
Exercised........................... -- (60,125) 2.41
Forfeited........................... 400 (400) 10.84
Increase in authorized shares....... 1,300,000 -- --
--------- --------- ------
Outstanding at March 31, 2000......... 350,787 1,022,463 $ 9.01
========= ========= ======
</TABLE>
Options available for future years as of March 31, 2000 are exercisable as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
WEIGHTED AVERAGE
REMAINING
RANGE OF NUMBER CONTRACTUAL LIFE WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ .625 - $ 6.00 23,438 5.08 $ 3.03 $ 22,501 $ 3.13
6.80 - 8.25 571,825 8.69 7.34 110,375 7.38
9.76 - 10.84 255,450 9.30 10.82 3,750 9.76
11.25 - 14.00 171,750 7.41 12.69 86,250 12.65
--------- --------
1,022,463 222,876
========= ========
</TABLE>
WARRANTS
In conjunction with various debt and equity financing activities, we have
granted warrants to purchase our common stock at exercise prices ranging between
$3.50 and $16.80.
At March 31, 2000 warrants to purchase 347,903 common shares were
outstanding at a weighted average exercise price of $9.11 per share. All
warrants are vested and expire between August 2000 and March 2003.
F-15
<PAGE> 94
STOCKWALK.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
SUPPLEMENTAL DISCLOSURES FOR STOCK-BASED COMPENSATION
We account for the above plans under APB Opinion No. 25, and, accordingly,
no compensation expense relating to the grant of options has been recognized in
the Consolidated Statements of Operations. Had the compensation cost for these
plans been determined consistent with Statement of Financial Accounting
Standards No. 123 "Accounting for Stock-Based Compensation" (SFS 123), our pro
forma net income and net income per common share diluted would have been
adjusted to the following pro forma amounts:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
--------------------------------------
1998 1999 2000
----------- ---------- -----------
<S> <C> <C> <C> <C>
Net income (loss): As reported...... $(1,224,300) $1,272,600 $(1,699,900)
Pro forma........ (1,291,400) 1,232,800 (2,487,500)
Diluted earnings (loss) per
share: As reported...... $ (0.08) $ 0.08 $ (0.09)
Pro forma........ $ (0.08) $ 0.08 $ (0.13)
</TABLE>
The fair value of each option granted subsequent to January 1, 1995 in
accordance with SFAS No. 123 was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions: risk free interest rates of 6.08% to 6.67% in 1998, 4.56% to 6.33%
in 1999 and 5.67% to 6.77% in 2000; expected life of 5 years for 1998, 2.5 to 5
years for 1999 and 5 to 10 years for 2000 and; expected volatility of 51.85% to
54.22% in 1998, 43.95% to 57.36% in 1999 and 113.32% to 159.75% in 2000.
7. NET CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS
Our three broker-dealers are subject to the Securities and Exchange
Commission's Uniform Net Capital Rule (Rule 15c3-1) which requires the
maintenance of minimum net capital. MJK has elected to use the alternative
method permitted by Rule 15c3-1 which requires that MJKI maintain minimum net
capital equal to the greater of $250,000 or 2.0% of aggregate debit balances
arising from customer transactions, as defined. At March 31, 2000, MJK's net
capital of $18.4 million was 7.9% of aggregate debit balances and $13.7 million
in excess of required net capital. The net capital rule also provides that
equity capital may not be withdrawn or cash dividends paid if resulting net
capital would be less than 5.0% of aggregate debits. Stockwalk.com and Arnold
Securities each require a minimum of $50,000 net capital. At March 31, 1999,
Stockwalk.com and Arnold Securities had net capital of $318,500 and $87,900,
respectively. Under the provisions of financing arrangements entered into during
fiscal 1998, we may not declare or pay dividends on any of the outstanding
capital stock.
8. EMPLOYEE BENEFIT PLANS
We have a qualified profit-sharing plan and a 401(k) plan, which cover all
employees who are at least 21 years old and have at least six months of
continuous employment.
F-16
<PAGE> 95
STOCKWALK.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. EMPLOYEE BENEFIT PLANS (CONTINUED)
Employees may contribute up to 10% of their compensation to the 401(k) plan.
Employer contributions are made to the profit sharing plan at the discretion of
our Board of Directors. We did not contribute to the profit-sharing plan in
fiscal 1998 or 2000. We contributed $100,000 in fiscal 1999.
9. COMMITMENTS AND CONTINGENCIES
We are obligated for the rental of office space, automobiles, and equipment
under noncancelable operating leases which expire at various dates from 2001 to
2004. The office lease includes escalation clauses for increases in taxes and
operating expenses of the leased premises. Minimum annual rental payments under
noncancelable leases in effect at March 31, 2000 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING MARCH 31,:
-----------------------------
<S> <C>
2001............................................. $2,540,600
2002............................................. 2,406,400
2003............................................. 1,702,900
2004............................................. 794,800
Thereafter....................................... --
----------
Total minimum future rental payments............. $7,444,700
==========
</TABLE>
10. RELATED PARTY TRANSACTIONS
Liabilities subordinated to claims of general creditors included secured
demand notes entered into by a member of our Board of Directors. The notes
totaled $300,000 in each period and mature in 2001.
We also had $1,484,100 and $1,758,400 of notes receivable from employees
which are included in other assets as of March 31, 1999 and 2000, respectively.
The amounts consist of 33 and 41 notes at March 31, 1999 and 2000, respectively,
which bear various interest rates and mature at various dates through 2003.
11. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts
F-17
<PAGE> 96
STOCKWALK.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES (CONTINUED)
used for income tax purposes. Significant components of our deferred tax assets
as of March 31 are as follows:
<TABLE>
<CAPTION>
1999 2000
-------- --------
<S> <C> <C>
Deferred tax assets:
Amortization of leasehold improvements................... $ 70,100 $108,300
Amortization of notes receivable......................... 41,300 44,400
Deferred rent............................................ 17,100 65,000
Accrued bonuses.......................................... 11,400 74,800
Other.................................................... -- 57,400
-------- --------
139,900 349,900
Net operating loss carryforwards........................... 172,800 421,000
-------- --------
Total deferred tax assets, net of valuation allowance...... $282,900 $741,100
-------- --------
Deferred tax liabilities:
Unrealized gain on investments........................... $ -- $301,800
Amortization of goodwill................................. -- 3,500
-------- --------
Deferred tax liabilities................................. -- 305,300
-------- --------
Net deferred tax assets.................................... $282,900 $435,800
======== ========
</TABLE>
The income tax expense (benefit) for the fiscal years ended March 31
included the following:
<TABLE>
<CAPTION>
1998 1999 2000
--------- -------- ---------
<S> <C> <C> <C>
Federal........................................ $(344,700) $706,000 $(698,100)
State.......................................... 5,000 100,000 12,200
Deferred....................................... (259,300) 179,000 (152,900)
--------- -------- ---------
$(599,000) $985,000 $(838,800)
========= ======== =========
</TABLE>
Reconciliation of the provision for income taxes and the amounts that would
be computed using the statutory federal income tax rate for the years ended
March 31, 1998, 1999 and 2000 are as follows:
<TABLE>
<CAPTION>
1998 1999 2000
--------- -------- ---------
<S> <C> <C> <C>
Tax at statutory rate.......................... $(620,400) $769,700 $(863,100)
Tax-exempt interest, net of related expenses... (30,800) 22,800 63,900
State taxes, net of federal tax benefit........ (64,000) 128,700 (240,100)
Non-deductible life insurance.................. 40,600 52,900 54,000
Non-deductible meals and entertainment......... 31,300 29,700 36,000
Change in valuation allowance.................. -- (95,300) --
Other.......................................... 44,300 76,500 110,500
--------- -------- ---------
$(599,000) $985,000 $(838,800)
========= ======== =========
</TABLE>
F-18
<PAGE> 97
STOCKWALK.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. INCOME TAXES (CONTINUED)
At March 31, 2000, we had a net operating loss (NOL) carryforward of
approximately $421,000 for federal income tax purposes that expires in 2004. The
utilization of the NOL carryforward is restricted under the provisions of
Section 382 of the Internal Revenue Code.
12. SUBSEQUENT EVENTS
In June 2000, we entered into merger agreements with Kinnard and Steichen.
Under the terms of the Kinnard agreement, we agreed to pay $6.00 cash per share
and issue one-half of a share our common stock for each of the approximately 4.9
million outstanding shares of Kinnard common stock. Under the terms of the
Steichen agreement we agreed to issue approximately 4.3 million shares of our
restricted common stock in exchange for all the capital stock of Steichen, plus
up to an additional 2.0 million common shares based on Steichen's future
operations. Both transactions are subject to regulatory and shareholder
approval. Completion of the mergers is expected to occur in the second quarter
of fiscal 2001. The merger transactions will be accounted for using the purchase
method.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected unaudited data reflecting our results of operations for each of
the last eight quarters are shown in the following table. The information for
each of these quarters includes all normal and recurring adjustments and
accruals that we consider necessary for a fair presentation. The quarterly data
do not include pro-forma results for the merger with NM Holdings, Inc. The
operating results, however, are not necessarily indicative of results for any
future period.
The December 31, 1999 results included a reclassification of $253,900
between interest revenue and interest expense.
<TABLE>
<CAPTION>
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Fiscal Year 2000
Revenues..................... $13,204,900 $13,891,200 $17,217,900 $26,656,300
Net income (loss)............ (1,044,300) (1,259,400) (996,000) 1,599,800
Basic earnings (loss) per
share...................... $ (0.05) $ (0.06) $ (0.05) $ 0.08
Diluted earnings (loss) per
share...................... $ (0.05) $ (0.07) $ (0.05) $ 0.08
Fiscal Year 1999
Revenues..................... $13,662,400 $13,832,900 $13,989,800 $14,105,200
Net income (loss)............ 392,300 442,300 499,800 (61,800)
Basic earnings (loss) per
share...................... $ 0.03 $ 0.02 $ 0.03 $ 0.00
Diluted earnings (loss) per
share...................... $ 0.03 $ 0.02 $ 0.03 $ 0.00
</TABLE>
F-19
<PAGE> 98
INDEPENDENT AUDITORS' REPORT
Board of Directors
R. J. Steichen & Co.:
We have audited the accompanying statements of financial condition of R. J.
Steichen & Co. (the Company) as of September 30, 1999 and 1998, and the related
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended September 30, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of R. J. Steichen & Co. as of
September 30, 1999 and 1998, and the results of its operations and its cash
flows for each of the years in the three-year period ended September 30, 1999,
in conformity with generally accepted accounting principles.
