<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 1, 1998
REGISTRATION NO. 333-51653
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
KNIGHT/TRIMARK GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 6211 52-2096335
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
OF INCORPORATION OR
ORGANIZATION)
NEWPORT TOWER, 29TH FLOOR 525 WASHINGTON BOULEVARD JERSEY CITY, NEW JERSEY
07310 (201) 222-9400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
MICHAEL T. DORSEY, ESQ. SENIOR VICE PRESIDENT AND GENERAL COUNSEL
KNIGHT/TRIMARK GROUP, INC. NEWPORT TOWER, 29TH FLOOR 525 WASHINGTON BOULEVARD
JERSEY CITY, NEW JERSEY 07310 (201) 222-9400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
MATTHEW J. MALLOW, ESQ. SKADDEN, ALEXANDER D. LYNCH, ESQ. BABAK YAGHMAIE,
ARPS, SLATE, MEAGHER & FLOM LLP919 ESQ.BROBECK, PHLEGER & HARRISON LLP1633
THIRD AVENUENEW YORK, NEW YORK BROADWAY, 47TH FLOORNEW YORK, NEW YORK
10022 (212) 735-3000 10019(212) 581-1600
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If delivery of the prospectus is expected to be made pursuant to rule 434,
please check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 1, 1998
[LOGO] KNIGHT/TRIMARK GROUP, INC.
10,000,000 SHARES
CLASS A COMMON STOCK
-----------
Of the 10,000,000 shares of Class A Common Stock offered hereby, 8,688,246
shares are being issued and sold by Knight/Trimark Group, Inc. (the "Company")
and 1,311,754 shares are being sold by a certain stockholder of the Company
(the "Selling Stockholder"). See "Principal and Selling Stockholders." The
Company will not receive any of the proceeds from the sale of shares by the
Selling Stockholder. Prior to this offering, there has been no public market
for the Class A Common Stock of the Company. It is currently estimated that the
initial public offering price will be between $14.00 and $16.00 per share. See
"Underwriting" for a discussion of factors considered in determining the
initial public offering price. The Company has applied to have the shares of
its Class A Common Stock approved for quotation in The Nasdaq Stock Market
("NASDAQ") as a National Market issue under the symbol "NITE."
The Company's outstanding capital stock is comprised of Class A Common Stock
and Class B Common Stock. The rights of holders of shares of Common Stock are
identical in all respects, except that the holders of Class B Common Stock are
not entitled to vote. Upon sale or transfer, shares of Class B are exchangeable
for shares of Class A Common Stock.
-----------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO THE SELLING
PUBLIC COMMISSIONS(1) COMPANY(2)(3) STOCKHOLDER
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.................... $ $ $ $
- --------------------------------------------------------------------------------
Total(3)..................... $ $ $ $
</TABLE>
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(1) The Company and the Selling Stockholder have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting offering expenses payable by the Company estimated at
$1,500,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 1,500,000 shares of Class A Common Stock on the same terms
as set forth above, solely to cover over-allotments, if any. If such option
is exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, Proceeds to Company and Proceeds to the Selling Stockholder
will be $ , $ , $ and $ , respectively. See "Underwriting."
-----------
The Class A Common Stock is offered by the Underwriters as stated herein
subject to receipt and acceptance by them and subject to their right to reject
any order in whole or in part. It is expected that delivery of such shares will
be made through the offices of BancAmerica Robertson Stephens, San Francisco,
California, on or about , 1998.
BANCAMERICA ROBERTSON STEPHENS
MERRILL LYNCH & CO.
PAINEWEBBER INCORPORATED
ABN AMRO INCORPORATED
SOUTHWEST SECURITIES
The date of this Prospectus is June , 1998
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION
WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.................................................................. 3
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Consolidated Financial Data..................................... 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 35
Management............................................................... 48
Certain Transactions..................................................... 57
Principal and Selling Stockholders....................................... 60
Description of Capital Stock............................................. 61
Shares Eligible for Future Sale.......................................... 64
Underwriting............................................................. 66
Legal Matters............................................................ 68
Experts.................................................................. 68
Additional Information................................................... 68
Index to Consolidated Financial Statements............................... F-1
</TABLE>
----------------
The Company intends to furnish to all of its stockholders an annual report
containing consolidated financial statements audited by its independent
accountants for each fiscal year and quarterly reports containing unaudited
financial data for each of the first three quarters of each fiscal year.
The Company was incorporated in Delaware in April 1998 under the name
Knight/Trimark Group, Inc. The Company's principal executive offices are
located at Newport Tower, 29th Floor, 525 Washington Boulevard, Jersey City,
New Jersey 07310, and its telephone number is (201) 222-9400.
Knight/Trimark, Knight, Trimark, e.Knight and eKnight, among other marks,
are common law trademarks of the Company. This Prospectus also includes
trademarks and tradenames of entities other than the Company.
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK OF THE COMPANY, INCLUDING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information included in "Risk Factors" and the Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Prospectus. This
Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in "Risk Factors" and elsewhere in this Prospectus.
Unless otherwise indicated, (i) references in this Prospectus to the "Company"
mean, as appropriate, prior to the Reorganization (as defined below),
Roundtable Partners, L.L.C. and its subsidiaries, on a consolidated basis and,
after the Reorganization, Knight/Trimark Group, Inc. and its subsidiaries, on a
consolidated basis and (ii) references to "Common Stock" mean the Class A
Common Stock and the Class B Common Stock.
THE COMPANY
Knight/Trimark Group, Inc. is a leading market maker in NASDAQ securities,
other over-the-counter ("OTC") equity securities, and equity securities listed
on the New York Stock Exchange ("NYSE") and the American Stock Exchange
("AMEX") in the Third Market. The Company has attained this leadership position
by providing best execution services to broker-dealer and institutional
customers through its sophisticated trading systems and proprietary methods.
Through its wholly-owned subsidiary, Knight Securities, Inc. ("Knight"), the
Company makes markets in approximately 4,200 equity securities in NASDAQ and on
the OTC Bulletin Board of the National Association of Securities Dealers, Inc.
("NASD"). The Company, through its wholly-owned subsidiary, Trimark Securities,
Inc. ("Trimark"), makes markets in all NYSE- and AMEX-listed equity securities
in the Third Market.
Since the beginning of 1997, Knight and Trimark have significantly increased
their market share of trading volume in each of their respective markets.
According to The AutEx Group ("AutEx"), Knight's advertised share volume in
NASDAQ increased from 614.7 million shares representing 4.4% of total market
share (or a rank of 6th overall) for the month of January 1997, to 1.2 billion
shares representing 8.1% of total market share (or a rank of 2nd overall) for
the month of December 1997, to 1.9 billion shares representing 9.9% of total
market share (or a rank of 1st overall) for the month of March 1998. According
to the NASD, Trimark's reported share volume of the NYSE-listed securities
increased from 234.2 million shares representing 21.2% of total NYSE Third
Market volume (or a rank of 1st overall) for the month of January 1997, to
338.4 million shares representing 30.5% of total NYSE Third Market volume (or a
rank of 1st overall) for the month of December 1997, to 445.6 million shares
representing 33.1% of total NYSE Third Market volume (or a rank of 1st overall)
for the month of March 1998. Trimark's reported share volume of AMEX-listed
securities increased from 40.2 million shares representing 51.4% of total AMEX
Third Market volume (or a rank of 1st overall) for the month of January 1997,
to 78.7 million shares representing 66.4% of total AMEX Third Market volume (or
a rank of 1st overall) for the month of December 1997, to 80.4 million shares
representing 68.9% of total AMEX Third Market volume (or a rank of 1st overall)
for the month of March 1998.
During recent years, the U.S. market for equity securities has experienced
dramatic growth in trading volumes. The average daily volume of securities
traded in NASDAQ increased from 225.0 million shares in December 1992 to 678.5
million shares in December 1997. The average daily volume of securities traded
on the NYSE increased from 222.2 million shares in December 1992 to 546.9
million shares in December 1997. The average daily volume of securities traded
on the AMEX increased from 14.2 million shares in December 1992 to 28.0 million
shares in December 1997. During this period, the average daily trading volume
in the Third Market, which consists of trading NYSE- and AMEX-listed securities
in the OTC market, also increased significantly. The increase in trading volume
has resulted from a number of factors, including the growth of cash flows into
equity-based mutual funds, historic high returns in U.S. equity markets, the
emergence and market acceptance of discount brokers, technological innovations,
such as the emergence of the Internet, and reduced transaction costs.
3
<PAGE>
Changes in regulations governing the securities market, and to a lesser
extent, the move from securities being quoted in sixteenths rather than eighths
of a dollar, have dramatically reduced average spreads between bid and ask
prices. As a result, traditional brokerage firms are increasingly electing to
focus on their core competencies and to outsource their market-making functions
to independent market makers. In addition, Internet brokers, who are handling
increased trading volume, also utilize independent market makers. According to
AutEx, in March 1998, the three largest independent market makers represented a
combined market share of 25.4% of the trading volumes of OTC equity securities,
up from 17.2% in March 1997. Similarly, according to the NASD, in March 1998
the three largest Third Market trading firms represented a combined market
share of 58% of the Third Market volume in NYSE equity securities compared to
42% in June 1997. The three largest Third Market trading firms in AMEX listed
securities represented a combined market share of 75% in March 1998 compared to
55% in June 1997. While a large volume of trading provides an opportunity to
spread fixed costs over a larger number of trades, net profit per trade has
declined. As a result, certain independent market makers are seeking new
trading methodologies to identify and take advantage of the profit
opportunities represented by each trade. These market makers are also seeking
to increase order flow in an effort to increase the number of trades they
handle, which, in turn, will provide increased trading profit opportunities.
These market makers require efficient and sophisticated systems and risk
management practices and personnel with the requisite expertise to deliver
superior trade execution and customer service, while handling increased order
flow and maintaining low costs per trade.
The Company provides best execution services to broker-dealer and
institutional customers through its sophisticated trading systems and
proprietary methods. The Company is committed to providing a value-added
execution methodology that emphasizes automated execution and rule compliance,
real-time information access to customers, and pricing plus liquidity
advantages based upon the Company's willingness to commit capital. The Company
believes that its highly skilled, experienced and entrepreneurial workforce is
uniquely positioned to provide high quality customer service. In addition, the
Company is currently implementing its proprietary electronic communications
gateway product, "e.Knight," which enables broker-dealer and institutional
customers to access the Knight and Trimark trading systems from their desktops
through the Internet and other electronic communications gateways. The Company
has made significant investments in technology to enable the efficient
processing of large volumes of order flow, without diminishing speed of
execution. The Company's systems are designed to process up to 500,000 trades
per day and in March, 1998, handled a combined average of 134,000 trades per
day. The Company's trading methodology focuses on the dynamic, real-time
analysis of market activity and price movements, which enables the Company to
better manage risk and quickly adjust its trading strategy in an effort to
maximize its trading profits.
The Company's goal is to maintain and enhance its leadership position in the
market-making industry by (i) continuing to invest in leading technologies to
ensure that it has the capability to process greater trading volumes, (ii)
increasing order flow to enhance its position as a leading market maker and to
create additional profit opportunities, (iii) accelerating its penetration of
the market for institutional investors, which it believes provides an
opportunity for growth and offers higher profit margins, (iv) investing in
human capital, by aggressively recruiting and retaining high caliber personnel
to deliver best execution and high quality customer service, (v) developing new
services that address evolving customer and technological requirements to
establish new customer relationships, and (vi) creating customer awareness of
the link between Knight and Trimark to leverage customer satisfaction in one
market to increased use of the Company's services in other markets.
The Company's marketing strategy is to continue to differentiate itself from
competitors by enhancing its reputation and brand as the provider of highest
quality execution solutions with superior customer service. The Company's
target customers are national and regional full-service broker-dealers,
electronic discount brokers and institutional investors. Certain of the
Company's customers include Ameritrade, Brown & Company, Discover Brokerage,
E*TRADE, Merrill Lynch, PaineWebber, Waterhouse Securities, and many leading
financial institutions.
4
<PAGE>
CERTAIN TRANSACTIONS AND RELATIONSHIPS
The Reorganization and Certain Transactions. The Company was organized in
April 1998 for the purpose of succeeding to the business of Roundtable
Partners, L.L.C. (the "LLC"). Concurrent with the closing of the Offering,
based on an assumed initial public offering price of $15.00 per share, all of
the member interests of the LLC will be exchanged for 41,000,000 shares of
Common Stock of the Company. Certain members of the LLC, including management,
who have so elected, will receive 1,741,581 additional shares of Class A Common
Stock valued at the initial public offering price with respect to their share
of the undistributed income of the LLC through March 31, 1998 (the
"Undistributed Profits"). Management of the Company has elected to receive
shares of Class A Common Stock for all of its Undistributed Profits. The
Company will receive no additional consideration in connection with such
conversion of member interests into shares of Common Stock. In connection with
the exchange, Knight will become the successor entity to Knight Securities,
L.P., and Trimark will become the successor entity to Trimark Securities, L.P.
(the foregoing transactions, collectively, shall be referred to herein as the
"Reorganization"). Prior to the effective date of the Registration Statement of
which this Prospectus is a part, certain non-management members of the LLC, who
have so elected, will receive a cash distribution of all or a portion of their
Undistributed Profits. Concurrently with such distribution, the LLC intends to
make a cash distribution to each member of an estimate of its share of the
total amount of profits of the LLC accruing between April 1, 1998 and the
closing of this Offering.
Transactions with Affiliates. Immediately prior to the Reorganization, 60% of
the member interests of the LLC will be owned by a consortium of 27 broker-
dealers or their affiliates. Additionally, Brown & Company Securities
Corporation ("Brown"), a major customer of the Company, held subordinated debt
of the LLC and an option to purchase member interests in the LLC (the "Brown
Option"). After the closing of this Offering, such broker-dealer owners,
including Brown, will own 48.5% of the Company's Common Stock (47.2% if the
Underwriters' over-allotment option is exercised in full). For the period from
March 27, 1995 through December 31, 1995, the years ended December 31, 1996 and
1997, and the three months ended March 31, 1998, the broker-dealer owners and
subordinated note holders, were the source of 31.3%, 35.1%, 39.8%, and 41.3%,
respectively of the Company's total order flow. For the period from March 27,
1995 through December 31, 1995, the years ended December 31, 1996 and 1997, and
the three months ended March 31, 1998, aggregate payments by the Company to its
broker-dealer owners and subordinated note holders for order flow and aggregate
profit distributions to broker-dealer owners equaled $14.4 million and $1.7
million, $46.4 million and $10.6 million, $50.7 million and $13.4 million, and
$11.3 million and $5.0 million, respectively. See "Certain Transactions."
Pursuant to the limited liability company agreement of the LLC, its broker-
dealer owners have partially shared in the LLC profits in proportion to their
equity interest and partially in proportion to the quantity of order flow they
have directed to the Company. This arrangement will be discontinued upon
consummation of the Reorganization. The broker-dealer owners will no longer
receive any special inducements to send order flow to the Company and will not
be contractually or otherwise obligated to provide the Company with any order
flow in the future. See "Risk Factors--Risks Associated with Change of
Ownership Structure."
THE OFFERING
<TABLE>
<S> <C>
Class A Common Stock Offered by the Com- 8,688,246 shares
pany....................................
Class A Common Stock Offered by the Sell- 1,311,754 shares
ing Stockholder.........................
Common Stock to be Outstanding after the
Offering:
Class A Common Stock................. 47,484,299 shares
Class B Common Stock................. 3,945,528 shares
Total.............................. 51,429,827 shares
Use of Proceeds.......................... To pay for the redemption of all
outstanding shares of Preferred B
Units, for working capital and for
general corporate purposes. See "Use
of Proceeds."
Proposed NASDAQ National Market Symbol... NITE
</TABLE>
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 27,
THROUGH YEAR ENDED THREE MONTHS
DECEMBER 31, DECEMBER 31, ENDED MARCH 31,
------------ ----------------- ---------------
1995 1996 1997 1997 1998
------------ -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
INCOME DATA:
Total revenues................. $69,812 $185,177 $226,666 $50,979 $63,533
Payments for order flow........ 25,994 69,829 66,912 18,129 16,257
Execution and clearance fees... 12,710 25,837 32,069 6,411 10,241
Employee compensation and bene-
fits.......................... 12,151 39,494 57,717 12,013 16,168
All other expenses............. 7,616 13,257 19,891 4,006 6,083
------- -------- -------- ------- -------
Total expenses................. 58,471 148,417 176,589 40,559 48,749
------- -------- -------- ------- -------
Income before income taxes..... 11,341 36,760 50,077 10,420 14,784
Pro forma income tax ex-
pense(1)...................... 5,217 15,807 21,533 4,481 6,357
------- -------- -------- ------- -------
Pro forma net income........... $ 6,124 $ 20,953 $ 28,544 $ 5,939 $ 8,427
======= ======== ======== ======= =======
Pro forma basic and diluted
earnings per share............ $ 0.67 $ 0.20
======== =======
Shares used to compute per
share data(2)................. 42,742 42,742
======== =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------------------------
AS
ACTUAL PRO FORMA(3) ADJUSTED(4)
-------- ------------ -----------
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF FINANCIAL
CONDITION DATA:
Cash and cash equivalents................... $ 5,429 $ 5,429 $111,506
Securities owned, at market value .......... 63,490 63,490 63,490
Receivable from clearing brokers............ 78,119 78,119 78,119
Total assets................................ 171,073 171,073 277,150
Securities sold, not yet purchased, at mar-
ket value.................................. 54,581 54,581 54,581
Distributions on Common Units payable to
members.................................... 8,767 35,288 35,288
Mandatorily Redeemable Preferred Units...... 27,484 13,847 --
Owners' equity.............................. 59,990 33,468 153,893
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 27,
THROUGH YEAR ENDED THREE MONTHS
DECEMBER 31, DECEMBER 31, ENDED MARCH 31,
------------ ----------------------- ---------------------
1995 1996 1997 1997 1998
------------ ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
OTHER OPERATING DATA:
Total shares traded..... 4,741,868 10,757,930 18,122,830 3,392,640 7,406,164
Total trades executed... 4,993 11,598 20,264 3,780 7,572
Average daily
trades(5).............. 26 46 80 63 124
Average daily net trad-
ing revenue(6)......... $ 356 $ 724 $ 888 $ 841 $ 1,033
</TABLE>
- --------
(1) Pro forma income tax expense was computed based on an effective tax rate of
46%, 43% and 43%, respectively, for the periods ended December 31, 1995,
1996 and 1997, and 43% for the first three months ended March 31, 1997 and
1998.
(2) Shares used to compute per share data represent Common Stock outstanding
immediately after the Reorganization and the exercise of the Brown Option,
but before the Offering.
(3) Pro forma to give effect to the Reorganization and the redemption of the
Preferred A Units and the redemption of a portion of the Preferred B Units.
(4) As adjusted to reflect the sale of 8,688,246 shares of Class A Common Stock
offered hereby at an assumed initial public offering price of $15.00 per
share and the application of the estimated net proceeds therefrom, and the
exercise of the Brown Option. See "Use of Proceeds" and "Capitalization."
(5) Average daily trades was computed by dividing total trades executed by the
aggregate number of trading days in each respective period.
(6) Average daily net trading revenue was computed by dividing net trading
revenue by the aggregate number of trading days in each respective period.
Except as otherwise indicated, all information in this Prospectus assumes (i)
no exercise of the Underwriters' over-allotment option, (ii) the consummation
of the Reorganization, (iii) the exercise of the Brown Option and the issuance
of 394,887 shares of Class A Common Stock therefor (the "Option Exercise") and
(iv) the filing of the Amended and Restated Certificate of Incorporation of the
Company to effect an increase in the Company's authorized capital stock to
200,000,000 shares of Class A Common Stock, 20,000,000 shares of Class B Common
Stock and 20,000,000 shares of Preferred Stock.
6
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements and from the results
historically experienced as a result of certain factors, including those in
the following risk factors and elsewhere in this Prospectus. In addition to
the other information contained in this Prospectus, the following risk factors
should be considered carefully in evaluating the Company and its business
before purchasing shares of the Class A Common Stock offered hereby.
RISKS ASSOCIATED WITH THE SECURITIES BUSINESS GENERALLY
The securities industry has undergone several fundamental changes as a
result of new regulation at the federal and state level, the emergence of
electronic discount brokers, the increased prominence of institutional
investors, consolidation among firms in the securities industry and the
increased use of technology. These changes have resulted in an increase in the
volume of equity securities traded in the U.S. equity markets and a general
decrease in the spreads market makers receive. There can be no assurance that
the spreads market makers receive upon execution of trades in equity
securities will not continue to decrease in the future. A substantial portion
of the Company's revenues are derived from market-making activities relating
to securities that trade in NASDAQ. In the past, NASDAQ has taken regulatory
actions designed to reduce spreads between bid and ask prices for securities.
NASDAQ, NYSE and AMEX are currently examining proposed regulations pursuant to
which securities will trade in decimals rather than in fractions. The adoption
of such proposed regulations would likely result in a further decrease in
spreads between bid and ask prices, which could make the execution of trades
and market making less profitable. Any further decline in the spreads that
market makers receive in trading equity securities could have a material
adverse effect on the Company's business, financial condition and operating
results.
The Company's volume of market-making activities also depends on the number
and size of new equity offerings and aftermarket trading for such securities.
The market for equity offerings has historically experienced significant
volatility not only in the number and size of equity offerings, but also in
the aftermarket trading volume and prices of newly issued securities. The
number and size of equity offerings may decline during periods of market
uncertainty occasioned by concerns over, among other things, inflation, rising
interest rates and related economic issues as well as a slowdown or reversal
of cash flows by mutual funds and other institutional investors into the U.S.
equity markets. The recent demand for new equity offerings has been driven in
part by mutual funds and other institutional investors. A decline in cash
flows into the U.S. equity markets or a slowdown in investment activity by
mutual funds and other institutional investors may have an adverse effect on
the securities markets generally and could result in lower revenues from the
Company's market-making activities. Any reduction in revenues resulting from a
decline in the number and size of new equity offerings or the aftermarket
trading volume of such offerings could have a material adverse effect on the
Company's business, financial condition and operating results.
The securities business is also subject to various other risks, including
customer default, employees' misconduct, errors and omissions and litigation.
Losses associated with these risks could have a material adverse effect on the
Company's business, financial condition and operating results.
RISKS ASSOCIATED WITH CHANGE OF OWNERSHIP STRUCTURE
The Company has historically derived a substantial portion of its order flow
from its broker-dealer owners. In the years ended December 31, 1996, 1997 and
the three months ended March 31, 1998, order flow from broker-dealer owners
and subordinated note holders represented 35.1%, 39.8% and 41.3%, of the
Company's total order flow, respectively. The Company's broker-dealer owners
have shared in profits partially in proportion to their equity interest and
partially in proportion to the quantity of order flow they have directed to
the Company. This arrangement will be discontinued upon consummation of the
Reorganization.
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The Company's broker-dealer owners are not contractually or otherwise
obligated to provide the Company with any order flow, and after the
Reorganization may no longer have sufficient inducement to do so. There can be
no assurance that the absence of such incentives will not cause the Company's
broker-dealer owners to reduce or discontinue the level of order flow they
direct to the Company in the future. The loss of, or a significant reduction
of, order flow from such broker-dealer owners could have a material adverse
effect on the Company's business, financial condition and operating results.
See "Certain Transactions--The Reorganization."
GOVERNMENT REGULATION
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. In addition, the U.S. Securities
and Exchange Commission (the "SEC"), the NASD, other self-regulatory
organizations ("SROs"), such as the various stock exchanges, and other
regulatory bodies, such as state securities commissions, require strict
compliance with their respective rules and regulations. As a matter of public
policy, regulatory bodies are charged with safeguarding the integrity of the
securities and other financial markets and with protecting the interests of
customers participating in those markets, not protecting creditors or
stockholders of market makers. Market makers are subject to regulation
concerning certain aspects of their business, including trade practices,
capital structure, record retention and the conduct of directors, officers and
employees. Failure to comply with any of these laws, rules or regulations
could result in censure, fines, the issuance of cease-and-desist orders or the
suspension or disqualification of its directors, officers or employees, and
other adverse consequences, which could have a material adverse effect on the
Company's business, financial condition and operating results. The Company and
certain of its officers and other employees have, in the past, been subject to
claims arising from the violation of such laws, rules and regulations, which
resulted in the payment of fines and settlements. There can be no assurance
that the Company and/or its officers and other employees will not, in the
future, be subject to claims arising from the violation of such laws, rules
and regulations. An adverse ruling against the Company and/or its officers and
other employees, including censure or suspension, could result in the Company
and/or its officers and other employees being required to pay a substantial
fine or settlement, and could result in their suspension or expulsion, which
could have a material adverse effect on the Company's business, financial
condition and operating results.
In connection with a three-year industry-wide investigation conducted by the
staff (the "Staff") of the SEC into the trading and supervisory activities of
many OTC market makers and certain of their individual supervisory and trading
personnel, in July, 1997, the Staff informed Kenneth Pasternak, President and
Chief Executive Officer of the Company, that he is a subject in their
investigation for certain of his activities as a trading room supervisor at
Troster Singer. All of the activities being investigated took place prior to
Mr. Pasternak joining the Company in 1995 and none of them relate to his
employment by the Company. Mr. Pasternak has also been orally informed by the
Staff that, as a result of its investigation, it currently intends to
recommend to the SEC that Mr. Pasternak be charged with failure to supervise
with respect to several transactions of other traders under his supervision at
Troster Singer and that Mr. Pasternak be suspended for six months, ordered to
cease and desist, and assessed a civil penalty of $50,000. In September, 1997,
Mr. Pasternak submitted a brief to the Staff arguing that these
recommendations would be inappropriate and unsupported by the facts. To date,
the Staff has not forwarded its recommendations to the SEC. The Company cannot
predict the outcome of the Staff's investigation, including whether the Staff
will determine to forward its recommendations to the SEC in their current or a
modified form or at all. If any such charges are brought, Mr. Pasternak
intends to vigorously defend himself against them. If Mr. Pasternak should be
suspended, the Company would seek to replace his services with other Company
personnel. However, the loss of Mr. Pasternak's services would have a material
adverse effect on the Company's business, financial condition and operating
results.
The regulatory environment in which the Company operates is subject to
change. The Company's business, financial condition and operating results may
be adversely affected as a result of new or revised
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legislation or regulations imposed by the SEC, other United States or foreign
governmental regulatory authorities or the NASD. The Company's business,
financial condition and operating results also may be adversely affected by
changes in the interpretation or enforcement of existing laws and rules by
these governmental authorities and the NASD.
Additional regulation, changes in existing laws and rules, or changes in
interpretations or enforcement of existing laws and rules often directly
affect the method of operation and profitability of securities firms. The
Company cannot predict what effect any such changes might have. Furthermore,
the Company's business, financial condition and operating results may be
materially affected not only by regulations directly applicable to it, but
also by regulations of general application. For example, the volume of the
Company's market-making activities in a given period could be affected by,
among other things, existing and proposed tax legislation, antitrust policy
and other governmental regulations and policies (including the interest rate
policies of the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board")) and changes in interpretation or enforcement of existing laws
and rules that affect the business and financial communities. The level of
trading and market-making activity can be affected not only by such
legislation or regulations of general applicability, but also by industry-
specific legislation or regulations.
The Company's market-making activities involve securities traded in NASDAQ.
