<PAGE> 1
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2000
COMMISSION FILE NUMBER: 0-22247
STOCKWALK.COM GROUP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MINNESOTA 41-1756256
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
5500 WAYZATA BOULEVARD
SUITE 800
MINNEAPOLIS, MINNESOTA 55416
(Address of principal executive offices)
(612) 542-6000
(Registrant's telephone number)
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, par value $.04 per share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of the Registrant's Common
Stock on May 31, 2000, as reported on the NASDAQ National Market System, was
$49.0 million.
Shares of $.04 par value Common Stock outstanding as of May 31, 2000:
21,582,148 shares.
DOCUMENTS INCORPORATED BY REFERENCE
The information required in response to Part III of Form 10-K is hereby
incorporated by reference to the specified portions of the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on or about
September 12, 2000.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
STOCKWALK.COM GROUP, INC.
INDEX TO ANNUAL REPORT FORM 10-K
<TABLE>
<CAPTION>
PART I PAGE
------ ----
<S> <C> <C>
Item 1. Business.................................................... 3
Company Overview............................................ 3
Pending Acquisitions........................................ 4
Our Industry................................................ 7
Products and Services....................................... 8
- Online Division........................................... 8
- Full Service Brokerage Division........................... 9
Our Strategy................................................ 11
Recent Developments......................................... 13
Competition................................................. 13
Regulation.................................................. 14
Uniform Net Capital Rule.................................... 14
Employees................................................... 15
Item 2. Properties.................................................. 15
Item 3. Legal Proceedings........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders......... 16
PART II
--------
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters......................................... 16
Item 6. Selected Consolidated Financial Data........................ 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 18
Item 7a. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 22
Item 8. Financial Statements and Supplementary Data................. 22
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 41
PART III
--------
Item 10. Directors and Executive Officers of the Registrant.......... 41
Item 11. Executive Compensation...................................... 44
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 44
Item 13. Certain Relationships and Related Transactions.............. 44
PART IV
--------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 44
Signatures.................................................. 51
</TABLE>
2
<PAGE> 3
PART I
ITEM 1: 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 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, Inc. sold its
operating assets prior to the merger. 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 and Arnold Securities, Inc. are
registered as broker-dealers with the SEC and are members of the NASD. Our
common stock is listed on the Nasdaq NMS under the symbol "STOK."
3
<PAGE> 4
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, affinity groups
and Internet portals a turn-key online brokerage service. This service, which we
call our private label program, provides small to medium-sized financial
institutions and affinity groups and Internet portals an additional product for
their customers and members. These entities can use their existing websites to
allow their customers and members direct access to the Stockwalk.com online
trading service.
PENDING ACQUISITIONS
On June 3, 2000, we entered into definitive merger agreements with R.J.
Steichen & Company ("Steichen") and Kinnard Investments, Inc. ("Kinnard") the
parent corporation of its broker-dealer John G. Kinnard, Incorporated ("JGK").
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 MJK's research department, Steichen's
equity research focuses on emerging growth companies typically headquartered in
the upper midwest. As of March 31, 2000, Steichen had 282 full-time employees
and 185 independent licensed sales representatives, and recorded total revenues
of approximately $52.5 million. Steichen's principal office is in Minneapolis,
and its operates 11 additional offices in the Minneapolis-St. Paul metropolitan
area, in addition to seven branch offices.
The Steichen merger agreement requires us to issue an aggregate of
4,315,062 shares of our common stock in exchange for all of the issued and
outstanding shares of Steichen's capital. The shares of our common stock to be
issued pursuant to the Steichen merger agreement will not be registered. All
issued and outstanding shares of Steichen's common stock are owned 50% by John
E. Feltl, its Chief Executive Officer, and 50% by a grantor retained annuity
trust created by him, although Mr. Feltl retained his right to transfer his
shares of Steichen's common stock prior to completion of the merger. The
Steichen agreement calls for the merger of Steichen with and into a subsidiary
formed by us to complete the merger. Completion of the Steichen transaction is
subject to expiration of the notification period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 and certain conditions that are typical in
transactions of this nature. Under the terms of the Steichen agreement, the
Steichen entity will continue to operate as a separate corporate
4
<PAGE> 5
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
million 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 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 remove 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 is withdrawing approximately $21.0 million in cash from
Steichen, in the form of dividends on which he has previously paid taxes;
- Mr. John E. Feltl has agreed to leave $3.0 million of capital in Steichen
with a premium of $600,000 paid upon withdrawal of such capital at the
end of the two-year period. He will have the option, at the end of the
two-year period, to be repaid $3.6 million or to convert such amount into
shares of 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 are entering into a five-year employment/noncompete agreement with Mr.
John E. Feltl pursuant to which he will be responsible for the Steichen
operations and will receive a salary of $1.0 million per year. The salary
will be deducted when determining Steichen's pre-tax earnings for
purposes of the earn-out agreement;
- we are also entering into a two-year employment agreement with Mr. John
C. Feltl pursuant to which we will pay him a signing bonus of $100,000
and a salary of $200,000 per year for two years, with all such amounts
being deducted when determining Steichen's pre-tax earnings for purposes
of the earn-out agreement;
5
<PAGE> 6
- 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
President, Mr. David Johnson;
- Mr. John E. Feltl will receive a five-year warrant to purchase 300,000
additional shares of our common stock at exercisable 85% of the fair
market value of such shares on the date of completion of the merger. This
warrant does not contain cashless exercise provisions, but it does
contain piggyback registration rights; and
- Messrs. John E. and John C. Feltl will be appointed to our board upon
completion of the transaction. Our principal shareholders, Messrs.
Miller, Johnson, Kuehn and Rahm, entered into a voting agreement pursuant
to which they agreed to vote shares of our common stock owned by them in
favor of Messrs. Feltl being elected to our board of directors.
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. We currently own
approximately 6.9% 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, total
revenues of approximately $54.9 million, and was a market maker for
approximately 175 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 merger 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
pursuant to an escrow agreement maintained by National City Bank, which must be
distributed to Kinnard in the event that, among other things, we fail to
consummate the
6
<PAGE> 7
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, 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. Mr. Farley is also entitled to receive an additional amount to
cover any federal excise tax which would be imposed on Mr. Farley's excess
parachute payment.
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 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.
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, which we expect will be given in
time for a third or fourth quarter 2000 closing. Kinnard and we have previously
filed the notifications reports 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
7
<PAGE> 8
number of online accounts translated to approximately $900 billion worth of
assets held in online accounts at the end of 1999. Industry experts predict that
by the year 2003, more than $3 trillion in assets will be held in over 20
million online accounts. The Internet is one of the primary methods by which
investors have taken control of their own portfolios. We believe that brokerage
firms that are able to provide online trading services to their customers as
well as continue to provide traditional full service brokerage services,
particularly in areas not well suited to Internet transactions, will be poised
to capitalize on the changes occurring in the securities industry.
Products & Services
ONLINE DIVISION (STOCKWALK.COM)
We launched Stockwalk.com, our online division, in September 1999. While
not providing investment advice, Stockwalk.com offers a secure online brokerage
service that provides order placement, portfolio tracking and related market
information, news and other information to investors 24 hours a day, seven days
a week, by means of the Internet and telephone. We plan to adapt our technology
to other areas of electronic commerce, such as processing of insurance
transactions and electronic cash transfers.
When we started Stockwalk.com, we launched a regional advertising campaign
in the Minneapolis-St. Paul area to create name recognition in that market and
acquired two discount and online brokerage firms to provide an initial customer
account base. Our October 1999 acquisition of Arnold Securities, Inc. resulted
in the addition of approximately 12,000 accounts. Our November 1999 acquisition
of M-One Investment Securities, Inc. provided us with approximately 5,000
accounts, the majority of which are 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.