/s/ KPMG LLP
October 27, 1999
F-20
<PAGE> 99
R. J. STEICHEN & CO.
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Cash (note 3)....................................... $ 1,914,961 $ 13,741,389
Deposits with clearing organizations................ 250,000 603,629
Receivables from brokers and dealers and clearing
organizations:
Clearing organizations......................... 558,009 585,104
Securities borrowed............................ 2,076,900 3,276,190
Receivables from customers.......................... 95,172,452 105,375,932
Securities in trading account, at market value...... 2,735,470 5,759,379
Prepaid expenses and other assets................... 1,779,266 2,124,804
------------ ------------
Total assets................................... $104,487,058 $131,466,427
============ ============
LIABILITIES
Payables to customers............................... $ 79,015,628 109,197,017
Short-term borrowings (note 5)...................... 7,800,000 1,600,000
Securities sold, not yet purchased.................. 478,299 665,782
Accounts payable and accrued liabilities............ 1,295,102 1,047,281
Accrued sales commissions........................... 579,280 1,275,110
Deposit from introducing broker..................... 197,800 196,000
------------ ------------
Total liabilities.............................. 89,366,109 113,981,190
------------ ------------
Stockholders' equity (note 8):
Common stock, $100 par value:
Authorized 200 shares; issued and outstanding,
20 shares.................................... 2,000 2,000
Additional paid-in capital........................ 439,063 439,063
Retained earnings................................. 14,679,886 17,044,174
------------ ------------
Total stockholders' equity..................... 15,120,949 17,485,237
Commitments and contingencies (notes 9 and 10)......
------------ ------------
Total liabilities and stockholders' equity..... $104,487,058 $131,466,427
============ ============
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE> 100
R. J. STEICHEN & CO.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Commissions:
Investment banking...................... $10,777,797 $ 6,669,137 $ 3,740,426
Securities.............................. 8,451,093 9,163,130 11,190,454
Investment companies and insurance
products.............................. 555,246 625,100 757,427
Principal transactions..................... 15,001,537 11,965,854 16,157,400
Interest and dividends..................... 7,584,917 8,818,446 8,233,536
Other revenue.............................. 149,388 577,275 354,986
----------- ----------- -----------
Total revenues........................ 42,519,978 37,818,942 40,434,229
----------- ----------- -----------
EXPENSES:
Commissions and compensation............... 24,458,722 22,696,676 24,881,470
Interest................................... 4,205,386 4,884,247 4,582,056
Communications............................. 2,142,394 2,267,140 2,444,233
Technology consultant fees and other data
processing.............................. 809,541 1,736,565 1,260,242
Occupancy.................................. 1,324,054 1,404,779 1,430,215
Clearing corporation services.............. 297,970 375,930 400,893
Other operating expenses................... 2,055,142 1,645,079 1,375,220
----------- ----------- -----------
Total expenses........................ 35,293,209 35,010,416 36,374,329
----------- ----------- -----------
Net earnings................................. $ 7,226,769 $ 2,808,526 $ 4,059,900
=========== =========== ===========
Basic earnings per common share.............. $ 361,338 $ 140,426 $ 202,995
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-22
<PAGE> 101
R. J. STEICHEN & CO.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30, 1997, 1998, AND 1999
----------------------------------------------------
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, September 30, 1996........ $2,000 $439,063 $15,800,317 $16,241,380
Net earnings..................... -- -- 7,226,769 7,226,769
Dividends paid................... -- -- (8,858,726) (8,858,726)
------ -------- ----------- -----------
Balance, September 30, 1997........ $2,000 $439,063 $14,168,360 $14,609,423
Net earnings..................... -- -- 2,808,526 2,808,526
Dividends paid................... -- -- (2,297,000) (2,297,000)
------ -------- ----------- -----------
Balance, September 30, 1998........ $2,000 $439,063 $14,679,886 $15,120,949
Net earnings..................... -- -- 4,059,900 4,059,900
Dividends paid................... -- -- (1,695,612) (1,695,612)
------ -------- ----------- -----------
Balance, September 30, 1999........ $2,000 $439,063 $17,044,174 $17,485,237
====== ======== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE> 102
R. J. STEICHEN & CO.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER 30,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings................................ $ 7,226,769 $ 2,808,526 $ 4,059,900
Adjustments to reconcile net earnings to net
cash provided (used) by operating
activities:
Depreciation and amortization............ 86,943 44,288 804
Changes in assets and liabilities:
Net receivables from and payables to
brokers, dealers, and clearing
organizations....................... 2,575,076 378,902 (1,226,385)
Net receivables from and payables to
customers........................... (1,321,027) (2,359,519) 19,977,909
Net securities in trading accounts and
securities sold, not yet
purchased........................... (1,612,537) (578,252) (2,836,426)
Accrued sales commissions.............. 586,517 (1,042,111) 695,830
Prepaid expenses and other assets...... (1,004,662) 27,804 (346,342)
Accounts payable and accrued
liabilities......................... (159,910) (1,026,295) (247,821)
Deposits, net.......................... 54,856 27,800 (355,429)
----------- ----------- -----------
Net cash provided (used) by operating
activities.................................. $ 6,432,025 $(1,718,857) $19,722,040
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under line of
credit................................... $ (500,000) $ 1,300,000 $(6,200,000)
Dividends paid.............................. (8,858,726) (2,297,000) (1,695,612)
Payments on obligations under capital
leases................................... (86,495) (86,069) --
----------- ----------- -----------
Net cash used by financing activities......... $(9,445,221) $(1,083,069) $(7,895,612)
----------- ----------- -----------
Net increase (decrease) in cash............... (3,013,196) (2,801,926) 11,826,428
Cash at beginning of year..................... 7,730,083 4,716,887 1,914,961
----------- ----------- -----------
Cash at end of year........................... $ 4,716,887 $ 1,914,961 $13,741,389
=========== =========== ===========
Cash paid during the year for interest........ $ 4,205,386 $ 4,884,247 $ 4,582,056
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE> 103
R. J. STEICHEN & CO.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1998 AND 1999
(1) NATURE OF BUSINESS
R. J. Steichen & Co. (the Company) is privately owned but is a registered
broker dealer in securities under the Securities and Exchange Act of 1934. The
Company trades, underwrites, and markets equity and fixed income securities.
(2) SIGNIFICANT ACCOUNTING POLICIES
(a) ACCOUNTING FOR SECURITIES TRANSACTIONS
Securities in trading and investment accounts and securities sold, not
yet purchased are recorded at quoted market values. Revenues from principal
transactions include the change in unrealized appreciation or depreciation
of securities.
Securities transactions and related commissions, revenues, and
expenses are recorded on a settlement date basis, which is not materially
different than on a trade date basis.
(b) CUSTOMER ACCOUNTS
Accounts receivable from customers primarily represents margin
balances. Other customer receivables and payables result from cash
transactions. Securities owned by customers and held as collateral are not
reflected in the financial statements.
(c) OTHER ASSETS
Included in other assets are forgivable loans made to investment
executives and other revenue producing employees, typically in connection
with their recruitment. Such forgivable loans are amortized as compensation
over the life of the note which is generally three to five years, using the
straight-line method.
(d) INCOME TAXES
The Company is a Subchapter S corporation for income tax purposes.
Accordingly, no provision for income taxes is included in the financial
statements, as the Company's earnings are allocated to the stockholder for
inclusion in his individual income tax returns.
(e) FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of the Company's financial assets and liabilities
are carried at market value or at amounts which, because of their
short-term nature, approximate current fair value.
(f) USE OF ESTIMATES
Preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and
liabilities and disclosure of contingent liabilities at the balance sheet
date and the reported amounts of revenues
F-25
<PAGE> 104
R. J. STEICHEN & CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and expenses during the reporting period. Actual results could differ from
those estimates.
(g) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased
with an original maturity of three months or less to be cash equivalents.
(h) EARNINGS PER SHARE
During the three-year period presented, there were no potential
dilutive shares and common shares outstanding remained constant.
(3) CASH
$9.0 million was required to be segregated at September 30, 1999 in
accordance with the provisions of Rule 15c3-3 of the Securities Exchange Act of
1934.
(4) RECEIVABLES FROM AND PAYABLES TO BROKERS AND DEALERS
Securities failed to deliver and receive, if any, represent the contract
value of securities which have not been delivered or received subsequent to
settlement date.
Securities borrowed and securities loaned are recorded at the amount of
cash collateral advanced or received in connection with the transaction.
Securities borrowed transactions require the Company to deposit cash or other
collateral with the lender. With respect to securities loaned, the Company
receives cash or other collateral. The initial collateral advanced or received
has a market value equal to or greater than the market value of the securities
borrowed or loaned. The Company monitors the market value of the securities
borrowed and loaned and requests additional collateral or returns excess
collateral, as appropriate. Deposits paid for securities borrowed and deposits
received for securities loaned approximate the market value of the related
securities.
(5) SHORT-TERM BORROWINGS
Short-term borrowings represent secured borrowings under a bank credit
agreement to finance securities inventory positions and receivables. The Company
may borrow up to an aggregate of $35 million, subject to borrowing base
availability. At September 30, 1998 and 1999, the Company had outstanding
balances of $7.8 million and $1.6 million, respectively. The interest rate was
6.43% and 6.45% at September 30, 1998 and 1999, respectively.
Cash, securities inventory, customer margin securities, and receivables
from clearing organizations of approximately $29.8 million and $25.6 million
were pledged as collateral on these borrowings at September 30, 1998 and 1999,
respectively.
F-26
<PAGE> 105
R. J. STEICHEN & CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(6) SECURITIES INVENTORY
Securities positions are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1998 1999
---------- ----------
<S> <C> <C>
Owned:
State and municipal government obligations............ $ 709,032 $3,869,626
U.S. government and Canadian government obligations... 543,683 22,174
Stock and warrants.................................... 1,477,897 1,827,173
Corporate obligations................................. 4,858 40,406
---------- ----------
Total............................................ $2,735,470 $5,759,379
========== ==========
Sold, not yet purchased:
Equity securities..................................... 478,299 665,782
---------- ----------
Total............................................ $ 478,299 $ 665,782
========== ==========
</TABLE>
Securities sold, not yet purchased, represent obligations of the Company to
deliver the specified security at the contracted price, and thereby, create a
liability to repurchase security in the market at prevailing prices. These
transactions result in off-balance-sheet market risk, as the Company's ultimate
obligation to satisfy the sale of securities sold, not yet purchased, may exceed
the amount recognized in the Statement of Financial Condition.
Revenues from principal transactions are generated by market-making
activities primarily from transactions relating to equity securities.