NASDAQ's operations have been the subject of extensive scrutiny in the media
and by government regulators, including the Antitrust Division of the United
States Department of Justice. This scrutiny has included allegations of
collusion among NASDAQ market makers. In fact, a large group of NASDAQ market
makers recently entered into a Stipulation and Order with the Department of
Justice in which they agreed not to engage in any collusive activities
relating to prices, quotes or spreads in NASDAQ-traded securities. In August
1996, the SEC adopted certain new rules and rule amendments, known as the
Order Handling Rules, which significantly altered the manner in which orders
related to both NASDAQ and listed securities are handled. The implementation
of these rules began in January 1997. The SEC has also issued for comment
certain proposed rules by the NASD which, if approved, would introduce a new
system for delivering and executing orders in NASDAQ. The proposed NASD rules,
if approved, along with other potential regulatory actions and improvements in
technology, could impact the manner in which business is currently conducted
in NASDAQ. These new rules, regulatory actions, and changes in market customs
and practices could have a material adverse effect on the Company's business,
financial condition and operating results.
The Company's business, both directly and indirectly, relies on the Internet
and other electronic communications gateways. The Company intends to expand
use of such gateways. To date, the use of the Internet has been relatively
free from regulatory restraints. However, the SEC, certain SROs and certain
states are beginning to address the regulatory issues that may arise in
connection with the use of the Internet. Accordingly, new regulations or
interpretations may be adopted that constrain the Company's and its customers'
ability to transact business through the Internet or other electronic
communications gateways. Any additional regulation of the use of such gateways
could have a material adverse effect on the Company's business, financial
condition and operating results.
In addition, the Company may in the future expand its business to other
countries. To expand its services internationally, the Company would have to
comply with regulatory controls of each specific country in which it conducts
business. The brokerage industry in many foreign countries is heavily
regulated. The varying compliance requirements of these different regulatory
jurisdictions and other factors may limit the Company's ability to expand
internationally. There can be no assurance that the Company will be successful
in obtaining the necessary regulatory approvals for any such expansion, or if
such approvals are obtained, that the Company will be able to continue to
comply with such regulations. The failure to obtain or comply with such
approvals could have a material adverse effect on the Company's business,
financial condition and operating results. See "Business--Government
Regulation."
DEPENDENCE ON MARKET-MAKING ACTIVITIES AND CLEARING BROKERS
Substantially all of the Company's revenues are derived from market-making
activities. The Company expects its market-making activities to continue to
account for substantially all of its revenues for the
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foreseeable future. Any factor adversely affecting market-making in general,
or the Company's market-making activities in particular, could adversely
affect the Company's business, financial condition and operating results. The
Company's future success will depend on continued growth in demand for its
market-making services and its ability to respond to regulatory and
technological changes, as well as customer demands. If demand for the
Company's market-making services fails to grow, grows more slowly than the
Company currently anticipates, or declines, the Company's business, financial
condition and operating results could be materially and adversely affected.
As a market maker of OTC and listed stocks, the majority of the Company's
securities transactions are conducted as principal with broker-dealer
counterparties located in the United States. The Company clears its securities
transactions through affiliated and unaffiliated clearing brokers. See
"Certain Transactions." Pursuant to the terms of the agreement between the
Company and the clearing brokers, the clearing brokers have the right to
charge the Company for losses that result from a counterparty's failure to
fulfill its contractual obligations. The Company's policy is to monitor the
credit standing of the counterparties with which it conducts business.
However, no assurance can be given that any such counterparty will not default
on their obligations, which default could have a material adverse effect on
the Company's business, financial condition and operating results. In
addition, at any time, a substantial portion of the Company's assets are held
at one or more clearing brokers and, accordingly, the Company is subject to
credit risk with respect to such clearing brokers. As of December 31, 1997 and
March 31, 1998, the Company's credit exposures were concentrated with the
clearing brokers and amounted to $30.2 million and $78.1 million,
respectively. Additionally, as of December 31, 1997 and March 31, 1998, the
clearing brokers held, as custodian, securities owned by the Company with a
market value of $61.7 million and $63.5 million, respectively. Consequently,
the Company is reliant on the ability of its clearing brokers to adequately
discharge their obligations on a timely basis. The Company is also dependent
on the solvency of such clearing brokers. Any failure by the clearing brokers
to adequately discharge their obligations on a timely basis, or failure by a
clearing broker to remain solvent, or any event adversely affecting the
clearing brokers, could have a material adverse effect on the Company's
business, financial condition and operating results.
RISK OF LOSSES ASSOCIATED WITH MARKET MAKING AND TRADING
The Company conducts its market-making activities predominantly as a
principal, which subjects the Company's capital to significant risks. These
activities involve the purchase, sale or short sale of securities for the
Company's own account and, accordingly, involve risks of price fluctuations
and illiquidity, or rapid changes in the liquidity of markets that may limit
or restrict the Company's ability to either resell securities it purchases or
to repurchase securities it sells in such transactions. From time to time, the
Company has large position concentrations in securities of a single issuer or
issuers engaged in a specific industry, which might result in higher trading
losses than would occur if the Company's positions and activities were less
concentrated.
The success of the Company's market-making activities depends upon its
ability to attract order flow, the skill of its personnel, general market
conditions, the price volatility of specific securities and the availability
of capital. To attract order flow, the Company must be competitive on price,
size of securities positions traded, order execution, technology and customer
service. In its role as a market maker, the Company attempts to derive a
profit from the difference between the prices at which it buys and sells
securities. However, competitive forces often require the Company to match the
quotes other market makers display and to hold varying amounts of securities
in inventory. By having to maintain inventory positions, the Company is
subjected to a high degree of risk. There can be no assurance that the Company
will be able to manage such risk successfully or that it will not experience
significant losses from such activities, either of which could materially
adversely effect the Company's business, financial condition and operating
results.
ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL
The Company's future success depends, in significant part, upon the
continued service of key executive officers, managers, sales, trading and
technical personnel, particularly Kenneth D. Pasternak, the Company's
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President and Chief Executive Officer. The Company has entered into employment
agreements with Mr. Pasternak and other key employees and maintains "key
person" life insurance policies on Mr. Pasternak and other key employees for
the benefit of the Company. Competition for key personnel and other highly
qualified management, sales, trading and technical personnel is intense, and
there can be no assurance that the Company will be able to retain its key
personnel or that it can attract, assimilate or retain other highly qualified
personnel in the future. The loss of the services of any of the Company's key
personnel or the inability to identify, hire, train and retain other qualified
personnel in the future could have a material adverse effect on the Company's
business, financial condition and operating results. See "Risk Factors--
Government Regulation," "Management--Employment Agreements."
The success of the Company also depends, in significant part, on the highly
skilled, and often specialized, individuals it employs. The Company's ability
to attract and retain management, sales, trading and technical professionals
is particularly important to its business strategy. The Company strives to
provide high quality services that will allow it to establish and maintain
long-term relationships with its customers. The Company's ability to do so
depends, in large part, upon the individual employees who represent the
Company in its dealings with such customers.
From time to time, other companies in the securities industry have
experienced losses of sales and trading professionals. The level of
competition to attract such professionals is intense. There can be no
assurance that the Company will not lose such professionals due to increased
competition or other factors in the future. The loss of a sales and trading
professional, particularly a senior professional with broad industry
expertise, could have a material adverse affect on the Company's business,
financial condition and operating results.
The Company expects that the number of its personnel will continue to grow,
particularly if current equity market activity continues and grows.
Competition for employees with the qualifications the Company desires is
intense, especially competition for equity trading professionals. There can be
no assurance that the Company will be able to recruit and retain a sufficient
number of new employees with the qualifications it desires in a timely manner
or that personnel costs will not increase significantly. The failure to retain
personnel or a significant increase in personnel costs could have a material
adverse effect on the Company's business, financial condition and operating
results.
RISKS ASSOCIATED WITH POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY
The Company's operating results may fluctuate significantly in the future
due to a number of factors, including the value of the Company's securities
positions and the Company's ability to manage the risks attendant thereto, the
volume of its market-making activities, volatility in the securities markets,
its ability to manage personnel, overhead and other expenses, the amount of
revenue derived from limit orders as a percentage of total revenues, changes
in payments for order flow, clearing costs, the addition or loss of sales and
trading professionals, regulatory changes, the amount and timing of capital
expenditures, the incurrence of costs associated with acquisitions and general
economic conditions. The Company's expense structure is based on historical
expense levels and the levels of demand for the Company's market-making
services. If demand for the Company's market-making services declines and the
Company is unable to adjust its cost structure on a timely basis, the
Company's operating results could be materially and adversely affected. The
Company has experienced, and may experience in the future, significant
seasonality in its business. The Company has historically experienced an
increase in revenues in the fourth quarter of the year, which the Company
believes is due, in large part, to higher trading volumes in the securities
markets at year end. The Company believes that this seasonal trend will
continue for the foreseeable future and that the Company's business, financial
condition and operating results may be affected by such trends in the future.
Due to all of the foregoing factors, period-to-period comparisons of the
revenues and operating results of the Company are not necessarily meaningful
and such comparisons cannot be relied upon as indicators of future
performance. There also can be no assurance that the Company will be able to
sustain the rates of revenue growth that it has experienced in the past, that
it will be able to improve its operating results or that
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it will be able to sustain its profitability on a quarterly basis. In
addition, the Company's operating results in future periods may be below the
expectations of securities analysts and investors. In that event, the market
price of the Common Stock would likely be materially and adversely affected.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
RISKS ASSOCIATED WITH ADVERSE ECONOMIC, POLITICAL AND MARKET CONDITIONS
The securities business generally is, by its nature, volatile. It is
directly affected by numerous national and international factors that are
beyond the Company's control, including, among others, economic, political and
market conditions; the availability of short-term and long-term funding and
capital; the level and volatility of interest rates; legislative and
regulatory changes; currency values and inflation. Any one or more of these
factors may contribute to reduced levels of activity in the securities markets
generally, which could result in lower revenues from the Company's market-
making activities. Any reduction in revenues or any loss resulting from such
factors could have a material adverse effect on the Company's business,
financial condition and operating results.
RISKS ASSOCIATED WITH DECLINES IN MARKET VOLUME, PRICE OR LIQUIDITY
The Company's revenues may decrease in the event of a decline in market
volume, prices or liquidity. Declines in the volume of securities transactions
and in market liquidity generally result in lower revenues from market-making
activities. Lower price levels of securities may also result in reduced
trading volume, and could cause a reduction in trading activity, and thereby
reduce revenues from market-making transactions, as well as losses from
declines in the market value of securities held in inventory. Sudden sharp
declines in market values of securities can result in illiquid markets,
declines in the market values of securities held in inventory, the failure of
buyers and sellers of securities to fulfill their obligations and settle their
trades and increases in claims and litigation. Any decline in market volume,
price or liquidity or any other of these factors could have a material adverse
effect on the Company's business, financial condition and operating results.
RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH
Since its inception in 1995, the Company has experienced significant growth
in its business activities and the number of its employees. For example, the
Company's share volume has increased from 2.0 billion shares traded for the
quarter ended December 31, 1995 to 7.4 billion shares traded for the quarter
ended March 31, 1998 and the number of the Company's employees has increased
from 152 as of December 31, 1995 to 337 as of March 31, 1998. The growth of
the Company's business and expansion of its customer base has placed, and is
expected to continue to place, a significant strain on the Company's
management and operations. This growth has required and will continue to
require increased investment in management personnel, financial and management
systems and controls and facilities, which, in the absence of continued
revenue growth, would cause the Company's operating margins to decline from
current levels. In addition, as is common in the securities industry, the
Company is and will continue to be highly dependent on the effective and
reliable operation of its communications and information systems. The Company
believes that its current and anticipated future growth will require
implementation of new and enhanced communications and information systems, and
training of its personnel to operate such systems. In addition, the scope of
procedures for assuring compliance with applicable rules and regulations has
changed as the size and complexity of the Company's business has increased.
The Company has implemented and continues to implement formal compliance
procedures to reflect such growth. Accordingly, the Company's future operating
results will depend on its ability to continue to improve its systems for
operations, financial control, and communication and information management;
to enhance its compliance procedures; and to recruit, train, manage and retain
its employee base. There can be no assurance that the Company will be able to
manage or continue to manage its recent or any future growth successfully. The
Company's inability to do so could materially and adversely affect the
Company's business, financial condition and operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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RISK RELATED TO CUSTOMER CONCENTRATION
A small number of customers have historically accounted for a significant
portion of the Company's market-making activities, and the Company expects a
significant portion of the future demand for its market-making services to
remain concentrated within a limited number of customers. The Company's five
largest customers accounted for 22.3%, 29.4% and 33.8% of the Company's order
flow for the years ended December 31, 1996 and 1997, and the three months
ended March 31, 1998, respectively. None of these customers are contractually
obligated to utilize the Company as market maker and, accordingly, these
customers may direct their trading activities to other market makers at any
time. There can be no assurance that the Company will be able to retain these
or other major customers or that such customers will maintain or increase
their demand for the Company's market-making activities. The loss of, or a
significant reduction of demand for the Company's services from, any of these
customers could have a material adverse effect on the Company's business,
financial condition and operating results. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business--
Customers."
RISKS ASSOCIATED WITH LIMITED OPERATING HISTORY
The Company began its operations in 1995 with the formation of Knight and
the acquisition of the listed securities market-making business of Trimark.
Knight, which has historically accounted for a substantial portion of the
Company's revenues, and is expected to continue to do so in the foreseeable
future, only began its operation in 1995. The Company's management has limited
experience with respect to the operations of Knight and in operating the
Company on a consolidated basis. Accordingly, the Company has a limited
consolidated operating history upon which an evaluation of the performance of
the Company and its prospects can be based. The Company's prospects must be
considered in light of the risks, uncertainties, expenses and difficulties
frequently encountered by similarly situated companies, particularly companies
in the securities industry that are subject to evolving regulatory,
technological and customer requirements. To address these risks, the Company
must, among other things, maintain existing customer relationships and
effectively develop new relationships, respond to regulatory and competitive
developments, attract, retain and motivate qualified personnel, and develop
and upgrade its technology. There can be no assurance that the Company will be
successful in addressing such requirements. The failure to do so could have a
material adverse effect on the Company's business, financial condition and
operating results.
RISKS ASSOCIATED WITH INTELLECTUAL PROPERTY RIGHTS
The Company relies primarily on copyright, trade secret and trademark law to
protect its proprietary technology. Notwithstanding the precautions taken by
the Company to protect its intellectual property rights, it is possible that
third parties may copy or otherwise obtain and use the Company's proprietary
technology without authorization or otherwise infringe on the Company's
proprietary rights. It is also possible that third parties may independently
develop technologies similar to those of the Company. It may be difficult for
the Company to police unauthorized use of its proprietary technology and
intellectual property rights. There can be no assurance that the steps taken
by the Company will prevent misappropriation of its technology or intellectual
property rights.
The Company is heavily dependent on two order entry and execution software
systems known as the "Brass System," which it licenses from Automated
Securities Clearance, Ltd. ("ASC") and the "Appletree System," which it
licenses from TCAM Systems, Inc. ("TCAM") pursuant to license agreements.
Although the Company has rights to modify the licensed software under the
license agreements, the licensors own all modifications and enhancements to
the licensed software, and the licensors can use the modifications and
enhancements to the licensed software without the Company's consent. While the
Company does not believe that ASC or TCAM has incorporated any such
modifications in software licensed to third parties, there can be no assurance
that they will not do so in the future or that any such license will not have
a material adverse effect on the Company's competitive position. The Company
relies on ASC to monitor the daily operation of the Brass System in order to
detect problems with the Brass System's operation. The Company relies on the
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licensors to support and maintain the Brass and Appletree Systems. The
licenses, and the licensors' daily operation and support obligations are
terminable if the Company breaches its obligations under the license
agreements. The failure by the Company to maintain these relationships, or to
find a replacement for such technology in a timely and cost-effective manner,
could have a material adverse effect on the Company's business, financial
condition and operating results.
The Company also licenses other software from third parties, which software
is integral to the Company's business. If any of these relationships were
terminated or if any of these third parties were to cease doing business, the
Company would be forced to spend significant time to replace the licensed
software, if possible. However, there can be no assurance that such
replacements would be available on reasonable terms, if at all. Such events
would have a material adverse effect upon the Company's business, financial
condition and operating results. In addition, litigation may be necessary in
the future to enforce the Company's intellectual property rights, to protect
the Company's trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. Such litigation, whether successful or unsuccessful, could result
in substantial costs and diversions of resources either of which could have a
material adverse effect on the Company's business, financial condition and
operating results. The Company may in the future receive notices of claims of
infringement of other parties' proprietary rights. There can be no assurance
that claims for infringement or invalidity (or claims for indemnification
resulting from infringement claims) will not be asserted or prosecuted against
the Company. Any such claims, with or without merit, could be time consuming
to defend, result in costly litigation, divert management's attention and
resources or require the Company to enter into royalty or licensing
agreements. There can be no assurance that such royalties or licenses would be
available on reasonable terms, if at all, and the assertion or prosecution of
any such claims, whether successful or unsuccessful, could have a material
adverse effect on the Company's business, financial condition and operating
results. See "Business--Intellectual Property and Other Proprietary Rights."
COMPETITION
The Company derives substantially all of its revenues from market-making
activities. The market for these services, particularly market-making services
through electronic communications gateways, is rapidly evolving and intensely
competitive. The Company expects competition to continue and intensify in the
future. Knight competes primarily with wholesale, national, and regional
broker-dealers. Trimark competes with the NYSE, the AMEX, regional exchanges
and Third Market competitors. The Company competes primarily on the basis of
execution standards, its relationship with its customers and technology.
A number of the Company's competitors have significantly greater financial,
technical, marketing and other resources than the Company. Some of the
Company's competitors also offer a wider range of services and products than
the Company and have greater name recognition and more extensive customer
bases than the Company. These competitors may be able to respond more quickly
to new or evolving opportunities, technologies and customer requirements than
the Company and may be able to undertake more extensive promotional activities
and offer more attractive terms to customers. Recent advancements in computing
and communications technology are substantially changing the means by which
market-making services are delivered, including more direct access on-line to
a wide variety of services and information, and have also created demand for
more sophisticated levels of customer service. The provision of such services
may entail considerable cost without an offsetting increase in revenues.
Moreover, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties or may
consolidate to enhance their services and products. New competitors or
alliances among competitors may emerge and they may acquire significant market
share.
There can be no assurance that the Company will be able to compete
effectively with current or future competitors or that the competitive
pressures faced by the Company will not have a material adverse effect on the
Company's business, financial condition and operating results.
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LITIGATION AND POTENTIAL SECURITIES LAWS LIABILITY
Many aspects of the Company's business involve substantial risks of
liability. A market maker is exposed to substantial liability under federal
and state securities laws, other federal and state laws and court decisions,
as well as rules and regulations promulgated by the SEC and the NASD. The
Company is also subject to the risk of litigation and claims that may be
without merit. As the Company intends to defend actively any such litigation,
significant legal expenses could be incurred. An adverse resolution of any
future lawsuits or claims against the Company could have a material adverse
effect on the Company's business, financial condition and operating results.
RISKS ASSOCIATED WITH DEPENDENCE ON COMPUTER AND COMMUNICATIONS SYSTEMS
The Company's market-making activities are heavily dependent on the
integrity and performance of the computer and communications systems
supporting them. Extraordinary trading volumes or other events could cause the
Company's computer systems to operate at an unacceptably low speed or even
fail. Any significant degradation or failure of the Company's computer systems
or any other systems in the trading process (e.g., on-line service providers,
record retention and data processing functions performed by third parties, and
third-party software, such as Internet browsers) could cause customers to
suffer delays in trading. Such delays could cause substantial losses for
customers and could subject the Company to claims from customers for losses,
including litigation claiming fraud or negligence. There can be no assurance
that the Company's network protections will work appropriately in the event of
a computer systems failure, or that, in the event of a tornado, fire or any
other natural disaster, power or telecommunications failure, act of God or
war, the Company will not suffer an extended computer systems failure. Any
computer or communications system failure or decrease in computer systems
performance that causes interruptions in the Company's operations could have a
material adverse effect on the Company's business, financial condition and
operating results. See "Business--Technology."
RISKS RELATED TO EVOLVING MARKETS; DEPENDENCE ON NEW SERVICES, PRODUCTS AND
TECHNOLOGIES
The demand for market-making services, particularly services that rely on
electronic communications gateways is characterized by rapid technological
change, changing customer demands, the need to enhance existing or introduce
new services and products, and evolving industry standards. New services,
products and technologies may render the Company's existing services, products
and technologies less competitive. The Company's future success will depend,
in part, on its ability to respond to the demand for new services, products
and technologies on a timely and cost-effective basis and adapt to
technological advancements and changing standards to address the increasingly
sophisticated requirements of its customers. There can be no assurance that
the Company will be successful in the development, acquisition of adequate
rights to, introduction or marketing of such new services, products and
technologies. Any failure by the Company to anticipate or respond adequately
to technological advancements, customer requirements or changing industry
standards, or any significant delays in the development, introduction or
availability of new services, products or enhancements could have a material
adverse effect on the Company's business, financial condition and operating
results.
RISKS ASSOCIATED WITH UNCERTAINTY OF MARKET ACCEPTANCE OF NEW SERVICES,
PRODUCTS AND THE INTERNET
The Company receives substantially all of its order flow through electronic
communications gateways, including a variety of computer-to-computer
interfaces and the Internet. The market for market-making services that rely
on the Internet is at an early stage of development and is rapidly evolving.
As a result, the demand for and market acceptance of recently introduced
services and products is subject to a high level of uncertainty. The Company's
electronic services may involve alternative approaches to market making and,
accordingly, substantial marketing and sales efforts may be necessary to
educate prospective customers regarding the use and benefit of the Company's
electronic services and products.
15
<PAGE>
The Company depends on the business it receives from broker-dealers who
increasingly rely on the Internet to conduct transactions with their
customers. The need for the Company's services and products depend on whether
the customers of such broker-dealers are willing to adopt the Internet as a
medium for commerce and communication. Customer concerns, including security,
reliability, cost, ease of use, accessibility and quality of service all may
negatively affect the growth of Internet use for such activities. The success
of the Internet will also depend on the development of necessary
infrastructure and complementary services and products, such as high speed
modems and high speed communication lines. As the number of users and the
amount of traffic on the Internet continues to increase, there can be no
assurance that the infrastructure needed to support the Internet will be able
to meet the demands placed on it. Finally, the success of the Internet will
also depend on government regulation and the ability of Internet users to
develop and adopt new standards and protocols to handle increased levels of
activity. As a result, there can be no assurance that the number of
transactions generated over the Internet will continue to increase. Any
reluctance of the clients of the Company's broker-dealer customers to obtain
brokerage services over the Internet may have a material adverse effect on the
Company's business, financial condition and operating results.
EFFECT OF NET CAPITAL REQUIREMENTS
The SEC, the NASD and various other regulatory agencies have stringent rules
with respect to the maintenance of specific levels of net capital by
securities brokers, including the SEC's Uniform Net Capital Rule (the "Net
Capital Rule"), which governs the net capital requirements of each of the
Company's subsidiaries. Failure to maintain the required net capital may
subject a firm to suspension or revocation of registration by the SEC and
suspension or expulsion by the NASD and other regulatory bodies and ultimately
could require the firm's liquidation. In addition, a change in the net capital
rules, the imposition of new rules or any unusually large charge against net
capital could limit those operations of the Company that require the intensive
use of capital, and also could restrict the Company's ability to withdraw
capital from its brokerage subsidiaries, which in turn could limit the
Company's ability to pay cash dividends, repay debt and repurchase shares of
its outstanding stock. A significant operating loss or any unusually large
charge against net capital could adversely affect the ability of the Company
to expand or even maintain its present levels of business, which could have a
material adverse effect on the Company's business, financial condition and
operating results. See "Business--Government Regulation."
YEAR 2000
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than two years, computer systems
and/or software used by many companies, including computers involved in the
securities industry, may need to be upgraded to comply with such "Year 2000"
requirements. Significant uncertainty exists concerning the potential effects
associated with the failure to achieve such compliance. The Company has
undertaken a project to identify and modify non-year 2000 compliant
communications and data processing systems in anticipation of the Year 2000.
Although the Company's main trading-related systems are designed to be Year
2000 compliant, there can be no assurance that the Company's proprietary
software and systems or any other software or systems licensed by third
parties to the Company contain all necessary date code changes or that it will
not be adversely affected by the failure of other companies' software to be
Year 2000 compliant. The Company plans to have its other computer systems
certified by the end of 1998. However, there can be no assurance that such
schedule will be met or that any software or systems licensed by third parties
to the Company, on which the Company's business is dependent, will be
corrected in a timely manner or that any such failure by such third parties
would not disrupt the Company's ability to accurately communicate with its
customers or its customers' ability to utilize the Company's services. Any
such disruption or failure could have an adverse effect on the Company's
business, financial condition and operating results. There can be no assurance
that third parties will not commence litigation against the Company for any
such disruption or failure.
16
<PAGE>
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF DELAWARE LAW AND THE COMPANY'S
CHARTER
The Company is organized under the laws of the State of Delaware. Certain
provisions of Delaware law may have the effect of delaying, deferring, or
preventing a change in control of the Company. In addition, certain provisions
of the Company's Certificate of Incorporation (the "Certificate") may be
deemed to have anti-takeover effects and may delay, defer or prevent a
takeover attempt that a stockholder might consider in its best interest. The
Certificate will authorize the Board to determine the rights, preference,
privileges and restrictions of unissued series of preferred stock and to fix
the number of shares of any series of preferred stock and the designation of
any such series, without any vote or action by the Company's stockholders.
Thus, the Board can authorize and issue shares of preferred stock with voting
or conversion rights that could adversely affect the voting or other rights of
holders of the Company's Common Stock. In addition, the issuance of preferred
stock may have the effect of delaying, deferring, or preventing a change of
control of the Company, as the terms of the preferred stock that might be
issued could potentially prohibit the Company's consummation of any merger,
reorganization, sale of substantially all of its assets, liquidation or other
extraordinary corporate transaction without the approval of the holders of the
outstanding shares of the Common Stock.
SUBSTANTIAL DISCRETION IN USE OF PROCEEDS
The company intends to use $13.8 million of the net proceeds from the
Offering to pay for the redemption of the Class B Preferred Units of the LLC.
The Company intends to use the balance of the net proceeds for working capital
and for general corporate purposes. Accordingly, management will have
significant flexibility in applying the net proceeds of the Offering. Although
the Company has no plans, commitments or agreements regarding any material
acquisitions as of the date of this Prospectus, the Company may seek
acquisitions of businesses, products or technologies that are complementary to
those of the Company, and a portion of the net proceeds may be used for such
acquisitions. See "Use of Proceeds."
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there was no public market for the Company's Class A
Common Stock. The Company has applied to have the Class A Common Stock
approved for quotation in NASDAQ as a National Market issue under the symbol
"NITE." There can be no assurance that an active public market for the Class A
Common Stock will develop or be sustained. The initial public offering price
will be determined through negotiations between the Company and the
representatives of the Underwriters, and it may not be indicative of the
market price for the Class A Common Stock after the Offering is complete. The
market price of the Class A Common Stock after completion of the Offering
could be subject to significant fluctuations in response to quarterly
variations in operating results, announcements of new services or products by
the Company or its competitors, changes in financial estimates by securities
analysts or other vents or factors many of which are beyond the Company's
control. In addition, stock markets generally, and the stock prices of
competitors in the Company's industry specifically, experience significant
price and volume volatility from time to time which may adversely affect the
market price of the Class A Common Stock for reasons unrelated to the
Company's performance. There can be no assurance that purchasers of Class A
Common Stock will be able to resell their Class A Common Stock at prices equal
to or greater than the initial public offering price. See "Underwriting."
IMMEDIATE SUBSTANTIAL DILUTION
Purchasers of Class A Common Stock in the Offering will experience an
immediate and substantial dilution of $12.29 in the net tangible book value
per share of their investment. If the Company issues additional Common Stock
in the future, purchasers of Class A Common Stock in the Offering may
experience further dilution in the net tangible book value of their Class A
Common Stock. See "Dilution." The Company does not anticipate paying any cash
dividends on its Common Stock in the foreseeable future. See "Dividend
Policy."