We intend to market our on-line technology to bank service providers,
financial institutions and members of affinity groups and Internet portals. Our
private label product allows the financial institution, affinity group or
Internet portal to give its customers or members access to online brokerage
services through the financial institution's, affinity group's or Internet
portal's websites. This allows the client to simply add our product to the
variety of online services it offers to its customers. Currently, we have
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. Currently, we also have
direct agreements with 26 financial institutions, including Northwest Airlines
Credit Union, Community Savings Bank, Arkansas National Bank and Capital Bank.
Finally, as of such date, we have 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 us with exposure to approximately 5,800 financial
institutions, affinity groups and Internet portals serving approximately 3.0
million customers. We expect that
8
<PAGE> 9
we will capture a small percentage of these customers for our website, which
would increase our customer base. Generally, we pay the financial institution a
per transaction fee, and it pays portals or affinity groups a flat fee for each
order.
Our agreement with Telescan, Inc., entered into in March 2000, will serve
to greatly enhance the online content we offer to our customers. Telescan
provides financial Internet content to many of the nation's largest financial
services and media companies, including America Online, American Express,
Fidelity Investments, Forbes, GlobalNetFinancial, 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, 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. 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. The Company employed 384
persons as of May 31, 2000. Stockwalk.com has offices in Golden Valley and
Minneapolis, Minnesota; and San Francisco and Fremont, California.
9
<PAGE> 10
Full Service Brokerage Division
Our full service brokerage business is conducted through MJK and includes
retail brokerage, trading, investment banking, research and clearing activities.
The division offers services to clients in the following four areas:
- investment advice for individuals and institutions;
- financial advisory and underwriting services to governments in the upper
midwest;
- investment banking assistance to start-up and early stage regional
companies to access capital; and
- resale of bank and thrift certificates of deposit.
At May 31, 2000, MJK employed approximately 140 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 7,000 active accounts.
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 clearing services for its business.
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.
10
<PAGE> 11
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 approximately $216 million. This
indebtedness was secured by customer securities positions with a market value of
approximately $1.0 billion at that date.
Customers will at times accumulate credit balances in their accounts. Such
balances result from payment of dividends, interest or principal on securities
held for such customers, from funds received in connection with sales of a
customer's securities and from cash deposits made by customers pending
investment. Pending investment of such funds or reimbursement upon the
customer's request, MJK pays interest on these credit balances. MJK uses
available credit balances to lend funds to customers purchasing securities on
margin. Excess customer credit balances are invested in short-term securities in
accordance with applicable regulations and are segregated for the exclusive
benefit of customers. MJK generates net interest income from the positive
interest rate spread between the rate earned from margin lending and alternative
short-term investments and the rate paid on customer credit balances. 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.
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
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
11
<PAGE> 12
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 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 59
companies. We also supplement internal research with research products from
independent organizations.
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 under our name
to private label the product under their own names.
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
12
<PAGE> 13
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, affinity groups and
Internet portals, with the goal of pulling the financial institutions'
customers, affinity group's and Internet portal's members through to our
website. Our private label program will allow financial institutions, affinity
groups and Internet portals to provide online brokerage services to their
customers or members without having to make large capital expenditures to
support online technology. At the same time, we believe that we will benefit
from these relationships because we will gain exposure to a large number of
potential customers without the use of expensive national advertising campaigns.
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. 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.
13
<PAGE> 14
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 & 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
14
<PAGE> 15
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 three 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.
ITEM 2: PROPERTIES
Our principal executive offices and back office facilities are located at
5500 Wayzata Boulevard, Minneapolis, Minnesota 55416 where at March 31, 20000 we
leased approximately 28,000 square feet of office space. The leases for these
premises expire in March 2004. We also have several leases for a total of
approximately 32,000 square feet for our regional branch offices, with
month-to-month leases or term leases terminating as late as February 2004. We
are currently in negotiations to acquire additional space in the headquarter
facility in Minneapolis. However, our existing facilities are adequate for the
short-term future. As we outgrow our existing facilities, we believe that
additional space can be timely obtained on acceptable terms.
ITEM 3: LEGAL PROCEEDINGS
Many aspects of our business involve substantial risks of liability,
including exposure under federal and state securities laws in connection with
the underwriting and distribution of securities. We do not presently maintain an
errors and omissions insurance policy insuring us against these risks. In recent
years, there has been an increasing incidence of litigation involving the
securities industry, including class actions which generally seek rescission and
substantial damages. Additionally, securities brokerage firms, including us,
become parties to arbitrations brought by dissatisfied customers in the general
course of business. At the present time, we are not a party to, nor is any
property subject to, any pending legal proceedings, other than routine
litigation or arbitration incidental to our
15
<PAGE> 16
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.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 2000.
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.
The Registrant's (Nutritional Medical Inc.) stock began trading September
26, 1996 on the NASDAQ Small Cap Market System under the symbol "NMED". In
response to a listing requirement of the NASDAQ Small Cap Market that the common
stock maintain a minimum bid price of $1.00 per share, the Company effected a
one-four four reverse stock split on June 10, 1998. In December 1999, the
Registrant discontinued all business operations.
On May 7, 1999 the Registrant received a determination from a NASDAQ
Listing Qualification Panel that the Common Stock would be delisted from trading
on the NASDAQ Small Cap Market effective as of the date. In its decision, the
panel noted that the Company's current status as a "shell" corporation with no
active business operations did not provide investors sufficient information to
determine the potential of an investment. The Common Stock continued to trade on
the Over The Counter Bulletin Board under the symbol, NMED. Pursuant to the
reverse merger with MJK Holdings on July 6, 1999, the common Stock symbol was
changed to STOK.
On October 5, 1999, the Company received approval for listing on the NASDAQ
National Market, trading under the symbol STOK. The table below sets forth the
high and low bid prices of the Company's common stock as reported by NASDAQ for
the quarters indicated:
<TABLE>
<CAPTION>
FISCAL FISCAL
2000 FIRST SECOND THIRD FOURTH 1999 FIRST SECOND THIRD
------ ---------- ---------- ---------- ------------ ------ --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
HIGH 18 3/8 16 1/8 10 3/8 14 15/16 HIGH 3 1/2 1 3/4 1 1/4
LOW 7 5/8 8 5/8 7 1/4 7 1/8 LOW 1 1/8 7/8 5/8
<CAPTION>
FISCAL
2000 FOURTH
------ ---------
<S> <C>
HIGH 9 5/8
LOW 1 1/4
</TABLE>
At May 31, 2000, there were 21,582,148 shares of common stock outstanding
held by approximately 1,044 beneficial shareholders and 124 shareholders of
record. We have not paid any cash dividends on our common stock and does not
anticipate paying cash dividends in the foreseeable future. There were no
unregistered sales of our common stock in fiscal year ended March 31, 2000.