(7) EMPLOYEE BENEFIT PLANS
The Company has a defined contribution retirement plan to provide
retirement income for employees. The Company matches 50% of employee
contributions up to a $1,000 annual maximum plus a contribution at the
discretion of the Board of Directors of the Company. No discretionary
contributions were made for fiscal years 1997, 1998 and 1999. The Company's
matching contributions under the plan for the years ended September 30, 1997,
1998 and 1999 were $33,644, $46,205, and $53,966, respectively.
(8) NET CAPITAL REQUIREMENTS
The Company is subject to the Uniform Net Capital Rule (Rule 15c3-1) under
the Securities Exchange Act of 1934, which requires the maintenance of minimum
net capital. The Company has elected to use the alternative method for computing
net capital, which requires that the Company maintain minimum net capital, as
defined, equal to the greater of $250,000 or 2% of aggregate debit balances
arising from customer transactions, as defined. At September 30, 1999 the
Company's net capital of $13,872,958 was 13% of aggregate debit balances and
$11,776,085 in excess of required net capital. Rule 15c3-1 also provides that
equity capital may not be withdrawn nor cash dividends paid if resulting net
capital would be less than 5% of aggregate debit balances.
F-27
<PAGE> 106
R. J. STEICHEN & CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(9) COMMITMENTS AND CONTINGENCIES
The Company leases its office facilities and certain equipment under
noncancelable leases with expiration dates through fiscal year 2004. Certain
leases contain provisions for payment of operating expenses as additional rents.
Minimum rental commitments required under these leases are as follow:
<TABLE>
<CAPTION>
OPERATING
YEAR ENDING SEPTEMBER 30, LEASES
------------------------- ----------
<S> <C>
2000............................................... $ 737,870
2001............................................... 570,080
2002............................................... 529,100
2003............................................... 438,661
2004............................................... 166,038
Thereafter......................................... --
----------
Total minimum lease payments.................. $2,441,749
==========
</TABLE>
Rent expense was $880,000, $1.4 million, and $1.4 million for the years
ended September 30, 1997, 1998, and 1999, respectively.
In the normal course of business, the Company enters into underwriting and
other commitments. The ultimate settlement of such transactions open at year end
is not expected to have a material effect on the financial statements.
The Company is a defendant in various actions incidental to its securities
business. While the outcome of the litigation is uncertain, based upon the facts
that have been developed to date and consultation with legal counsel, Company
management believes that the resolution of those actions will not have a
materially adverse effect on the Company's financial condition.
(10) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET CREDIT RISK
The Company's customer securities activities are transacted on either a
cash or margin basis. In margin transactions, the Company extends credit to the
customer, subject to various regulatory and internal margin requirements,
collateralized by cash and securities in the customer's account. Such
transactions may expose the Company to significant off-balance-sheet credit risk
in the event margin requirements are not sufficient to fully cover losses which
customers may incur. In the event the customer fails to satisfy its obligation,
the Company may be required to purchase or sell financial instruments at
prevailing market prices in order to fulfill the customer's obligations.
In accordance with industry practice, the Company records customer
transactions on a settlement date basis, which is generally three business days
after trade date. The Company is therefore exposed to risk of loss on these
transactions in the event of the customer's or broker's inability to meet the
terms of their contracts, in which case the Company may have to purchase or sell
financial instruments at prevailing market prices.
F-28
<PAGE> 107
R. J. STEICHEN & CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(10) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET CREDIT RISK (CONTINUED)
Settlement of these transactions is not expected to have a material effect upon
the Company's Statement of Financial Condition.
The Company seeks to control the risks associated with its customer
activities by requiring customers to maintain margin collateral in compliance
with various regulatory and internal guidelines. The Company monitors required
margin levels daily and, pursuant to such guidelines, requires the customer to
deposit additional collateral or to reduce positions, when necessary.
The Company sells securities that are not yet purchased (short sales) for
its own account. The establishment of short positions exposes the Company to
off-balance-sheet market risk in the event prices increase, as the Company may
be obligated to acquire the securities at prevailing market prices. Due to
market fluctuations, the amount necessary to acquire and deliver securities sold
but not yet purchased may be greater than the obligation already recorded in the
financial statements.
In connection with its trading securities, the Company does not, nor does
it have plans to, utilize interest rate swaps, foreign currency contracts,
futures, forward contracts, or other derivatives.
In the normal course of business, the Company's activities involve the
execution, settlement, and financing of various securities transactions. These
activities may expose the Company to off-balance-sheet risk in the event the
customer or counterparty is unable to fulfill its contractual obligations. Such
risks may be increased by volatile trading markets.
As a broker dealer, the Company is engaged in various securities trading
and brokerage activities serving a diverse group of corporations, governments,
institutions, and individual investors. The Company's exposure to credit risk
associated with the nonperformance of these customers and the related
counterparties in fulfilling their contractual obligations pursuant to
securities transactions can be directly impacted by volatile security markets,
credit markets, and regulatory changes which may impair the ability of customers
and/or counterparties to satisfy their obligations to the Company. This exposure
is measured on an individual customer basis, as well as for groups of customers
that share similar attributes.
To alleviate the potential for risk concentrations, the Company has
established credit limits which are monitored on an on-going basis in light of
market conditions.
(11) SEGMENTS
The Company's reportable segments are: retail sales, equity capital
markets, fixed income, and other. The retail segment consists of commissions on
equity and principal transactions, including mutual funds and insurance
products. Equity capital markets consists of market making trading,
institutional sales and investment banking. Fixed income includes the
origination and trading of fixed income securities. Interest has been presented
separately as the Company does not allocate these amounts to its segments. Other
consists of general corporate and administrative support functions. The Company
does not provide balance sheet data for segment reporting as this data is not
presented.
F-29
<PAGE> 108
R. J. STEICHEN & CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(11) SEGMENTS (CONTINUED)
Information concerning operations in these segments of business is as
follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Retail sales........................... $20,572,982 $18,059,773 $22,366,375
Equity capital markets................. 13,981,922 9,598,524 8,504,102
Fixed income........................... 246,620 1,076,159 1,101,390
Interest income........................ 7,562,121 8,720,623 8,189,720
Other.................................. 156,333 363,863 272,642
----------- ----------- -----------
Total............................. $42,519,978 $37,818,942 $40,434,229
=========== =========== ===========
Net earnings:
Retail sales........................... $ (231,826) $ 442,735 $ 3,066,576
Equity capital markets................. 6,017,677 2,710,354 2,026,530
Fixed income........................... 81,479 395,282 694,880
Interest income, net................... 3,356,735 3,836,376 3,607,664
Other.................................. (1,997,296) (4,576,221) (5,335,750)
----------- ----------- -----------
Total............................. $ 7,226,769 $ 2,808,526 $ 4,059,900
=========== =========== ===========
</TABLE>
F-30
<PAGE> 109
R. J. STEICHEN & CO.
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1999 2000
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash................................................ $ 13,741,389 $ 397,636
Deposits with clearing organizations................ 603,629 2,709,629
Receivables from brokers and dealers and clearing
organizations:
Clearing organizations............................ 585,104 1,760,177
Securities borrowed............................... 3,276,190 10,568,941
Receivables from customers.......................... 105,375,932 146,852,180
Securities in trading account, at market value...... 5,759,379 3,264,023
Prepaid expenses and other assets................... 2,124,804 2,493,884
------------ ------------
$131,466,427 $168,046,470
============ ============
LIABILITIES
Payables to customers............................... $109,197,017 $139,294,251
Short-term borrowings............................... 1,600,000 1,500,000
Securities sold, not yet purchased.................. 665,782 268,031
Accounts payable and accrued liabilities............ 1,047,281 1,277,640
Accrued sales commissions........................... 1,275,110 2,986,876
Deposit from introducing broker..................... 196,000 196,000
------------ ------------
113,981,190 145,522,798
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $100 par value; authorized 200
shares; issued and outstanding, 20 shares...... 2,000 2,000
Additional paid-in capital........................ 439,063 439,063
Retained earnings................................. 17,044,174 22,082,609
------------ ------------
Total stockholders' equity..................... 17,485,237 22,523,672
------------ ------------
$131,466,427 $168,046,470
============ ============
</TABLE>
See accompanying notes to unaudited financial statements.
F-31
<PAGE> 110
R. J. STEICHEN & CO.
UNAUDITED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX-MONTH PERIODS
ENDED MARCH 31,
--------------------------
1999 2000
----------- -----------
<S> <C> <C>
Revenues:
Commissions:
Investment banking............................... $ 1,374,819 $ 2,740,212
Securities....................................... 5,187,224 11,007,501
Investment companies and insurance products...... 345,264 579,675
Principal transactions.............................. 7,947,283 11,172,764
Interest and dividends.............................. 3,906,899 5,191,872
Other revenue....................................... 382,692 552,010
----------- -----------
Total revenues................................. 19,144,181 31,244,034
=========== ===========
Expenses:
Commissions and compensation........................ 11,620,969 19,016,318
Interest............................................ 2,155,614 2,757,952
Communications...................................... 1,169,597 1,294,756
Technology consultant fees and other data
processing....................................... 638,592 531,516
Occupancy........................................... 702,554 674,411
Clearing corporation services....................... 209,362 160,753
Other operating expenses............................ 922,470 1,117,372
----------- -----------
Total expenses................................. 17,419,158 25,553,078
----------- -----------
Net earnings.......................................... $ 1,725,023 $ 5,690,956
=========== ===========
Basic earnings per common share....................... $ 86,251 $ 284,548
=========== ===========
</TABLE>
See accompanying notes to unaudited financial statements.
F-32
<PAGE> 111
R. J. STEICHEN & CO.
UNAUDITED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE SIX-MONTH PERIOD ENDED MARCH 31, 2000
----------------------------------------------------
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, September 30, 1999......... $2,000 $439,063 $17,044,174 $17,485,237
Net earnings........................ -- -- 5,690,956 5,690,956
Dividends paid...................... -- -- (652,521) (652,521)
------ -------- ----------- -----------
Balance, March 31, 2000............. $2,000 $439,063 $22,082,609 $22,523,672
====== ======== =========== ===========
</TABLE>
See accompanying notes to unaudited financial statements.
F-33
<PAGE> 112
R.J. STEICHEN & CO.