17
<PAGE>
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
The Company's business is dependent upon the availability of adequate
funding and regulatory capital under applicable regulatory requirements.
Historically, the Company has satisfied these needs from internally generated
funds. Prior to the Reorganization, the LLC will pay a portion of its
undistributed profits to its members, thereby reducing the Company funds
available for business operations. The Company currently anticipates, based on
management's experience and current industry trends, that its available cash
resources, combined with the net proceeds to the Company from the Offering,
will be sufficient to meet its presently anticipated working capital and
capital expenditure requirements for at least the next 12 months. The Company
expects that it will incur approximately $8.0 million in capital expenditures
in 1998. However, if the Company needs to raise additional funds to support
more rapid expansion, develop new or enhanced services and products, respond
to competitive pressures, acquire complementary businesses, products or
technologies or respond to unanticipated requirements, there can be no
assurance that additional financing will be available when needed on terms
favorable to the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have 47,484,299 shares
of Class A Common Stock and 3,945,528 shares of Class B Common Stock
outstanding. Of these shares, the shares of Class A Common Stock offered
hereby will be freely tradeable without restriction or further registration
under the Securities Act, by persons other than affiliates of the Company
within the meaning of Rule 144 promulgated under the Securities Act. The
remaining shares, other than shares held by affiliates, may also be freely
tradeable. 41,429,827 of these shares are held by affiliates and, accordingly,
are "restricted securities" as that term is defined in Rule 144 under the
Securities Act and may be sold only if registered or pursuant to an exemption
from registration.
In addition, the existing stockholders have the right to cause the Company
to register the sale of certain shares of Class A Common Stock or Class B
Common Stock owned by them and/or to include their shares in future
registrable statements relating to the Company's securities.
Each of the Company, its directors and officers and certain other
stockholders has agreed that it will not offer, sell, contract to sell,
announce its intention to sell, pledge or otherwise dispose of, directly or
indirectly, or file with the SEC a registration statement under the Securities
Act relating to, any additional shares of the Class A Common Stock or
securities convertible into or exchangeable or exercisable for any shares of
the Class A Common Stock without the prior written consent of BancAmerica
Robertson Stephens for a period of 180 days after the date of this Prospectus.
See "Shares Eligible for Future Sale" and "Underwriting."
After the date of this Prospectus, the Company intends to file a Form S-8
registration statement under the Securities Act to register all shares of
Common Stock issuable under the Company's stock option plan. Such registration
statement is expected to become effective immediately upon filing, and shares
covered by that registration statement will thereupon be eligible for sale in
the public markets, subject to certain lock-up agreements and Rule 144
limitations applicable to affiliates. See "Management," "Description of
Capital Stock--Registration Rights," "Shares Eligible for Future Sale" and
"Underwriting."
18
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 8,688,246 shares of
Class A Common Stock offered by the Company hereby are estimated to be
approximately $120.4 million ($141.4 million if the Underwriters' over-
allotment option is exercised in full) at an assumed initial public offering
price of $15.00 per share after deducting underwriting discounts and
commissions and estimated offering expenses payable by the Company. The
Company will not receive any proceeds from the sale of Class A Common Stock by
the Selling Stockholder. See "Principal and Selling Stockholders."
The principal purposes of the Offering are to increase the Company's working
capital and equity base, to provide a public market for its Class A Common
Stock, to permit future acquisitions using cash or publicly tradeable Class A
Common Stock, and to facilitate future access to capital markets. From the
proceeds of the Offering, the Company intends to use $13.8 million to pay for
the redemption of all of the outstanding Preferred B Units of the LLC. The
Company intends to use the remaining proceeds of the Offering for working
capital and for general corporate purposes. The Company may also use a portion
of the proceeds of the Offering to pursue acquisitions of or investments in
businesses, products or technologies that are complementary to those of the
Company. The Company currently does not have any commitments or agreements
with respect to any such acquisitions. Pending such uses, the Company intends
to invest the net proceeds of the Offering in short-term, investment-grade,
interest-bearing securities.
DIVIDEND POLICY
Prior to the Reorganization, the LLC has been treated as a partnership for
federal and state income tax purposes. Since inception, the LLC generated
taxable income and made distributions to its members to facilitate the payment
of the tax liability associated with the allocation of LLC income of an
aggregate of $2.9 million, $17.6 million, $22.3 million and $8.4 million in
1995, 1996, 1997, and the three months ended March 31, 1998, respectively. In
addition, prior to the Reorganization, the LLC will distribute to its members
all of its Undistributed Profits (other than $26.1 million which certain LLC
members have elected not to have distributed and to receive in exchange
therefor additional shares of Common Stock), as well as all of its taxable
income earned during the period beginning April 1, 1998 and ending with the
closing of the Offering. See "Certain Transactions--The Reorganization."
The Company intends to retain future earnings, if any, to finance the
development and expansion of its business and, therefore, does not anticipate
paying any cash dividends on its Common Stock in the foreseeable future. The
payment of cash dividends is within the discretion of the Company's Board of
Directors and will be dependent upon, among other factors, the Company's
results of operations, financial condition and capital requirements,
restrictions imposed by the Company's financing arrangements and legal
requirements.
19
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1998, (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the
Company after giving effect to the Reorganization and the redemption of the
Preferred A Units and a portion of the Preferred B Units and (iii) the as
adjusted capitalization of the Company after giving effect to the sale by the
Company of 8,688,246 shares of Class A Common Stock at an assumed initial
public offering price of $15.00 per share and the application of the estimated
net proceeds therefrom and the exercise of the Brown Option. See "Use of
Proceeds." This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and Notes thereto appearing elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt:
Mandatorily Redeemable Preferred Units... $13,847(1) $13,847 $ --
Owners' equity:
Common Units............................. 7,345 -- --
Preferred Stock, $0.01 par value;
20,000,000 shares authorized; no shares
issued and outstanding, actual, pro
forma, or as adjusted................... -- -- --
Class A Common Stock, $0.01 par value;
200,000,000 shares authorized; no shares
issued and outstanding, actual;
38,401,166 shares issued and outstand-
ing, pro forma; 47,484,299 shares issued
and outstanding, as adjusted (2)........ -- 384 475
Class B Common Stock, $0.01 par value;
20,000,000 shares authorized; no shares
issued and outstanding, actual;
3,945,528 shares issued and outstanding,
pro forma; and 3,945,528 shares issued
and outstanding, as adjusted............ -- 39 39
Additional paid-in capital............... -- 33,045 153,379
Undistributed income..................... 52,645 -- --
------- ------- --------
Total owners' equity................... 59,990 33,468 153,893
------- ------- --------
Total capitalization.................. $73,837 $47,315 $153,893
======= ======= ========
</TABLE>
- --------
(1) In April 1998, the Company redeemed and retired all of the Preferred A
Units for $12.5 million and a portion of the Preferred B Units for $1.2
million (the "Redemption") pursuant to mandatory redemption provisions.
(2) Does not include outstanding options to purchase a total of shares of
Class A Common Stock issuable at an exercise price equal to the initial
public offering price as of the date of this Prospectus. As of the date of
this Prospectus, an additional 7,409,000 shares were reserved for future
grants under the Company's stock option plans.
20
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1998,
giving effect to the Reorganization, Option Exercise and the Redemption, was
$19.1 million or $0.45 per share. Pro forma net tangible book value per share
represents the amount of total tangible assets less total liabilities, divided
by the number of shares of Common Stock outstanding. After giving effect to
the sale of 8,688,246 shares of Class A Common Stock offered by the Company
hereby (at an assumed initial public offering price of $15.00 per share and
after deducting underwriting discounts and commissions and estimated offering
expenses), the pro forma as adjusted net tangible book value of the Company as
of March 31, 1998 would have been approximately $139.5 million or $2.71 per
share. This represents an immediate dilution of $12.29 per share to new
investors in this Offering. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $15.00
Pro forma net tangible book value per share as of March 31,
1998....................................................... $0.45
Increase per share attributable to new investors............ 2.26
-----
Pro forma as adjusted net tangible book value per share after
this Offering................................................ 2.71
------
Dilution per share to new investors........................... $12.29
======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1998,
(i) the number of shares of Common Stock purchased from the Company, (ii) the
total consideration paid for such shares and (iii) the average price per share
paid by existing stockholders and by new stockholders:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ -------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders
(1).................... 42,741,581 83.1% $ 33,540,119 20.5% $0.78
New stockholders........ 8,688,246 16.9 130,323,690 79.5 15.00
---------- ----- ------------ -----
Total................. 51,429,827 100.0% $163,863,809 100.0%
========== ===== ============ =====
</TABLE>
- --------
(1) Sales by the Selling Stockholder in this offering will cause the number of
shares held by existing stockholders to be reduced to 41,429,827 shares or
80.6% (41,429,827 shares or 78.3% if the Underwriters' over-allotment
option is exercised in full) of the total number of shares of Common Stock
to be outstanding after this Offering, and will increase the number of
shares held by new investors to 10,000,000 shares or 19.4% (11,500,000
shares or 21.7% if the Underwriters' over-allotment option is exercised in
full) of the total number of shares of Common Stock to be outstanding
after this Offering. See "Principal and Selling Stockholders."
The calculation of pro forma net tangible book value and the other
computations above assume no exercise of stock options outstanding, except for
the Option Exercise. As of the date of this Prospectus, there were options
outstanding to purchase a total of shares of Class A Common Stock at an
exercise price equal to the initial public offering price. See
"Capitalization," "Management--Stock Option Plan," "Description of Capital
Stock" and "Shares Eligible for Future Sale."
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data are qualified by the more
detailed consolidated financial statements of the Company and the notes
thereto included elsewhere in this Prospectus and should be read in
conjunction with such consolidated financial statements and notes and the
discussion under "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Prospectus. The
consolidated statement of income data for the period from March 27, 1995
through December 31, 1995 and years ended December 31, 1996 and 1997 and the
consolidated statement of financial condition data at December 31, 1996 and
1997 have been derived from the Company's audited consolidated financial
statements included elsewhere in this Prospectus. The consolidated statement
of financial condition data at December 31, 1995 are derived from audited
consolidated financial statements not included in this Prospectus. The
consolidated statement of income data for the three months ended March 31,
1997 and 1998 and the consolidated statement of financial data at March 31,
1998 are derived from the unaudited consolidated financial statements which,
in the opinion of management, have been prepared on the same basis as the
audited consolidated financial statements and contain all adjustments,
consisting only of normal recurring accruals, necessary for a fair
presentation of the results of operations for such periods. The results of
operations for the three months ended March 31, 1998 are not necessarily
indicative of results to be expected for the full year.
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 27,
THROUGH YEAR ENDED THREE MONTHS
DECEMBER 31, DECEMBER 31, ENDED MARCH 31,
------------ ----------------- ---------------
1995 1996 1997 1997 1998
------------ -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
INCOME DATA:
Revenues
Net trading revenue.......... $69,516 $183,894 $224,627 $50,483 $63,007
Interest, net................ 296 1,283 2,039 496 526
------- -------- -------- ------- -------
Total revenues............. 69,812 185,177 226,666 50,979 63,533
------- -------- -------- ------- -------
Expenses
Payments for order flow...... 25,994 69,829 66,912 18,129 16,257
Execution and clearance
fees........................ 12,710 25,837 32,069 6,411 10,241
Employee compensation and
benefits.................... 12,151 39,494 57,717 12,013 16,168
Communications and data
processing.................. 2,202 4,360 6,809 1,319 2,170
Depreciation and amortiza-
tion........................ 1,626 2,975 4,225 936 1,291
Interest on Preferred Units.. 1,310 2,093 1,941 604 416
Occupancy and equipment
rentals..................... 849 1,777 2,657 537 1,082
Business development......... 130 624 1,460 245 377
Other........................ 1,499 1,428 2,799 365 747
------- -------- -------- ------- -------
Total expenses............. 58,471 148,417 176,589 40,559 48,749
------- -------- -------- ------- -------
Income before income taxes..... 11,341 36,760 50,077 10,420 14,784
Pro forma income tax ex-
pense(1)...................... 5,217 15,807 21,533 4,481 6,357
------- -------- -------- ------- -------
Pro forma net income........... $ 6,124 $ 20,953 $ 28,544 $ 5,939 $ 8,427
======= ======== ======== ======= =======
Pro forma basic and diluted
earnings per share............ $ 0.67 $ 0.20
======== =======
Shares used to compute per
share data(2)................. 42,742 42,742
======== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------- ---------
1995 1996 1997 1998
------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF FINANCIAL
CONDITION DATA:
Cash and cash equivalents................. $ 1,668 $ 15,353 $ 13,797 $ 5,429
Securities owned, at market value......... 33,763 46,781 61,726 63,490
Receivable from clearing brokers.......... 11,437 23,156 30,152 78,119
Total assets.............................. 65,182 106,035 127,872 171,073
Securities sold, not yet purchased, at
market value............................. 11,001 19,021 21,061 54,581
Distributions on Common Units payable to
members.................................. -- 4,984 8,405 8,767
Mandatorily Redeemable Preferred Units.... 28,415 37,706 27,484 27,484
Owners' equity............................ 12,199 29,987 53,973 59,990
</TABLE>
- -------
(1) Prior to the Reorganization described elsewhere in this Prospectus, the
Company was a limited liability company and was not subject to
income taxes. Pro forma income tax expense has been presented for each of
the periods indicated as if the Reorganization had occurred as of March
27, 1995.
(2) Shares used to compute per share data represent Common Stock outstanding
immediately after the Reorganization and the exercise of the Brown Option,
but before the Offering.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The Company is a leading market maker in NASDAQ securities, other OTC equity
securities, and NYSE- and AMEX- listed equity securities in the Third Market.
Through its wholly-owned subsidiary, Knight, the Company makes markets in
approximately 4,200 equity securities in NASDAQ and on the NASD's OTC Bulletin
Board. Through its wholly-owned subsidiary, Trimark, the Company makes markets
in all NYSE- and AMEX-listed equity securities in the Third Market.
Knight commenced NASDAQ and OTC securities market making operations on July
24, 1995. Based on rankings published by AutEx, an electronic database and
online, real-time network for trade order indications used by the securities
industry, Knight was ranked first in AutEx's Nasdaq/OTC Securities rankings,
with a 8.95% and 9.93% market share, respectively, during February and March
1998. Knight's share volume totaled 1.1 billion, 5.7 billion and 11.2 billion,
or 23%, 53% and 62% of the Company's total share volume, during the period
from March 27, 1995 through December 31, 1995 and the years ended December 31,
1996 and 1997, respectively. For the three months ended March 31, 1998,
Knight's share volume grew 161% to 5.0 billion, or 67% of the Company's total
share volume, from 1.9 billion shares, or 56% of the Company's total share
volume, in the same period in 1997. Since commencing operations in 1995,
Knight's business has grown rapidly and accounted for 76%, 75% and 77% of the
Company's total share volume growth during the years ended December 31, 1996
and 1997, and the three months ended March 31, 1998, respectively.
Trimark commenced operations on March 27, 1995 when it acquired the NYSE-
and AMEX-listed equity securities market-making business and certain assets of
Trimark Securities, Inc. for $15 million in Mandatorily Redeemable Preferred B
Units and additional consideration based on Trimark's earnings during the five
years immediately following the acquisition. On November 17, 1997, Trimark
purchased the business and certain of the assets of Tradetech Securities, L.P.
("Tradetech"), a direct competitor of Trimark, for $750,000 in cash and
additional consideration based on Trimark's earnings during a minimum of three
years immediately following the acquisition. Since March, 1995, Trimark has
experienced significant increases in share volumes. Trimark's share volume
totaled 3.7 billion, 5.1 billion and 6.9 billion, or 77%, 47% and 38% of the
Company's total share volume during the period from March 27, 1995 through
December 31, 1995 and the years ended December 31, 1996 and 1997,
respectively. With the acquisition of Tradetech, Trimark's share volume grew
63% for the three months ended March 31, 1998 to 2.4 billion shares, from 1.5
billion shares for the comparable period in 1997 and accounted for 33% of the
Company's share volume for the three months ended March 31, 1998.
The Company was organized in April 1998 for the purpose of succeeding to the
business of the LLC. Concurrent with the closing of the Offering, based on an
assumed initial public offering price of $15.00 per share, all of the member
interests of the LLC will be exchanged for 41,000,000 shares of Common Stock
of the Company. Certain members, who have so elected, will receive additional
shares of Class A Common Stock valued at the initial public offering price
with respect to their share of the Undistributed Profits. Management of the
Company has elected to receive shares of Class A Common Stock for all of its
Undistributed Profits. The Company will receive no additional consideration in
connection with such conversion of member interests into shares of Common
Stock. In connection with the exchange, Knight will become the successor
entity to Knight Securities, L.P., and Trimark will become the successor
entity to Trimark Securities, L.P. Prior to the effective date of the
Registration Statement of which this Prospectus is a part, certain members of
the LLC, who have so elected, will receive a cash distribution of all or a
portion of their Undistributed Profits. Concurrently with such distribution,
the LLC intends to make a cash distribution to each member of an estimate of
its share of the total amount of profits of the LLC accruing between April 1,
1998 and the closing of this Offering.
23
<PAGE>
Immediately prior to the Reorganization, 60% of the member interests of the
LLC will be owned by a consortium of 27 broker-dealers or their affiliates.
Additionally, Brown & Company Securities Corporation ("Brown"), a major
customer of the Company, held subordinated debt of the LLC and an option to
purchase a member interest in the LLC (the "Brown Option"). After the closing
of this Offering, such broker-dealer owners, including Brown, will own 48.5%
of the Company's Common Stock (47.2% if the Underwriters' over-allotment
option is exercised in full). For the period from March 27, 1995 through
December 31, 1995, the years ended December 31, 1996 and 1997, and the three
months ended March 31, 1998, the broker-dealer owners and subordinated note
holders, were the source of 31.3%, 35.1%, 39.8%, and 41.3%, respectively of
the Company's total order flow. For the period from March 27, 1995 through
December 31, 1995, the years ended December 31, 1996 and 1997 and the three
months ended March 31, 1998, aggregate payments by the Company to its broker-
dealer owners and subordinated note holders for order flow and aggregate
profit distributions to broker-dealer owners equaled $14.4 million and $1.7
million, $46.4 million and $10.6 million, $50.7 million and $13.4 million,
$11.3 million and $5.0 million, respectively. See "Certain Transactions."
Pursuant to the limited liability company agreement of the LLC, its broker-
dealer owners have partially shared in the LLC profits in proportion to their
equity interest and partially in proportion to the quantity of order flow they
have directed to the Company. This arrangement will be discontinued upon
consummation of the Reorganization. The broker-dealer owners will no longer
receive any special inducements to send order flow to the Company and will not
be contractually or otherwise obligated to provide the Company with any order
flow in the future. See "Risk Factors--Risks Associated with Change of
Ownership Structure."
Revenues
The Company's revenues consist principally of net trading revenue from
market-making activities and, to a much lesser extent, net interest income
from the Company's cash and securities positions held at banks and in trading
accounts at clearing brokers. To date, the Company has only traded equity
securities, and has never traded in options, futures, forwards, swaps or other
derivative instruments. Net trading revenue, which represents trading gains
net of trading losses, is primarily affected by changes in trade and share
volumes from customers, the Company's ability to derive trading gains by
taking proprietary positions to facilitate customer transactions and, most
recently, by regulatory changes, and evolving industry customs and practices.
These regulatory changes and the move from securities being quoted in
sixteenths rather than eighths of a dollar have resulted in a decrease in net
trading revenue per trade. The Company's net trading revenue per trade for OTC
securities has historically exceeded the net revenue per trade for listed
securities.
Interest, net includes interest earned on cash balances held at banks and
clearing brokers, net of transaction-related interest charged by clearing
brokers for facilitating the settlement and financing of securities sold, not
yet purchased, and interest on subordinated notes. Interest, net is primarily
affected by the changes in cash balances held at banks and clearing brokers,
and the level of securities sold, not yet purchased, and the principal amount
outstanding under the subordinated notes.
Expenses
The Company's operating expenses largely consist of payments for order flow,
execution and clearance fees and employee compensation and benefits. A
substantial portion of these expenses are variable in nature. Payments for
order flow fluctuate based on share volume, the mix of market orders and limit
orders and the mix of orders received from broker-dealers compared to other
institutional customers. Execution and clearance fees fluctuate primarily
based on changes in trade and share volume, the mix of trades of OTC
securities compared to listed securities and the clearance fees charged by
clearing brokers. Employee compensation and benefits expense, which is largely
profitability based, fluctuates, for the most part, based on changes in net
trading revenue and the Company's profitability.
24
<PAGE>
Payments for order flow represent customary payments to broker-dealers, in
the normal course of business, for directing their order flow to the Company.
The Company does not pay for order flow from non-broker-dealer customers. As a
result of the new Order Handling Rules implemented by the SEC in 1997, the
Company changed its order flow payment policy from paying broker-dealers for
substantially all order executions, to paying broker-dealers only for orders
which provide the Company with a profit opportunity. For example, the Company
makes payments on market orders, but does not pay on limit orders. As a result
of these changes, the average order flow payment per transaction has declined.
Execution and clearance fees primarily represent clearance fees paid to
clearing brokers for OTC and listed securities, transaction fees paid to
NASDAQ for OTC securities, and execution fees paid to third parties, primarily
for executing trades in listed securities on the NYSE and AMEX and for
executing orders through Electronic Communications Networks ("ECNs").
Execution and clearance fees are higher for listed securities than for OTC
securities. Due to the Company's significant growth in share and trade volume,
the Company has been able to negotiate favorable rates and volume discounts
from clearing brokers and providers of execution services. As a result of
these lower rates and discounts and the increase in trade volume of OTC
securities as a percentage of total trade volume, execution and clearance fees
per trade have decreased.
Employee compensation and benefits expense primarily consists of salaries
and wages paid to administrative and customer service personnel and
profitability based compensation, which includes compensation and benefits
paid to market-making and sales personnel based on their individual
performance, and incentive compensation paid to all other employees based on
the overall profitability of the Company ("Profitability Based Compensation").
Profitability Based Compensation represented 65%, 79% and 78% of total
employee compensation and benefits expense for the period from March 27, 1995
through December 31, 1995 and the years ended December 31, 1996 and 1997,
respectively. Profitability Based Compensation represented 78% and 72% of
employee compensation and benefits expense for the three months ended March
31, 1997 and 1998, respectively. The Company has grown from 152 employees at
December 31, 1995 to 195 employees, 317 employees and 337 employees as of
December 31, 1996, 1997 and March 31, 1998, respectively. More than 70% of the
Company's employees are directly involved in market-making, sales or customer
service activities.
Communications and data processing expense primarily consists of costs for
obtaining stock market data and telecommunications services.
Depreciation and amortization expense results from the depreciation of fixed
assets purchased by the Company or financed under a capital lease, and the
amortization of goodwill, which includes contingent consideration, resulting
from the acquisition of the listed securities market-making business of
Trimark and the Tradetech acquisition.
Interest on Preferred Units expense represents required interest payments on
the Company's Mandatorily Redeemable Preferred A and B Units at a rate
approximating the Federal Funds rate. As of April 15, 1998, all outstanding
Preferred A Units have been redeemed and the Company has redeemed $1.2 million
of Preferred B Units. The Company intends to redeem all of the remaining
Preferred B Units for $13.8 million with the proceeds of this Offering.
Occupancy and equipment rentals expense primarily consists of rental
payments on office and equipment leases.
Business development expense primarily consists of marketing expenses,
including travel and entertainment expenses and promotion and advertising
costs.
Other expenses primarily consist of fees paid to computer programming and
systems consultants, as well as legal fees and other professional fees.
25
<PAGE>
Income Tax
Prior to the Reorganization, the Company was a limited liability company and
was not subject to federal or state income taxes. Subsequent to the
Reorganization, which will occur concurrently with the consummation of this
Offering, the Company will be subject to federal income taxes and state income
taxes in New York, New Jersey and other states. Income tax expense includes
pro forma amounts relating to federal income taxes, as well as pro forma
amounts relating to state income taxes in New York, New Jersey and other
states. The Company's pro forma effective tax rate will generally differ from
the federal statutory rate of 35% primarily due to state income taxes, as well
as the effect of nondeductible expenses, including the amortization of
goodwill resulting from the acquisition of the listed securities market-making
business of Trimark and the Tradetech acquisition and a portion of business
development expenses.
RESULTS OF OPERATIONS
The following table sets forth the consolidated statement of income data for
the periods indicated as a percentage of total revenues:
<TABLE>
<CAPTION>
PERIOD FROM THREE MONTHS
MARCH 27 THROUGH YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
---------------- -------------- --------------
1995 1996 1997 1997 1998
---------------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Revenues
Net trading revenue......... 99.6% 99.3% 99.1% 99.0% 99.2%
Interest, net............... 0.4 0.7 0.9 1.0 0.8
----- ------ ------ ------ ------
Total revenues............ 100.0 100.0 100.0 100.0 100.0
----- ------ ------ ------ ------
Expenses
Payments for order flow..... 37.2 37.7 29.5 35.6 25.6
Execution and clearance
fees....................... 18.2 14.0 14.1 12.6 16.1
Employee compensation and
benefits................... 17.4 21.3 25.5 23.6 25.4
Communications and data
processing................. 3.2 2.4 3.0 2.6 3.4
Depreciation and amortiza-
tion....................... 2.3 1.6 1.9 1.8 2.0
Interest on Preferred
Units...................... 1.9 1.1 0.9 1.2 0.7
Occupancy and equipment
rentals.................... 1.2 1.0 1.2 1.1 1.7
Business development........ 0.2 0.3 0.6 0.5 0.6
Other....................... 2.1 0.8 1.2 0.7 1.2
----- ------ ------ ------ ------
Total expenses............ 83.7 80.2 77.9 79.7 76.7
----- ------ ------ ------ ------
Income before income taxes.... 16.3 19.8 22.1 20.3 23.3
Pro forma income tax expense.. 7.5 8.5 9.5 8.8 10.0
----- ------ ------ ------ ------
Pro forma net income.......... 8.8% 11.3% 12.6% 11.5% 13.3%
===== ====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Revenues
Net trading revenue increased 24.8% to $63.0 million for the three months
ended March 31, 1998, from $50.5 million for the comparable period in 1997.
This increase was primarily due to higher trading volume, particularly higher
trade volume for OTC securities, which was offset in part by lower average net
trading revenue per trade. Total trade volume increased 100.3% to 7.6 million
trades for the three months ended March 31, 1998, from 3.8 million trades for
the comparable period in 1997. Total share volume increased 118.3% to 7.4
billion shares traded for the three months ended March 31, 1998, from 3.4
billion shares traded for the comparable period in 1997. Average net trading
revenue per trade decreased 37.7% to $8.32 per trade for the three months
ended March 31, 1998, from $13.36 per trade for the comparable period in 1997.
The
26
<PAGE>
decrease in average net trading revenue per trade was primarily due to the new
Order Handling Rules, which were implemented between January 1997 and October
1997, and, to a lesser extent, the move to securities being quoted in
sixteenths of a dollar rather than eighths of a dollar.
Interest, net increased 6.1% to $526,000 for the three months ended March
31, 1998, from $496,000 for the comparable period in 1997. This increase was
primarily due to larger cash balances held at banks and the Company's clearing
brokers, which was offset, in part, by increased transaction-related interest
expense resulting from a higher level of securities sold, not yet purchased.