16
<PAGE> 17
ITEM 6: SELECTED 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 of MJK for the fiscal 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 information should be read in conjunction with the
financial statements and related notes, and Management's Discussion and Analysis
of Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
---------------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
REVENUES:
Trading profits................. $16,073 $15,063 $10,634 $ 9,856 $10,536
Interest........................ 20,989 15,410 13,507 9,150 5,487
Commissions..................... 14,287 9,888 9,040 3,930 2,732
Investment banking.............. 10,363 8,389 9,656 7,716 6,932
Clearing fees................... 5,248 3,105 1,902 785 567
Other Income.................... 4,010 3,735 2,354 1,170 690
------- ------- ------- ------- -------
TOTAL REVENUES............. $70,970 $55,590 $47,093 $32,607 $26,944
EXPENSES
Employee compensation and
benefits..................... $34,163 $26,987 $25,950 $17,736 $16,807
Clearing fees................... 2,999 2,890 1,475 750 653
Occupancy and equipment......... 4,854 3,285 3,381 1,965 1,052
Communication................... 8,017 5,251 3,938 2,298 1,655
Interest........................ 16,331 11,806 11,027 7,427 4,429
Other expense................... 7,145 3,113 3,145 2,207 1,489
------- ------- ------- ------- -------
TOTAL EXPENSES............. $73,509 $53,332 $48,916 $32,383 $26,085
INCOME (LOSS) BEFORE INCOME
TAXES........................... (2,539) 2,258 (1,823) 224 859
Income tax expense (benefit)...... (839) 985 (599) 34 334
------- ------- ------- ------- -------
NET INCOME (LOSS)................. $(1,700) $ 1,273 $(1,224) $ 190 $ 525
======= ======= ======= ======= =======
BASIC AND DILUTED EARNINGS PER
SHARE........................... $ (0.09) $ 0.08 $ (0.08) $ 0.01 $ 0.03
======= ======= ======= ======= =======
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DATA
Total Assets............... 538,875 322,353 272,616 181,042 124,633
Total Debt................. 55,619 48,113 27,728 27,102 28,303
Total Shareholder's
Equity.................. 24,652 7,011 1,358 2,583 2,392
</TABLE>
17
<PAGE> 18
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Stockwalk.com Group, Inc., ("The Company") has two principal subsidiaries:
MJK and Stockwalk.com, Inc. 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 50 brokerage firms as of March 31,
2000. Stockwalk.com, Inc. has commenced online securities trading through its
website.
During fiscal 2000, our subsidiary, Stockwalk.com, Inc., completed the
acquisition of two on-line brokerage firms. In October 1999, we acquired Arnold
Securities, Inc. (ASI) of Minneapolis, MN. ASI offers on-line trading services
to customers across the upper midwest. In November 1999, we completed the
acquisition of M-One Securities, which is headquartered in San Francisco, CA and
maintains a branch office in Freemont, CA. M-One Securities offers on-line
trading services for its customers through its web-site which includes language
alternatives in English, Cantonese and Mandarin.
Our business is highly competitive and sensitive to many factors beyond the
control of management, including the volatility and price level of securities
markets; the volume, size and timing of securities transactions, the level and
volatility of interest rates, local and national economic conditions and demand
for services and investment products. In addition, a significant portion of our
expenses, including salaries, benefits, occupancy and communications, are
relatively fixed and do not vary with market activity. Consequently, our revenue
and net income have been and may continue to be subject to fluctuations.
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 their
respective closing dates and the goodwill from the acquisitions will be
amortized over 20 years.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The matters set forth in this public dissemination, including management's
expectations regarding future growth and profitability, are forward-looking
statements within the context of the Private Securities Litigation Reform Act of
1995. These statements involve certain risks and uncertainties that could cause
actual results to differ materially from such statements. These potential risks
and uncertainties include, among other factors, the volatile nature of financial
markets and the securities industry, rapidly growing competition in the
financial services industry, including the on-line security trading business
dependence on and competition for experienced personnel, successful
implementation of the our long-term strategy and federal and state regulatory
and legislative changes.
SEGMENTS
Our reportable segments are as follows: clearing services, retail sales,
internet brokerage, underwriting, and other.
18
<PAGE> 19
CLEARING SERVICES
We serve as a clearing agent providing transaction execution, account
maintenance, including extension of credit, and record keeping services for
customers of its 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.
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
adopted to provide information and transaction processing services related to
other aspects of electronic commerce, such as processing, insurance transactions
and electronic cash transfers.
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-dealers 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 the our
19
<PAGE> 20
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 as follows
for the years ended:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------
MARCH 31 MARCH 31 MARCH 31
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE:
Clearing services...................... $28,102,800 $19,279,800 $15,968,700
Retail sales........................... 36,276,400 30,672,200 28,009,400
Internet brokerage..................... 2,717,500 -- --
Underwriting........................... 3,215,500 4,337,600 2,173,600
Other.................................. 1,483,600 1,300,700 940,900
Eliminations........................... (825,500) -- --
----------- ----------- -----------
CONSOLIDATED REVENUE..................... $70,970,300 $55,590,300 $47,092,600
=========== =========== ===========
PRETAX INCOME (LOSS):
Clearing services...................... $ 4,210,900 $ 2,050,700 $ 1,080,300
Retail sales........................... (715,900) (272,300) (3,066,000)
Internet brokerage..................... (3,585,500) -- --
Underwriting........................... (142,200) 485,000 162,400
Other.................................. (1,855,900) -- --
Eliminations........................... (450,100) (5,800) --
----------- ----------- -----------
CONSOLIDATED PRETAX INCOME (LOSS):....... $(2,538,700) $ 2,257,600 $(1,823,300)
=========== =========== ===========
</TABLE>
Revenues from clearing services increased $8.8 million from 1999 to 2000
and $3.3 million from 1998 to 1999 representing increases of 45.8% and 20.7%,
respectively. Clearing fee expenses increased $6.7 million from 1999 to 2000 and
$2.3 million from 1998 to 1999 representing increases of 38.7% and 15.7%,
respectively. The significant increase in revenues is directly related to ticket
charges collected on the increased number of customers from the Company's
introducing brokers. The number of introducing brokers for which we clears
trades has increased from 22 at March 31, 1998 to 31 at March 31, 1999 to 50 at
March 31, 2000. We processed 916,900, 504,700 and 314,600 tickets in the fiscal
years ended March 31, 2000, 1999 and 1998 respectively. The increase in revenues
is also impacted by interest income earned on the increased number of customer
margin accounts. Clearing fee expenses have increased primarily as staff
additions are required to service the increasing number of trades and interest
expense is charged on cash balances for the increased number of customers from
the new correspondent brokers. It is anticipated that clearing fee income will
grow as we maintain customer accounts and clear trades for our expanding
internet brokerage business and attract 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 quarter generated by record fluctuations and overall
insecurity 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
20
<PAGE> 21
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.
Our internet brokerage business generated trading fee revenues of $2.7
million in the fiscal year ended March 31, 2000. During the year ended March
2000 we launched our web-site and completed the acquisition of Arnold
Securities, Inc., Minneapolis, MN and M-One Securities Inc., San Francisco, CA.
The $3.6 million loss from internet brokerage in the year ended March 2000 was
attributed to significant costs incurred in advertising designed to create brand
awareness for attracting new on-line customers and generating new private label
business. We expect our internet brokerage revenue to grow as we attract new
private label partners, acquire other on-line broker dealers, and attract new
direct customers and customer activity increases.
Underwriting revenues declined $1.1 million from 1999 to 2000 after
increasing $2.2 million from 1998 to 1999. The 1999 results include a $815,000
placement fee for locating a financial partner of a 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 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
transactions 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, the fluctuations in cash flows from financing activities are
directly related to operating activities.
The $17.7 million increase in deposits 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
2000 as a result of the acquisitions of certain assets of M-One Securities,
Inc., Arnold Securities, 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 2000, primarily resulting from the issuance of approximately 2.2 million
shares of the Company's
21
<PAGE> 22
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 the Company's common
stock. Notes payables were issued in connection with the acquisitions completed
in the year ended March 31, 2000. The increase in short-term borrowings at March
1999 and subsequent decline in March of 2000 is the result of fluctuating
operating balances at each respective year-end.