UNAUDITED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX-MONTH PERIODS
ENDED MARCH 31,
---------------------------
1999 2000
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings....................................... $ 1,725,023 $ 5,690,956
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Changes in assets and liabilities:
Net receivables from and payables to brokers,
dealers, and clearing organizations........ 218,659 (8,467,824)
Net receivables from and payables to
customers.................................. 20,412,907 (11,379,014)
Net securities in trading accounts and
securities sold, not yet purchased......... (831,580) 2,097,605
Accrued sales commissions..................... 524,963 1,711,766
Prepaid expenses and other assets............. (167,135) (369,080)
Accounts payable and accrued liabilities...... (548,970) 230,359
Deposits, net................................. (671,933) (2,106,000)
----------- ------------
Net cash provided (used) by operating activities..... $20,661,934 $(12,591,232)
----------- ------------
Cash flows from financing activities:
Net repayment under line of credit................. $(4,400,000) $ (100,000)
Dividends paid..................................... (201,250) (652,521)
----------- ------------
Net cash used by financing activities................ $(4,601,250) $ (752,521)
----------- ------------
Net increase in cash................................. $16,060,684 $(13,343,753)
Cash at beginning of period.......................... 1,914,961 13,741,389
----------- ------------
Cash at end of period................................ $17,975,645 $ 397,636
=========== ============
Cash paid during the period for interest............. $ 2,155,614 $ 2,757,952
=========== ============
</TABLE>
See accompanying notes to unaudited financial statements.
F-34
<PAGE> 113
R.J. STEICHEN & CO.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited financial statements should be read in
conjunction with the financial statements and notes for the year ended September
30, 1999. In the opinion of Steichen's management, the financial information
reflects all adjustments which are necessary for a fair presentation of
financial position, results of operations, and cash flows for the interim
periods. The results of operations for interim periods are not necessarily
indicative of the results to be expected for the entire year.
(2) SEGMENTS
The Company's reportable segments are: retail sales, equity capital
markets, fixed income, and other. The retail segment consists of commissions on
equity and principal transactions, including mutual funds and insurance
products. Equity capital markets consist of market making trading, institutional
sales, and investment banking. Fixed income includes the origination and trading
of fixed income securities. Other consists of general corporate and
administrative support functions. Interest income has been presented separately
as Steichen does not allocate this item to its segments. The Company does not
provide balance sheet data for segment reporting as this data is not measured.
Information concerning operations in these segments of business is as
follows:
<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED
MARCH 31,
--------------------------
1999 2000
----------- -----------
<S> <C> <C>
Revenue:
Retail sales........................................ $10,195,222 $19,718,761
Equity capital markets.............................. 4,195,053 5,324,966
Fixed income........................................ 499,328 491,506
Interest income..................................... 3,868,968 5,115,917
Other............................................... 385,610 592,884
----------- -----------
Total............................................ $19,144,181 $31,244,034
=========== ===========
Net earnings (loss):
Retail sales........................................ $ 1,153,438 $ 3,428,780
Equity capital markets.............................. 866,909 2,269,380
Fixed income........................................ 310,040 290,839
Interest income, net................................ 1,713,355 2,357,965
Other............................................... (2,318,719) (2,656,008)
----------- -----------
Total............................................ $ 1,725,023 $ 5,690,956
=========== ===========
</TABLE>
F-35
<PAGE> 114
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Kinnard Investments, Inc.:
We have audited the accompanying consolidated statements of financial
condition of Kinnard Investments, Inc. and subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Kinnard
Investments, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Minneapolis, Minnesota
February 17, 2000
F-36
<PAGE> 115
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------
1998 1999
-------- --------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 2,689 $ 8,018
Receivable from clearing firm............................... 1,009 590
Miscellaneous receivables................................... 3,527 2,899
Trading securities, at market............................... 8,221 12,976
Office equipment at cost, less accumulated depreciation of
$2,540 and $3,594, respectively........................... 1,888 1,247
Investment securities, at fair value........................ 16,918 13,992
Income tax receivable....................................... 1,456 0
Deferred income taxes....................................... 242 354
Other assets................................................ 414 351
------- -------
Total assets........................................... $36,364 $40,427
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Securities sold but not yet purchased, at market.......... 257 844
Accrued compensation...................................... 3,770 6,233
Other accounts payable and accrued expenses............... 2,831 3,158
Income taxes payable...................................... 0 1,228
------- -------
Total liabilities...................................... 6,858 11,463
======= =======
Shareholders' equity
Common stock, $.02 par value; authorized 7,500 shares;
issued and outstanding 5,483 and 4,782 shares,
respectively........................................... 110 96
Additional paid-in capital................................ 9,265 6,028
Retained earnings......................................... 20,131 22,840
======= =======
Total shareholders' equity............................. 29,506 28,964
------- -------
Total liabilities and shareholders' equity............. $36,364 $40,427
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-37
<PAGE> 116
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
Commissions................................... $14,745 $14,684 $16,645
Principal transactions........................ 25,929 16,453 22,708
Net gains/losses on investment account........ 455 (187) 6,520
Investment banking............................ 3,977 5,640 3,839
Interest...................................... 2,276 1,422 1,638
Other......................................... 2,464 2,932 3,518
------- ------- -------
Total revenues........................ 49,846 40,944 54,868
------- ------- -------
Expenses:
Compensation and benefits..................... 33,872 31,360 34,628
Floor brokerage and clearance................. 4,171 3,413 3,931
Communications................................ 787 910 765
Occupancy and equipment....................... 5,333 5,554 5,161
Other......................................... 5,147 5,336 5,870
------- ------- -------
Total expenses........................... 49,310 46,573 50,355
------- ------- -------
Income (loss) before income taxes............... 536 (5,629) 4,513
Income tax expense (benefit).................... 228 (2,253) 1,804
------- ------- -------
Net income (loss)............................... $ 308 $(3,376) $ 2,709
======= ======= =======
Earnings (loss) per common share:
Basic......................................... $ 0.05 $ (0.58) $ 0.54
Diluted....................................... $ 0.05 $ (0.58) $ 0.53
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-38
<PAGE> 117
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------- ----------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996.... 6,027 120 12,710 23,199 36,029
----- ---- ------- ------- -------
Issuance of shares under
employee stock option
plan..................... 68 1 230 231
Issuance of new shares...... 325 7 1,700 1,707
Repurchase of stock......... (465) (9) (2,694) (2,703)
Net income.................. 308 308
----- ---- ------- ------- -------
Balance, December 31, 1997.... 5,955 119 11,946 23,507 35,572
----- ---- ------- ------- -------
Issuance of shares under
employee stock purchase
plan..................... 13 0 78 78
Issuance of shares under
employee stock option
plan..................... 81 2 379 381
Repurchase of stock......... (566) (11) (3,138) (3,149)
Net loss.................... (3,376) (3,376)
----- ---- ------- ------- -------
Balance, December 31, 1998.... 5,483 $110 $ 9,265 $20,131 $29,506
----- ---- ------- ------- -------
Issuance of shares under
employee stock option
plan..................... 59 1 273 274
Repurchase of stock......... (760) (15) (3,604) (3,619)
Tax benefit from stock
options exercised........ 94 94
Net income.................. 2,709 2,709
----- ---- ------- ------- -------
Balance, December 31, 1999.... 4,782 $ 96 $ 6,028 $22,840 $28,964
===== ==== ======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-39
<PAGE> 118
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR YEARS ENDED
DECEMBER 31,
-----------------------------
1997 1998 1999
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers and clearing firm............ $45,103 $40,553 $42,960
Cash paid to suppliers and employees...................... (49,473) (46,550) (45,819)
Interest:
Received................................................ 2,276 1,422 1,638
Paid.................................................... 0 0 0
Income taxes (paid) refunded.............................. (3,349) 317 862
------- ------- -------
Net cash used in operating activities..................... (5,443) (4,258) (359)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of:
Office equipment........................................ 5 63 0
Investment securities................................... 16,511 16,285 18,220
Purchases of:
Office equipment........................................ (1,074) (1,505) (413)
Investment securities................................... (17,866) (10,685) (8,774)
Funds released from escrow................................ 0 1,593 0
------- ------- -------
Net cash provided by (used in) investing activities....... (2,424) 5,751 9,033
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock.................................. 1,938 459 274
Repurchase of common stock................................ (2,703) (3,149) (3,619)
------- ------- -------
Net cash used in financing activities..................... (765) (2,690) (3,345)
------- ------- -------
Increase (decrease) in cash and cash equivalents............ (8,632) (1,197) 5,329
Cash and cash equivalents at beginning of year.............. 12,518 3,886 2,689
------- ------- -------
Cash and cash equivalents at end of year.................... $ 3,886 $ 2,689 $ 8,018
======= ======= =======
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH USED IN
OPERATING ACTIVITIES:
Net income (loss)......................................... $ 308 $(3,376) $ 2,709
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization............................. 766 821 1,054
Net unrealized loss (gain) on investment securities....... (222) 626 (1,344)
Net realized gain on sale of investment securities........ (233) (439) (5,176)
Realized loss (gain) on sale of office equipment.......... 21 0 0
Deferred income taxes..................................... 89 (462) (322)
(Increase) decrease in:
Receivable from clearing firm........................... 968 (1,009) 419
Miscellaneous receivables............................... (1,211) (216) 628
Trading securities, at market........................... (3,072) 2,509 (4,755)
Income tax receivable................................... 0 (1,456) 1,456
Other assets............................................ (56) 66 63
Increase (decrease) in:
Due to clearing firm.................................... 1,069 (1,069) 0
Securities sold but not yet purchased, at market........ 73 (658) 587
Accrued compensation.................................... (306) 176 2,463
Other accounts payable and accrued expenses............. (427) 247 327
Income taxes payable.................................... (3,210) (18) 1,532
------- ------- -------
Net cash used in operating activities....................... $(5,443) $(4,258) $ (359)
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-40
<PAGE> 119
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Kinnard Investments, Inc. ("Kinnard") is a holding company that has been
providing financial products and services for over 50 years. The primary
subsidiary, John G. Kinnard and Company, Incorporated ("John G. Kinnard" or
"JGK"), is a regional broker-dealer headquartered in Minneapolis, Minnesota.
Kinnard and John G. Kinnard are hereinafter collectively referred to as the
"Company".
John G. Kinnard is a full-service broker-dealer engaged in securities
brokerage, trading, investment banking, asset management and related financial
services to both retail and institutional customers. Its principal business is
trading, underwriting, research and sale of securities of emerging growth
companies with market capitalizations up to $250 million. Kinnard also
negotiates, underwrites and participates in fixed income debt offerings. Other
products and services include mutual funds, insurance products, investment
management, IRA services and fixed income securities.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Kinnard
Investments, Inc. and its wholly owned subsidiaries. All intercompany accounts
and transactions have been eliminated in consolidation. Kinnard does not present
a statement of comprehensive income as there are no items. Kinnard does not
provide balance sheet data for segment reporting as this data is not measured.