Expenses
Payments for order flow decreased 10.3% to $16.3 million for the three
months ended March 31, 1998, from $18.1 million for the comparable period in
1997. As a percentage of net trading revenue, payments for order flow
decreased to 25.8% for the three months ended March 31, 1998, from 35.9% for
the comparable period in 1997. The decrease in payments for order flow on a
dollar basis and as a percentage of total revenue resulted from changes in the
Company's order flow payment policy, changes in the mix of market orders
versus limit orders, and changes in customer mix. Payments for order flow made
to broker-dealer owners and subordinated note holders represented 69.6% of
total payments for order flow for the three months ended March 31, 1998, as
compared to 78.9% for the comparable period in 1997 due to the expansion of
the Company's broker-dealer customer base.
Execution and clearance fees increased 59.7% to $10.2 million for the three
months ended March 31, 1998, from $6.4 million for the comparable period in
1997. As a percentage of net trading revenue, execution and clearance fees
increased to 16.3% of net trading revenue for the three months ended March 31,
1998, from 12.7% of net trading revenue for the comparable period in 1997. The
increase on a dollar basis was primarily due to a 100.3% increase in trades
for the comparable period in 1997, which was offset, in part, by a decrease in
clearance rates charged by clearing brokers and higher growth in the volume of
OTC securities transactions, which have lower execution costs than
transactions in listed securities. The increase in execution and clearance
fees as a percentage of net trading revenue was primarily due to the decrease
in the average net trading revenue per trade.
Employee compensation and benefits expense increased 34.6% to $16.2 million
for the three months ended March 31, 1998, from $12.0 million for the
comparable period in 1997. As a percentage of net trading revenue, employee
compensation increased to 25.7% of net trading revenue for the three months
ended March 31, 1998, from 23.8% of net trading revenue for the comparable
period in 1997. The increase on a dollar basis and as a percentage of net
trading revenue was primarily due to the Company's increased profitability and
an increase in the number of employees. Due to increased net trading revenue
and profitability, Profitability Based Compensation increased 24.8% to $11.6
million for the three months ended March 31, 1998, from $9.3 million for the
comparable period in 1997. The number of employees increased to 337 employees
as of March 31, 1998, from 228 employees as of March 31, 1997.
Communications and data processing expense increased 64.5% to $2.2 million
for the three months ended March 31, 1998, from $1.3 million for the
comparable period in 1997. This increase was generally attributable to higher
trading volumes, and an increase in the number of employees.
Depreciation and amortization expense increased 37.9% to $1.3 million for
the three months ended March 31, 1998, from $936,000 for the comparable period
in 1997. This increase was primarily due to the purchase of additional fixed
assets and leasehold improvements during 1997 and the first quarter of 1998 to
support the Company's expanded operations, and, to a lesser extent, the
amortization of goodwill recognized as part of the Tradetech acquisition,
which was completed in November 1997.
Interest on Preferred Units expense decreased 31.0% to $416,000 for the
three months ended March 31, 1998, from $604,000 for the comparable period in
1997. This decrease was primarily due to the redemption and retirement of
$10.2 million Preferred A Units by the Company in April 1997.
27
<PAGE>
Occupancy and equipment rental expense increased 101.5% to $1.1 million for
the three months ended March 31, 1998, from $537,000 for the comparable period
in 1997. This increase was primarily attributable to additional office space
and increased computer equipment lease expense. The Company occupied 75,768
square feet of office space at March 31, 1998, up from 47,598 square feet of
office space at March 31, 1997.
Business development expense increased 54.2% to $377,000 for the three
months ended March 31, 1998, from $244,000 for the comparable period in 1997.
This increase was primarily the result of higher travel and entertainment
costs.
Other expenses increased 104.6% to $747,000 for the three months ended March
31, 1998, from $365,000 for the comparable period in 1997. This was the result
of increased fees for computer programming and systems consultants.
Income Tax
Pro forma income tax expense was determined using an effective tax rate of
43% for the three months ended March 31, 1998 and 1997.
YEAR ENDED DECEMBER 31, 1997 AND 1996
Revenues
Net trading revenue increased 22.2% to $224.6 million in 1997, from $183.9
million in 1996. This increase was primarily due to higher trading volume,
particularly higher trade volume for OTC securities, which was offset in part
by lower average net revenue per trade. Total trade volume increased 74.7% to
20.3 million trades in 1997, from 11.6 million trades in 1996. Total share
volume increased 68.5% to 18.1 billion shares traded in 1997, from 10.8
billion shares traded in 1996. Average net revenue per trade decreased 30.1%
to $11.09 per trade in 1997, from $15.86 per trade in 1996, principally as a
result of the new Order Handling Rules, which were implemented during 1997,
and the reduction in the increments by which securities are quoted.
Interest, net increased 59.0% to $2.0 million in 1997, from $1.3 million in
1996. This increase was primarily due to larger cash balances held at banks
and the Company's clearing brokers, which was offset in part by increased
transaction-related interest expense resulting from a higher level of
securities sold, not yet purchased.
Expenses
Payments for order flow decreased 4.2% to $66.9 million, from $69.8 million
in 1996. As a percentage of net trading revenue, payments for order flow
decreased to 29.8% in 1997, as compared to 38.0% in 1996. The decrease in
payments for order flow on a dollar basis and as a percentage of total revenue
resulted from changes in the Company's order flow payment policy, changes in
the mix of market orders versus limit orders, and changes in customer mix.
Payments for order flow made to broker-dealer owners and subordinated note
holders represented 75.7% of total payments for order flow in 1997, from 66.4%
in 1996.
Execution and clearance fees increased 24.1% to $32.1 million in 1997, from
$25.8 million in 1996. As a percentage of net trading revenue, execution and
clearance fees remained relatively constant and were 14.3% of net trading
revenue in 1997 and 14.0% of net trading revenue in 1996. The increase on a
dollar basis was primarily due to increased trade volume, which was offset, in
part, by a decrease in clearance rates charged by clearing brokers, and growth
in the volume of OTC securities transactions, which have lower execution costs
than transactions in listed securities. The increase in execution and
clearance fees as a percentage of net trading revenue was primarily due to the
decrease in the average net trading revenue per trade.
Employee compensation and benefits expense increased 46.1% to $57.7 million
in 1997, from $39.5 million in 1996. As a percentage of net trading revenue,
employee compensation and benefits expense increased to 25.7% in 1997, from
21.5% in 1996. The increase on a dollar basis and as a percentage of net
trading revenue was primarily due to the Company's increased profitability and
growth in the number of employees. Due to increased net trading revenue and
profitability, Profitability Based Compensation increased 44.2% to $45.0
million in 1997, from $31.2 million in 1996. The number of employees increased
to 317 employees as of December 31, 1997, from 195 employees as of December
31, 1996.
28
<PAGE>
Communications and data processing expense increased 56.2% to $6.8 million
in 1997, from $4.4 million in 1996. This increase was generally attributable
to higher trading volumes, and an increase in the number of employees.
Depreciation and amortization expense increased 42.0% to $4.2 million in
1997, from $3.0 million in 1996. This increase was primarily due to the
purchase of approximately $4.8 million of additional fixed assets and
leasehold improvements during 1997 and the amortization of goodwill related to
the acquisition of the listed securities market-making business of Trimark.
Interest on Preferred Units expense decreased 7.2% to $1.9 million in 1997,
from $2.1 million in 1996. This decrease was primarily due to the redemption
and retirement of 1,022,208 Preferred A Units by the Company in April 1997 for
$10.2 million.
Occupancy and equipment rentals expense increased 49.6% to $2.7 million in
1997, from $1.8 million in 1996. This increase was primarily attributable to
additional office space and increased computer equipment lease expense. The
Company occupied 56,351 square feet of office space at December 31, 1997, up
from 47,598 square feet of office space at December 31, 1996.
Business development expense increased 134.1% to $1.5 million in 1997, from
$623,000 in 1996. This increase was primarily the result of higher travel and
entertainment costs.
Other expenses increased 96.0% to $2.8 million in 1997, from $1.4 million in
1996. This increase was primarily due to increased professional fees for
computer programming and systems consultants.
Income Tax
Pro forma income tax expense was determined using an effective tax rate of
43% for 1997 and 1996.
YEAR ENDED DECEMBER 31, 1996 VERSUS THE PERIOD FROM MARCH 27, 1995 THROUGH
DECEMBER 31, 1995
Revenues
Net trading revenue increased to $183.9 million in 1996, from $69.5 million
for the period from March 27, 1995 through December 31, 1995 (the "1995
Period"). Total trade volume increased to 11.6 million trades in 1996, from
5.0 million trades in the 1995 Period. Total share volume increased to 10.8
billion shares traded in 1996, from 4.7 billion shares traded in the 1995
Period. Average net trading revenue per trade increased to $15.86 per trade in
1996, from $13.92 per trade in the 1995 Period due to significant growth in
OTC securities volume.
Interest, net increased to $1.3 million in 1996, from $296,000 in the 1995
Period. This increase was primarily due to larger cash balances held at banks
and the Company's clearing brokers and the exchange of $5.0 million of
subordinated notes for equity interests in the Company in January 1996, which
was offset, in part, by increased transaction-related interest expense costs
resulting from a higher level of securities sold, not yet purchased.
Expenses
Payments for order flow increased to $69.8 million in 1996, from $26.0
million in the 1995 Period. As a percentage of net trading revenue, payments
for order flow increased slightly to 38.0% in 1996, from 37.4% in the 1995
Period. The increase on a dollar basis and as a percentage of net trading
revenue resulted from the commencement of OTC securities market-making in July
1995, and the higher trading volumes in 1996. Payments for order flow made to
broker-dealer owners and subordinated note holders represented 66.4% of total
payments for order flow for 1996, from 55.4% in the 1995 Period.
Execution and clearance fees increased to $25.8 million in 1996, from $12.7
million in the 1995 Period. As a percentage of net trading revenue, execution
and clearance fees decreased to 14.0% in 1996, from 18.3% in the 1995 Period.
The dollar increase was primarily due to increased trade volumes. The decrease
as a
29
<PAGE>
percentage of net trading revenue was primarily due to strong growth in the
volume of OTC securities transactions, which have lower execution costs than
transactions in listed securities.
Employee compensation and benefits expense increased to $39.5 million in
1996, from $12.2 million in the 1995 Period. As a percentage of net trading
revenue, employee compensation and benefits expense increased to 21.5% in
1996, from 17.5% in the 1995 Period. The increase on a dollar basis and as a
percentage of net trading revenue was primarily due to increased profitability
and growth in the number of employees. The number of employees increased to
195 employees as of December 31, 1996, from 152 employees as of December 31,
1995.
Communications and data processing expense increased to $4.4 million in
1996, from $2.2 million in the 1995 Period. This increase was generally
attributable to higher trading volumes and an increase in the number of
employees.
Depreciation and amortization expense increased to $3.0 million in 1996,
from $1.6 million in the 1995 Period. This increase was the result of the
purchase of $3.9 million of additional fixed assets and leasehold improvements
during 1996 and the amortization of goodwill related to the acquisition of the
listed securities market-making business of Trimark.
Interest on Preferred Units expense increased to $2.1 million in 1996, from
$1.3 million in the 1995 Period. This increase was primarily due to the
issuance of $13.2 million Preferred A Units during 1996, which was offset in
part by the redemption and retirement of $3.9 million Preferred A Units by the
Company in April 1996.
Occupancy and equipment rentals expense increased to $1.8 million in 1996,
from $849,000 in the 1995 Period. This increase was primarily attributable to
additional office space leased by the Company in 1996. The Company occupied
47,598 square feet of office space at December 31, 1996, up from 26,174 square
feet of office space at December 31, 1995.
Business development expense increased to $623,000 in 1996, from $130,000 in
the 1995 Period. This increase was primarily the result of higher travel and
entertainment costs.
Other expenses decreased to $1.4 million in 1996, from $1.5 million in the
1995 Period. This decrease was primarily due to higher professional fees and
promotional costs incurred in the 1995 Period in connection with the formation
of Knight and the acquisition of the listed securities market-making business
of Trimark.
Income Tax
Pro forma income tax expense was determined using an effective tax rate of
43% for 1996 and 46% in the 1995 Period. The effective tax rate in the 1995
Period differed from the effective rate in 1996 due to one-time nondeductible
syndication expenses incurred in the 1995 Period in connection with the
formation of the Company.
30
<PAGE>
CONSOLIDATED QUARTERLY RESULTS
The following table sets forth certain unaudited consolidated quarterly
statement of income data, such data as a percentage of total revenues and
certain unaudited consolidated quarterly operating data for the nine quarters
ended March 31, 1998. In the opinion of the Company's management, this
unaudited information has been prepared on substantially the same basis as the
consolidated financial statements appearing elsewhere in this Prospectus and
includes all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the unaudited consolidated quarterly data. The
unaudited consolidated quarterly data should be read in conjunction with the
audited consolidated financial statements and notes thereto appearing
elsewhere in this Prospectus. The results for any quarter are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1996 1996 1996 1996 1997 1997 1997 1997 1998
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Net trading reve-
nue............... $ 39,138 $ 54,000 $ 38,150 $ 52,606 $ 50,482 $ 49,656 $ 58,060 $ 66,426 $ 63,007
Interest, net...... 174 219 389 500 496 435 510 598 526
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues..... 39,312 54,219 38,539 53,106 50,978 50,091 58,570 67,024 63,533
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Expenses
Payments for order
flow.............. 14,234 19,390 15,696 20,509 18,129 16,841 16,136 15,806 16,257
Execution and
clearance fees.... 5,819 6,592 5,936 7,489 6,411 6,873 8,576 10,209 10,241
Employee
compensation and
benefits.......... 7,745 12,627 7,932 11,191 12,013 12,492 15,034 18,178 16,168
Communications and
data processing... 882 1,063 1,124 1,291 1,319 1,721 1,832 1,937 2,170
Depreciation and
amortization...... 637 719 770 849 936 1,062 1,083 1,143 1,291
Interest on
Preferred Units... 504 451 540 597 604 477 435 425 416
Occupancy and
equipment
rentals........... 436 424 450 468 537 565 666 889 1,082
Business
development....... 101 140 162 221 245 432 321 462 377
Other.............. 241 307 357 523 365 737 860 837 747
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses..... 30,599 41,713 32,967 43,138 40,559 41,200 44,943 49,886 48,749
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income
taxes.............. 8,713 12,506 5,572 9,968 10,419 8,891 13,627 17,138 14,784
Pro forma income tax
expense............ 3,747 5,378 2,396 4,286 4,480 3,823 5,860 7,369 6,357
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Pro forma net
income............. $ 4,966 $ 7,128 $ 3,176 $ 5,682 $ 5,939 $ 5,068 $ 7,767 $ 9,769 $ 8,427
========== ========== ========== ========== ========== ========== ========== ========== ==========
Revenues
Net trading
revenue........... 99.6% 99.6% 99.0% 99.1% 99.0% 99.1% 99.1% 99.1% 99.2%
Interest, net...... 0.4 0.4 1.0 0.9 1.0 0.9 0.9 0.9 0.8
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues..... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Expenses
Payments for order
flow.............. 36.2 35.8 40.7 38.6 35.6 33.6 27.5 23.6 25.6
Execution and
clearance fees.... 14.8 12.2 15.4 14.1 12.6 13.7 14.6 15.2 16.1
Employee
compensation and
benefits.......... 19.7 23.3 20.6 21.1 23.6 24.9 25.7 27.1 25.4
Communications and
data processing... 2.2 2.0 2.9 2.4 2.6 3.4 3.1 2.9 3.4
Depreciation and
amortization...... 1.6 1.3 2.0 1.6 1.8 2.1 1.8 1.7 2.0
Interest on
Preferred Units... 1.3 0.8 1.4 1.1 1.2 1.0 0.8 0.6 0.7
Occupancy and
equipment
rentals........... 1.1 0.7 1.2 0.9 1.0 1.1 1.2 1.3 1.7
Business
development....... 0.3 0.3 0.4 0.4 0.5 0.9 0.5 0.7 0.6
Other.............. 0.6 0.5 0.9 1.0 0.7 1.6 1.5 1.3 1.2
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses..... 77.8 76.9 85.5 81.2 79.6 82.3 76.7 74.4 76.7
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income
taxes.............. 22.2 23.1 14.5 18.8 20.4 17.7 23.3 25.6 23.3
Pro forma income tax
expense............ 9.5 9.9 6.2 8.1 8.8 7.6 10.0 11.0 10.0
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Pro forma net in-
come............... 12.7% 13.2% 8.3% 10.7% 11.6% 10.1% 13.3% 14.6% 13.3%
========== ========== ========== ========== ========== ========== ========== ========== ==========
OTHER OPERATING DA-
TA(1):
Total shares traded
................... 2,316,854 2,909,494 2,360,870 3,170,712 3,392,640 3,594,245 5,025,399 6,110,546 7,406,164
Total trades
executed .......... 2,518 3,021 2,637 3,422 3,780 4,141 5,550 6,793 7,572
Average daily trades
................... 40 48 42 53 63 65 88 103 124
Average daily net
trading revenues... $ 621 $ 857 $ 606 $ 809 $ 841 $ 776 $ 922 $ 1,006 $ 1,033
</TABLE>
- -------
(1) In thousands.
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The Company has experienced and expects to continue to experience,
significant fluctuations in quarterly operating results, including the value
of the Company's securities positions and the Company's ability to manage the
risks attendant thereto, the volume of its market-making activities,
volatility in the securities markets, its ability to manage personnel,
overhead and other expenses, the amount of revenue derived from limit orders
as a percentage of total revenues, changes in payments for order flow,
clearing costs, the addition or loss of sales and trading professionals,
regulatory changes, the amount and timing of capital expenditures, the
incurrence of costs associated with acquisitions and general economic
conditions. The Company's expense structure is based on historical expense
levels and the levels of demand for the Company's market-making services. If
demand for the Company's market-making services declines and the Company is
unable to adjust its cost structure on a timely basis, the Company's operating
results could be materially and adversely affected. The Company has
experienced, and may experience in the future, significant seasonality in its
business. The Company has historically experienced an increase in revenues in
the fourth quarter of the year, which the Company believes is due, in large
part, to higher trading volumes in the securities markets at year end. The
Company believes that this seasonal trend will continue for the foreseeable
future and that the Company's business, financial condition and operating
results may be affected by such trends in the future.
Due to all of the foregoing factors, period-to-period comparisons of the
revenues and operating results of the Company are not necessarily meaningful
and such comparisons cannot be relied upon as indicators of future
performance. There also can be no assurance that the Company will be able to
sustain the rates of revenue growth that it has experienced in the past, that
it will be able to improve its operating results or that it will be able to
sustain its profitability on a quarterly basis. See "Risk Factors--Risks
Associated with Potential Fluctuations in Quarterly Results; Seasonality."
LIQUIDITY
The Company has financed its business primarily through cash generated by
operations, as well as the private placement of preferred and common units and
borrowings under subordinated notes. As of March 31, 1998, the Company had
$171.1 million in assets, 86.0% of which consisted of cash or assets readily
convertible into cash (principally receivables from clearing brokers and
securities owned). Receivables from clearing brokers include interest bearing
cash balances held with clearing brokers and net receivables for transactions
that have not yet reached their contracted settlement date, which is generally
within three business days of the trade date. Securities owned principally
consist of equity securities which trade in NASDAQ and on the NYSE and AMEX
markets.
Pro forma net income plus depreciation and amortization was $9.7 million
during the three months ended March 31, 1998, up 41.3% from $6.9 million
during the comparable period in 1997. Pro forma net income plus depreciation
and amortization was $32.8 million in 1997, up 36.9% from $23.9 million in
1996. Depreciation and amortization expense, which related to fixed assets and
goodwill, was $1.3 million for the three months ended March 31, 1998, from
$936,000 for the comparable period in 1997. Depreciation and amortization
expense was $4.2 million and $3.0 million in 1997 and 1996, respectively. The
Company's capital expenditures were $2.4 million for the three months ended
March 31, 1998 or 4% of total revenues. Capital expenditures were $5.2 million
in 1997 and $5.3 million in 1996, or 2% and 3% of total revenues in each year,
respectively. Capital expenditures in 1997 primarily related to the purchase
of data processing and communications equipment, as well as leasehold
improvements and additional office facilities to support the Company's growth.
Additionally, during 1997, the Company made cash payments of $2.4 million in
connection with its acquisitions of the listed securities market-making
businesses of Trimark in 1995 and Tradetech in 1997. The Company's aggregate
minimum rental commitments for 1998 are $3.8 million, and it expects that it
will incur $8.0 million of capital expenditures during 1998.
As registered broker-dealers and market makers, Knight and Trimark are
subject to regulatory requirements intended to ensure the general financial
soundness and liquidity of broker-dealers and requiring the maintenance of
minimum levels of net capital, as defined in SEC Rule 15c3-1 ($1.0 million
each as of March 31, 1998). These regulations also prohibit a broker-dealer
from repaying subordinated borrowings, paying cash
32
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dividends, making loans to its parent, affiliates or employees, or otherwise
entering into transactions which would result in a reduction of its total net
capital to less than 120.0% of its required minimum capital. Moreover, broker-
dealers, including Knight and Trimark, are required to notify the SEC prior to
repaying subordinated borrowings, paying dividends and making loans to its
parent, affiliates or employees, or otherwise entering into transactions,
which, if executed, would result in a reduction of 30.0% or more of their
excess net capital (net capital less minimum requirement). The SEC has the
ability to prohibit or restrict such transactions if the result is detrimental
to the financial integrity of the broker-dealer. At March 31, 1998, Knight had
net capital of $39.1 million, which was $38.1 million in excess of its required
net capital of $1.0 million and Trimark had net capital of $16.1 million, which
was $15.1 million in excess of its required net capital of $1.0 million.
The Company has used a portion of its capital resources to pay interest on
its issued and outstanding Mandatorily Redeemable Preferred A and B Units, and
to make quarterly distributions to its members to meet their estimated income
tax obligations on their share of the Company's taxable income. The Preferred
A and B Units bore interest at a rate approximating the Federal Funds rate.
The Preferred A Units were redeemed and retired in their entirety in April
1998 for approximately $12.5 million in cash. In April 1998, the Company
redeemed a portion of the Preferred B Units for approximately $1.2 million in
cash. The Company intends to use $13.8 million of the proceeds of the Offering
to redeem all of the remaining outstanding Preferred B Units. See "Use of
Proceeds." After the Offering, the Company will no longer make distributions
to its owners for income tax purposes.
The Company and its subsidiaries currently anticipate that net proceeds from
this Offering together with their available cash resources and credit
facilities will be sufficient to meet their anticipated working capital and
capital expenditure requirements for at least the next 12 months.
MARKET RISK
On January 28, 1997, the SEC adopted new rules (Securities Act Release No.
7386) that require disclosures about the policies used to account for
derivatives, and certain quantitative and qualitative information about market
risk exposures. Since its inception, neither the Company or its subsidiaries
has traded or otherwise transacted in derivatives.
In the normal course of its market-making business, the Company maintains
inventories of exchange-listed and OTC securities. The fair value of these
securities at March 31, 1998 and December 31, 1997 was $63.5 million and $61.7
million, respectively, in long positions and $54.6 million and $21.1 million,
respectively, in short positions. The potential loss in fair value, using a
hypothetical 10.0% decline in prices, is estimated to be approximately $1.0
million and $4.0 million as of March 31, 1998 and December 31, 1997,
respectively, due to the offset of losses in long positions with gains in
short positions.
For working capital purposes, the Company invests in money market funds or
maintains interest bearing balances in its trading accounts with clearing
brokers, which are classified as cash equivalents and receivable from clearing
brokers, respectively, in the consolidated statement of financial condition.
These amounts do not have maturity dates or present a material market risk, as
the balances are short-term in nature and subject to daily repricing.
YEAR 2000
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than two years, computer systems
and/or software used by many companies, including computers involved in the
securities industry, may need to be upgraded to comply with such "Year 2000"
requirements. The Company has undertaken a project to identify and modify non-
year 2000 compliant communications and data processing systems in anticipation
of the Year 2000. The
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<PAGE>
Company's main trading-related systems are currently Year 2000 compliant. The
Company plans to have its other computer systems certified by the end of 1998.
However, there can be no assurance that such schedule will be met or the
systems of other companies on which the Company's business is dependent also
will be converted timely or that any such failure to convert by another
company would not have an adverse effect on the Company's business. The
Company's progress under its Year 2000 compliance plan is reviewed and
monitored by senior management.
The success of the Company's plan depends heavily on parallel efforts being
undertaken by other entities with which the Company's systems interact, most
notably the Company's clearing brokers and the major securities industry
service organizations, and therefore, the Company is taking steps to determine
the status of these other entities' Year 2000 compliance. The Company's plan
includes participating in industry-wide testing during the fourth quarter of
1998.
The total cost of the Year 2000 project is currently estimated to be
approximately $500,000. This amount primarily represents the total estimated
man-hour costs of internal Company resources working on the Year 2000 project.
Costs related to the project are expensed as incurred, and the Company has
incurred approximately $250,000 of such costs as of March 31, 1998.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, Accounting for
Transfers of Assets and Servicing of Financial Assets and Extinguishments of
Liabilities, which provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities. On
December 31, 1996, the FASB issued SFAS No. 127, Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125, which defers the
effective date of SFAS No. 125 until January 1, 1998 for transfers which are
part of repurchase agreements, dollar-roll, securities lending or similar
transactions. The Company adopted SFAS No. 125 and SFAS No. 127 effective
January 1, 1997 and January 1, 1998, respectively. The adoption of the
provisions of these standards did not have a material impact on the Company's
financial statements.
In February 1997, the FASB issued SFAS No. 128, Earnings Per Share. This
statement establishes standards for computing and presenting earnings per
share and applies to entities with publicly held common stock or potential
common stock. The Company adopted the provisions of SFAS No. 128 effective
December 31, 1997. The adoption of these provisions required the presentation
of earnings per share in the financial statements included elsewhere in this
Prospectus.
In February 1997, the FASB also issued SFAS No. 129, Disclosure of
Information about Capital Structure. This statement establishes standards for
disclosing information about an entity's capital structure. The Company
adopted the provisions of SFAS No. 129 on its effective date of January 1,
1998. The adoption of these provisions did not have a material impact on the
Company's financial statements.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income
which establishes standards for the reporting and display of comprehensive
income and its components. The Company adopted the provisions of SFAS No. 130
on its effective date of January 1, 1998. The adoption of these provisions did
not have any impact on the Company's financial statements.
In June 1997, the FASB also issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, which determines how segments are
determined and reported. The Company adopted the provisions of SFAS No. 131 on
its effective date of January 1, 1998. As the Company operates only in a
single segment and a single line of business - equity securities market-
making, the adoption of these provisions did not have any impact on the
Company's financial statements.
34
<PAGE>
BUSINESS
OVERVIEW
The Company is a leading market maker in NASDAQ securities, other OTC equity
securities and equity securities listed on the NYSE and the AMEX in the Third
Market. The Company has attained this leadership position by providing best
execution services to broker-dealers and institutional customers through its
sophisticated trading systems and proprietary methods. Through its wholly-
owned subsidiary, Knight, the Company makes markets in approximately 4,200
equity securities in NASDAQ and on the OTC Bulletin Board of the NASD. The
Company, through its wholly-owned subsidiary, Trimark, makes markets in all
NYSE- and AMEX-listed equity securities in the Third Market.
Since the beginning of 1997, Knight and Trimark have significantly increased
their market share of trading volume in each of their respective markets.