At March 2000, we had approximately $70.0 million in committed credit
agreements, of which $29.5 million was utilized. The extended credit was
collateralized with approximately $20.9 million of firm-owned securities and
cash and approximately $14.2 million was collateralized by customer securities
collateralizing liabilities subordinated to claims of general creditors.
We believe that our current cash position, cash generated from future
operations, availability of line of credit borrowings, additional capacity for
subordinated debt, and sale of securities will be adequate to meet the present
capital requirements for the combined entity for at least one year.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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 high-grade government
obligations with short-term maturities.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
STOCKWALK.COM GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Consolidated Statements of Financial Condition.............. Page 24
Consolidated Statements of Operations....................... Page 25
Consolidated Statements of Shareholders' Equity............. Page 26
Consolidated Statements of Cash Flows....................... Page 27
Consolidated Notes to Financial Statements.................. Page 28
Report of Independent Public Accountants.................... Page 40
</TABLE>
22
<PAGE> 23
BASIS OF PRESENTATION
The Merger between MJK Holdings and the former registrant, NM Holdings has
been accounted for using the reverse purchase method of accounting. The Company
issued new shares of Common Stock in exchange for outstanding shares of MJK
capital stock. The shares of common stock issued to MJK Holdings, Inc.
shareholders represented 93.5% of the common shares outstanding immediately
following the consummation of the merger. In applying generally accepted
accounting principles ("GAAP"), the Merger has been deemed to be equivalent, for
accounting purposes, to MJK's issuance of its capital stock in exchange for the
fair market value of the assets and liabilities of the Company. As a result, no
goodwill has been recorded, and the assets of MJK and it subsidiaries are
recorded at their historic values.
23
<PAGE> 24
STOCKWALK.COM GROUP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Cash................................................ $ 5,533,500 $ 3,200,700
Cash and cash equivalents -- segregated............. 83,009,400 73,130,500
Receivables from customers.......................... 216,216,100 139,910,800
Receivables from brokers and dealers................ 160,230,300 70,350,300
Deposits at clearing organizations.................. 26,234,900 8,492,200
Trading securities owned, at market................. 8,320,100 9,274,300
Secured demand notes receivable..................... 18,575,000 9,675,000
Goodwill, less accumulated amortization of $489,400
and $243,600...................................... 10,284,900 1,380,200
Other assets........................................ 10,471,100 6,938,800
------------ ------------
TOTAL ASSETS........................................ $538,875,300 $322,352,800
============ ============
LIABILITIES
Short-term borrowings............................... $ 29,500,000 $ 33,900,000
Payables to customers............................... 280,364,200 203,313,800
Payables to brokers and dealers..................... 160,153,400 53,363,600
Trading securities sold but not yet purchased, at
market............................................ 1,339,000 812,200
Notes payable....................................... 7,544,400 4,538,100
Liabilities subordinated to claims of general
creditors......................................... 18,575,000 9,675,000
Other liabilities................................... 16,747,000 9,738,900
------------ ------------
TOTAL LIABILITIES................................... 514,223,000 315,341,600
SHAREHOLDERS' EQUITY
Common stock, 2000 -- $.04 par value;
1999 -- $.01 par value
Authorized shares: 50,000,000
Issued and outstanding 2000 -- 21,575,313;
1999 -- 4,255,971............................ 863,000 42,600
Preferred Stock -- no par
Authorized shares: 2000 -- 0; 1999 -- 5,000,000
Issued and outstanding 2000 -- 0;
1999 -- 558,000.............................. -- 4,380,300
Paid-in capital..................................... 25,440,900 2,540,000
Retained earnings (deficit)......................... (1,651,600) 48,300
------------ ------------
TOTAL SHAREHOLDERS' EQUITY.......................... $ 24,652,300 $ 7,011,200
------------ ------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY............ $538,875,300 $322,352,800
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
24
<PAGE> 25
STOCKWALK.COM GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Trading profits........................ $16,073,000 $15,063,100 $10,634,100
Interest............................... 20,988,500 15,410,200 13,506,700
Commissions............................ 14,287,200 9,888,200 9,039,900
Investment banking..................... 10,362,900 8,388,900 9,656,200
Clearing fees.......................... 5,247,600 3,105,400 1,902,300
Other income........................... 4,011,100 3,734,500 2,353,400
----------- ----------- -----------
TOTAL REVENUES........................... $70,970,300 $55,590,300 $47,092,600
EXPENSES:
Employee compensation and benefits..... $34,163,000 $26,986,900 $25,950,400
Clearing fees.......................... 2,998,900 2,890,100 1,474,500
Occupancy and equipment................ 4,853,800 3,285,100 3,380,600
Communication.......................... 8,016,500 5,251,400 3,937,900
Interest............................... 16,331,400 11,805,900 11,027,400
Other expense.......................... 7,145,400 3,113,300 3,145,100
----------- ----------- -----------
TOTAL EXPENSES........................... $73,509,000 $53,332,700 $48,915,900
INCOME (LOSS) BEFORE INCOME TAXES........ (2,538,700) 2,257,600 (1,823,300)
Income tax expense (benefit)............. (838,800) 985,000 (599,000)
----------- ----------- -----------
NET INCOME (LOSS)........................ $(1,699,900) $ 1,272,600 $(1,224,300)
=========== =========== ===========
BASIC EARNINGS (LOSS) PER SHARE.......... $ (0.09) $ 0.08 $ (0.08)
=========== =========== ===========
Weighted average shares
outstanding -- basic................... 18,849,200 15,848,500 15,848,500
=========== =========== ===========
DILUTED EARNINGS (LOSS) PER SHARE........ $ (0.09) $ 0.08 $ (0.08)
=========== =========== ===========
Weighted average shares
outstanding -- diluted................. 18,998,400 15,848,500 15,848,500
=========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements
25
<PAGE> 26
STOCKWALK.COM GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FISCAL YEARS ENDED MARCH 31, 2000, 1999, AND 1998
<TABLE>
<CAPTION>
COMMON STOCK
PREFERRED --------------------- ADDITIONAL PAID RETAINED
STOCK SHARES AMOUNT IN CAPITAL EARNINGS (DEFICIT) TOTAL
---------- ---------- -------- --------------- ------------------ -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, MARCH 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 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 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 2000......... $ -- 21,575,313 $863,000 $25,440,900 $(1,651,600) $24,652,300
========== ========== ======== =========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements
26
<PAGE> 27
STOCKWALK.COM GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
-------------------------------------------
2000 1999 1998
----------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)...................... $(1,699,900) $ 1,272,600 $ (1,224,300)
Adjustments to reconcile net income
(loss) to net cash used for operating
activities:
Depreciation and amortization........ 946,600 1,013,900 919,200
Changes in assets and liabilities:
Cash and investments segregated... (9,878,900) 22,515,600 (60,772,200)
Customer receivables and
payables........................ 745,100 11,199,000 35,621,800
Broker and dealer receivables and
payables........................ 16,909,800 (47,410,100) (190,500)
Deposits at clearing
organizations................... (17,742,700) (7,689,300) 236,300
Trading securities................ 1,481,000 (9,168,700) 9,724,000
Other assets and liabilities...... 3,113,500 3,264,000 5,103,700
----------- ------------ ------------
Net cash used for operating
activities........................... $(6,125,500) $(25,003,000) $(10,582,000)
INVESTING ACTIVITIES
Acquisition of certain assets of broker
dealers and license agreements....... $(9,150,500) $ -- $ 15,400,400
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....................... (338,500) (645,100) (1,356,900)
----------- ------------ ------------
Net cash provided by (used for)
investing activities................. $(9,489,000) $ (645,100) $ 13,561,600
FINANCING ACTIVITIES
Increase (decrease) in short-term
borrowings........................... $(4,400,000) $ 21,900,000 $ (5,000,000)
Issuance of notes payable.............. 4,667,400 -- 5,100,000
Payments on notes payable.............. (1,661,100) (714,400) (969,000)
Issuance of preferred stock............ 101,800 4,380,300 --
Issuance of common stock............... 19,239,200 -- --
----------- ------------ ------------
Net cash provided by (used for)
financing activities................. $17,947,300 $ 25,565,900 $ (869,000)
Net increase (decrease) in cash........ $ 2,332,800 $ (82,200) $ 2,110,600
Cash at beginning of period............ 3,200,700 3,282,900 1,172,300
----------- ------------ ------------
Cash at end of period.................. $ 5,533,500 $ 3,200,700 $ 3,282,900
=========== ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid (received) during the year
for:
Interest............................... $15,333,500 $ 11,297,200 $ 11,188,100
=========== ============ ============
Income taxes........................... $ 798,600 $ (373,400) $ 38,800
=========== ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements
27
<PAGE> 28
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. MJK 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.