CASH AND CASH EQUIVALENTS
Kinnard considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
SECURITIES TRANSACTIONS
Securities transactions and the related revenues and expenses are recorded
on a settlement date basis, which is not materially different than if such
transactions were recorded on trade date. Trading securities, securities sold
but not yet purchased and investment securities that are readily marketable are
stated at quoted market values. Trading and investment securities not readily
marketable are carried at fair value as determined by management. Unrealized
gains and losses are included in earnings.
MISCELLANEOUS RECEIVABLES
Included in miscellaneous receivables are forgivable loans made to
investment executives and other revenue-producing employees, typically in
connection with their recruitment. Such loans are forgivable based on continued
employment and are amortized
F-41
<PAGE> 120
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
over the term of the loan, which is generally three to five years, using the
straight-line method.
INCOME TAXES
Kinnard accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". Under this
method, deferred tax liabilities and assets and the resultant provision for
income taxes are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
OFFICE EQUIPMENT
The cost of office equipment is depreciated using accelerated methods over
the estimated useful lives of two to seven years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of Kinnard's financial assets and liabilities are carried
at market value or at amounts which, because of their short-term nature,
approximate current fair value.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
and disclosure of contingent liabilities at the balance sheet date, and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
EMPLOYEE STOCK COMPENSATION
Kinnard has elected to continue following the guidance of Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees", for measurement and recognition of stock-based transactions with
employees. Kinnard has adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". See Note 10 to the Consolidated
Financial Statements for additional information.
EARNINGS PER SHARE
Basic earnings per share are based upon the weighted average number of
common shares outstanding during the reporting period. Diluted earnings per
share take into account the dilutive effect, if any, of stock options and other
potential dilutive common shares outstanding during the period.
F-42
<PAGE> 121
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following reconciliation illustrates the computation of basic and
diluted earnings per share:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1998 1999
------ ------- ------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Net income (loss)..................................... $ 308 $(3,376) $2,709
====== ======= ======
Weighted average number of common shares
outstanding......................................... 6,149 5,825 5,050
Dilutive effect of stock options and warrants......... 82 0 22
------ ------- ------
Weighted average number of common and potential
dilutive common shares outstanding:................. 6,231 5,825 5,072
====== ======= ======
Basic earnings (loss) per share....................... $ 0.05 $ (0.58) $ 0.54
Diluted earnings (loss) per share..................... $ 0.05 $ (0.58) $ 0.53
====== ======= ======
</TABLE>
Non-dilutive options as of December 31, 1997, 1998 and 1999 totaled
447,000, 537,000 and 574,000, respectively.
NOTE 2. BINDING ARBITRATION AWARD
On December 10, 1999, the National Association of Securities Dealers
("NASD") issued a binding arbitration award for $16.6 million in favor of
Kinnard and against Dain Rauscher Corporation ("Dain") and several of its
investment executives who were wrongfully recruited by Dain from Kinnard from
1997 to 1999.
NASD arbitration awards are not subject to appeal. While Dain has filed a
motion with the Hennepin County District Court (the "Court") to vacate the
arbitration panel's decision, Kinnard believes that vacatur is unlikely due to
the narrow grounds upon which a binding arbitration award may be vacated. Under
both Federal and Minnesota Arbitration Acts, the Court must find evidence of
fraud, corruption, misconduct or partiality on the part of the arbitration
panel, or that the panel exceeded its powers in rendering its award decision.
The award included compensatory damages of $9.1 million, punitive damages
of $7.1 million and reimbursement of legal costs of $350 thousand. Upon
exhaustion of all vacatur efforts, Kinnard anticipates recognizing up to $16.6
million in revenue. Recognition of such revenue may result in additional
compensation and income tax expense. The additional compensation expense would
result from an incremental ESOP contribution and additional incentive
compensation, both based on pre-tax income.
The following unaudited pro forma information has been prepared assuming
that the binding arbitration settlement had been recognized during the period
presented after the
F-43
<PAGE> 122
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. BINDING ARBITRATION AWARD (CONTINUED)
impact of certain adjustments to revenue, employee compensation based on current
formulas and the related income tax effects thereof.
PRO FORMA STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
---------------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
(UNAUDITED)
<S> <C>
Revenues.................................................... $71,085
Expenses.................................................... $53,491
-------
Income before income taxes.................................. 17,594
Income tax expense.......................................... 7,037
-------
Net income.................................................. $10,557
=======
Earnings per common share:
Basic..................................................... $ 2.09
Diluted................................................... $ 2.08
Book value per common share:................................ $ 7.70
=======
</TABLE>
NOTE 3. OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Included in other accounts payable and accrued expenses are vendor accounts
payable, accrual for contingencies, sales incentive program accruals and
miscellaneous payables.
NOTE 4. SECURITIES
Trading securities are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
------ -------
(IN THOUSANDS)
<S> <C> <C>
Trading securities:
Corporate stocks.......................................... $2,298 1,837
U.S. government and municipal bonds....................... 3,702 10,226
Corporate debt securities................................. 2,221 913
------ -------
$8,221 $12,976
====== =======
Securities sold but not yet purchased:
Corporate stocks.......................................... $ 252 $ 433
Corporate debt securities................................. 5 411
------ -------
$ 257 $ 844
====== =======
</TABLE>
F-44
<PAGE> 123
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. SECURITIES (CONTINUED)
Revenues from principal transactions are generated by market making
activities in both equity and fixed income products. Revenues from equity
principal transactions were $18.8 million, $10.9 million and $17.2 million for
the years ended December 31, 1997, 1998 and 1999. Revenues from fixed income
principal transactions were $7.1 million, $5.5 million and $5.5 million for the
years ended December 31, 1997, 1998 and 1999.
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Investment securities:
Corporate stocks.......................................... $ 4,590 $ 3,166
U.S. government bonds..................................... 5,557 7,065
Outside money managers.................................... 6,771 3,761
------- -------
$16,918 $13,992
======= =======
</TABLE>
NOTE 5. NOTES PAYABLE
JGK maintains a discretionary credit facility providing for conditional
short-term borrowing of up to $10 million. The facility limits borrowing to 90
days and is secured by the firm's marketable securities. Advances under the
facility are at the bank's sole discretion, accrue interest at a fluctuating
interest rate to be agreed upon by JGK and the bank, and are subject to certain
affirmative and negative covenants. There are no fees or compensating balances
related to this line of credit. There were no outstanding borrowings at December
31, 1998 and 1999 nor for the years then ended.
NOTE 6. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
Employees are eligible to participate in the Employee Stock Ownership Plan
and Trust (ESOP) upon completing one year of service. Contributions to the ESOP
are made at the discretion of Kinnard and can be made in cash or other property,
as the Trustees of the ESOP consider appropriate. These contributions are used
primarily to purchase stock of Kinnard. A participant is generally fully vested
after five years of service. During the years ended December 31, 1997, 1998 and
1999, Kinnard contributed $0, $0 and $796,093, respectively, to the ESOP.
PENSION AND PROFIT SHARING PLANS
Kinnard has defined contribution pension and profit sharing plans covering
substantially all employees who have completed at least one full year of
continuous service. Kinnard contributes to the pension plan, on behalf of each
eligible employee, an amount equal to five percent of their annual qualified
compensation. This contribution is reflected
F-45
<PAGE> 124
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. EMPLOYEE BENEFIT PLANS (CONTINUED)
as an operating expense and amounted to $1.0 million, $781,000 and $854,000 for
the years ended December 31, 1997, 1998 and 1999, respectively.
There were no contributions to the Profit Sharing Plan for the years ended
December 31, 1999, 1998 and 1997. Kinnard does not intend to make any further
contributions to the Profit Sharing Plan so long as the ESOP is in effect.
NOTE 7. INCOME TAXES
Income tax expense (benefit) is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
---- -------------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal........................................... $ 97 $(1,433) $2,533
State............................................. 42 (358) (407)
Deferred............................................ 89 (462) (322)
---- ------- ------
$228 $(2,253) $1,804
==== ======= ======
</TABLE>
The provision for income taxes for the years ended December 31, 1997, 1998
and 1999, differs from the amount obtained by applying the U.S. federal income
tax rate of 34% to pretax income due to the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
---- ------- ------
<S> <C> <C> <C>
Ordinary federal income tax expense (benefit)......... $182 $(1,914) $1,534
State income taxes, net of federal tax benefit........ 46 (339) 0
Other................................................. 0 0 270
---- ------- ------
$228 $(2,253) $1,804
==== ======= ======
</TABLE>
F-46
<PAGE> 125
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to Kinnard's
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1998 1999
---- ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accruals not currently deductible......................... $627 $ 680
Receivables............................................... 216 219
Other..................................................... 137 386
---- ------
980 1,285
==== ======
Deferred tax liabilities:
Unrealized appreciation of investment securities.......... 658 868
Other..................................................... 80 63
---- ------
738 931
---- ------
Net deferred tax asset...................................... $242 $ 354
==== ======
</TABLE>
Kinnard has determined that there is no need to establish a valuation
allowance for the deferred tax asset. That determination is based on the
assumption that it is more likely than not that the deferred tax asset will be
realized principally through future reversals of existing taxable temporary
differences and future taxable income.
NOTE 8. NET CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS
Kinnard is subject to the Securities and Exchange Commission (SEC) Rule
15c3-1, net capital requirements for brokers and dealers, which required Kinnard
to maintain minimum net capital of $799,000 as of December 31, 1999. Also, under
this rule, the ratio of aggregate indebtedness to net capital may not exceed 15
to 1, and Kinnard may be prohibited from expanding its business or paying cash
dividends if its ratio of aggregate indebtedness to net capital is greater than
10 to 1. At December 31, 1999, Kinnard had net capital of $8.0 million, and a
ratio of aggregate indebtedness to net capital of 1.5 to 1.
Kinnard is exempt from the provisions of SEC Rule 15c3-3, customer
protection: reserves and custody of securities, as Kinnard's clearing firm is
responsible for complying with these provisions. Accordingly, the computation
for determination of reserve requirements and information relating to the
possession or control requirements is not required for Kinnard.
NOTE 9. EQUITY
Kinnard's 16.5 million shares of authorized undesignated stock may be
designated by the Board of Directors as either preferred stock or common stock.
During the years 1997, 1998 and 1999 Kinnard repurchased 465,000, 566,000
and 760,000 shares of its common stock at a total cost of $2.7 million, $3.1
million and
F-47
<PAGE> 126
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. EQUITY (CONTINUED)
$3.6 million, respectively. In October 1998, the board of directors authorized
the repurchase of 1,000,000 shares in the open market or through privately
negotiated transactions, at the discretion of the firm's management. In November
1999, the board of directors authorized the repurchase of an additional
1,000,000. Remaining shares authorized for repurchase at December 31, 1999 are
1,231,491.