According to AutEx, Knight's advertised share volume in NASDAQ increased from
614.7 million shares representing 4.4% of total market share (or a rank of 6th
overall) for the month of January 1997, to 1.2 billion shares representing
8.1% of total market share (or a rank of 2nd overall) for the month of
December 1997, to 1.9 billion shares representing 9.9% of total market share
(or a rank of 1st overall) for the month of March 1998. According to the NASD,
Trimark's reported share volume of the NYSE-listed securities increased from
234.2 million shares representing 21.2% of total NYSE Third Market volume (or
a rank of 1st overall) for the month of January 1997, to 338.4 million shares
representing 30.5% of total NYSE Third Market volume (or a rank of 1st
overall) for the month of December 1997, to 445.6 million shares representing
33.1% of total NYSE Third Market volume (or a rank of 1st overall) for the
month of March 1998. Trimark's reported share volume of AMEX-listed securities
increased from 40.2 million shares representing 51.4% of total AMEX Third
Market volume (or a rank of 1st overall) for the month of January 1997, to
78.7 million shares representing 66.4% of total AMEX Third Market volume (or a
rank of 1st overall) for the month of December 1997, to 80.4 million shares
representing 68.9% of total AMEX Third Market volume (or a rank of 1st
overall) for the month of March 1998.
INDUSTRY BACKGROUND
During recent years, the U.S. market for equity securities has experienced
dramatic growth in trading volumes. The average daily volume of securities
traded in NASDAQ increased from 225.0 million shares in December 1992 to 678.5
million shares in December 1997. The average daily volume of securities traded
on the NYSE increased from 222.2 million shares in December 1992 to 546.9
million shares in December 1997. During this period, the average daily trading
volume of the Third Market, which consists of trading in NYSE- and AMEX-listed
securities in the OTC market, also increased significantly. The increase in
trading volume has resulted from a number of factors, including the growth of
cash flows into equity-based mutual funds, historic high returns in U.S.
equity markets, the emergence and market acceptance of electronic discount
brokers, technological innovations, such as the emergence of the Internet, and
reduced transaction costs. In addition, due to favorable market conditions,
companies have increasingly raised capital through the U.S. equity markets,
which has resulted in a significant increase in the number of companies that
are quoted in NASDAQ or listed on the NYSE. At March 31, 1998, there were
approximately 5,500 and 3,046 companies, respectively, quoted in NASDAQ and
listed on the NYSE, as compared to approximately 4,100 and 2,008 at December
31, 1992.
The retail brokerage business has been impacted by advances in technology
that have provided new and inexpensive means for individual investors to
access and participate in the market for equity securities. For example, the
Internet has facilitated individual investors' access to market information
and has significantly reduced transaction costs. The proliferation of Internet
brokers has resulted in dramatically lowered commissions charged for trading
securities. For example, some Internet brokers charge less than $10.00 per
trade for a 1,000 share trade compared to over $300.00 per trade for some
traditional "full service" brokers. While handling an increasing number of
trades for a wide range of securities, Internet brokers provide more
35
<PAGE>
immediate access to the market place than many other retail brokers.
Additionally, mutual funds and other institutional investors are also
demanding better execution of their trades and are seeking to reduce trading
costs. The Internet brokerage business model and the demands of institutional
investors have forced traditional brokers to change their approach to their
business and seek ways to manage increased trading volumes while providing
improved trade execution and reducing costs.
These changes have caused significant pressure on market makers, a critical
and lesser known part of the securities industry. Market makers typically
provide trading execution by offering to buy securities from, or sell
securities to, broker-dealers and institutional investors. Firms that have
elected to make a market in a security display the price at which they are
willing to buy (bid) or sell (ask) these securities and adjust their bid and
ask prices in response to the forces of supply and demand for each security.
Market makers are either a department within larger, diversified securities
firms or independent businesses. The internal market-making departments of
securities firms often are limited in their ability to handle significant
trading volumes in a broad range of securities and, as a result, are often
unable to provide adequate or enhanced liquidity. Most discount brokers and
on-line brokers do not have internal market-making functions and, accordingly,
rely entirely on independent market makers for trade execution.
A market maker typically acts as principal and derives most of its revenues
from the difference between the price paid when a security is bought and the
price received when that security is sold. In the past, market makers relied
on the spreads between bid and ask prices to ensure profitability and built
cost structures based on these spreads. However, changes in regulations
governing the securities industry and, to a lesser extent, the move from
securities being quoted in sixteenths rather than eighths of a dollar, have
dramatically reduced average spreads. Implemented in January 1997, the SEC's
Limit Order Display Rule requires the display or execution of customer limit
orders (orders to buy or sell stock at a particular price) that (1) are priced
better than a market maker's quote or (2) in certain circumstances add to the
size associated with the market maker's quote when the market maker is at the
best price in the market. The Limit Order Display Rule enables investors to
advertise directly their trading interest to the market, thereby allowing them
to compete with market maker quotes and affect the size of bid-ask spreads.
Additional regulations adopted by the NASD require market makers to fill a
customer's limit order before their own trades. Since the implementation of
the Limit Order Display Rule and the move to trading in sixteenths of a
dollar, NASDAQ and NYSE spreads have each decreased by an average of 35%.
Spreads could further decline if NASDAQ adopts proposed regulations under
which securities would be traded in decimals rather than in fractions.
In this new narrower spread environment, maintaining profitability has
become extremely difficult for many traditional marker makers. At the same
time, market makers have become subject to an increasing demand for better
execution standards and improved customer service. To meet these demands and
remain competitive, market makers have been forced to reexamine their
traditional spread-based approach to market making and to make extensive
technological and human resource investments. To leverage these large
investments and to remain profitable, market makers must execute a larger
volume of trades and maintain increased inventory positions. However, the
significant increases in trading volumes are only a benefit for the market
maker if its cost per trade is lower than its revenues per trade and if the
market maker is able to manage the risks associated with larger inventory
positions.
In response to these challenges, traditional brokerage firms are
increasingly electing to focus on their core competencies and to outsource
their market-making functions to independent market makers. In addition,
Internet brokers, who are handling increased trading volume, also utilize
independent market makers. According to AutEx, in March 1998, the three
largest independent market makers represented a combined market share of 25.4%
of the trading volumes of OTC equity securities, up from 17.2% in March 1997.
Similarly, according to the NASD, in March 1998 the three largest Third Market
trading firms represented a combined market share of 58% of the Third Market
volume in NYSE-listed equity securities compared to 42% in June 1997. The
three largest Third Market trading firms in AMEX-listed securities represented
a combined market share of 75% in March 1998 compared to 55% in June 1997.
While large volumes of trading provides an opportunity to spread fixed costs
over a larger number of trades, net profit per
36
<PAGE>
trade has declined. Certain independent market makers are seeking new trading
methodologies to identify and take advantage of the profit opportunities
represented by each trade. These market makers are also seeking to increase
the number of buy and sell orders that they receive ("order flow") which, in
turn, will provide increased trading profit opportunities. These market makers
require efficient and sophisticated systems and risk management practices and
personnel with the requisite expertise to deliver superior trade execution and
customer service, while handling increased order flow and maintaining low
costs per trade.
THE KNIGHT/TRIMARK SOLUTION
The Company is a leading market maker in NASDAQ securities, other OTC equity
securities and equity securities listed on the NYSE and the AMEX in the Third
Market. The Company has attained a leadership position by providing best
execution services to broker-dealer and institutional customers through its
sophisticated trading systems and proprietary methods. Through Knight, the
Company makes markets in approximately 4,200 equity securities in NASDAQ and
on the NASD's OTC Bulletin Board. The Company, through Trimark, makes markets
in all NYSE- and AMEX-listed equity securities in the Third Market. The
Company is committed to providing a value-added execution methodology that
emphasizes automated execution and rule compliance, real-time information
access to customers and pricing plus liquidity advantages based upon the
Company's willingness to commit capital. The main elements of the Company's
solution include:
. Superior Execution and Enhanced Liquidity. The Company has implemented a
variety of best execution practices which meet or exceed customer
requirements and provide its customers with significantly enhanced
liquidity, while complying with SEC and NASD regulations. These practices
include the following:
Knight
- Knight provides guaranteed, automated, electronic, continuous execution
for over 3,000 NASDAQ securities in which it makes markets for orders of
up to 2,000-3,000 shares on quotes as low as 100 shares.
- Knight, a year prior to the implementation of the SEC's Limit Order
Display Rule, established a policy of displaying all unexecuted limit
orders for 2,000 shares or greater.
- In March 1998, for securities in which Knight was a market maker, 99.9%
of all orders eligible for automated execution were executed within 3
seconds.
- Knight was the first, and remains the only, market maker to guarantee
execution, at the opening, of market-eligible orders it has received
before the opening for all shares in which it makes a market, up to an
aggregate of 250,000 shares.
- Knight guarantees that it will execute trades at the opening price for
substantially all NASDAQ initial public offerings, up to an aggregate of
250,000 shares.
- Knight has considerable expertise in handling large trades and, in March
1998, it executed 80,559 trades of 5,000 shares or greater.
- Knight was the first market maker to accept stop orders on all NASDAQ
stocks. A stop order is an order to buy/sell a security immediately if
the security's market price falls/rises to a specified price.
Trimark
- Trimark provides guaranteed, automated, electronic, continuous execution
in every NYSE- and AMEX-listed equity security at the National Best Bid
or Offer ("NBBO") for all orders eligible for automated execution.
- Trimark accepts all orders that can be sent to a primary exchange, i.e.
short sale, all or none, or stop order.
37
<PAGE>
- Trimark provides execution for orders up to 5,000 shares at the NBBO
regardless of the quote's size for a select group of over 500 of the most
actively traded stocks, representing more than 75% of NYSE volume.
- Trimark not only guarantees the customer's market order to receive the
best price available on any exchange or by any competing market maker,
but Trimark frequently delivers that price for many more shares than
advertised if demanded by the customer.
- Trimark offers various proprietary features such as limit order execution
protection based on the primary exchange and price improvement
guarantees.
. Commitment to Highest Quality Customer Service. The Company is committed to
providing the highest quality customer service. The Company believes that
its highly skilled, experienced and entrepreneurial workforce is uniquely
positioned to address the needs of its customers. The Company has 49
employees involved in customer service, with an average of 7.5 years of
related experience. The Company's customer service group is dedicated to
handling orders greater than the automated execution size and ensuring
consistent quality of execution.
The Company is currently implementing its proprietary electronic
communications gateway product, "e.Knight," which enables broker-dealers
and institutions to access the Knight and Trimark trading systems from
their desktops through the Internet and other electronic communications
gateways. In addition, e.Knight provides a backup service to certain of the
Company's customers. If a customer's system fails, e.Knight provides the
customer with uninterrupted access to the Company's trading systems and
thereby enables the customer to continue to provide services to its
clients.
The Company supplies each of its customers with monthly execution reports
that provide a level of detail exceeding regulatory requirements. The
report documents the percentage of price-improved shares and trades, the
average dollar value per share and the total dollar value of all price
improvements. This report is a valuable tool to the Company's customers as
it enables them to monitor their compliance with regulatory requirements to
seek and obtain best execution for their clients' trades.
. Sophisticated Trading Technology. The Company relies on sophisticated
technology to facilitate its market-making activities. Knight uses the
Brass trading system under license from Automated Securities Clearance,
Ltd. ("ASC"). Brass is used by over 130 market makers. Knight is one of
only two Brass users to run Brass on its own computers with its own
personnel, while all other market makers use ASC as a service bureau.
Trimark employs a TCAM/Appletree trading system. The Company has made
significant investments in its technology platform and infrastructure since
its inception. The Company's trading systems are augmented by software
applications that enable the processing of a large volume of order flow
efficiently, without diminishing speed of execution. The Company's systems
are designed to process up to 500,000 trades per day and in March, 1998
handled a combined average of 134,000 trades per day.
. Proprietary Trading Methods. The Company's net trading revenues are
dependent on its ability to evaluate and act rapidly on market trends and
successfully manage risk. The Company's methodology focuses on the dynamic,
real time analysis of market activity and price movements, which enables
the Company to better manage risk. Throughout the business day, the Company
continually analyzes its trading positions in individual securities and
monitors its short and long positions and its aggregate profits and losses.
Management uses this information to assess market trends and adjust its
trading strategy on a real time basis in an effort to maximize its trading
profits.
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<PAGE>
STRATEGY
The Company's goal is to maintain and enhance its leadership position in the
market-making industry through the following key strategies:
Continue to Invest in Leading Technologies. The Company believes that its
future growth and profitability will depend largely on its continued
investment in leading technologies. For example, the Company believes that an
increasing number of customers and proportion of order flow will reach market
makers through the Internet and other electronic communications gateways. The
Company intends to expand into this growing market segment by increasing the
number of customers with access to e.Knight and by examining other possible
electronic means of capturing order flow. The Company also intends to augment
its Brass and TCAM/Appletree trading systems with proprietary software
applications to ensure that it has the capability to process greater trading
volumes in the future.
Aggressively Capture New Order Flow. The Company believes that extensive
order flow is critical to creating opportunities for trading revenues. The
Company is focused on increasing order flow to enhance its position as a
leading market maker and create additional revenue opportunities. The Company
intends to retain and expand customer relationships by continuing to provide
low-cost, high quality execution services, and intends to continue to respond
to evolving customer needs through the development of new services and
customer service excellence. Knight is seeking regulatory approval to increase
the number of securities in which it is allowed to make a market.
Significantly Expand Institutional Market Share. The Company believes it has
an opportunity to significantly increase its institutional customer base.
Trades for institutional investors generally have higher margins because these
investors do not receive payments for order flow. The Company is seeking to
increase its penetration of this market by marketing e.Knight to institutions
that manage more than $1 billion in assets and invest predominantly in equity
securities. In addition, within the next 18 months, the Company also plans to
significantly increase its institutional sales force.
Invest in and Develop the Best Human Capital. The Company believes that
investing in human capital is key to delivering best execution practices and
high quality customer service. The Company intends to continue its practice of
aggressively recruiting high caliber personnel and retaining such personnel by
providing appropriate compensation incentives. The Company believes that it
has high employee morale due to its competitive performance-based incentive
compensation structure and its encouragement of a highly cooperative and
creative culture. In addition, Knight has its own in-house training program
for trading staff, Knight School, which provides ongoing training and skill-
development to Knight's sales and trading personnel. The Company intends to
expand this initiative and to develop additional programs to improve the
skills and productivity of its workforce.
Develop New Services. The Company intends to continue to develop new
services that address evolving customer needs and technological requirements.
The Company recently launched e.Knight, which it plans to provide to the
majority of its institutional and broker-dealer customers and use as a means
of establishing new customer relationships. The Company also plans to
introduce additional services to support customers in executing equity
transactions. For example, the Company has recently developed an Electronic
Communications Network ("ECN") for order execution in a joint venture with a
wholly-owned subsidiary of ASC. The Company believes that this ECN product
will greatly enhance the breadth of the Company's execution services.
Leverage Cross-Selling Opportunities. The Company jointly markets Knight and
Trimark to offer market-making services for a broad range of securities to its
customers. The Company believes that by creating customer awareness of the
link between the two companies, customer satisfaction in one market can lead
to increased use of the Company's services in other markets. In addition,
customers with the e.Knight gateway will have real-time access to both
Knight's and Trimark's services at their desktops and will be targeted for
cross-selling opportunities.
39
<PAGE>
MARKET SHARE INFORMATION
Since the beginning of 1997, Knight and Trimark have significantly increased
their market share of trading volume in each of their respective markets.
Knight's market share is based on rankings published by AutEx, an electronic
database and on-line, real-time network for trade order indications used by
the securities industry.
<TABLE>
<CAPTION>
PERCENTAGE TOTAL NUMBER
ADVERTISED OF TOTAL OF OTC
MONTH ENDED SHARE VOLUME MARKET SHARE RANK STOCKS TRADED RANK
----------- -------------- ------------ ---- ------------- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
March 1998............... 1,864,544 9.93% 1 6,578 1
February 1998............ 1,451,983 8.95% 1 5,954 2
January 1998............. 1,125,939 7.50% 2 5,873 2
December 1997............ 1,248,282 8.11% 2 6,174 2
November 1997............ 993,276 8.20% 2 5,710 2
October 1997............. 1,396,968 7.14% 2 5,997 2
September 1997........... 1,073,493 6.99% 2 5,651 1
August 1997.............. 890,829 6.39% 3 5,386 1
July 1997................ 859,161 5.84% 3 5,395 1
June 1997................ 671,845 5.22% 5 5,131 1
May 1997................. 651,441 4.93% 6 5,013 1
April 1997............... 636,927 4.99% 6 4,884 1
March 1997............... 562,336 4.67% 6 4,938 1
February 1997............ 572,895 4.72% 6 4,963 1
January 1997............. 614,692 4.38% 6 4,952 1
</TABLE>
Trimark's market share is based on trade volumes reported to the NASD.
<TABLE>
<CAPTION>
THIRD MARKET VOLUME IN
-------------------------------------------------------------------
NYSE SECURITIES AMEX SECURITIES
--------------------------------- ---------------------------------
% THIRD % THIRD
MONTH ENDED SHARE VOLUME MARKET VOLUME RANK SHARE VOLUME MARKET VOLUME RANK
----------- -------------- ------------- ---- -------------- ------------- ----
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
March 1998.............. 445,662 33.1% 1 80,443 68.9% 1
February 1998........... 383,719 34.4% 1 70,301 69.1% 1
January 1998............ 337,126 29.2% 1 58,427 69.0% 1
December 1997........... 338,433 30.5% 1 78,793 66.4% 1
November 1997........... 247,468 28.5% 1 59,410 64.9% 1
October 1997............ 347,815 29.2% 1 84,323 65.8% 1
September 1997.......... 262,594 25.7% 1 58,731 57.9% 1
August 1997............. 238,652 24.1% 1 40,517 52.1% 1
July 1997............... 251,631 22.5% 1 42,540 46.7% 1
June 1997............... 216,472 20.7% 1 33,554 44.0% 1
May 1997................ 202,036 20.7% 1 27,629 42.0% 1
April 1997.............. 180,502 20.6% 1 23,666 41.5% 1
March 1997.............. 181,938 20.2% 1 25,088 43.1% 1
February 1997........... 209,402 22.4% 1 25,807 46.5% 1
January 1997............ 234,291 21.2% 1 40,271 51.4% 1
</TABLE>
ELECTRONIC COMMUNICATIONS NETWORK
ECNs are private trading systems which are popular among institutional
investors and traders because they provide investors with the ability to trade
securities anonymously. ECNs currently account for approximately 20% of the
NASDAQ trading volume.
The Company has entered into a joint venture with ASC, the developer and
owner of the Brass order entry and trading system, to establish an ECN. The
Company owns 20% of the joint venture entity, Brass Utility, L.L.C. ("BRUT").
The Company believes that access to the BRUT ECN will greatly enhance the
breadth of the Company's execution services.
40
<PAGE>
CUSTOMERS
The Company's target customers are national and regional full-service
broker-dealers, electronic discount brokers and institutional investors.
Selected customers of the Company own equity interests in the Company. See
"Certain Transactions--Transactions with Affiliates." The following table
presents a representative list of the Company's customers.
Ameritrade Inc. Josephthal & Co. Inc.
BHC Securities, Inc. Merrill Lynch, Pierce, Fenner & Smith
BHF Securities Corp. Incorporated
Bidwell & Company Mesirow Financial
Brown & Company Securities Nathan & Lewis Securities, Inc.
Corporation National Discount Brokers
Burke, Christensen & Lewis National Financial Services Corporation
Securities, Inc. PaineWebber Incorporated
CIBC Woody Gundy Securities Corp. Primevest Financial Services, Inc.
Cowles, Sabol & Co., Inc. The R.J. Forbes Group, Inc.
Dain Rauscher Incorporated Sanders Morris Mundy, Inc.
David A. Noyes & Co. Scottsdale Securities, Inc.
Direct Access Brokerage Services, Southwest Securities, Inc.
Inc. Stockcross, Inc.
Discover Brokerage Direct Thomas F. White & Co.
E*TRADE Securities, Inc. U.S. Clearing Corp.
A.G. Edwards & Sons, Inc. Van Kasper & Company
Fiserv Correspondent Services, Inc. Waterhouse Securities, Inc.
Gruntal & Co., LLC (Gruntal & Co., Wedbush Morgan Securities, Inc.
Inc.)
Howe Barnes Investments, Inc.
International Correspondent Trading,
Inc.
J.W. Charles Securities, Inc.
MARKETING
The Company seeks to increase its market share through direct-response
advertising, advertising on its Web site and a public relations program. The
Company's marketing focuses on advertising its execution services in
publications targeted at the securities industry. In addition, the Company has
a quarterly program of targeted mailings to existing and potential broker-
dealer and institutional customers.
The Company also markets aggressively through one-on-one meetings with
customers and potential customers, and continuous communications with existing
customers. The Company maintains a comprehensive customer database that is
used regularly to better understand and address customer needs. The Company's
marketing strategy is to continue to differentiate itself from competitors by
enhancing its reputation and brand as the provider of highest quality
execution solutions with superior customer service.
CLEARING ARRANGEMENTS
By contract, Knight clears all its trades through Correspondent Services
Corp., a subsidiary of PaineWebber Incorporated ("PaineWebber"). The contract
will remain in effect until terminated by either party upon sixty days' prior
written notice or upon thirty days' written notice in certain limited
circumstances. Trimark is a party to a contract with National Investor
Services Corp., a subsidiary of Waterhouse Investor Services, Inc., pursuant
to which all of Trimark's trades are cleared. The contract will remain in
effect until terminated by either party upon sixty days' prior written notice.
See "Certain Transactions."
41
<PAGE>
TECHNOLOGY
The Company's success is largely attributable to management's ability to
identify and deploy emerging technologies that facilitate the execution of
trades. Technology has not only enhanced the Company's ability to handle order
flow, it has also been an important component of the Company's strategy to
comply with government regulations, achieve the highest execution standards
and provide superior customer service. The Company also uses its technology
and technology licensed from third parties to monitor proactively the
performance of its traders and to assess its inventory positions and to
provide ongoing information to its customers. The Company is electronically
linked to its broker-dealer and institutional customers through dedicated
servers. The Company's trading volume is transacted over dedicated
communications networks, which provide immediate access to the Company's
trading operations and facilitate the handling of customer orders. The Company
plans to continue to make additional investments in technology and to automate
further its execution services.
Architectural Design and Industry Standards. The Company's systems are
designed to be open, interoperable, scalable, redundant and flexible. The
Company utilizes leading edge technologies including Sun Microsystems, Inc.'s
client/server architecture, C/C++ programming languages, Java, relational
database management systems and online analytical processing.
Electronic Commerce. The Company's electronic commerce architecture enables
its broker-dealer and institutional customers to send their orders through a
variety of electronic communications gateways, including the Internet and
direct customer interfaces over the Company's private network. The Company's
customers can use their own order management system, an institutional
portfolio management system or can select from a variety of the Company's
electronic connections.
Knight uses the Brass trading system designed by ASC. This system has a
client/server architecture that uses Sun Microsystems, Inc. workstations and
servers. Knight runs a local version of Brass. Knight also makes extensive use
of application program interfaces ("APIs") to develop software applications.
Trimark uses the Appletree trading system designed by TCAM. This system runs
on Stratus Computer Inc.'s fault tolerant platform. Trimark has also developed
software applications using APIs.
Disaster Recovery Center. The Company is in the process of establishing a
back-up data center and trading facility in Ridgefield, New Jersey. This
facility will be used primarily to accommodate traders if a disaster or major
system malfunction occurs. This back-up data center will run a real-time copy
of the Company's trading systems and house a small group of full-time traders.
To provide for system continuity in the event of short power outages, the
Company has also equipped its three data centers and trading rooms with
uninterruptible power supply units and back up generators.
COMPETITION
The Company derives substantially all of its revenues from market-making
activities. The market for these services, particularly market-making services
through electronic communications gateways, is rapidly evolving and intensely
competitive. The Company expects competition to continue and intensify in the
future. Knight competes primarily with wholesale, national, and regional
broker-dealers. Trimark competes with the NYSE, the AMEX, regional exchanges
and Third Market competitors. The Company competes primarily on the basis of
execution standards, its relationship with its customers and technology.
A number of the Company's competitors have significantly greater financial,
technical, marketing and other resources than the Company. Some of the
Company's competitors also offer a wider range of services and products than
the Company and have greater name recognition and more extensive customer
bases than the Company. These competitors may be able to respond more quickly
to new or evolving opportunities, technologies and customer requirements than
the Company and may be able to undertake more extensive promotional activities
and offer more attractive terms to customers. Recent advancements in computing
and communications technology are substantially changing the means by which
market-making services are
42
<PAGE>
delivered, including more direct access on-line to a wide variety of services
and information, and have also created demand for more sophisticated levels of
customer service. The provision of such services may entail considerable cost
without an offsetting increase in revenues. Moreover, current and potential
competitors have established or may establish cooperative relationships among
themselves or with third parties or may consolidate to enhance their services
and products. New competitors or alliances among competitors may emerge and
they may acquire significant market share.
There can be no assurance that the Company will be able to compete
effectively with current or future competitors or that the competitive
pressures faced by the Company will not have a material adverse effect on the
Company's business, financial condition and operating results.
EMPLOYEES
At March 31, 1998 the Company had a total of 337 full-time employees, of
which 246 were employed at Knight and of which 91 were employed at Trimark. Of
Knight's 246 employees, 142 were engaged in market-making activities, 33 in
customer service and 71 in administration. Of Trimark's 91 employees, 55 were
engaged in market-making activities, 16 in customer service and 20 in
administration. None of the Company's employees are subject to a collective
bargaining agreement. The Company believes that its relations with its
employees are excellent.
The Company recruits and retains its employees by compensating them largely
on a performance basis, measuring performance primarily in terms of revenue
generation. The Company is committed to improving the skill levels of its
employees and, to that end, Knight has established Knight School, a weekly
training session in which trading staff learn new trading techniques and are
informed of regulatory developments. The Company intends to expand this
initiative and to develop additional programs to improve the skills and
productivity of its workforce. The Company believes that it has high employee
morale due to its performance-based incentive compensation and its
encouragement of a highly cooperative and creative culture.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
The Company relies primarily on copyright, trade secret and trademark law to
protect its proprietary technology. Notwithstanding the precautions taken by
the Company to protect its intellectual property rights, it is possible that
third parties may copy or otherwise obtain and use the Company's proprietary
technology without authorization or otherwise infringe on the Company's
proprietary rights. It is also possible that third parties may independently
develop technologies similar to those of the Company. It may be difficult for
the Company to police unauthorized use of its intellectual property rights.
There can be no assurance that the steps taken by the Company will prevent
misappropriation of its technology. In addition, litigation may be necessary
in the future to enforce the Company's intellectual property rights, to
protect the Company's trade secrets, to determine the validity and scope of
the proprietary rights of others, or to defend against claims of infringement
or invalidity. Such litigation, whether successful or unsuccessful, could
result in substantial costs and diversions of resources either of which could
have a material adverse effect on the Company's business, financial condition
and operating results. The Company may in the future receive notices of claims
of infringement of other parties' proprietary rights. There can be no
assurance that claims for infringement or invalidity (or claims for
indemnification resulting from infringement claims) will not be asserted or
prosecuted against the Company. Any such claims, with or without merit, could
be time consuming to defend, result in costly litigation, divert management's
attention and resources or require the Company to enter into royalty or
licensing agreements. There can be no assurance that such royalties or
licenses would be available on reasonable terms, if at all, and the assertion
or prosecution of any such claims could have a material adverse effect on the
Company's business, financial condition and operating results.
GOVERNMENT REGULATION
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. In addition, the SEC, the NASD,
other SROs, such as the various stock exchanges, and other regulatory
43
<PAGE>
bodies, such as state securities commissions, require strict compliance with
their rules and regulations. As a matter of public policy, regulatory bodies
are charged with safeguarding the integrity of the securities and other
financial markets and with protecting the interests of customers participating
in those markets, not protecting creditors or stockholders of market makers.