28
<PAGE> 29
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.
29
<PAGE> 30
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.
30
<PAGE> 31
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>
2000 1999
------------ -----------
<S> <C> <C>
Securities borrowed.................................. $148,564,800 $51,283,400
Securities failed-to-deliver......................... 6,608,200 17,859,900
Receivable from introducing broker................... 2,632,200 473,400
Other................................................ 2,425,100 733,600
------------ -----------
Total receivables............................... $160,230,300 $70,350,300
============ ===========
Securities loaned.................................... $147,089,600 $35,550,200
Securities failed-to-receive......................... 5,605,300 5,440,100
Payable to introducing broker........................ 4,347,900 2,398,300
Payable to clearing broker........................... 3,110,600 9,975,000
------------ -----------
Total payables.................................. $160,153,400 $53,363,600
============ ===========
</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 brokers-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, 2000 and 1999 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
31
<PAGE> 32
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>
2000 1999
---------- ----------
<S> <C> <C>
Trading securities owned, at market
Corporate equities.................................... $2,346,200 $6,318,800
State and municipal obligations....................... 4,372,900 2,950,800
U.S. Government obligations........................... 938,900 --
Corporate obligations................................. 662,100 4,700
---------- ----------
$8,320,100 $9,274,300
========== ==========
</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, 2000 and 1999. Trading securities sold but not
yet purchased at March 31, consisted of the following:
<TABLE>
<CAPTION>
2000 1999
---------- --------
<S> <C> <C>
Trading securities sold but not yet purchased, at market
Corporate equities..................................... $ 688,600 $ 40,200
State and municipal obligations........................ 370,100 148,000
U.S. government obligations............................ 156,100 246,500
Corporate obligations.................................. 124,200 377,500
---------- --------
$1,339,000 $812,200
========== ========
</TABLE>
5. FINANCING ARRANGEMENTS
We had discretionary lines of credit totaling $70.0 million at March 31,
2000 and $60.0 million at March 31, 1999 which are secured by firm-owned
securities, customer securities collateralizing liabilities subordinated to
claims of general creditors and unpaid customer securities. These lines are
payable on demand. Borrowings on the lines bear interest at various rates over
the 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, 2000, 1999,
and 1998 respectively. 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 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 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.
32
<PAGE> 33
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, 2000 and 1999 of $4.5
million and $938,100, 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
5.25% to 10.16% as of March 31, 2000 and 7.00% to 8.75% as of March 31, 1999.
Notes payable at March 31, 2000 mature as follows:
<TABLE>
<S> <C>
Fiscal year ending March 31,:
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>
<S> <C>
Year ending March 31,:
2001.......................... $11,275,000
2002.......................... 7,300,000
-----------
$18,575,000
===========
</TABLE>
6. SHAREHOLDERS' EQUITY
EFFECTS OF THE REORGANIZATION
On July 7, 1999, MJK Holdings, Inc. merged with NM Holdings, Inc. NM
Holdings, was a publicly traded shell corporation with no remaining active
business. Pursuant to the terms of the reorganization agreement all outstanding
shares of NM Holdings, Inc.'s merger subsidiary 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, Merger Sub of 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 merger subsidiary immediately prior to the effective time
were canceled and extinguished without any conversion thereof.
33
<PAGE> 34
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.
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 diving net income by the weighted average number
of shares of common stock and dilutive stock equivalents from the exercise of
stock options and warrants using the treasury stock method. The results for
March 31, 1999 and 1998 reflect the conversion of MJK shares into Stockwalk.com
Group, Inc. 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 MARCH 31 MARCH 31
2000 1999 1998
---------- ---------- --------
<S> <C> <C> <C>
Weighted average shares
outstanding -- basic...................... 18,849,200 15,848,500 15,848,500
Dilutive effect of stock options and
warrants after application of the treasury
stock method.............................. 149,200 -- --
---------- ---------- ----------
Weighted average shares
outstanding -- diluted.................... 18,998,400 15,848,500 15,848,500
========== ========== ==========
</TABLE>
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
Plan was amended in July 1999, changing the maximum number of shares of
authorized common stock issuable upon exercise of options or other awards
granted or issued under the 1995 Plan to 1.5 million. The 1996 Non-Employee
Director stock option plan provides for a maximum of up to 25,000 shares of
common stock be served for the granting of options.
34
<PAGE> 35
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 WEIGHTED AVERAGE
FOR GRANT OF 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 AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL LIFE EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING (YEARS) PRICE EXERCISABLE 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 acquire common stock at exercise prices ranging between
$3.50 and $16.80.
At March 31, 2000 warrants to purchase 347,903 shares were outstanding at
weighted average exercise price of $9.11 per share. All warrants are vested and
expire between August 2000 and March 2003.
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 granting of option has been recognized in
the
35
<PAGE> 36
STOCKWALK.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
Consolidated Statements of Operations. Had compensation cost for these plans
been determined consistent with Statement of Financial Accounting Standards No.
123 "Accounting for Stock-Based Compensation" (SFAS 123), our pro-forma net
income and net income per common share diluted would have been adjusted to the
following proforma amounts:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
----------------------------------------
2000 1999 1998
----------- ---------- -----------
<S> <C> <C> <C> <C>
Net income As reported.............. $(1,699,900) $1,272,600 $(1,224,300)
(loss): Pro-forma................ (2,487,500) 1,232,800 (1,291,400)
Basic and diluted As reported.............. $ (0.09) $ 0.08 $ (0.08)
earnings per
share: Pro-forma................ $ (0.13) $ 0.08 $ (0.08)
</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 the grant using the
Black-Scholes option pricing model with the following weighted average
assumptions: risk free interest rates of 5.67% to 6.77% in 2000, 4.56% to 6.33%
in 1999 and 6.08% to 6.67% in 1998 expected life of 5 to 10 years for 2000, 2.5
to 5 years for 1999 and 5 years for 1998; expected volatility of 113.32% to
159.75% in 2000, 43.95% to 57.36% in 1999 and 51.85% to 54.22% in 1998.
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 Inc. and
Arnold Securities, Inc. each require a minimum of $50,000 net capital. At March
31, 1999, Stockwalk.com, Inc. 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 with six months of continuous employment who are at least 21 years
old. Employees may contribute up to 10% of their compensation to the 401(k)
plan. Employer contributions are made to the profit sharing plan at the
discretion of our Board of Directors. We did not contribute to the
profit-sharing plan in fiscal 2000 or 1998. We contributed $100,000 in fiscal
1999.