In April 1997, Kinnard entered into a Subscription and Purchase Agreement
with William F. Farley, whereby Mr. Farley purchased 325,000 Units of securities
of Kinnard for $1.7 million or $5.25 per Unit. Each Unit consisted of one share
of common stock of Kinnard and a warrant to purchase an additional share at a
price of $6.00 per share.
Kinnard has an Employee Stock Purchase Plan ("ESPP") under which 1,050,000
shares are authorized for issuance. The ESPP allows employees to set aside up to
15% of earnings to purchase shares of Kinnard's common stock. Shares are issued
semi-annually at a price equal to 85% of a defined market price, but not less
than book value at the end of the period. Reserved but unissued shares under the
Plan were 689,538 at December 31, 1999.
NOTE 10. STOCK OPTION PLANS
Under Kinnard's 1990 and 1997 Stock Option Plans, a total of 620,000 and 1
million shares, respectively, have been reserved for options to employees and
Directors of Kinnard. At December 31, 1999 authorized but unissued shares were
161,857 for the 1990 Stock Option Plan and 463,500 for the 1997 Stock Option
Plan. Under terms of the plan, options are generally granted at the current
market price, but not less than the book value per share. The options may be
exercised over the period prescribed at the time of the grant, not to exceed ten
years.
F-48
<PAGE> 127
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. STOCK OPTION PLANS (CONTINUED)
The options, in general, vest evenly over five years. Stock option
transactions are summarized below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding at December 31, 1996........................... 368,200 $4.40
Granted.................................................... 488,000 5.98
Exercised.................................................. (67,693) 4.01
Forfeited or expired....................................... (131,557) 5.39
-------- -----
Outstanding at December 31, 1997........................... 656,950 5.37
Granted.................................................... 250,000 5.97
Exercised.................................................. (81,250) 4.69
Forfeited or expired....................................... (95,000) 5.74
-------- -----
Outstanding at December 31, 1998........................... 730,700 5.62
Granted.................................................... 159,500 4.70
Exercised.................................................. (58,950) 3.74
Forfeited or expired....................................... (143,000) 4.98
-------- -----
Outstanding at December 31, 1999........................... 688,250 $5.52
======== =====
Exercisable at:
December 31, 1997..................................... 416,450 5.07
December 31, 1998..................................... 373,700 5.37
December 31, 1999..................................... 477,500 5.62
======== =====
</TABLE>
The following table summarizes information for stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
RANGE OF AVERAGE AVERAGE WEIGHTED
EXERCISE NUMBER LIFE EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING (YEARS) PRICE EXERCISABLE PRICE
-------- ----------- ------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$3.58 to $4.04................ 66,750 1.08 $4.00 0 N/A
$4.25 to $5.88................ 234,500 6.71 4.91 200,000 $4.91
$5.98 to $5.98................ 119,500 1.22 5.98 20,000 5.98
$6.00 to $6.88................ 267,500 6.51 6.18 257,500 6.15
------- ---- ----- ------- -----
$3.58 to $6.88................ 688,250 6.25 $5.50 477,500 $5.62
======= ==== ===== ======= =====
</TABLE>
No compensation expense has been recognized for its stock option and stock
purchase plans because the exercise price of all options granted under the stock
option plan and price of shares issued under the stock purchase plan were not
deemed to be less than fair value.
F-49
<PAGE> 128
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. STOCK OPTION PLANS (CONTINUED)
Had compensation cost for these equity instruments been determined based on
the fair value at the grant dates, Kinnard's net income (loss) and earnings
(loss) per share for the years ended December 31, 1997, 1998 and 1999 would have
been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1998 1999
------ ------- ------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Net income (loss):
As reported...................................... $ 308 $(3,376) $2,709
Pro forma........................................ $ (145) $(3,514) $2,357
Basic earnings (loss) per share:
As reported...................................... $ 0.05 $ (0.58) $ 0.54
Pro forma........................................ $(0.02) $ (0.60) $ 0.47
Diluted earnings (loss) per share:
As reported...................................... $ 0.05 $ (0.58) $ 0.53
Pro forma........................................ $(0.02) $ (0.60) $ 0.46
====== ======= ======
</TABLE>
Using the Black-Scholes option pricing model, the estimated weighted
average fair value of options granted during 1997, 1998 and 1999 was $2.04,
$2.71 and $5.25 per share. The assumptions used in the computations for 1997,
1998 and 1999 are as follows: risk-free interest rate of 6.3%, 5.6% and 6.2%;
expected dividend yield of 0% in all three years; expected life of five, four
and six years; and expected volatility of 43%, 42% and 61%. Pro forma
compensation cost of shares issued under the Employee Stock Purchase Plan is
measured based on the discount from market value. At December 31, 1999, the
closing price of Kinnard's common stock was $7.44 per share.
NOTE 11. COMMITMENTS
Kinnard and its subsidiaries lease office space and equipment under various
operating leases with remaining terms ranging up to eight years. Certain of
these leases have escalation clauses and renewal options. Minimum rentals
required under these non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
2000............................................... $ 758
2001............................................... 728
2002............................................... 709
2003............................................... 620
2004............................................... 322
Thereafter......................................... 398
------
$3,535
======
</TABLE>
Rent expense was $2.9 million, $3.2 million and $2.8 million for the years
ended December 31, 1997, 1998 and 1999, respectively.
F-50
<PAGE> 129
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11. COMMITMENTS (CONTINUED)
In the normal course of business, Kinnard enters into underwriting and
other commitments. The ultimate settlement of such transactions open at year-end
is not expected to have a material effect on the consolidated financial
statements.
NOTE 12. LEGAL PROCEEDINGS
Kinnard is a defendant in various other actions relating to its business,
some of which involve claims for unspecified amounts. Although the ultimate
resolution of these matters cannot be predicted with certainty, in management's
opinion, while their outcome may have a material effect on the earnings in a
particular period, the outcome will not have a material adverse effect on the
financial condition of Kinnard.
NOTE 13. SEGMENTS
Kinnard's reportable segments are: retail sales, equity capital markets,
fixed income and other. The retail segment consists of various retail branch
locations and the financial services division. Equity capital markets consists
of equity trading, institutional sales, research and investment banking. Fixed
income includes the origination, trading, and institutional sales of fixed
income securities. Other consists of general corporate, administrative support
functions and net gains or losses on the investment account. Kinnard does not
provide balance sheet data for segment reporting as this data is not measured.
Information concerning operations in these segments of business is as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue:
Retail sales................................... $30,422 $24,737 $28,760
Equity capital markets......................... 10,192 8,660 11,720
Fixed income................................... 6,224 5,943 6,182
Other.......................................... 3,008 1,604 8,206
------- ------- -------
$49,846 $40,944 $54,868
======= ======= =======
Pretax income (loss):
Retail sales................................... $ 4,342 $ 2,501 $ 4,983
Equity capital markets......................... (509) (3,126) (1,148)
Fixed income................................... 1,166 1,132 840
Other.......................................... (4,463) (6,136) (162)
------- ------- -------
$ 536 $(5,629) $ 4,513
======= ======= =======
</TABLE>
F-51
<PAGE> 130
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Kinnard sells securities that are not yet purchased (short sales) for its
own account. The establishment of short positions exposes Kinnard to
off-balance-sheet market risk in the event prices increase, as Kinnard may be
obligated to acquire the securities at prevailing market prices. Due to market
fluctuations, the amount necessary to acquire and deliver securities sold but
not yet purchased may be greater than the obligation already recorded in the
consolidated financial statements.
In connection with its trading securities, Kinnard does not, nor does it
have plans to, utilize interest rate swaps, foreign currency contracts, futures,
forward contracts, or other derivatives.
In the normal course of business, Kinnard's activities involve the
execution, settlement and financing of various securities transactions. These
activities may expose Kinnard to off-balance-sheet risk in the event the
customer or counterparty is unable to fulfill its contractual obligations. Such
risks may be increased by volatile trading markets.
Kinnard clears all transactions for its customers on a fully disclosed
basis with a clearing firm that carries all customer accounts and maintains
related records. However, Kinnard is liable to the clearing firm for the
transactions of its customers. These activities may expose Kinnard to
off-balance-sheet risk in the event a customer or counterparty is unable to
fulfill its contractual obligations. Kinnard maintains all of its trading
securities at the clearing firm. These trading securities may collateralize
amounts due to the clearing firm.
Kinnard is also exposed to the risk of loss on customer transactions in the
event of the customer's or counterparty's inability to meet the terms of their
contracts, in which case Kinnard may have to purchase or sell financial
instruments at prevailing market prices. The impact of unsettled transactions is
not expected to have a material effect upon Kinnard's consolidated financial
statements.
Kinnard's customer securities activities are transacted on either a cash or
margin basis. Kinnard seeks to control the risks associated with its customer
margin activities by requiring customers to maintain margin collateral in
compliance with regulatory and internal guidelines. Kinnard monitors required
margin levels daily, and pursuant to such guidelines, requires that customers
deposit additional collateral, or reduce margin positions, when necessary.
As a broker dealer, JGK is engaged in various securities trading and
brokerage activities serving a diverse group of corporations, governments,
institutions and individual investors. JGK's exposure to credit risk associated
with the nonperformance of these customers and the related counterparties in
fulfilling their contractual obligations pursuant to securities transactions can
be directly impacted by volatile security markets, credit markets and regulatory
changes which may impair the ability of customers and/or counterparties to
satisfy their obligations to Kinnard. This exposure is measured on an individual
customer basis, as well as for groups of customers that share similar
attributes.
To alleviate the potential for risk concentrations, Kinnard has established
credit limits which are monitored on an on-going basis in light of market
conditions.
F-52
<PAGE> 131
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ -----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents............................ $ 8,018 $ 8,346
Receivable from clearing firm........................ 590 999
Miscellaneous receivables............................ 2,899 4,734
Trading securities, at market........................ 12,976 11,959
Office equipment at cost, less accumulated
depreciation of $3,594 and $3,841, respectively.... 1,247 1,133
Investment securities, at fair value................. 13,992 13,477
Deferred income taxes................................ 354 337
Other assets......................................... 351 343
------- -------
Total assets.................................... $40,427 $41,328
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Securities sold but not yet purchased, at market... 844 748
Accrued compensation............................... 6,233 5,111
Other accounts payable and accrued expenses........ 3,158 3,020
Income taxes payable............................... 1,228 1,695
------- -------
Total liabilities............................... 11,463 10,574
Shareholders' equity
Common Stock, $.02 par value;
Authorized 7,500 shares;........................