Market makers are subject to regulation concerning certain aspects of their
business, including trade practices, capital structure, record retention and
the conduct of directors, officers and employees. Failure to comply with any
of these laws, rules or regulations could result in censure, fine, the
issuance of cease-and-desist orders or the suspension or disqualification of
its directors, officers or employees, and other adverse consequences, which
could have a material adverse effect on the Company's business, financial
condition and operating results. The Company and certain of its officers and
other employees have, in the past, been subject to claims arising from the
violation of such laws, rules and regulations, which resulted in the payment
of fines and settlements. There can be no assurance that the Company and/or
its officers and other employees will not, in the future, be subject to claims
arising from the violation of such laws, rules and regulations. An adverse
ruling against the Company and/or its employees, including censure or
suspension, could result in the Company and/or its officers and other
employees being required to pay a substantial fine or settlement, and could
result in their suspension or expulsion, which could have a material adverse
effect on the Company's business, financial condition and operating results.
In connection with a three-year industry-wide investigation conducted by the
staff of the SEC into the trading and supervisory activities of many OTC
market makers and certain of their individual supervisory and trading
personnel, in July, 1997, the Staff informed Kenneth Pasternak, President and
Chief Executive Officer of the Company, that he is a subject in their
investigation for certain of his activities as a trading room supervisor at
Troster Singer. All of the activities being investigated took place prior to
Mr. Pasternak joining the Company in 1995 and none of them relate to his
employment by the Company. Mr. Pasternak has also been orally informed by the
Staff that, as a result of its investigation, it currently intends to
recommend to the SEC that Mr. Pasternak be charged with failure to supervise
with respect to several transactions of other traders under his supervision at
Troster Singer and that Mr. Pasternak be suspended for six months, ordered to
cease and desist, and assessed a civil penalty of $50,000. In September, 1997,
Mr. Pasternak submitted a brief to the Staff arguing that these
recommendations would be inappropriate and unsupported by the facts. To date,
the Staff has not forwarded its recommendations to the SEC. The Company cannot
predict the outcome of the Staff's investigation, including whether the Staff
will determine to forward its recommendations to the SEC in their current or a
modified form or at all. If any such charges are brought, Mr. Pasternak
intends to vigorously defend himself against them. If Mr. Pasternak should be
suspended, the Company would seek to replace his services with other Company
personnel. However, the loss of Mr. Pasternak's services would have a material
adverse effect on the Company's business, financial condition and operating
results.
The regulatory environment in which the Company operates is subject to
change. The Company's business, financial condition and operating results may
be adversely affected as a result of new or revised legislation or regulations
imposed by the SEC, other United States or foreign governmental regulatory
authorities or the NASD. The Company's business, financial condition and
operating results also may be adversely affected by changes in the
interpretation or enforcement of existing laws and rules by these governmental
authorities and the NASD.
Additional regulation, changes in existing laws and rules, or changes in
interpretations or enforcement of existing laws and rules often directly
affect the method of operation and profitability of securities firms. The
Company cannot predict what effect any such changes might have. Furthermore,
the Company's business, financial condition and operating results may be
materially affected not only by regulations directly applicable to it, but
also by regulations of general application. For example, the volume of the
Company's market-making activities in a given period could be affected by,
among other things, existing and proposed tax legislation, antitrust policy
and other governmental regulations and policies (including the interest rate
policies of the Federal Reserve Board) and changes in interpretation or
enforcement of existing laws and rules that affect the business and financial
communities. The level of trading and market-making activity can be affected
not only by such legislation or regulations of general applicability, but also
by industry-specific legislation or regulations.
44
<PAGE>
The Company's market-making activities involve securities traded in NASDAQ.
NASDAQ's operations have been the subject of extensive scrutiny in the media
and by government regulators, including the Antitrust Division of the United
States Department of Justice. This scrutiny has included allegations of
collusion among NASDAQ market makers. In fact, a large group of NASDAQ market
makers recently entered into a Stipulation and Order with the Department of
Justice in which they agreed not to engage in any collusive activities relating
to prices, quotes or spreads in NASDAQ-traded securities. In August 1996, the
SEC adopted certain new rules and rule amendments, known as the Order Handling
Rules, which significantly altered the manner in which orders related to both
NASDAQ and listed securities are handled. The implementation of these rules
began in January 1997. The SEC has also issued for comment certain proposed
rules by the NASD which, if approved, would introduce a new system for
delivering and executing orders in NASDAQ. The proposed NASD rules, if
approved, along with other potential regulatory actions and improvements in
technology, could impact the manner in which business is currently conducted in
NASDAQ. These new rules, regulatory actions, and changes in market customs and
practices could have a material adverse effect on the Company's business,
financial condition and operating results.
The Company's business, both directly and indirectly, relies on the Internet
and other electronic communications gateways. The Company intends to expand
use of such gateways. To date, the use of the Internet has been relatively
free from regulatory restraints. However, the SEC, certain SROs and certain
states are beginning to address the regulatory issues that may arise in
connection with the use of the Internet. Accordingly, new regulations or
interpretations may be adopted that constrain the Company's and its customers'
ability to transact business through the Internet or other electronic
communications gateways. Any additional regulation of the use of such gateways
could have a material adverse effect on the Company's business, financial
condition and operating results.
In addition, the Company may in the future expand its business to other
countries. To expand its services internationally, the Company would have to
comply with regulatory controls of each specific country in which it conducts
business. The brokerage industry in many foreign countries is heavily
regulated. The varying compliance requirements of these different regulatory
jurisdictions and other factors may limit the Company's ability to expand
internationally. There can be no assurance that the Company will be successful
in obtaining the necessary regulatory approvals for any such expansion, or if
such approvals are obtained, that the Company will be able to continue to
comply with such regulations. The failure to obtain or comply with such
approvals could have a material adverse effect on the Company's business,
financial condition and operating results. See "Business--Government
Regulation."
NET CAPITAL REQUIREMENTS
As registered broker-dealers and members of the NASD, the Company's
subsidiaries are subject to the Net Capital Rule. The Net Capital Rule, which
specifies minimum net capital requirements for registered brokers-dealers, is
designed to measure the general financial integrity and liquidity of a broker-
dealer and requires that at least a minimum part of its assets be kept in
relatively liquid form. In general, net capital is defined as net worth
(assets minus liabilities), plus qualifying subordinated borrowings and
certain discretionary liabilities, and less certain mandatory deductions that
result from excluding assets that are not readily convertible into cash and
from valuing conservatively certain other assets. Among these deductions are
adjustments (called "haircuts"), which reflect the possibility of a decline in
the market value of an asset prior to disposition.
Failure to maintain the required net capital may subject a firm to
suspension or revocation of registration by the SEC and suspension or
expulsion by the NASD and other regulatory bodies and ultimately could require
the firm's liquidation. The Net Capital Rule prohibits payments of dividends,
redemption of stock, the prepayment of subordinated indebtedness and the
making of any unsecured advance or loan to a stockholder, employee or
affiliate, if such payment would reduce the firm's net capital below required
levels.
The Net Capital Rule also provides that the SEC may restrict for up to 20
business days any withdrawal of equity capital, or unsecured loans or advances
to stockholders, employees or affiliates ("capital
45
<PAGE>
withdrawal"), if such capital withdrawal, together with all other net capital
withdrawals during a 30-day period, exceeds 30% of excess net capital and the
SEC concludes that the capital withdrawal may be detrimental to the financial
integrity of the broker-dealer. In addition, the Net Capital Rule provides
that the total outstanding principal amount of a broker-dealer's indebtedness
under certain subordination agreements, the proceeds of which are included in
its net capital, may not exceed 70% of the sum of the outstanding principal
amount of all subordinated indebtedness included in net capital, par or stated
value of capital stock, paid in capital in excess of par, retained earnings
and other capital accounts for a period in excess of 90 days.
A change in the Net Capital Rule, the imposition of new rules or any
unusually large charge against net capital could limit those operations of the
Company that require the intensive use of capital and also could restrict the
Company's ability to withdraw capital from its broker-dealer subsidiaries,
which in turn could limit the Company's ability to pay dividends, repay debt
and repurchase shares of its outstanding stock. A significant operating loss
or any unusually large charge against net capital could adversely affect the
ability of the Company to expand or even maintain its present levels of
business, which could have a material adverse effect on the Company's
business, financial condition and operating results.
RISK MANAGEMENT
The Company's market-making and trading activities expose the Company's
capital to significant risks. These risks include, but are not limited to,
absolute and relative price movements, price volatility or changes in
liquidity, over which the Company has virtually no control.
The Company employs an automated proprietary trading and risk management
system which provides real time, on-line risk management and inventory
control. The Company monitors its risks by a constant review of trading
positions. For each trader, the Company has established a system whereby any
trades that exceed pre-determined limits are monitored by senior management as
are individual and aggregate dollar and share position totals and real-time
profits and losses. The management of trading positions is enhanced by review
of mark-to-market valuations and/or position summaries on a daily basis. The
following table illustrates the number of trading days the Company earned net
trading revenues or net trading losses for the respective periods.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------- ---------------
1996 1997 1998
------------- -------------- ---------------
DAILY DAILY DAILY
DAYS AVERAGE DAYS AVERAGE DAYS AVERAGE
---- -------- ---- --------- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Daily trading revenues.......... 252 $730,010 252 $ 895,338 61 $1,032,895
Daily trading losses............ 2 (34,439) 1 (997,755) -- --
--- -------- --- --------- --- ----------
Average daily net trading
revenues..................... $723,991 $ 887,855 $1,032,895
======== ========= ==========
Total days.................... 254 253 61
=== === ===
</TABLE>
The Company takes long and short positions in securities in which it makes a
market. The following table illustrates, for the period indicated, the
Company's average, highest and lowest month-end inventory at market value
(based on both the aggregate and the net of the long and short positions of
trading securities).
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------- ------------------------
1996 1997 1998
----------------------- ----------------------- ------------------------
AGGREGATE AGGREGATE AGGREGATE OF
OF LONG AND NET OF LONG OF LONG AND NET OF LONG LONG AND NET OF LONG
SHORT AND SHORT SHORT AND SHORT SHORT AND SHORT
POSITIONS POSITIONS POSITIONS POSITIONS POSITIONS POSITIONS
----------- ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Average month-end....... $48,010,762 $15,833,096 $73,545,271 $20,946,420 $ 96,365,617 $13,855,650
Highest month-end....... 65,802,039 27,759,237 84,466,227 40,665,188 118,071,197 21,598,757
Lowest month-end........ 37,865,308 8,968,927 56,988,279 11,535,551 74,539,279 8,908,909
</TABLE>
46
<PAGE>
PROPERTIES
The Company's headquarters are located in Jersey City, New Jersey. The
Company leases approximately 52,000 square feet under a lease which expires in
March 2005. The Company has an option to extend the lease term on three floors
for an additional five-year period. The Company also leases approximately
24,000 square feet for its offices in Purchase, NY, Chicago, IL and Boston,
MA. The Company believes that its present facilities, together with its
current options to extend lease terms and occupy additional space, are
adequate for its current needs.
LEGAL PROCEEDINGS
The Company is not currently a party to any legal proceedings, the adverse
outcome of which, individually or in the aggregate, could have a material
adverse effect on its business, financial condition or operating results. The
Company and certain of its officers and employees have been subject to legal
proceedings in the past and may be subject to legal proceedings in the future.
See "Risk Factors--Government Regulations."
47
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Steven L. Steinman.... 50 Chairman of the Board of Directors
Kenneth D. Pasternak.. 44 President, Chief Executive Officer and Director
Walter F. Raquet...... 53 Executive Vice President and Director
Robert I. Turner...... 46 Executive Vice President, Chief Financial Officer,
Treasurer and Director
Robert M. Lazarowitz.. 42 Executive Vice President and Director
Anthony M.
Sanfilippo........... 42 Executive Vice President and Director
Michael T. Dorsey..... 42 Senior Vice President, General Counsel and Secretary
Martin Averbuch(1).... 46 Director
Charles V.
Doherty(1)........... 64 Director
Gene L. Finn(1)....... 65 Director
Gary R. Griffith(2)... 58 Director
Bruce R. McMaken(2)... 38 Director
J. Joe Ricketts....... 56 Director
Rodger O. Riney....... 52 Director
V. Eric Roach......... 35 Director
Charles A. Zabatta.... 55 Director
</TABLE>
- --------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Steven L. Steinman, Chairman of the Board of Directors of the Company, has
more than 20 years of experience in the securities industry. For the past 12
years, Mr. Steinman has been the Chief Executive Officer of Trimark
Securities, L.P., which he founded in 1986. Mr. Steinman is a co-founder of
the LLC, along with Messrs. Pasternak, Raquet and Lazarowitz, and has served
as the Chairman of the LLC for the past three years. Before founding Trimark
Securities, L.P., Mr. Steinman held trading positions at a number of trading
firms including Troster Singer and M.H. Meyerson & Co., Inc., and was Trading
Room Manager for Stix Friedman and Co., Gattini & Co., Traubner Bach Co. Inc.
and Monvest Securities. Mr. Steinman attended Columbia University.
Kenneth D. Pasternak, President, Chief Executive Officer and Director of the
Company, has 20 years of experience in the securities industry. For the past
three years, Mr. Pasternak has been the President, Chief Executive Officer and
a trading room supervisor for Knight Securities, L.P. Before co-founding the
LLC and Knight Securities, L.P., Mr. Pasternak served as the Senior Vice
President, Limited Partner and Trading Room Manager for Spear Leeds &
Kellogg/Troster Singer, a trading firm. Mr. Pasternak received his B.A. degree
from the State University of New York at New Paltz in 1976.
Walter F. Raquet, Executive Vice President and Director of the Company and
Chief Operating Officer of Knight, has 30 years of experience in the
securities industry. For the past three years, Mr. Raquet has been a Managing
Director and the Chief Operating Officer of Knight Securities, L.P. Mr. Raquet
was one of the co-founders of the LLC and Knight. From 1992 to 1994, he was a
Senior Vice President with Spear, Leeds & Kellogg/Troster Singer managing
their technology and marketing functions. From 1982 to 1992, Mr. Raquet was a
Partner at Herzog Heine & Geduld, Inc., a trading firm, where he directed the
firm's technology and marketing efforts. Mr. Raquet was also Corporate
Controller for PaineWebber Incorporated between 1980 and 1982. He was
Executive Vice President of Cantor Fitzgerald from 1977 to 1980 and Controller
for Weeden & Co. from 1968 to 1976. He has a CPA and practiced at the
accounting firm of Price Waterhouse. Mr. Raquet received a B.S. degree in
Accounting from New York University in 1966.
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Robert I. Turner, Executive Vice President, Chief Financial Officer,
Treasurer and Director of the Company and Chief Financial Officer of Knight,
has 20 years of experience in the financial services and securities
industries. For the past three years, Mr. Turner has served as the Chief
Financial Officer for Knight and in April 1996 he was elected to the advisory
board of the LLC. From 1988 to 1995, Mr. Turner was a Corporate Vice President
at PaineWebber Incorporated, serving in a variety of financial management
positions in the fixed income, financial services, merchant banking and
commodities trading divisions. From 1982 to 1987, Mr. Turner worked for
Citicorp in the treasury and investment banking divisions. From 1979 to 1981,
Mr. Turner practiced at the accounting firm of Price Waterhouse where he
became a CPA. Mr. Turner received his B.A. from the State University of New
York at Binghamton in 1973 and his M.S.B.A. from the University of
Massachusetts at Amherst in 1976.
Robert M. Lazarowitz, Executive Vice President and Director of the Company
and Chief Operating Officer of Trimark, has 20 years of experience in the
securities and financial services industries. For the past 10 years, Mr.
Lazarowitz served first as Chief Financial Officer and then as Chief Operating
Officer of Trimark Securities, L.P. Mr. Lazarowitz was also a co-founder of
the LLC. From 1985 to 1987, he served as Chief Financial Officer of Bach
Management/Investment Banking, and, from 1984 to 1985, as Chief Operating
Officer of Traubner Bach Co. Inc. He has been a member of the NASD's
Intermarket Trading System Committee for the past three years. Mr. Lazarowitz
received his B.S. in Accounting from the University of South Florida in 1978.
Anthony M. Sanfilippo, Executive Vice President and Director of the Company
and President of Trimark, has over 22 years of experience in the securities
industry. For the past year, he has been the President of Trimark Securities,
L.P. From 1993 to 1997, Mr. Sanfilippo was President and Chief Executive
Officer of Tradetech Securities, a market maker in the Third Market which he
founded in 1993. From 1988 to 1993, he served as Executive Vice President at
Mesirow Financial, managing the Institutional Equity Division and Regional
Exchange Specialist Operations. From 1980 to 1986, he was Vice President of
Jefferies & Co., an investment bank where he co-managed the firm's capital
commitments in listed securities. Mr. Sanfilippo is a member of the National
Organization of Investment Professionals. He has also served as President of
the Security Traders Association of Chicago and is currently serving on the
NASDR Business District Conduct Committee. Mr. Sanfilippo attended DePaul
University.
Michael T. Dorsey, Senior Vice President, General Counsel and Secretary of
the Company, joined the Company in March 1998. From June 1994 to March 1998,
Mr. Dorsey served as the Chief Legal Officer to Prudential Investment
Management Services LLC and its predecessor, in the institutional money
management unit of The Prudential Insurance Company of America. From March
1986 until June 1994, Mr. Dorsey served as an attorney in the SEC's Division
of Market Regulation, holding various posts including Special Counsel to the
Assistant Director and then Branch Chief of the Office of Compliance
Inspections and Oversight. Mr. Dorsey received a B.S.B.A. in Finance from St.
Louis University in 1981, a J.D. from the University of Missouri-Columbia in
1984 and an LL.M. in Securities Regulations from Georgetown University Law
Center in 1989. Mr. Dorsey is admitted to the Missouri and Illinois state
bars.
Martin Averbuch, Director of the Company, has served as an advisory board
member of the LLC since 1996. Mr. Averbuch has served in various positions at
E*TRADE Group, Inc., including President of E*TRADE Capital, Vice President
On-Line Ventures, and Vice President, Special Projects. Mr. Averbuch is also a
member of the TAG Industry Advisory Board on Execution Quality. Mr. Averbuch
was a member of the Hofstra University faculty from 1977 to 1978 as a
Professor in the Finance Department. He received a B.S. in Economics, magna
cum laude, from The Wharton School of Business at the University of
Pennsylvania in 1974 and a J.D./M.B.A. from the University of Chicago in 1977.
Charles V. Doherty, Director of the Company, has served as an advisory board
member of the LLC since March 1995. He has also been a Managing Director of
Madison Asset Group, an investment advisory firm, since 1993. From 1986 to
1992, Mr. Doherty was President and Chief Operating Officer of the Chicago
Stock Exchange specializing in information technology, marketing, floor
operations and compliance. He is a CPA
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and founder of Doherty, Zable & Company, an accounting firm, where he served
as President between 1974 to 1985. Mr. Doherty received his B.A. in
Accounting, magna cum laude, from the University of Notre Dame in 1955 and his
M.B.A. from the University of Chicago in 1967.
Gene L. Finn, Director of the Company, has served as an advisory board
member of the LLC since March 1995. He served as Vice President and Chief
Economist of the NASD from 1983 to 1995 and as Chief Economist and Senior
Economic Adviser for the SEC from 1969 to 1982. In such capacities, Mr. Finn
provided policy advice on stock market and investment company regulation and
oversight. Mr. Finn is an independent consultant and has been a Director of
Ameritrade Holding Corporation since December 1996. Mr. Finn holds a Ph.D. in
Economics from the University of Wisconsin.
Gary R. Griffith, Director of the Company, has served as an advisory board
member of the LLC since March 1995. He has been an independent financial
consultant since 1990 and has been in investment banking and financial
consulting since 1980. Before 1980, Mr. Griffith was with CBS, Inc. and Price
Waterhouse. Mr. Griffith is a CPA. Mr. Griffith received a B.S. in Business
Administration from Ohio State University.
J. Joe Ricketts, Director of the Company, is Chairman and Chief Executive
Officer of Ameritrade Holding Corporation. Previously, Mr. Ricketts was an
investment advisor with Ricketts & Co., a registered representative with Dean
Witter, and a branch manager at Dun & Bradstreet. Mr. Ricketts is a member of
the Board of Directors of Creighton University, a director of CSS Management,
Inc. of Denver, Colorado and a member of the District Business Conduct
Committee of the NASD, District No. 4. He received his B.A. degree in
economics from Creighton University in Omaha, Nebraska.
Bruce R. McMaken, Director of the Company, has been an advisory board member
of the LLC since March 1995. He also has been employed by Sanders Morris Mundy
("SMM"), an investment banking firm, since 1992, currently serving as a
Managing Director of Corporate Finance. Mr. McMaken serves as one of the
managers of Environmental Opportunities Fund, Ltd., a $38 million private
equity fund managed by an affiliate of SMM. Before joining SMM, Mr. McMaken
provided independent corporate finance and venture capital advisory services
to clients primarily in the environmental services, biotechnology and real
estate development industries. He is also a director of Independent
Environmental Services, Inc., a private solid waste collection and disposal
company. He received his B.A. degree from Cornell University in 1981.
Rodger O. Riney, Director of the Company, has been an advisory board member
of the LLC since March 1995. He is also the President of Scottsdale
Securities, Inc., a discount brokerage firm he founded in 1980. In 1969, he
joined Edward Jones & Co., a brokerage firm, and in 1975 became a General
Partner of that firm. Mr. Riney received a B.S. degree in Civil Engineering in
1968 and an M.B.A. in 1969, both from the University of Missouri-Columbia.
V. Eric Roach, Director of the Company, has served as an advisory board
member of the LLC since 1995. He founded Lombard Brokerage, a brokerage firm,
in 1992 and was Chairman and Chief Executive Officer until Dean Witter,
Discover & Co. acquired the company in 1997. He is President of Discover
Brokerage Direct, a 100%-owned subsidiary of Morgan Stanley Dean Witter,
managing the company's strategy, marketing and public relations areas. He
attended Brigham Young University and also attended the Executive M.B.A.
program of Pepperdine University.
Charles A. Zabatta, Director of the Company, is President and Chief
Operating Officer of Wall Street Connect, a national financial services
company. He has over 30 years of brokerage experience, having recently served
as Executive Vice President of Corporate Development at Waterhouse Investor
Services and Executive Vice President of Marketing at Kennedy Cabot & Co. He
also served as Director of Marketing for Securities Settlement, a national
clearing organization. He received his B.A. degree from Iona College in 1964.
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BOARD COMMITTEES
The Board of Directors has created an Audit Committee and a Compensation
Committee of the Board. The Audit Committee was established in April, 1998 and
is charged with reviewing the Company's annual audit and meeting with the
Company's independent accountants to review the Company's internal controls
and financial management practices. As of the date of this Prospectus, the
Audit Committee is composed of Gary R. Griffith, Joseph A. Konen and Bruce R.
McMaken. The Compensation Committee, was established in April 1998, and is
charged with recommending to the Board of Directors compensation for the
Company's key employees and will administer the 1998 Stock Option and Award
Plan. As of the date of this Prospectus, the Compensation Committee is
composed of Martin Averbuch, Charles V. Doherty and Gene L. Finn. See "--Stock
Option Plan."
DIRECTOR COMPENSATION
Non-employee directors will receive $18,000 per year, with committee
chairpersons receiving an additional $3,000 per year, in addition to $1,000
for each Board or Committee Meeting attended. Each non-employee director will
receive stock options pursuant to the automatic option grant provisions of the
Company's Stock Incentive Plan. See "--Nonemployee Director Stock Option
Plan." All directors will receive reimbursement of reasonable out-of-pocket
expenses incurred in connection with meetings of the Board of Directors. No
director who is an employee of the Company will receive compensation for
services rendered as a director.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1997, and prior to the formation of the Compensation Committee,
decisions concerning the compensation of executive officers were made by the
entire Board of Directors. As of the date of this Prospectus, the Company's
Compensation Committee consists of Messrs. Averbuch, Doherty and Finn, none of
whom has ever been an officer or employee of the Company. No executive officer
of the Company serves as a member of the board of directors or compensation
committee of any entity that has one or more executive officers serving as a
member of the Company's Board of Directors or Compensation Committee. Certain
members of the Company's Board of Directors are parties to transactions with
the Company. See "Certain Transactions."
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company utilizes certain provisions in Delaware corporate law to limit
the liability of corporate officers and directors. The Company believes that
the provisions of its Certificate of Incorporation and Bylaws and the separate
indemnification agreements outlined below are necessary to attract and retain
qualified persons as directors and officers. The Company's Certificate of
Incorporation limits the liability of directors to the maximum extent
permitted by Delaware law. This provision is intended to allow the Company's
directors the benefit of Delaware General Corporation Law, which provides that
directors of Delaware corporations may be relieved of monetary liabilities for
breach of their fiduciary duties as directors, except under certain
circumstances, including breach of their duty of loyalty, acts or omissions
not in good faith or involving intentional misconduct or a knowing violation
of law, unlawful payments or dividends or unlawful stock repurchases or
redemptions or any transaction from which the director derived an improper
personal benefit. The Company's Bylaws provide that the Company shall
indemnify officers and directors to the fullest extent provided by Delaware
law. The Bylaws authorize the use of indemnification agreements and the
Company intends to enter into such agreements with each of its directors and
executive officers.
The Company intends to obtain officer and director liability insurance with
respect to liabilities arising out of certain matters, including matters
arising under the Securities Act.
There is no pending litigation or proceeding involving a director, officer,
associate or other agent of the Company as to which indemnification is being
sought, nor is the Company aware of any threatened litigation that may result
in claims for indemnification by any director, officer, associate or other
agent.
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EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to Kenneth
Pasternak, the Company's Chief Executive Officer, and the Company's four other
most highly compensated executive officers (together with the Chief Executive
Officer, the "Named Executive Officers") for services rendered in all
capacities to the Company in 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------------------
NAME AND ALL OTHER
PRINCIPAL POSITION SALARY($) BONUS($)(1)(2) COMPENSATION($)(3)
- ------------------ --------- -------------- ------------------
<S> <C> <C> <C>
Kenneth Pasternak, President and
Chief Executive Officer......... 250,000 3,084,742(4) 5,421,289
Steven Steinman, Chairman of the
Board of Directors.............. 250,000 780,936 5,421,289
Walter Raquet, Executive Vice
President....................... 250,000 1,219,788 5,421,289
Robert Turner, Executive Vice
President, Chief Financial
Officer and Treasurer........... 140,576 379,708 4,750
Robert Lazarowitz, Executive Vice
President....................... 250,000 872,038 5,421,289
</TABLE>
- --------
(1) Includes discretionary incentive cash bonuses paid pursuant to the
Incentive Plan described below.
(2) The columns for "Long-Term Compensation Awards" and "Other Annual
Compensation" have been omitted because there is no compensation required
to be reported in such columns.
(3) Includes self-employment earnings reported on Form K-1 for the LLC, as
well as $4,750 contributed on behalf of each of the executive officers by
the Company under the Company's 401(k) defined contribution plan.
(4) Includes $60,025 paid as trading compensation to Mr. Pasternak for fiscal
1997.
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KNIGHT/TRIMARK GROUP, INC. 1998 LONG-TERM INCENTIVE PLAN. The Company, with
the approval of its stockholders, has adopted the 1998 Long-Term Incentive
Plan (the "1998 Plan"). The 1998 Plan will take effect prior to the
consummation of this Offering. A maximum of 7,145,000 shares of Common Stock
has been reserved for issuance under the 1998 Plan, subject to equitable
adjustment upon the occurrence of any increase in, decrease in or exchange of
the outstanding shares of Common Stock through merger, consolidation,
recapitalization, reclassification, stock split, stock dividend or similar
corporate transaction.
The 1998 Plan will be administered by a committee established by the Board
of Directors, the composition of which will at all times satisfy the
provisions of Rule 16b-3 of the Securities Exchange Act of 1934, as in effect
from time to time, including any successor thereof (the "Committee"). The
Committee will have full authority, subject to the provisions of the 1998
Plan, to determine, among other things, the persons to whom awards under the
1998 Plan ("Awards") will be made, the size of such Awards, and the specific
terms and conditions applicable to Awards, including, but not limited to, the
duration, vesting and exercise or other realization periods, the circumstances
for forfeiture and the form and timing of payment. The 1998 Plan limits the
number of shares of Common Stock that may be the subject of Awards to any
grantee in any calendar year to 1 million.