36
<PAGE> 37
STOCKWALK.COM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
We are obligated for the rental of office space, automobiles, and equipment
under noncancelable operating leases which expire at various date 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:
FISCAL YEAR ENDING MARCH 31,:
<TABLE>
<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 as of March 31, 2000 and 1999 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 $1,758,400 and $1,484,100 of notes receivable from employees
which are included in other assets as of March 31, 2000 and 1999, respectively.
The amounts consist of 41 and 33 notes at March 31, 2000 and 1999, 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
37
<PAGE> 38
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>
2000 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Amortization of leasehold improvements................... $108,300 $ 70,100
Amortization of notes receivable......................... 44,400 41,300
Deferred rent............................................ 65,000 17,100
Accrued bonuses.......................................... 74,800 11,400
Other.................................................... 57,400 --
-------- --------
349,900 139,900
Net operating loss carryforwards........................... 421,000 172,800
-------- --------
Total deferred tax assets, net of valuation allowance...... $741,100 $282,900
-------- --------
Deferred tax liabilities:
Unrealized gain on investments........................... 301,800 --
Amortization of goodwill................................. 3,500 --
-------- --------
Deferred tax liabilities................................. 305,300 --
-------- --------
Net deferred tax assets.................................... $435,800 $282,900
======== ========
</TABLE>
The income tax expense (benefit) for the fiscal years ended March 31
included the following:
<TABLE>
<CAPTION>
2000 1999 1998
--------- -------- ---------
<S> <C> <C> <C>
Federal........................................ $(698,100) $706,000 $(344,700)
State.......................................... 12,200 100,000 5,000
Deferred....................................... (152,900) 179,000 (259,300)
--------- -------- ---------
$(838,800) $985,000 $(599,000)
========= ======== =========
</TABLE>
Reconciliations of the provisions for income taxes and the amounts that
would be computed using statutory federal income tax rates for the years ended
March 31 are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
--------- -------- ---------
<S> <C> <C> <C>
Tax at statutory rate.......................... $(863,100) $769,700 $(620,400)
Tax-exempt interest, net of related expenses... 63,900 22,800 (30,800)
State taxes, net of federal tax benefit........ (240,100) 128,700 (64,000)
Non-deductible life insurance.................. 54,000 52,900 40,600
Non-deductible meals and entertainment......... 36,000 29,700 31,300
Change in valuation allowance.................. -- (95,300) --
Other.......................................... 110,500 76,500 44,300
--------- -------- ---------
$(838,800) $985,000 $(599,000)
========= ======== =========
</TABLE>
38
<PAGE> 39
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 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 purchase agreements with Kinnard Investments,
Inc. and R.J. Steichen. Under the terms of the Kinnard Investments, Inc.
agreement, we agreed to pay $6.00 per share and grant one-half share of our
common stock for approximately each of the 4.9 million outstanding shares of
Kinnard Investments, Inc. common stock. Under the terms of the R.J. Steichen
agreement we agreed to grant 4.3 million shares of our restricted common stock,
plus up to an additional 2.0 million shares based on R.J. Steichen future
operations. Both transactions are subject to regulatory and shareholder
approval. The combinations will be accounted for using the purchase method of
accounting and are expected to be completed in the second quarter of fiscal
2001.
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>
39
<PAGE> 40
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.
Our audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule 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. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
/s/ Ernst & Young LLP
Minneapolis, MN
May 3, 2000, except for Note 12,
as to which the date is June 7, 2000
40
<PAGE> 41
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Positions with the Company
---- --- --------------------------
<S> <C> <C>
Eldon C. Miller 59 Chief Executive Officer & Chairman of the Board
David B. Johnson 49 President & Director
Paul R. Kuehn 57 President of MJK and Director
Stanley D. Rahm 68 Treasurer of MJK and Director
Robert Vosburgh 46 Chief Operating Officer
Todd W. Miller 36 Chief Financial Officer
Philip T. Colton 41 Senior Vice President & General Counsel, &
Secretary
Andrew R. Guzman 49 Chief Information & Technology Officer
Randy Nitzsche 36 Chief Executive Officer of Stockwalk.com, Inc.
Frank H. Lallos 29 President of Stockwalk.com, Inc.
N. Lee Wesley 59 Director
George E. Kline 63 Director
Richard J. Nigon 52 Director
</TABLE>
The Bylaws of the Company provide that the number of directors of the
Company shall be fixed by the shareholder, subject to increase by the Board of
Directors. Currently, the authorized size of the Board of Directors is six.
The Company's directors and executive officers are as follows:
Eldon C. Miller founded Miller Securities, Inc., the Company's predecessor,
in December 1980. He has served as Chairman of the Board and as Chief Executive
Officer since the Company's inception. Prior to forming Miller Securities, Mr.
Miller was a Vice President of Miller & Schroeder Municipals for more than seven
years. Mr. Miller is a 1968 graduate of Stonier Graduate School of Banking at
Rutgers University.
David B. Johnson, the Company's 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.
41
<PAGE> 42
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.
Robert Vosburgh joined us as Chief Operating Officer on August 1, 1999. He
comes from Wells Fargo's (formerly Norwest Financial) Private Client Services
Group, where he was Senior Vice President for the Twin Cities area. He also
managed sales for the brokerage, portfolio management, trust and private banking
operations. In addition, he led Norwest's Investments & Insurance merger team
and held the post of Senior Vice President, Strategic Programs, for the
Investments and Insurance group. Mr. Vosburgh's seven years at Norwest also
included five years managing the institutional sales groups in Iowa and
Nebraska. Mr. Vosburgh is a graduate of Iowa State University (Aerospace
Engineering) and completed his master's degree and Ph.D. coursework in
Astronautical Engineering at the University of Tennessee.
Todd Miller, Chief Financial Officer and Senior Vice President of MJK's
clearing division, has been employed by Miller, Johnson & Kuehn, Inc. since
1982. He is responsible for founding MJK's clearing division. He was a member of
the NASD's District 4 Business Conduct Committee from 1996 to 1998 and served as
its Chairman during 1998. He is licensed by NASD as a Registered Representative
(Series 7), General Securities Principal (Series 24) and Financial and
Operations Principal (Series 27). Mr. Miller holds a CPA certificate from the
State of Minnesota. He received his MBA and BS degrees from the University of
Minnesota.
Philip T. Colton became Senior Vice President and General Counsel to the
Company in September 1999. Mr. Colton has served as Secretary of the Company and
its various predecessors since January 1998. Mr. Colton graduated with honors
from the University of Minnesota Law School in 1984, where he was a member and
editor of the Minnesota Law Review. Mr. Colton also served as a law clerk to
Justice Glenn E. Kelley of the Minnesota Supreme Court. For the past 15 years,
Mr. Colton practiced law at the Minneapolis law firm of Maun & Simon, PLC,
principally in the areas of corporate finance, mergers and acquisitions, and
securities and broker/dealer regulation.
Andrew R. Guzman, Chief Information and Chief Technology Officer, joined us
on September 1, 1999. He has more than 25 years of strategic, information
technology consulting and senior management experience in the financial services
industry. Mr. Guzman has managed the strategic planning, financial,
technological and project-management activities of various firms, as well as the
pursuit of new markets, joint ventures and alliances. He was instrumental in the
success of Olympic Financial (now Arcadia Financial) and other related financial
services companies. Mr. Guzman earned a Bachelor of Arts degree in Political
Science and the Sciences from Brown University. He also graduated from the
University of Virginia (McIntire School of Commerce) Graduate School of Retail
Bank Management.