Issued and outstanding 4,782 and 4,853 shares,
respectively.................................. 96 97
Additional paid-in capital......................... 6,028 6,310
Retained earnings.................................. 22,840 24,347
------- -------
Total shareholders' equity...................... 28,964 30,754
------- -------
Total liabilities and shareholders' equity...... $40,427 $41,328
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-53
<PAGE> 132
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1999 2000
------ ------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
(UNAUDITED)
<S> <C> <C>
OPERATING REVENUES:
Commissions............................................. $4,177 $6,031
Principal transactions.................................. 5,049 9,324
Investment banking...................................... 562 2,388
Interest................................................ 393 670
Net gain (loss) on investment account................... 672 (352)
Other................................................... 965 961
------ ------
Total operating revenues........................... 11,818 19,022
OPERATING EXPENSES:
Compensation and benefits............................... 7,630 12,670
Floor brokerage and clearance........................... 965 1,497
Communications.......................................... 198 200
Occupancy and equipment................................. 1,437 1,292
Other................................................... 1,001 851
------ ------
Total operating expenses........................... 11,231 16,510
Operating income.......................................... 587 2,512
Pretax income............................................. 587 2,512
Income tax expense........................................ 234 1,005
Net income................................................ $ 353 $1,507
Earnings per common share:
Basic................................................... $ 0.07 $ 0.31
Diluted................................................. $ 0.07 $ 0.29
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-54
<PAGE> 133
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997....... 5,955 $119 $11,946 $23,507 $35,572
----- ---- ------- ------- -------
Issuance of shares under the
employee stock purchase
plan........................ 13 0 78 -- 78
Issuance of shares under the
employee stock option
plan........................ 81 2 379 -- 381
Repurchase of stock............ (566) (11) (3,138) -- (3,149)
Net loss....................... -- -- -- (3,376) (3,376)
----- ---- ------- ------- -------
Balance, December 31, 1998....... 5,483 110 9,265 20,131 29,506
----- ---- ------- ------- -------
Issuance of shares under the
employee stock option
plan........................ 59 1 367 -- 368
Repurchase of stock............ (760) (15) (3,604) -- (3,619)
Net income..................... -- -- -- 2,709 2,709
----- ---- ------- ------- -------
Balance, December 31, 1999....... 4,782 96 6,028 22,840 28,964
----- ---- ------- ------- -------
Issuance of shares under the
employee stock option
plan........................ 71 1 282 -- 283
Net income..................... -- -- -- 1,507 1,507
----- ---- ------- ------- -------
Balance, March 31, 2000
(unaudited).................... 4,853 $ 97 $ 6,310 $24,347 $30,754
===== ==== ======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-55
<PAGE> 134
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1999 2000
-------- -------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers and clearing firm............ $ 9,646 $19,216
Cash paid to suppliers and employees...................... (12,779) (19,350)
Interest received......................................... 393 670
Income taxes paid/income tax refunds received............. 38 (615)
-------- -------
Net cash used in operating activities....................... (2,702) (79)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investment securities............... 7,827 846
Purchases of:
Office equipment....................................... (71) (133)
Investment securities.................................. (5,209) (683)
-------- -------
Net cash provided by investing activities................... 2,547 30
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock.................................. 21 377
Repurchase of common stock................................ (1,716) --
-------- -------
Net cash provided by (used in) financing activities......... (1,695) 377
Increase (decrease) in cash and cash equivalents............ (1,850) 328
Cash and cash equivalents at beginning of period............ 2,689 8,018
-------- -------
Cash and cash equivalents at end of period.................. $ 839 $ 8,346
======== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-56
<PAGE> 135
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
------------------
1999 2000
---- ----
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH USED IN OPERATING
ACTIVITIES:
Net income................................................ $ 353 $ 1,507
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization.......................... 284 247
Net unrealized loss on investment securities........... 115 979
Net realized gain on sale of investment securities..... (787) (627)
Deferred income taxes.................................. (18) 17
(Increase) decrease in:
Receivable from clearing firm........................ (515) (409)
Miscellaneous receivables............................ 164 (1,835)
Trading securities, at market........................ (702) 1,017
Income tax receivable................................ 291 --
Other assets......................................... 110 8
Increase (decrease) in:
Securities sold but not yet purchased, at market..... 111 (96)
Accrued compensation................................. (1,769) (1,122)
Other accounts payable and accrued expenses.......... (339) (138)
Income taxes payable................................. -- 373
------- -------
Net cash used in operating activities....................... $(2,702) $ (79)
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-57
<PAGE> 136
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements of Kinnard have been
prepared in conformity with generally accepted accounting principles and should
be read in conjunction with Kinnard's financial information included elsewhere
herein. The results of operations for the three months ended March 31, 2000 are
not necessarily indicative of the results to be expected for the year ending
December 31, 2000.
The consolidated statement of financial condition as of March 31, 2000 and
other financial information for the three months ended March 31, 1999 and 2000,
are unaudited, but Kinnard's management believes that all adjustments
(consisting only of normal recurring adjustments) necessary for a fair statement
of the results of operations for the periods have been included.
NOTE 2. BINDING ARBITRATION AWARD
On December 10, 1999, the NASD issued a binding arbitration award for $16.6
million in favor of Kinnard and against Dain Rauscher Corporation ("Dain") and
several of its investment executives who were wrongfully recruited by Dain from
Kinnard from 1997 to 1999.
NASD arbitration awards are not subject to appeal. While Dain has filed a
motion with the Hennepin County District Court to vacate the arbitration panel's
decision, Kinnard believes that vacature is unlikely due to the narrow grounds
upon which a binding arbitration award may be vacated. Under both Federal and
Minnesota Arbitration Acts, the court must find evidence of fraud, corruption,
misconduct or partiality on the part of the arbitration panel, or that the panel
exceeded its powers in rendering its award decision.
The award included compensatory damages of $9.1 million, punitive damages
of $7.1 million and reimbursement of legal costs of $350 thousand. Under NASD
Rules, Dain is required to pay interest on the unpaid settlement amount based on
a statutory interest rate of 5.5%. Upon exhaustion of all vacatur efforts,
Kinnard anticipates recognizing up to $16.6 million in revenue from the
settlement, plus interest income during the period that the settlement remains
unpaid. Recognition of such revenue may result in additional compensation and
income tax expense.
The following unaudited pro forma information has been prepared assuming
that the binding arbitration settlement and related accrued interest had been
recognized at the end
F-58
<PAGE> 137
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. BINDING ARBITRATION AWARD (CONTINUED)
of the period presented after the impact of certain adjustments to revenue,
employee compensation based on current formulas and the related income tax
effects thereof.
PRO FORMA STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
THREE-MONTH PERIOD
ENDED
MARCH 31, 2000
------------------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
(UNAUDITED)
<S> <C>
Revenues................................................. $35,810
Expenses................................................. $19,647
Income before income taxes............................... 16,163
Income tax expense....................................... 6,465
-------
Net income............................................... $ 9,698
=======
Earnings per common share:
Basic.................................................. $ 2.01
Diluted................................................ $ 1.89
Book value per common share:............................. $ 8.02
</TABLE>
NOTE 3. OTHER COMMITMENTS AND CONTINGENT LIABILITIES
John G. Kinnard and Company, Incorporated is a defendant in various actions
relating to its business, some of which involve claims for unspecified amounts.
Although the resolution of these matters cannot be predicted with certainty,
management believes that while their outcome may have a material effect on the
earnings in a particular period, the outcome will not have a material adverse
effect on the financial condition of Kinnard.
NOTE 4. SEGMENTS
Kinnard's reportable segments are: retail sales, equity capital markets,
fixed income and other. The retail segment consists of various retail branch
locations and the financial services division. Equity capital markets consists
of equity trading, institutional sales, research and investment banking. Fixed
income includes the origination, trading, and institutional sales of fixed
income securities. Other consists of general corporate and administrative
support functions. Kinnard does not provide balance sheet data for segment
reporting as this data is not measured.
F-59
<PAGE> 138
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. SEGMENTS (CONTINUED)
Information concerning operations in these segments of business is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
------------------
1999 2000
------- -------
(IN THOUSANDS)
<S> <C> <C>
Operating revenue:
Retail sales.............................................. $ 6,896 $11,259
Equity capital markets.................................... 2,433 5,597
Fixed income.............................................. 1,329 1,882
Other..................................................... 1,160 284
------- -------
Total.................................................. $11,818 $19,022
Operating income/(loss):
Retail sales.............................................. $ 1,183 $ 2,416
Equity capital markets.................................... (405) 1,074
Fixed income.............................................. 203 435
Other..................................................... (394) (1,413)
------- -------
Total.................................................. $ 587 $ 2,512
======= =======
</TABLE>
F-60
<PAGE> 139
STOCKWALK.COM GROUP, INC.