Awards, including stock options ("Options"), and restricted stock
("Restricted Stock"), and restricted stock units ("Restricted Stock Units")
may be made under the 1998 Plan to selected employees and independent
contractors of the Company and its present or future subsidiaries and
affiliates, in the discretion of the Committee. Approximately 300 employees
will be eligible to receive Awards under the 1998 Plan. Stock options may be
either "incentive stock options," as such term is defined in Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), or nonqualified
stock options. The exercise price of an Option will not be less than the fair
market value per share of Common Stock on the date of grant. The exercise
price of an Option may be paid in cash or Common Stock or pursuant to a
"broker's cashless exercise" or other similar arrangement approved by the
Committee. Options will have a term of not more than ten years, will become
exercisable at such times and upon such terms as the Committee may determine,
and may be exercised following termination of employment as determined by the
Committee in the document evidencing the Award.
Restricted Stock is Common Stock transferred to the grantee, generally
without payment to the Company, which shares are subject to certain
restrictions and to a risk of forfeiture. A Restricted Stock Unit is a right
to receive shares of Common Stock or cash at the end of a specified period,
subject to a risk of forfeiture. The vesting of Restricted Stock and
Restricted Stock Units may be conditioned upon the satisfaction of specified
performance criteria. The maximum number of shares of Common Stock that may be
awarded as Restricted Stock under the 1998 Plan is 500,000.
In the event of a "change of control" (as defined in the 1998 Plan), (i) any
Award carrying a right to exercise that was not previously exercisable and
vested will become fully exercisable and vested, (ii) the restrictions,
deferral limitations, payment conditions and forfeiture conditions applicable
to any other Award granted under the 1998 Plan will lapse and such Award will
be deemed fully vested, and (iii) any performance conditions imposed with
respect to Awards will be deemed to be fully achieved.
The 1998 Plan may, at any time and from time to time, be altered, amended,
suspended, or terminated by the Board of Directors, in whole or in part,
provided that no amendment that, in the opinion of counsel, requires
stockholder approval will be effective unless such amendment has received the
requisite approval of stockholders. In addition, no amendment may be made that
adversely affects any of the rights of a grantee under any Award theretofore
granted, without such grantee's consent.
Set forth below is a brief discussion of certain federal income tax
consequences relating to Awards that may be granted pursuant to the 1998 Plan.
Nonqualified Stock Options. In the case of a nonqualified stock option, an
option holder generally will not be taxed upon the grant of the option.
Rather, at the time of exercise of such nonqualified stock option,
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<PAGE>
the option holder will generally recognize ordinary income for federal income
tax purposes in an amount equal to the excess of the then fair market value of
the shares purchased over the option price (the "Spread"). The Company will
generally be entitled to a tax deduction at the time and in the amount that
the holder recognizes ordinary income.
Incentive Stock Options. In the case of an incentive stock option, the tax
recognition event will generally occur upon the disposition of the shares
acquired upon exercise of the incentive stock option, rather than upon the
grant of the incentive stock option or upon its exercise within the
employment-related period prescribed by the Code for this purpose ("timely
exercise"). The Spread will, however, be an item of tax adjustment for
purposes of the "alternative minimum tax" imposed by Section 55 of the Code.
If, upon disposition of the shares acquired upon exercise, the special holding
period requirements prescribed in the Code with respect to incentive stock
options have been satisfied (a "Qualifying Disposition"), any taxable income
will constitute capital gain in an amount equal to the excess of the sale
proceeds over the exercise price. The Company will not be entitled to a tax
deduction with respect to the timely exercise of an incentive stock option or
the subsequent Qualifying Disposition of shares so acquired. The tax
consequences of any untimely exercise of an incentive stock option or non-
Qualifying Disposition of acquired shares will be determined in accordance
with the rules applicable to nonqualified stock options, as described in the
preceding paragraph.
Exercise with Shares. An option holder who pays the option price upon
exercise of an option, in whole or in part, by delivering already owned shares
of stock will generally not recognize gain or loss on the shares surrendered
at the time of such delivery, except under certain circumstances. Rather,
recognition of such gain or loss will generally occur upon disposition of the
shares acquired in substitution for the shares surrendered.
Restricted Stock. Generally, the grant of restricted stock has no federal
income tax consequences at the time of grant. Rather, at the time the shares
are no longer subject to a substantial risk of forfeiture (as defined in the
Code), the holder will recognize ordinary income in an amount equal to the
fair market value of such shares. A holder may, however, elect to be taxed at
the time of the grant. The Company generally will be entitled to a deduction
at the time and in the amount that the holder recognizes ordinary income.
THE FOREGOING SUMMARY CONSTITUTES A BRIEF OVERVIEW OF THE PRINCIPAL FEDERAL
INCOME TAX CONSEQUENCES RELATING TO THE ABOVE-DESCRIBED AWARDS BASED UPON
CURRENT FEDERAL INCOME TAX LAWS. THIS SUMMARY IS NOT INTENDED TO BE EXHAUSTIVE
AND DOES NOT DESCRIBE STATE, LOCAL OR FOREIGN TAX CONSEQUENCES. PARTICIPANTS
IN THE 1998 PLAN SHOULD CONSULT THEIR PERSONAL TAX ADVISORS TO DETERMINE THE
SPECIFIC TAX CONSEQUENCES TO THEM OF AWARDS AND OTHER TRANSACTIONS RELATING
THERETO.
KNIGHT/TRIMARK GROUP, INC. 1998 NONEMPLOYEE DIRECTOR STOCK OPTION PLAN. The
Company, with the approval of its stockholders, has adopted the 1998
Nonemployee Director Stock Option Plan (the "Nonemployee Director Plan"). The
Nonemployee Director Plan will take effect upon, and only in the event of, the
consummation of this Offering. A maximum of 264,000 shares of Common Stock
have been reserved for issuance under the Nonemployee Director Plan, subject
to equitable adjustment upon the occurrence of any increase in, decrease in or
exchange of the outstanding shares of Common Stock through merger,
consolidation, recapitalization, reclassification, stock split, stock dividend
or similar corporate transaction.
Under the Nonemployee Director Plan, any questions of administration that
arise will be resolved by the Board of Directors. Approximately eight
directors will be eligible to receive awards under the Plan. All stock options
granted under the Nonemployee Director Plan ("Director Options") will be
nonqualified stock options.
A Director Option to purchase 8,000 shares of Common Stock will be granted
upon the effective date of the Nonemployee Director Plan to each then
Nonemployee Director and, thereafter, to each new Nonemployee Director upon
election to the Board of Directors. In addition, on the first business day
following each annual meeting of the Company's stockholders, each continuing
Nonemployee Director will
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<PAGE>
be granted a Director Option to purchase 4,000 shares of Common Stock. The
exercise price of a Director Option will be the fair market value per share of
Common Stock on the date of grant and may be paid in cash or Common Stock or
pursuant to a "broker's cashless exercise." Director Options will have a term
of ten years, will become exercisable in four equal annual instalments
commencing with the first anniversary of the date of grant, and may be
exercised following a director's termination of service, as determined by the
Board of Directors in the document evidencing the grant.
In the event of a "change of control" (as defined in the Nonemployee
Director Plan), any outstanding Director Options not yet exercisable in whole
or in part will become exercisable in full.
The Nonemployee Director Plan may, at any time and from time to time, be
altered, amended, suspended, or terminated by the Board of Directors, in whole
or in part; provided that no amendment that, in the opinion of counsel,
requires stockholder approval will be effective unless such amendment has
received the requisite approval of stockholders. In addition, no amendment may
be made that adversely affects any of the rights of a grantee under any
Director Option theretofore granted, without such grantee's consent.
For a discussion of certain federal income tax consequences relating to
options granted pursuant to the Nonemployee Director Plan, see "Knight/Trimark
Group, Inc. 1998 Long-Term Incentive Plan."
KNIGHT/TRIMARK GROUP, INC. MANAGEMENT INCENTIVE PERFORMANCE PLAN. The
Company has established a profit-pool incentive plan (the "Incentive Plan"),
currently consisting of three sub-profit pools, one for the Company
(disregarding its subsidiary companies)(the "Holding Company Pool"), one for
Knight (the "Knight Sub-Pool") and one for Trimark (the "Trimark Sub-Pool").
The Incentive Plan also provides for the creation of a new sub-pool at the
time of any future formation or acquisition of a new Company subsidiary, to be
allocated by such person or persons as determined by a committee of the Board
of Directors consisting of its executive officers (the "Executive Board").
The annual Holding Company Pool will equal 15% of the before-tax profits of
the Company (on an unconsolidated basis) earned by the Holding Company during
each fiscal quarter (not taking into account amounts paid out pursuant to the
Incentive Plan) and will be allocated on a quarterly basis by the Chief
Executive Officer of the Company. The annual Knight Sub-Pool equals 15% of the
before-tax profits earned by Knight during each fiscal quarter (not taking
into account amounts paid out pursuant to the Incentive Plan), and is
allocated on a quarterly basis by the Chief Executive Officer and Chief
Operation Officer of Knight. The annual Trimark Sub-Pool equals 15% of the
before-tax profits earned by Trimark during each fiscal quarter (not taking
into account amounts paid out pursuant to the Incentive Plan), and is
allocated on a quarterly basis by the Chief Executive Officer and Chief
Operation Officer of Trimark. Such officers may not themselves receive an
allocation from any sub-profit pool in any year unless the entire Company, on
a consolidated basis, earns a before-tax profit (not taking into account
amounts paid out pursuant to the Incentive Plan).
401(K) PLAN
The Company has a Section 401(k) Plan (the "401(k) Plan"), a tax-qualified
plan covering substantially all of the Company's employees. Under the terms of
the 401(k) Plan, participants may elect to defer a portion of their
compensation, subject to certain limitations and the Company is required to
make annual contributions to the 401(k) Plan equal to 50% of the contributions
made by its employees, subject to certain limitations.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements substantially the same as
the prior LLC employment agreements with Messrs. Raquet, Steinman, Lazarowitz
and Pasternak, and the prior Trimark employment agreement with Mr. Sanfilippo
(collectively, the "Executives"). The term of each of the agreements (the
"Agreements") will be four (4) years, beginning on the date of the
consummation of the
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<PAGE>
Offering, with annual, automatic one-year extensions beginning on the fourth
anniversary of such date unless either party gives notice of nonrenewal at
least 60 days prior to such anniversary.
Mr. Pasternak's Agreement provides that he will be President and Chief
Executive Officer of the Company and President and Chief Executive Officer of
Knight. Each of Messrs. Raquet and Lazarowitz's Agreement provides that the
Executive will be Executive Vice President of the Company; Mr. Raquet will
also be Chief Operating Officer of Knight and Mr. Lazarowitz will be Chief
Operating Officer of Trimark. Mr. Steinman's Agreement provides that he will
be Chairman of the Board of the Company and Chief Executive Officer of
Trimark. Mr. Sanfilippo's Agreement provides that he will be Executive Vice
President of the Company and President of Trimark. Each Executive will receive
an annual salary of $250,000, as from time to time increased by the Board of
Directors.
Each Agreement provides for the payment of annual bonuses pursuant to the
Incentive Plan (see "Knight/Trimark Group, Inc. 1998 Incentive Plan,") and for
participation in current and future employee benefit plans. In addition, the
Agreements of each of Messrs. Pasternak and Sanfilippo provide for the payment
of a sales commission equal to a percentage (in the case of Mr. Pasternak,
35%; in the case of Mr. Sanfilippo, a percentage consistent with the Company's
other traders) of the net, before-tax trading profits of the Executive's
personal trading account; and the Agreements of each of Messrs. Steinman and
Lazarowitz provide for the payment of an additional annual bonus until March
31, 2000, equal in each case to 5 percent of the before-tax earnings of
Trimark (the "Additional Trimark Bonus").
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CERTAIN TRANSACTIONS
THE REORGANIZATION
The Company was organized in April 1998 for the purpose of succeeding to the
business of Roundtable Partners, L.L.C. (the "LLC"). Concurrent with the
closing of the Offering, based on an assumed initial public offering price of
$15.00 per share, all of the member interests of the LLC will be exchanged for
41,000,000 shares of Common Stock of the Company. Certain members of the LLC,
including management, who have so elected, will receive 1,741,581 additional
shares of Class A Common Stock valued at the initial public offering price
with respect to their share of the undistributed income of the LLC through
March 31, 1998 (the "Undistributed Profits"). Management of the Company has
elected to receive shares of Class A Common Stock for all of its Undistributed
Profits. The Company will receive no additional consideration in connection
with such conversion of member interests into shares of Common Stock. In
connection with the Reorganization, Knight will become the successor entity to
Knight Securities, L.P., and Trimark will become the successor entity to
Trimark Securities, L.P. Prior to the effective date of the Registration
Statement of which this Prospectus is a part, certain non-management members
of the LLC, who have so elected, will receive a cash distribution of all or a
portion of their Undistributed Profits. Concurrently with such distribution,
the LLC intends to make a cash distribution to each member of an estimate of
its share of the total amount of profits of the LLC accruing between April 1,
1998 and the closing of this Offering.
BROWN & COMPANY SECURITIES CORPORATION
On April 24, 1996, the Company entered into a $500,000 subordinated note
agreement with Brown & Company Securities Corporation ("Brown"), a major
customer of the Company, which pays interest quarterly at a market rate
approximating the prevailing Federal Funds Rate. The subordinated note matures
on April 23, 1999, but may be prepaid by the Company at any time without
penalty. Concurrent with the execution of the subordinated note, the Company
granted Brown certain benefits, including the right to receive additional
payments based on the amount of order flow provided to the Company by Brown.
For the period from March 27, 1995 through December 31, 1995, the years ended
December 31, 1996 and 1997, and for the three-months ended March 31, 1998,
Brown was the source of 4.0%, 4.6%, 4.3% and 4.1%, respectively, of the
Company's order flow. Payments by the Company to Brown during these periods
amounted to $2.1 million, $6.2 million, $7.5 million and $1.7 million,
respectively. Additionally, in April 1996, the Company granted Brown the right
to purchase 7,143 Common Units in the LLC at the then prevailing market price
of $10.00 per Common Unit (the "Brown Option"). As of the date of grant, the
right to purchase the Common Units had a de minimis value. Brown has elected
to exercise the Brown Option at the closing of the Offering. Upon the closing
of the Offering, Brown will own 394,887 shares of the Company's Class A Common
Stock. The aggregate exercise price for the Brown Option is $71,430.
TRANSACTIONS WITH AFFILIATES
Transactions with Affiliates. Immediately prior to the Reorganization, 60%
of the Common Units of the LLC will be owned by a consortium of 27 broker-
dealers or their affiliates. After the closing of this Offering, such broker-
dealer owners will own 48.5% of the Company's Common Stock (47.2% if the
Underwriters' over-allotment option is exercised in full).
Set forth below is a list of the Company's broker-dealer owners as of March
31, 1998:
<TABLE>
<S> <C> <C>
Ameritrade Inc. E*TRADE Securities, Inc. Dain Rauscher Incorporated
BHC Securities, Inc. Fiserv Correspondent Services, Inc. R.J. Forbes Group, Inc.
BHF Securities Corp. Gruntal & Co., L.L.C. Sanders Morris Mundy Inc.
Bidwell & Company Howe Barnes Investments, Inc. Scottsdale Securities, Inc.
Burke, Christensen &
Lewis Securities International Correspondents Trading, Inc. Southwest Securities, Inc.
Cowles, Sabol & Co.,
Inc. J.W. Charles Securities, Inc. Stockcross, Inc.
David A. Noyes & Co. Josephthal & Co. Inc. Thomas F. White & Co.
Direct Access Brokerage
Services, Inc. Nathan & Lewis Securities, Inc. Van Kasper & Company
Discover Brokerage
Direct Primevest Financial Services, Inc. Waterhouse Securities, Inc.
</TABLE>
57
<PAGE>
For the period from March 27, 1995 through December 31, 1995, the years
ended December 31, 1996 and 1997, and the three-months ended March 31, 1998,
the broker-dealer owners and subordinated note holders were the source of
31.3%, 35.1%, 39.8% and 41.3% of the Company's order flow, respectively. For
the period from March 27, 1995 through December 31, 1995, the years ended
December 31, 1996 and 1997, and the three months ended March 31, 1998,
aggregate payments by the Company to its broker-dealer owners and subordinated
note holders for order flow and aggregate profit distributions to broker-
dealer owners equaled $14.4 million and $1.7 million, $46.4 million and $10.6
million, $50.7 million and $13.4 million and $11.3 million and $5.0 million,
respectively. Pursuant to the limited liability company agreement of the LLC,
its broker-dealer owners have shared in the LLC profits partially in
proportion to their equity interest and partially in proportion to the
quantity of order flow they have directed to the Company. This arrangement
will be discontinued upon consummation of the Reorganization.The broker-dealer
owners will no longer receive any special inducements to send order flow to
the Company and will not be contractually or otherwise obligated to provide
the Company with any order flow in the future. See "Risk Factors--Risks
Associated with Change of Ownership Structure."
Ameritrade. Upon the closing of this Offering, Ameritrade, Inc.
("Ameritrade") will own 3,953,675 shares of the Company's Class A Common
Stock. Mr. J. Joe Ricketts, the Chairman and Chief Executive Officer of
Ameritrade Holding Corporation, an affiliate of Ameritrade, is a Director of
the Company. For the period from March 27, 1995 through December 31, 1995, the
years ended December 31, 1996 and 1997, and the three months ended March 31,
1998, Ameritrade was the source of 6.8%, 5.7%, 5.8% and 8.4%, respectively, of
the Company's order flow. During the same periods, aggregate payments by the
Company to Ameritrade for order flow and profit distributions, respectively,
equalled $3.1 million and $529,000, $8.2 million and $2.7 million, $6.9
million and $2.6 million, and $1.9 million and $972,000, respectively.
Discover Brokerage Direct. Upon the closing of this Offering, Discover
Brokerage Direct, Inc. ("Discover") will own 2,101,963 shares of the Company's
Class A Common Stock. Mr. V. Eric Roach, the President of Discover, is a
Director of the Company. For the period from March 27, 1995 through December
31, 1995, the years ended December 31, 1996 and 1997, and the three months
ended March 31, 1998, Discover was the source of 2.1%, 2.3%, 3.5% and 2.8%,
respectively, of the Company's order flow. During the same periods, aggregate
payments by the Company to Discover for order flow and profit distributions,
respectively, equalled $1.0 million and $185,000, $4.4 million and $964,000,
$5.5 million and $1.3 million, and $954,000 and $394,000, respectively.
E*Trade. Upon the closing of this Offering, E*Trade Securities, Inc.
("E*Trade") will own 2,566,432 shares of the Company's Class A Common Stock.
Mr. Martin Averbuch, the Vice President, Special Projects of E*Trade Group, an
affiliate of E*Trade, is a Director of the Company. For the period from March
27, 1995 through December 31, 1995, the years ended December 31, 1996 and
1997, and the three months ended March 31, 1998, E*Trade was the source of
1.8%, 3.2%, 5.7% and 7.2%, respectively, of the Company's order flow. During
the same periods, aggregate payments by the Company to E*Trade for order flow
and profit distributions, respectively, equalled $645,000 and $190,000, $3.5
million and $825,000, $5.3 million and $1.7 million, and $1.3 million and
$545,000, respectively.
Gruntal & Co. After the Reorganization, Gruntal & Co., L.L.C. ("Gruntal")
will own 1,311,754 shares of the Company's Class A Common Stock, all of which
shares are being sold by Gruntal in the Offering. For the period from March
27, 1995 through December 31, 1995, the years ended December 31, 1996 and
1997, and the three months ended March 31, 1998, Gruntal was the source of
1.0%, 0.6%, 0.3% and 0.2%, respectively, of the Company's order flow. During
the same periods, aggregate payments by the Company to Gruntal for order flow
and profit distributions, respectively, equalled $421,000 and $341,000,
$434,000 and $1.2 million, $415,000 and $845,000, and $66,000 and $290,000,
respectively. In addition, from its inception until March 1998, the Company
utilized Gruntal as its clearing broker. For the period from March 27, 1995
through December 31, 1995, the years ended December 31, 1996 and 1997, and the
three months ended March 31, 1998, the Company paid Gruntal clearing fees in
the amount of $11.7 million , $21.5 million, $14.8 million and $1.6 million.
The Company terminated its clearing arrangements with Gruntal as of
March 1998.
58
<PAGE>
Sanders Morris Mundy. Upon the closing of this Offering, Sanders Morris
Mundy Inc. ("SMM") will own 134,566 shares of the Company's Class A Common
Stock. Mr. Bruce R. McMaken, a Managing Director of SMM, is a Director of the
Company. For the period from March 27, 1995 through December 31, 1995, the
years ended December 31, 1996 and 1997, and the three months ended March 31,
1998, SMM was the source of 0.1%, 0.046%, 0.033% and 0.017%, respectively, of
the Company's order flow. During the same periods, aggregate payments by the
Company to SMM for order flow and profit distributions, respectively, equalled
$34,000 and $31,000, $64,000 and $115,000, $45,000 and $85,000, and $3,000 and
$28,000, respectively.
Scottsdale Securities. Upon the closing of this Offering, Scottsdale
Securities, Inc. ("Scottsdale Securities") will own 1,012,097 shares of the
Company's Class A Common Stock. Mr. Rodger O. Riney, the President of
Scottsdale Securities, is a Director of the Company. For the period from March
27, 1995 through December 31, 1995, the years ended December 31, 1996 and
1997, and the three months ended March 31, 1998, Scottsdale Securities was the
source of 0.9%, 1.5%, 1.4% and 1.3%, respectively, of the Company's order
flow. During the same periods, aggregate payments by the Company to Scottsdale
Securities for order flow and profit distributions, respectively, equalled
$662,000 and $170,000, $2.2 million and $798,000, $1.3 million and $649,000,
and $340,000 and $226,000, respectively.
Southwest Securities. Upon the closing of this Offering, Southwest
Securities, Inc. ("Southwest") will own 1,674,850 shares of the Company's
Class A Common Stock. For the period from March 27, 1995 through December 31,
1995, the years ended December 31, 1996 and 1997, and the three months ended
March 31, 1998, Southwest was the source of 2.7%, 2.3%, 1.4% and 1.4%,
respectively, of the Company's order flow. During the same periods, aggregate
payments by the Company to Southwest for order flow and profit distributions,
respectively, equalled $1.6 million and $451,000, $3.1 million and $1.6
million, $1.8 million and $1.1 million, and $383,000 and $375,000,
respectively. In addition, Southwest is acting as an underwriter in connection
with this Offering. See "Underwriting."
Waterhouse Investor Services, Inc. Upon the closing of this Offering,
Waterhouse Investor Services, Inc. ("Waterhouse") will own 2,136,793 shares of
the Company's Class A Common Stock and 3,945,528 shares of the Company's Class
B Common Stock. Waterhouse is an affiliate of Waterhouse Securities, Inc.
("Waterhouse Securities," together with "Waterhouse," is herein referred to as
the "Waterhouse Entities"). For the period from March 27, 1995 through
December 31, 1995, the years ended December 31, 1996 and 1997, and the three
months ended March 31, 1998, Waterhouse Securities was the source of 5.8%,
6.5%, 10.1% and 11.3%, respectively, of the Company's order flow. During the
same periods, aggregate payments by the Company to the Waterhouse Entities for
order flow and profit distributions, respectively, equalled $2.0 million and
$697,000, $6.8 million and $2.9 million, $10.2 million and $3.9 million and
$3.5 million and $1.5 million, respectively. In addition, Trimark utilizes
National Investor Services Corp. ("NISC"), a subsidiary of Waterhouse, as its
clearing broker. In the year ended December 31, 1997 and the three months
ended March 31, 1998, the Company paid NISC clearing fees in the amount of
$9.5 million and $6.0 million, respectively.
Trimark Leasing. The Company leases certain computer and telephone equipment
and furniture from Trimark Leasing, Inc., an entity which is wholly-owned by
Steven L. Steinman and Robert M. Lazarowitz, executive officers and directors
of the Company. For the period from March 27, 1995 through December 31, 1995,
the years ended December 31, 1996 and 1997, and for the three months ended
March 31, 1998, rental expenses under such leases were $261,000, $530,000,
$539,000, and $118,000, respectively.
PaineWebber. Knight has contracted to clear all its trades through
Correspondent Services Corp. ("CSC"), a subsidiary of PaineWebber Incorporated
("PaineWebber"). In the three months ended March 31, 1998, the Company paid
CSC clearing fees in the amount of $590,000. PaineWebber is acting as an
underwriter in connection with the Offering. In addition, Knight is party to a
$30,000,000 subordinated credit facility with PaineWebber Group, Inc., an
affiliate of PaineWebber. As of March 31, 1998, no amounts were outstanding
under the facility.
59
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Company's Common Stock giving effect to
the Reorganization and the exercise of the Brown Option, and as adjusted to
reflect the sale of the shares pursuant to this offering, by (i) each person
who is known by the Company to own beneficially more than 5% of its
outstanding shares of Common Stock, (ii) each director and Named Executive
Officer of the Company, (iii) all directors and executive officers of the
Company as a group and (iv) the Selling Stockholder. Except as otherwise
indicated below, to the knowledge of the Company, each person listed below has
sole voting power and investment power with respect to the shares beneficially
owned by such person subject to community property laws where applicable.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO SHARES OWNED AFTER
THE OFFERING OFFERED BY THE OFFERING(3)
--------------------- THE SELLING -----------------------
NAME AND ADDRESS(1) NUMBER PERCENT(2) STOCKHOLDER NUMBER PERCENT
- ------------------- ---------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Steven L. Steinman(4)... 4,414,656 10.33% -- 4,414,656 8.58%
Kenneth D. Pasternak.... 4,342,104 10.16 -- 4,342,104 8.44
Walter F. Raquet........ 4,269,709 9.99 -- 4,269,709 8.30
Robert M.
Lazarowitz(5).......... 4,342,104 10.16 -- 4,342,104 8.44
Anthony M. Sanfilippo... 415,705 * -- 415,705 *
Robert I. Turner........ -- 0.00 -- -- 0.00
Michael T. Dorsey....... -- 0.00 -- -- 0.00
Martin Averbuch......... -- 0.00 -- -- 0.00
Charles V. Doherty...... -- 0.00 -- -- 0.00
Gene L. Finn............ -- 0.00 -- -- 0.00
Gary R. Griffith........ -- 0.00 -- -- 0.00
J. Joe Ricketts......... -- 0.00 -- -- 0.00
Bruce R. McMaken........ -- 0.00 -- -- 0.00
Rodger O. Riney......... -- 0.00 -- -- 0.00
V. Eric Roach........... -- 0.00 -- -- 0.00
Charles A. Zabatta...... -- 0.00 -- -- 0.00
Ameritrade Holding
Corp................... 3,953,675 9.25 -- 3,953,675 7.69
E* TRADE Securities,
Inc.................... 2,566,432 6.00 -- 2,566,432 4.99
Gruntal & Co.,
L.L.C.(6).............. 1,311,754 3.07 1,311,754 -- 0.00
Discover Brokerage
Direct................. 2,101,963 4.92 -- 2,101,963 4.09
Waterhouse Investor
Services, Inc.......... 6,082,321 14.23 -- 6,082,321 11.83
All executive officers
and directors as a
group (16 persons)..... 17,784,278 41.61% -- 17,784,278 34.58%
</TABLE>
- --------
* Less than one percent of the outstanding Common Stock.