Randy Nitzsche, Chief Executive Officer of the online brokerage division
(or Stockwalk.com, Inc.), 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.
42
<PAGE> 43
Frank H. Lallos, President of Stockwalk.com, Inc., Inc., joined the Company
in February 2000. Previously, he was a Senior Financial Services Analyst at
Gomez Advisors, Inc. in Lincoln, Massachusetts. At Gomez, Mr. Lallos covered
online brokerage and insurance companies and was one of the firm's personal
finance domain experts. Prior to his tenure at Gomez Advisors, Mr. Lallos was
Director of Finance for Fidelity Investments' customer marketing and development
group. He holds a master's degree in business administration from the William E.
Simon Graduate School of Business Administration at the University of Rochester
(NY). He also holds a bachelor's degree in economics and political science from
the same university. Additionally, he has a Chartered Financial Analyst (CFA)
designation and is a member of the Phi Beta Kappa society.
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 purpose of developing an extensive web
hosting business. Prior to joining Dantis, Inc., Mr. Nigon was with Ernst &
Young LLP for 30 years and a partner for the past 18 years. For a three-year
period at Ernst & Young LLP, Mr. Nigon was head of the Entrepreneurial Services
Group, and focused on serving venture-backed start-up organizations as well as
large publicly traded retail and consumer product manufacturing companies. Mr.
Nigon is a graduate of Saint John's University of Minnesota.
There are no arrangements or understandings among any of the executive
officers of the Registrant and any other person (not and officer or director of
the Registrant acting as such) pursuant to which any of the executive officers
were selected as an officer of the Registrant.
COMPLIANCE WITH SECTION 16 (A)
Section 16 (a) of the 1934 Act requires the Company's directors, executive
officers and persons who own more than ten percent of the Common Stock of the
Company to file with the Securities and Exchange Commission ("Commission")
initial reports of beneficial ownership and reports of changes in beneficial
ownership of common shares of the Company. Directors, officers, and greater than
ten percent shareholders are required by the regulations of the Commission to
furnish the Company with copies of all Section 16 (a) reports they file. The
Company's knowledge, based solely on review of the copies of
43
<PAGE> 44
such reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended March 31, 2000, all Form 3,
Form 4, and Form 5 filing requirements were met, except Form 4 was filed late
for George Kline for the months of July, August and October, Randy Nitzsche for
the month of December and N. Lee. Wesley for January.
ITEM 11: EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" appearing in the Registrant's
proxy statement for the annual meeting of stockholders to be held on or about
September 12, 2000, sets forth certain information with respect to the
compensation of management of the Registrant and the required information is
incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The sections entitled "Security ownership of Certain Beneficial Owners,
Directors, and Executive Officers" appearing the Registrant's proxy statement
for the annual meeting of stockholders to be held on or about September 12,
2000, set forth certain information with respect to ownership of the
Registrant's Common Stock and the required information is incorporated herein by
reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Transactions" appearing in the Registrant's
proxy statement for the annual meeting of stockholders to be held on or about
September 12, 2000, sets forth certain information with respect to certain
business relationships and transactions between the Registrant, its directors
and officers, and the required information is incorporated herein by reference.
PART IV
ITEM 14: EXHIBITS AND REPORTS ON FORM 8-K.
(a.) The following documents are filed as a part of this Report:
1. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The consolidated financial statements filed as part of this report are
listed on the Index to Financial Statements on Page 22.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
44
<PAGE> 45
STOCKWALK.COM GROUP, INC.
(PARENT COMPANY)
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH 31 MARCH 31
2000 1999
----------- -----------
<S> <C> <C>
ASSETS
Cash.................................................. $ 2,329,300 $ 800
Investment in subsidiaries, at cost................... 15,925,600 10,616,200
Advances to subsidiaries.............................. 230,700 --
Notes receivable...................................... 742,200 --
Goodwill, less accumulated amortization of:
2000 -- $109,500.................................... 5,093,700 --
Other assets.......................................... 1,929,900 --
----------- -----------
TOTAL ASSETS........................................ $26,251,400 $10,617,000
=========== ===========
LIABILITIES
Accounts payable and accrued expenses................. $ 304,700 $ --
Notes payable......................................... 1,294,400 3,600,000
TOTAL LIABILITIES................................... $ 1,599,100 $ 3,600,000
SHAREHOLDERS' EQUITY
Common stock, 2000 -- $.04 par value; 1999 -- $.01
par value
Authorized shares: 50,000,000
Issued and outstanding 2000 -- 21,575,313;
1999 -- 5,000,000.............................. 863,000 50,000
Paid-in capital....................................... 25,440,900 2,491,000
Retained earnings (deficit) and other equity.......... (1,651,600) 4,476,000
----------- -----------
TOTAL SHAREHOLDER'S EQUITY.......................... $24,652,300 $ 7,017,000
----------- -----------
TOTAL LIABILITIES & SHAREHOLDER'S EQUITY............ $26,251,400 $10,617,000
=========== ===========
</TABLE>
See accompanying notes to the parent company financial statements.
45
<PAGE> 46
STOCKWALK.COM GROUP, INC.
(PARENT COMPANY)
STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED
<TABLE>
<CAPTION>
MARCH 31 MARCH 31 MARCH 31
2000 1999 1998
----------- -------- --------
<S> <C> <C> <C>
REVENUES:
Trading profits.......................... $ (161,600) $ -- $ --
Interest................................. 46,100 900 --
Management fees............................. 1,104,200 325,000 270,900
Investment banking....................... -- -- --
Clearing fees............................ -- -- --
Other income............................. 72,900 250,000 --
----------- -------- --------
TOTAL REVENUES................................ $ 1,061,600 $575,900 $270,900
EXPENSES:
Employee compensation and benefits....... $ 1,658,000 $ -- $ --
Professional fees........................ 373,700 2,100 --
Occupancy and equipment.................. 161,800 -- --
Communication............................ 117,400 -- --
Interest................................. 34,200 327,100 251,200
Other expense............................ 448,200 2,200 18,400
----------- -------- --------
TOTAL EXPENSES................................ $ 2,793,300 $331,400 $269,600
INCOME (LOSS) BEFORE INCOME TAXES............. (1,731,700) 244,500 1,300
Income tax expense (benefit).................. 610,900 -- --
----------- -------- --------
Net income (loss)............................. $(1,120,800) $244,500 $ 1,300
=========== ======== ========
</TABLE>
See accompanying notes to the parent company financial statements
46
<PAGE> 47
STOCKWALK.COM GROUP, INC.