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
------------------------------------
STOCKWALK.COM PRO FORMA
GROUP, INC. ADJUSTMENTS FOR
MARCH 31, 2000 STEICHEN KINNARD STEICHEN
-------------- -------- ------- ---------------
(DOLLARS IN THOUSANDS)
(AUDITED)
<S> <C> <C> <C> <C>
ASSETS
Cash............................................. $ 5,534 $ 398 $ 8,346 $ 3,000(5)
Cash and cash equivalents -- segregated.......... 83,009 -- -- --
Receivables from customers....................... 216,216 146,852 -- --
Receivables from brokers and dealers............. 160,230 12,329 -- (12,329)(6)
Deposits at clearing organizations............... 26,235 2,710 999 --
Trading securities owned, at market.............. 8,320 3,264 11,959 --
Investments...................................... -- -- 13,477 --
Secured demand notes receivable.................. 18,575 -- -- --
Intangibles, net of accumulated amortization..... 10,285 -- -- 45,425(4)
Other assets..................................... 10,471 2,494 6,547 --
-------- -------- ------- --------
Total assets................................. $538,875 $168,047 $41,328 $ 36,096
======== ======== ======= ========
LIABILITIES
Short-term borrowings............................ $ 29,500 $ 1,500 $ -- $ 8,843(6)
Payables to customers............................ 280,365 139,294 -- --
Payables to brokers and dealers.................. 160,153 196 -- --
Trading securities sold but not yet purchased, at
market......................................... 1,339 268 748 --
Notes payable.................................... 7,544 -- -- --
Liabilities subordinated to claims of general
creditors...................................... 18,575 -- -- 3,000(5)
Accounts Payable and other liabilities........... 16,747 4,265 9,826 --
-------- -------- ------- --------
Total liabilities............................ $514,223 $145,523 $10,574 $ 11,843
SHAREHOLDERS' EQUITY
Common stock
Authorized shares:
Common stock................................... 863 2 97 250(7)(8)
Paid-in capital.................................. 25,441 439 6,310 46,086(7)(8)
Retained earnings................................ (1,652) 22,083 24,347 (22,083)(8)
-------- -------- ------- --------
Total Shareholders' equity....................... 24,652 22,524 30,754 24,253
-------- -------- ------- --------
Total Liabilities and shareholders' equity....... $538,875 $168,047 $41,328 $ 36,096
======== ======== ======= ========
<CAPTION>
AS OF MARCH 31, 2000
------------------------------------
PRO FORMA PRO FORMA
ADJUSTMENTS FOR ADJUSTMENTS FOR PRO-FORMA
KINNARD OFFERING MARCH 31, 2000
--------------- --------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Cash............................................. $(25,877)(1) $18,145(2) $ 9,546
Cash and cash equivalents -- segregated.......... (40,000)(3) -- 43,009
Receivables from customers....................... 40,000(3) -- 403,068
Receivables from brokers and dealers............. -- -- 160,230
Deposits at clearing organizations............... -- -- 29,944
Trading securities owned, at market.............. -- -- 23,543
Investments...................................... (13,477)(1) -- --
Secured demand notes receivable.................. -- -- 18,575
Intangibles, net of accumulated amortization..... 27,386(4) -- 83,096
Other assets..................................... (700)(9) 1,855(2) 20,667
-------- ------- --------
Total assets................................. $(12,668) $20,000 $791,678
======== ======= ========
LIABILITIES
Short-term borrowings............................ $ -- $ $ 39,843
Payables to customers............................ -- -- 419,659
Payables to brokers and dealers.................. -- -- 160,349
Trading securities sold but not yet purchased, at
market......................................... -- -- 2,355
Notes payable.................................... -- 20,000(2) 27,544
Liabilities subordinated to claims of general
creditors...................................... -- -- 21,575
Accounts Payable and other liabilities........... -- -- 30,838
-------- ------- --------
Total liabilities............................ $ -- $20,000 $702,163
SHAREHOLDERS' EQUITY
Common stock
Authorized shares:
Common stock................................... 0(7)(8) -- $ 1,212
Paid-in capital.................................. 11,679(7)(8) -- 89,955
Retained earnings................................ (24,347)(8) -- (1,652)
-------- ------- --------
Total Shareholders' equity....................... (12,668) -- 89,515
-------- ------- --------
Total Liabilities and shareholders' equity....... $(12,668) $20,000 $791,678
======== ======= ========
</TABLE>
F-61
<PAGE> 140
STOCKWALK.COM GROUP, INC.
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE TWELVE MONTHS ENDED MARCH 31, 2000
----------------------------------------------------------------------------------------------
PRO FORMA
PRO FORMA PRO FORMA ADJUSTMENTS
STOCKWALK.COM ADJUSTMENTS ADJUSTMENTS FOR
GROUP, INC. STEICHEN KINNARD FOR STEICHEN FOR KINNARD SUB DEBT PRO FORMA
------------- -------- ------- ------------ ----------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Trading profits............ $16,073 $19,383 $32,479 $ -- $ -- $ -- $ 67,935
Interest................... 20,989 9,519 1,915 -- 3,400(A) -- 35,823
Commissions................ 14,287 18,002 18,499 -- -- -- 50,788
Investment banking......... 10,363 5,106 5,665 -- -- -- 21,134
Clearing fees.............. 5,248 -- -- -- -- -- 5,248
Other income............... 4,011 524 3,514 (1,906)(H) (1,690)(B)(J) -- 4,453
---------- ------- ------- ------- ------- ------- ----------
Total revenues......... 70,971 52,534 62,072 (1,906) 1,710 -- 185,381
EXPENSES:
Employee compensation and
benefits................. 34,163 32,277 39,668 -- (3,500)(C) -- 102,608
Clearing fees.............. 2,999 352 4,463 -- (1,400)(D) -- 6,414
Occupancy and equipment.... 4,854 1,402 5,016 -- (265)(E) -- 11,007
Communication.............. 8,017 2,569 767 -- (537)(I) -- 10,816
Interest................... 16,331 5,185 -- -- 2,200(A) 2,000(G) 25,716
Other expense.............. 7,145 2,723 5,720 2,271(F) 1,369(F) 371(K) 19,559
---------- ------- ------- ------- ------- ------- ----------
Total expenses......... 73,509 44,508 55,634 2,271 (2,133) 2,371 176,160
Income (loss) before income
taxes...................... (2,538) 8,026 6,438 (4,177) 3,843 2,371 9,221
Income tax expense
(benefit).................. (839) 3,531 2,575 (838) 2,293 (1,043) 5,679
--------- ------- ------- ------- ------- ------- --------
Net income (loss)............ $(1,699) $ 4,495 $ 3,863 $(3,339) $ 1,550 $(1,328) $ 3,542
========== ======= ======= ======= ======= ======= ==========
BASIC EARNINGS PER COMMON
SHARE...................... $(0.09) $0.10
========== ==========
Weighted average shares
outstanding -- basic....... 18,849,200 34,000,000
========== ==========
DILUTED EARNINGS PER COMMON
SHARE...................... $(0.09) $0.10
========== ==========
Weighted average shares
outstanding -- diluted..... 18,998,400 34,000,000
========== ==========
</TABLE>
F-62
<PAGE> 141
STOCKWALK.COM GROUP, INC.
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA
FOOTNOTES TO FINANCIAL STATEMENTS
BASIS OF PRESENTATION
These pro forma financial statements are presented as a combination of the
respective statements of Stockwalk.com Group, Inc. (the "Company"), R.J.
Steichen & Company and Kinnard Investments, Inc. for the periods shown, and have
been prepared pursuant to the rules and regulations of the SEC and, therefore,
do not include all information and notes required by generally accepted
accounting principles for complete financial statements. The pro forma financial
statements and the related notes are not necessarily indicative of the balance
sheet and statements of operations that would have been reported had the
combination of the three companies occurred on the dates indicated, nor do they
represent a forecast of their combined financial position at any future period.
The tables set forth the unaudited pro forma financial information of the
Company (the "Pro Forma Financial Statements"), which consist of: (i) the
Statement of Financial Condition of the Company as of March 31, 2000, which
gives effect to the combination of R.J. Steichen & Company and Kinnard
Investments, Inc. and assumes the receipt of the net proceeds from and the
completion of the offering of Convertible Notes on March 31, 2000, and (ii) the
unaudited pro forma statement of operations of the Company for the year ended
March 31, 2000, which gives effect to the acquisition of Steichen and Kinnard
and assumes the receipt of the net proceeds from the sale and the completion of
the offering of the Convertible Notes as if they had occurred on April 1, 1999,
and the acquisition of Kinnard as if it had occurred on April 1, 1999.
1) Represents the net reduction of cash related to the following: payment of
$6.00 per share for 4,659,691 shares of Kinnard, $4,446,310 paid to retire
913,000 options and warrants for Kinnard stock, and $6,950,000 for various
acquisition costs including investment banking fees and severance costs;
offset by the liquidation of $13,477,000 of investments.
2) Represents the net proceeds from the issuance of $20.0 million of
convertible debt and the related deferred financing costs.
3) Represents the increase in customer receivables resulting from Kinnard's
customer margin accounts being held at MJK and funded by cash in the reserve
account.
4) Represents the goodwill recorded on the respective companies as a result of
the acquisitions.
5) Represents earnings retained per the Steichen agreement.
6) Represents the reduction in discretionary broker lending and the increase in
short-term borrowings in connection with Mr. John E. Feltl removing
approximately $21 million of capital prior to completion of the merger.
7) Represents the issuance of 2,435,846 and 6.3 million shares of $.04 par
value common stock and additional paid in capital related to the acquisition
of Kinnard and Steichen, respectively at $7.425 per share ($9.0 discounted
to 82.5%).
F-63
<PAGE> 142
8) Represents the accounting elimination of shares of common stock, related
additional paid in capital and remaining retained earnings at acquisition of
the respective companies.
9) Represents the write off of $700,000 of fixed assets of Kinnard.
A.) Represents interest revenue and expense on the $40,000,000, of customer
margin balances at 8.5% and 5.5%, respectively, moved from Kinnard's current
clearing firm to MJK.
B.) Represents the increase in rebates associated with a $100,000,000 average
balance held by Kinnard earning the premium rate currently recognized by
MJK.
C.) Represents the reduction of compensation and benefit expense of certain
Kinnard employees offset by retention bonuses in first year offered to
certain employees and sales representatives.
D.) Represents the elimination of clearing fees paid to clearing brokers by
Kinnard, as a result of Kinnard's trades being cleared by MJK, offset by the
increase in administrative costs required to administer the additional
transaction volume.
E.) Represents a reduction in the space and related rent for the combined
companies.
F.) Represents the amortization of the goodwill of $27.4 million and $45.4
million recorded for Kinnard and Steichen over 20 years.
G.) Represents interest expense on the convertible note.
H.) Represents the reduction of income generated by the approximately $21
million of funds to be removed by Mr. Feltl at closing.
I.) Represents a reduction of quote feeds and other miscellaneous efficiencies
of scale.
J.) Represents a reduction of the other income generated by $20 million of
excess funds at Kinnard as these funds are depleted to finance the
acquisition.
K.) Represents the amortization of $1.9 million of deferred financing costs
associated with the issuance of convertible subordinated debt over five
years.
F-64
<PAGE> 143
[INSIDE BACK COVER]
[CAPTION: PHOTO LOGO FOR STOCKWALK.COM,(TM) "THE ONLINE BROKERAGE FOR ALL WALKS
OF LIFE" PRIVATE LABEL SERVICES]
<PAGE> 144
------------------------------------------------------
------------------------------------------------------
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........................ 27
Use of Proceeds..................... 28
Price Range of Common Stock......... 28
Dividend Policy..................... 28
Capitalization...................... 29
Ratio of Earnings to Fixed
Charges........................... 30
Selected Consolidated Financial
Data.............................. 31
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 32
Business............................ 37
Management.......................... 51
Description of Convertible Notes.... 54
Certain Federal Tax
Considerations.................... 69
Description of Capital Stock........ 73
Underwriting........................ 75
Legal Matters....................... 77
Experts............................. 77
Where You Can Find More
Information....................... 78
Index to Financial Statements....... F-1
</TABLE>
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
$20,000,000
[STOCKWALK.COM LOGO]
10% CONVERTIBLE SUBORDINATED
NOTES DUE 2005
--------------------
PROSPECTUS
--------------------
SOUTHWEST SECURITIES
MILLER, JOHNSON & KUEHN,
INCORPORATED
R.J. STEICHEN & COMPANY
AUGUST 3, 2000
------------------------------------------------------
------------------------------------------------------