(PARENT COMPANY)
STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED
<TABLE>
<CAPTION>
MARCH 31 MARCH 31 MARCH 31
2000 1999 1998
------------ ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)....................... $ (1,120,800) $ 244,500 $ 1,300
Adjustments to reconcile net income
(loss) to net cash used for operating
activities:........................... -- --
Depreciation and amortization......... 109,500 -- --
Changes in assets and liabilities:...... -- --
Receivables........................... (742,200) -- --
Equity in net earnings of
subsidiaries....................... (579,100) 1,278,900 (1,222,600)
Deposits at clearing organizations.... -- -- --
Trading securities.................... -- -- --
Other assets and liabilities.......... (1,624,400) -- --
------------ ----------- -----------
Net cash used for operating
activities............................ $ (3,957,000) $ 1,523,400 $(1,221,300)
INVESTING ACTIVITIES
Acquisition of certain assets of broker
dealers and license agreements........ (5,203,200) --
Investment in Subsidiary................ (5,309,400) (1,123,900) (2,777,400)
Advances to subsidiaries................ $ (230,700) $ -- $ --
------------ ----------- -----------
Net cash provided by (used for)
investing activities.................. $(10,743,300) $(1,123,900) $(2,777,400)
FINANCING ACTIVITIES
Increase (decrease) in short-term
borrowings............................ -- -- --
Issuance of notes payable............... -- -- 4,000,000
Payments on notes payable............... (2,305,600) (400,000) --
Restructuring parent company............ (4,427,700) -- --
Issuance of common stock................ 23,762,100 -- --
------------ ----------- -----------
Net cash provided by (used for)
financing activities.................. $ 17,028,800 $ (400,000) $ 4,000,000
Net increase (decrease) in cash......... 2,328,500 (500) 1,300
Cash at beginning of period............. 800 1,300 --
------------ ----------- -----------
Cash at end of period................... $ 2,329,300 $ 800 $ 1,300
============ =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements
47
<PAGE> 48
STOCKWALK.COM GROUP, INC.
(PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL INFORMATION
A. The condensed financial statements of Stockwalk.com Group, Inc. (Parent
Company) should be read in conjunction with the consolidated financial
statements of Stockwalk.com Group, Inc. and the notes thereto beginning in
Item 8. MJK Holdings, Inc. was formed in June 1997 as a holding company for
Miller Johnson & Kuehn, Inc. and it's clearing division. On July 7, 1999,
then privately-owned MJK Holdings, Inc. and publicly-held NM Holdings, Inc.
completed a merger whereby MJK Holdings, Inc. 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
Miller Johnson & Kuehn, Inc., MJK Capital Corporation, MJK Holdings, Inc.,
MJK Management Services, Inc., Stockwalk.com, Inc. and Arnold Securities,
Inc. Miller, Johnson & Kuehn, Inc., Stockwalk.com, Inc. and Arnold
Securities, Inc. are registered as broker-dealers with the SEC and are
members of the NASD and SIPC. The results for the year ended March 2000
represent the results of Stockwalk.com Group, Inc. Periods prior to March
2000 represent the results of MJK Holdings, Inc.
B. Certain prior-year amounts in the Parent Company's financial statements have
been reclassified to conform to the 2000 presentation. The reclassifications
include restating prior-year amounts related to the Parent Company's
capitalization of its former operating subsidiaries as defined above.
C. Investments in subsidiaries are carried at cost plus equity in undistributed
earnings. See Note 7 to Consolidated Financial Statements for information
regarding net capital requirements of the broker-dealer subsidiaries which
could result in restriction on the ability of the subsidiaries to transfer
funds to the parent in the form of loans, advances or cash dividends.
D. Assets of Miller Johnson & Kuehn, Inc. a subsidiary of the Parent Company
included cash segregated for the exclusive benefit of customers of $83.0 and
$73.1 million at March 2000 and 1999 respectively.
E. No dividends were paid to the Parent Company by its wholly-owned
subsidiaries in 2000. The Parent Company received $400,000 of dividends from
Miller, Johnson & Kuehn, Inc. in 1999 in connection with principal payments
on the with a bank note entered by the Parent Company.
48
<PAGE> 49
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <C> <S>
2.1 Agreement and Plan of Merger, dated June 5, 2000, by and
between Kinnard Investments, Inc., Stockwalk.com Group, Inc.
and SW Acquisition, Inc. (included as Annex A to the proxy
statement/prospectus which is a part of this registration
statement) (1)
2.2 Agreement and Plan of Merger, dated June 5, 2000, by and
between R.J. Steichen & Company, Stockwalk.com Group, Inc.
and SCG Acquisition Corporation (2)
3.1 Third Amended and Restated Articles of Incorporation (3)
3.2 Restated Bylaws (4)
10.1 Employment Agreement, dated August 1, 1999, by and between
Stockwalk.com Group, Inc. and Robert J. Vosburgh (5)
10.2 Employment Agreement, dated September 1, 1999, by and
between Stockwalk.com Group, Inc. and Andrew R. Guzman (6)
10.3 Employment Agreement, dated September 27, 1999, by and
between Stockwalk.com Group, Inc. and Philip T. Colton (7)
10.4 Amendment No. 1 to Employment Agreement, dated November 12,
1999, by and between Stockwalk.com Group, Inc. and Robert J.
Vosburgh (8)
10.5 Employment Agreement, dated February 7, 2000, by and between
Stockwalk.com Group, Inc. and Frank H. Lallos (9)
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
</TABLE>
-------------------------
(#) Previously filed.
(1) Incorporated by reference to Exhibit 2.7 to the Registration Statement on
Form S-2 (Registration No. 333-35544) filed on June 23, 2000.
(2) Incorporated by reference to Exhibit 2.6 to the Registration Statement on
Form S-2 (Registration No. 333-35544) filed on June 23, 2000.
(3) Incorporated by reference to the Definitive Schedule 14A (Proxy Statement)
(Commission File No. 0-22247) filed on June 14, 1999.
(4) Incorporated by reference to Exhibit 3.2 to the Registration Statement on
Form S-2 (Registration No. 333-09999) filed on August 12, 1996.
(5) Incorporated by reference to Exhibit 10.1 to Stockwalk's Quarterly Report
on Form 10-Q (Commission File No. 0-22247) for the quarter ended September
30, 1999.
(6) Incorporated by reference to Exhibit 10.2 to Stockwalk's Quarterly Report
on Form 10-Q (Commission File No. 0-22247) for the quarter ended September
30, 1999.
(7) Incorporated by reference to Exhibit 10.3 to Stockwalk's Quarterly Report
on Form 10-Q (Commission File No. 0-22247) for the quarter ended September
30, 1999.
49
<PAGE> 50
(8) Incorporated by reference to Exhibit 10.1 to Stockwalk's Quarterly Report
on Form 10-Q (Commission File No. 0-22247) for the quarter ended December
31, 1999.
(9) Incorporated by reference to Exhibit 10.5 to the Registration Statement on
Form S-2 (Registration No. 333-35544) filed on June 23, 2000.
(b) Reports on Form 8-K
None
50
<PAGE> 51
SIGNATURES*
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
Dated:
By: /s/ ELDON C. MILLER
-------------------------------------
Eldon C. Miller
Its: Chairman of the Board and Date: June 28, 2000
Chief Executive Officer
</TABLE>
In accordance with the Securities Exchange Act of 1934, this report has
been sign below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ELDON C. MILLER Chairman of the Board and June 28, 2000
--------------------------------------- Chief Executive Officer
Eldon C. Miller
/s/ DAVID B. JOHNSON President and Director June 28, 2000
---------------------------------------
David B. Johnson
/s/ PAUL R. KUEHN Director June 28, 2000
---------------------------------------
Paul R. Kuehn
/s/ STANLEY D. RAHM Director June 28, 2000
---------------------------------------
Stanley D. Rahm
/s/ TODD W. MILLER Chief Financial Officer June 28, 2000
---------------------------------------
Todd W. Miller
/s/ JEFFREY L. HOUDEK Principal Accounting Officer June 28, 2000
---------------------------------------
Jeffrey L. Houdek
/s/ N. LEE WESLEY Director June 28, 2000
---------------------------------------
N. Lee Wesley
/s/ GEORGE E. KLINE Director June 28, 2000
---------------------------------------
George E. Kline
/s/ RICHARD J. NIGON Director June 28, 2000
---------------------------------------
Richard J. Nigon
</TABLE>
51