(1) See "Management--Executive Officers and Directors." Unless otherwise
indicated, the address for each beneficial owner is c/o Knight/Trimark
Group, Inc., Newport Tower, 29th Floor, 525 Washington Boulevard, Jersey
City, New Jersey 07310.
(2) The percentage of total outstanding for each stockholder immediately prior
to the Offering is calculated by dividing (i) the number of shares of
Common Stock deemed to be beneficially owned by such stockholder at such
time by (ii) the sum of the number of shares of Common Stock outstanding
at such time.
(3) Assumes that the Underwriters' over-allotment option to purchase up to an
additional 1,500,000 shares from the Company is not exercised.
(4) Mr. Steinman owns a nominal amount of the Company's Common Stock, and the
remainder of the shares attributed to him are owned by Steinman Family
Associates, L.P., a Delaware limited partnership, in which he is the
general partner and the limited partners are his wife and a trust for the
benefit of certain members of his immediate family.
(5) Mr. Lazarowitz will own a nominal amount of the Company's Common Stock,
and the remainder of the shares attributed to him are owned by Lazarowitz
Family Associates, L.P., a Delaware limited partnership, in which he is
the general partner and the limited partners are his wife and a trust for
the benefit of certain members of his immediate family.
(6) The address of Gruntal & Co., L.L.C. is 14 Wall Street, New York, New York
10005.
60
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary description of the capital stock of the Company does
not purport to be complete and is subject to the provisions of the Certificate
of Incorporation and Bylaws of the Company, which are included as exhibits to
the Registration Statement of which this Prospectus forms a part, and the
provisions of applicable law.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Upon consummation of the Offering, the authorized Capital Stock of the
Company will consist of 220,000,000 shares of Common Stock, par value $.01 per
share, and 20,000,000 shares of Preferred Stock, par value $.01 per share (the
"Preferred Stock"). Of the 220,000,000 authorized shares of the Company's
Common Stock, 200,000,000 shares will be designated Class A Common Stock and
20,000,000 shares will be designated as Class B Common Stock. As of March 31,
1998, after giving effect to the Reorganization and the Offering, 47,484,299
shares of Class A Common Stock will be issued and outstanding and 3,945,528
shares of Class B Common Stock will be issued and outstanding.
COMMON STOCK
Voting Rights. Except as otherwise required by law or, as described below,
by the Certificate of Incorporation, the holders of shares of Class A Common
Stock will vote together as a single class. Each share of Class A Common Stock
will entitle the registered holder thereof to one vote. There will be no
cumulative voting and, therefore, holders of a majority of the shares of Class
A Common Stock can elect all of the directors.
The holders of Class A Common Stock will be entitled to elect all members of
the Company's Board of Directors and the holders of Class B Common Stock will
have no voting rights except as otherwise provided by law.
Conversion into Class A Common Stock. Pursuant to the Certificate of
Incorporation, each share of Class B Common Stock will be exchangeable at any
time upon sale or other transfer thereof, subject to certain limitations on
such sale or transfer, for one fully paid and nonassessable share of Class A
Common Stock, subject to adjustment for any stock split. Subject to certain
limitations and upon satisfaction of certain conditions, holders of Class B
Common Stock shall be entitled to convert their shares into the same number of
shares of Class A Common Stock.
Liquidation. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company, after payment in full to creditors
and distribution in full of the preferential amounts, if any, to be
distributed to holders of shares of Preferred Stock, unless otherwise required
by law, holders of shares of Common Stock will be entitled to receive all the
remaining assets of the Company of whatever kind available for distribution to
stockholders ratably in proportion to the number of shares of Common Stock
held by them. Pursuant to the Certificate of Incorporation, the holders of
Common Stock will participate in the distribution of such assets as if all
classes and series of Common Stock constituted a single class of stock.
Dividends. Subject to the preferential rights of holders of Preferred Stock,
if any, the holders of shares of Common Stock will be entitled to receive,
when, as and if declared by the Board of Directors, out of the assets of the
Company which are by law available therefor, dividends payable either in cash,
in property or in shares of capital stock. Pursuant to the Certificate of
Incorporation, no dividend will be declared or paid in respect of any class of
Common Stock by the Company unless the holders of all classes of Common Stock
receive the same per share dividend, payable in the same amount and type of
consideration, as if such classes constituted a single class, except that if
any dividend is declared that is payable in shares of Common Stock, or in
subscription or other rights to acquire shares of Common Stock, then such
dividend will be declared and paid at the same rate per share with respect to
each class of Common Stock, the dividend payable on shares of Class A Common
Stock will be payable only in shares of, or in subscription or other rights to
acquire shares of, Class A Common Stock, and the dividend payable on shares of
Class B Common Stock will be payable only in shares of, or in subscription or
other rights to acquire shares of Class B Common Stock.
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<PAGE>
PREFERRED STOCK
Under the Certificate of Incorporation, the Board of Directors will be
expressly authorized, without further stockholder approval, to provide for the
issuance of all or any shares of Preferred Stock in one or more classes or
series, and to fix for each such class or series such voting powers, full or
limited, or no voting powers, and such distinctive designations, preferences
and relative, participating, optional or other special rights and such
qualifications, limitations or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions adopted by the Board of Directors
providing for the issuance of such class or series and as may be permitted by
the DGCL. The Company has no present plans to issue any shares of Preferred
Stock. See "--Antitakeover Effects of Provisions of the Certificate of
Incorporation and Bylaws and the DGCL."
REGISTRATION RIGHTS
Certain securityholders of the Company (the "Rightsholders") are entitled to
require the Company to register under the Securities Act, up to a total of
shares (the "Registrable Shares") of outstanding Common Stock (including
Registrable Shares being sold by the Selling Stockholder in this
offering) pursuant to the terms of a Registration Rights Agreement (the
"Registration Rights Agreement"). The Registration Rights Agreement provides
that in the event the Company proposes to register any of its securities under
the Securities Act at any time or times, the Rightsholders, subject to certain
exceptions, shall be entitled to include Registrable Shares in such
registration. However, the managing underwriter of any such offering may
exclude for marketing reasons some of such Registrable Shares from such
registration. In addition, certain Rightsholders have additional rights,
subject to certain conditions and limitations, to require the Company to
prepare and file a registration statement under the Securities Act with
respect to their Registrable Shares. The Company is generally required to bear
the expenses of all such registrations, except underwriting discounts and
commissions.
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND
BYLAWS AND THE DGCL
Certificate of Incorporation and Bylaws. The Certificate of Incorporation
will provide that stockholders are not entitled to call a special meeting of
stockholders, nor to require the Board of Directors to call such a meeting.
The Certificate of Incorporation will provide that stockholders will not be
entitled to act by written consent in lieu of a meeting except where such
consent is unanimous. These provisions of the Certificate of Incorporation,
could discourage potential acquisition proposals and could delay or prevent a
change of control of the Company.
Delaware Takeover Statute. The Company is subject to Section 203 of the DGCL
("Section 203"), which, subject to certain exceptions, prohibits a publicly
held Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years following the date that
such stockholder became an interested stockholder, unless: (i) prior to such
date, the board of directors of the corporation approved either the business
combination or the transaction that resulted in the stockholder becoming an
interested stockholder; (ii) upon consummation of the transaction that
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (a) by persons
who are directors and also officers and (b) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or (iii) on or subsequent to such date, the business
combination is approved by the board of directors and authorized at an annual
or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock that is
not owned by the interested stockholder.
Section 203 defines "business combination" to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii)
any sale, transfer, pledge or other disposition of 10% or more of the assets
of the corporation involving the interested stockholder; (iii) subject to
certain exceptions, any
62
<PAGE>
transaction that results in the issuance or transfer by the corporation of any
stock of the corporation to the interested stockholder; (iv) any transaction
involving the corporation that has the effect of increasing the proportionate
share of the stock of any class or series of the corporation beneficially
owned by the interested stockholder; or (v) the receipt by the interested
stockholder of the benefit of any loans, advances, guarantees, pledges or
other financial benefits provided by or through the corporation. In general,
Section 203 defined an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
Other Provisions. The holders of Common Stock are not entitled to preemptive
or subscription rights. In any merger, consolidation or business combination,
the consideration to be received per share by holders of Class A Common Stock
is identical to that to be received by holders of Class B Common Stock. No
class of Common Stock may be subdivided, consolidated, reclassified or
otherwise changed unless the other class of Common Stock concurrently is
subdivided, consolidated, reclassified or otherwise changed in the same
proportion and in the same manner. All outstanding shares are, and the shares
of Class A Common Stock offered hereby will be upon issuance, validly issued,
fully paid and nonassessable.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is .
63
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have an aggregate of
51,429,827 shares of Common Stock outstanding (assuming no exercise of the
Underwriters' over-allotment option). Of these shares, the 10,000,000 shares
of Class A Common Stock sold in this Offering will be freely tradable without
restriction or further registration under the Securities Act, except that any
shares purchased by an "affiliate" of the Company, as that term is defined in
Rule 144 ("Rule 144") under the Securities Act (an "Affiliate"), may generally
be sold only in compliance with Rule 144 as described below.
In addition, the existing stockholders have the right to cause the Company
to register the sale of certain shares of Class A Common Stock or Class B
Common Stock owned by them and/or to include their shares in future
registrable statements relating to the Company's securities.
Approximately 41,429,827 of the outstanding shares of Common Stock are
"restricted securities" as that term is defined under Rule 144 (the
"Restricted Shares"). Of these Restricted Shares, shares will be subject
to lock-up agreements as described below. Upon expiration of these agreements
all of the Restricted Shares will be available for sale in the public market,
subject to the provisions of Rule 144 under the Securities Act. Upon
completion of this offering, the holders of 41,429,827 of the Restricted
Shares will be entitled to registration rights. Sales of Restricted Shares in
the public market, or the availability of such shares for sale, could
adversely affect the market price of the Common Stock. See "Description of
Capital Stock--Registration Rights."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially
owned Restricted Shares for at least one year is entitled to sell, within any
three-month period, a number of such shares that does not exceed the greater
of (i) one percent of the then outstanding shares of Class A Common Stock
(approximately 474,844 shares immediately after this offering) or (ii) the
average weekly trading volume in the Class A Common Stock in the Nasdaq
National Market during the four calendar weeks preceding the date on which
notice of such sale is filed with the Securities and Exchange Commission. Such
sales under Rule 144 are also subject to certain manner of sale provisions and
notice requirements and to the availability of current public information
about the Company. In addition, a person who is not an Affiliate and has not
been an Affiliate for at least three months prior to the sale and who has
beneficially owned Restricted Shares for at least two years may resell such
shares without regard to the requirements described above. The Company is
unable to estimate accurately the number of Restricted Shares that ultimately
will be sold under Rule 144 because the number of shares will depend in part
on the market price for the Common Stock, the personal circumstances of the
sellers and other factors. See "Risk Factors--Shares Eligible for Future Sale"
and "Risk Factors--No Prior Market; Possible Volatility of Stock Price."
After the date of this Prospectus, the Company intends to file a
registration statement under the Securities Act on Form S-8 to register all
shares of Common Stock issuable pursuant to the Company's stock option plans.
Such registration statement is expected to become effective immediately upon
filing. Accordingly, shares issued under the Company's stock plans will be
eligible for sale in the public markets upon vesting and exercise of options
or awards, subject to the Rule 144 volume restrictions applicable to
affiliates and, in certain cases, lock-up agreements.
All executive officers and directors of the Company and substantially all of
the Company's stockholders (including the Selling Stockholder), who upon the
completion of this Offering will hold in the aggregate shares of Common
Stock, have agreed that they will not, without the prior written consent of
BancAmerica Robertson Stephens, directly or indirectly, offer to sell, sell,
contract to sell or otherwise dispose of any shares of Common Stock
beneficially owned by them for a period of 180 days after the date of this
Prospectus, subject to certain exceptions. BancAmerica Robertson Stephens may,
in its sole discretion and at any time, without notice, release all or any
portion of the securities subject to lock-up agreements. See "Underwriting."
64
<PAGE>
The Company is unable to estimate the number of shares that will be sold
under Rule 144, as this will depend upon the market price for the Common Stock
of the Company, the personal circumstances of the sellers and other factors.
Prior to this offering, there has been no public market for the Common Stock,
and there can be no assurance that a significant public market for the Common
Stock will develop or be sustained after the Offering.
Sales of substantial amounts of Common Stock, or the perception that such
sales could occur, could adversely affect prevailing market prices for the
Common Stock and could impair the Company's future ability to obtain capital
through an offering of equity securities.
65
<PAGE>
UNDERWRITING
The Underwriters named below, acting through their representatives,
BancAmerica Robertson Stephens, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, PaineWebber Incorporated, ABN AMRO Incorporated and Southwest
Securities, Inc. (the "Representatives"), have severally agreed with the
Company and the Selling Stockholder, subject to the terms and conditions of
the Underwriting Agreement, to purchase the number of shares of Class A Common
Stock set forth below opposite their respective names. The Underwriters are
committed to purchase and pay for all such shares, if any are purchased.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
BancAmerica Robertson Stephens...........................
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......
PaineWebber Incorporated.................................
ABN AMRO Incorporated....................................
Southwest Securities, Inc. ..............................
----------
Total.................................................. 10,000,000
==========
</TABLE>
The Representatives have advised the Company and the Selling Stockholder
that the Underwriters propose to offer the shares of Class A Common Stock to
the public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $ per share, of which $ may be reallowed to other dealers.
After the completion of the initial public offering, the public offering
price, concession and reallowance to dealers may be reduced by the
Representatives. No such reduction shall change the amount of proceeds to be
received by the Company and the Selling Stockholder as set forth on the cover
page of this Prospectus.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to
1,500,000 additional shares of Class A Common Stock from the Company at the
initial public offering price per share set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the
same percentage of such additional shares that the number of shares of Class A
Common Stock to be purchased by it shown in the above table represents as a
percentage of the total number of shares offered hereby. If purchased, such
additional shares will be sold by the Underwriters on the same terms less the
underwriting discount as those on which the shares offered hereby are being
sold.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Selling Stockholder and the Company against certain civil
liabilities, including liabilities under the Securities Act and liabilities
arising from breaches of representations and warranties contained in the
Underwriting Agreement.
Pursuant to the terms of lock-up agreements, the holders of 41,429,827
shares of the Company's Common Stock have agreed, for a period of up to 180
days after the date of this Prospectus, that, subject to certain exceptions,
they will not contract to sell or otherwise dispose of any shares of Common
Stock, any options or warrants to purchase shares of Common Stock or any
securities convertible into, or exchangeable for, shares of Common Stock,
owned directly by such holders or with respect to which they have the power of
disposition, without the prior written consent of BancAmerica Robertson
Stephens. BancAmerica Robertson Stephens may, in its sole discretion, and at
any time without notice, release all or any portion of the securities subject
to lock-up agreements. All of the shares of Common Stock subject to lock-up
agreements may be eligible for sale in the public market upon the expiration
of the lock-up agreements, subject to Rule 144.
In addition, the Company and the Selling Stockholder have agreed that until
180 days after the date of this Prospectus, the Company and the Selling
Stockholder will not, without prior written consent of BancAmerica Robertson
Stephens, subject to certain exceptions, offer, sell, contract to sell or
otherwise
66
<PAGE>
dispose of any shares of Common Stock, any options or warrants to purchase any
shares of Common Stock or any securities convertible into, exercisable for or
exchangeable for shares of Common Stock other than the Company's and the
Selling Stockholder's sale of shares in this offering, the issuance of shares
of Common Stock upon the exercise of outstanding options and warrants and the
grant of options to purchase shares of Common Stock under existing employee
stock option or stock purchase plans. Furthermore, the Company has agreed not
to file any registration statements on Form S-8 to register the 7,409,000
shares of Class A Common Stock reserved for issuance pursuant to its Stock
Option Plans until at least 90 days after the date of this Prospectus. See
"Management--Stock Options Plans" and "Shares Eligible for Future Sale."
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
The Company's subsidiary, Knight, is a party to a clearing contract with an
affiliate of PaineWebber Incorporated, whereby such affiliate clears all of
Knight's trades for usual and customary fees. One of the Underwriters,
Southwest Securities, Inc., is a stockholder of the Company. See "Certain
Transactions."
Prior to this offering, there has been no public market for the Class A
Common Stock of the Company. Consequently, the initial public offering price
for the Class A Common Stock offered hereby will be determined through
negotiations between the Company and the Representatives. Among the factors to
be considered in such negotiations are prevailing market conditions, certain
financial information of the Company, market valuations of other companies
that the Company and the Representatives believe to be comparable to the
Company, estimates of the business potential of the Company, the present state
of the Company's development and other factors deemed relevant.
The offering is being conducted in accordance with Rule 2720 ("Rule 2720")
of the National Association of Securities Dealers, Inc. (the "NASD") which
provides that, among other things, when an NASD member firm participates in
the offering of equity securities of a company with whom such member has a
"conflict of interest" (as defined in Rule 2720), the initial public offering
price can be no higher than that recommended by a "qualified independent
underwriter" (as defined in Rule 2720) (a "QIU"). BancAmerica Robertson
Stephens is serving as the QIU in the offering and will recommend a price in
compliance with the requirements of Rule 2720. BancAmerica Robertson Stephens
has performed due diligence investigations and reviewed and participated in
the preparation of this Prospectus and the Registration Statement of which
this Prospectus forms a part. BancAmerica Robertson Stephens, in its capacity
as QIU, will receive no additional compensation as such in connection with the
offering.
The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions, or the imposition of penalty bids which may have the effect of
stabilizing or maintaining the market price of the Class A Common Stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of the Class A Common Stock on
behalf of the Underwriters for the purpose of fixing or maintaining the price
of the Class A Common Stock. A "syndicate covering transaction" is the bid for
or the purchase of the Class A Common Stock on behalf of the Underwriters to
reduce a short position incurred by the Underwriters in connection with the
offering. A "penalty bid" is an arrangement permitting the Representatives to
reclaim the selling concession otherwise accruing to an Underwriter or
syndicate member in connection with this offering if the shares of Class A
Common Stock originally sold by such Underwriter or syndicate member are
purchased by the Representatives in a syndicate covering transaction and has
therefore not been effectively placed by such Underwriter or syndicate member.
The Representatives have advised the Company that such transactions may be
effected in NASDAQ as a National Market issue or otherwise and, if commenced,
may be discontinued at any time.
67
<PAGE>
LEGAL MATTERS
The validity of the Class A Common Stock offered hereby will be passed upon
for the Company by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New
York. Certain legal matters will be passed on for the Underwriters by Brobeck,
Phleger & Harrison LLP, New York, New York.
EXPERTS
The consolidated financial statements as of and for the years ended December
31, 1996 and 1997 and for the period from March 27, 1995 to December 31, 1995
included in this Prospectus have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has not previously been subject to the reporting requirements of
the Exchange Act. Upon completion of the Offerings, the Company will be
subject to the informational requirements of the Exchange Act, and in
accordance therewith, will be required to file periodic reports and other
information with the SEC. Such information can be inspected without charge
after the Offerings at the public reference facilities of the SEC at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the regional offices of the SEC located at Suite 1400, Northwest, Atrium
Center, 500 West Madison Street, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048. Copies of such material may also
be obtained at prescribed rates from the Public Reference Section of the SEC,
450 Fifth Street, N.W., Washington, D.C. 20549. The SEC also maintains a web
site (http://www.sec.gov) that will contain all information filed
electronically by the Company with the SEC.
This Prospectus, which constitutes a part of a Registration Statement on
Form S-1 (the "Registration Statement") filed by the Company with the SEC
under the Securities Act, does not contain all of the information set forth in
the Registration Statement, including the exhibits thereto. For further
information with respect to the Company and the Class A Common Stock offered
hereby, reference is made to the Registration Statement and the exhibits
thereto. Statements contained in this Prospectus as to the contents of any
contract or other document are not necessarily complete, and, with respect to
each such contract or document filed as an exhibit to the Registration
Statement, reference is made to the copy of such contract or document, and
each such statement is qualified in all respects by such reference. A copy of
the Registration Statement, including the exhibits thereto, may be inspected
and copies thereof may be obtained as described in the preceding paragraph
with respect to periodic reports and other information to be filed by the
Company under the Exchange Act.
68
<PAGE>
ROUNDTABLE PARTNERS, L.L.C.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants.......................................... F-2
Consolidated Statements of Financial Condition as of December 31, 1996 and
1997 and (unaudited) March 31, 1998 and (unaudited) Pro forma March 31,
1998...................................................................... F-3
Consolidated Statements of Income for the period from March 27, 1995 (date
of initial capitalization) through December 31, 1995, the years ended
December 31, 1996 and 1997 and the (unaudited) three month periods ended
March 31, 1997 and 1998................................................... F-4
Consolidated Statements of Changes in Members' Equity for the period from
March 27, 1995 (date of initial capitalization) through December 31, 1995,
the years ended December 31, 1996 and 1997 and the (unaudited) three month
period ended March 31, 1998............................................... F-5
Consolidated Statements of Cash Flows for the period from March 27, 1995
(date of initial capitalization) through December 31, 1995, the years
ended December 31, 1996 and 1997 and the (unaudited) three month periods
ended March 31, 1997 and 1998............................................. F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Advisory Board and
Members of Roundtable Partners, L.L.C.
In our opinion, the accompanying consolidated statements of financial
condition and the related consolidated statements of income, changes in
members' equity and cash flows present fairly, in all material respects, the
consolidated financial position of Roundtable Partners, L.L.C. and its
subsidiaries at December 31, 1996 and 1997, and the results of their
operations and their cash flows for the period from March 27, 1995 (date of
initial capitalization) through December 31, 1995 and for the years ended
December 31, 1996 and 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audits 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
Price Waterhouse LLP
New York, New York
February 10, 1998, except as to Note 15,
which is as of April 15, 1998
F-2
<PAGE>
ROUNDTABLE PARTNERS, L.L.C.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------------- MARCH 31, MARCH 31,
1996 1997 1998 1998
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
(NOTE 16)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash
equivalents............ $ 15,353,166 $ 13,797,198 $ 5,429,440 $ 5,429,440
Securities owned, at
market value........... 46,780,638 61,726,045 63,490,053 63,490,053
Receivable from clearing
brokers................ 23,155,776 30,151,720 78,119,153 78,119,153
Fixed assets and
leasehold improvements,
at cost, less
accumulated
depreciation and
amortization of
$1,752,435 in 1996,
$3,884,743 in 1997 and
$4,650,032 in 1998
(unaudited)............ 6,398,112 7,353,429 8,273,607 8,273,607
Goodwill, less
accumulated
amortization of
$2,720,728 in 1996,
$4,465,484 in 1997 and
$4,973,786 in 1998
(unaudited)............ 13,852,211 14,192,840 14,394,624 14,394,624
Other assets............ 495,564 651,190 1,366,150 1,366,150
------------ ------------ ------------ ------------
Total assets........ $106,035,467 $127,872,422 $171,073,027 $171,073,027
============ ============ ============ ============
LIABILITIES AND MEMBERS' (PRO FORMA
STOCKHOLDERS') EQUITY
Liabilities
Securities sold, not
yet purchased, at
market value......... $ 19,021,401 $ 21,060,857 $ 54,581,144 $ 54,581,144
Mandatorily Redeemable
Preferred Units
currently
redeemable........... -- -- -- 13,636,510
Distributions on
Common Units payable
to members........... 4,983,972 8,405,326 8,767,185 35,288,478
Accrued compensation
expense.............. 4,185,918 6,112,562 7,940,980 7,940,980
Accrued execution and
clearance fees....... 3,174,472 3,966,145 3,789,466 3,789,466
Accrued payments for
order flow........... 2,898,601 3,764,391 5,278,397 5,278,397
Liability for capital
lease................ 1,070,029 786,801 713,207 713,207
Accounts payable,
accrued expenses and
other liabilities.... 1,911,988 1,394,288 1,612,570 1,612,570
Interest payable on
Preferred Units...... 596,878 424,981 416,486 416,486
Subordinated note..... 500,000 500,000 500,000 500,000
Mandatorily Redeemable
Preferred A Units.... 22,705,690 12,483,610 12,483,610 --
Mandatorily Redeemable
Preferred B Units.... 15,000,000 15,000,000 15,000,000 13,847,100
------------ ------------ ------------ ------------
Total liabilities... 76,048,949 73,898,961 111,083,045 137,604,338
------------ ------------ ------------ ------------
Commitments and contin-
gent liabilities (Notes
9 and 12)
Members' equity
Common units, $10 par
value, 750,000 units
authorized; 738,097,
734,497 and 734,497
(unaudited) units
issued and
outstanding at
December 31, 1996,
1997 and March 31,
1998, respectively... 7,380,970 7,344,970 7,344,970 --
Undistributed income.. 22,605,548 46,628,491 52,645,012 --
Pro forma stockholders'
equity (unaudited)
Class A Common Stock,
$0.01 par value,
200,000,000 shares
authorized;
38,401,166
shares issued and
outstanding.......... -- -- -- 384,012
Class B Common Stock,
$0.01 par value,
20,000,000 shares
authorized; 3,945,528
shares issued and
outstanding.......... -- -- -- 39,455
Additional paid-in
capital.............. -- -- -- 33,045,222
------------ ------------ ------------ ------------
Total members' (pro
forma
stockholders')
equity............. 29,986,518 53,973,461 59,989,982 33,468,689
------------ ------------ ------------ ------------
Total liabilities
and members' (pro
forma
stockholders')
equity............ $106,035,467 $127,872,422 $171,073,027 $171,073,027
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
ROUNDTABLE PARTNERS, L.L.C.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
MARCH 27, 1995 FOR THE THREE MONTHS
(DATE OF INITIAL FOR THE YEARS ENDED ENDED
CAPITALIZATION) DECEMBER 31, MARCH 31,
THROUGH ------------------------- -----------------------
DECEMBER 31, 1995 1996 1997 1997 1998
------------------- ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Net trading revenue..... $69,516,222 $183,893,654 $224,627,402 $50,482,673 $63,006,565
Interest, net........... 296,019 1,282,522 2,039,244 495,551 525,651
----------- ------------ ------------ ----------- -----------
Total revenues...... 69,812,241 185,176,176 226,666,646 50,978,224 63,532,216
----------- ------------ ------------ ----------- -----------
EXPENSES
Payments for order flow
Affiliates ........... 14,388,467 46,374,341 50,662,461 14,300,570 11,313,265
Non-affiliates........ 11,605,572 23,454,327 16,249,579 3,827,950 4,943,253
Execution and clearance
fees...................
Affiliates............ 11,724,385 21,461,560 24,262,767 4,923,875 7,579,469
Non-affiliates........ 985,373 4,375,397 7,805,806 1,487,104 2,661,208
Employee compensation
and benefits........... 12,150,932 39,494,032 57,716,994 12,013,016 16,168,160
Communications and data
processing............. 2,202,276 4,359,785 6,809,086 1,318,959 2,169,675
Depreciation and
amortization........... 1,626,159 2,975,152 4,225,286 936,362 1,291,164
Interest on Preferred
Units.................. 1,309,576 2,092,593 1,940,972 603,955 416,486
Occupancy and equipment
rentals................ 849,352 1,776,806 2,657,402 536,627 1,081,542
Business development.... 130,422 623,492 1,459,822 244,421 376,850
Other................... 1,498,614 1,428,089 2,799,238 365,315 747,438
----------- ------------ ------------ ----------- -----------
Total expenses...... 58,471,128 148,415,574 176,589,413 40,558,154 48,748,510
----------- ------------ ------------ ----------- -----------
NET INCOME.............. $11,341,113 $ 36,760,602 $ 50,077,233 $10,420,070 $14,783,706
=========== ============ ============ =========== ===========
Earnings per common unit
Basic................. $ 33.21 $ 62.31 $ 67.93 $ 14.12 $ 20.13
=========== ============ ============ =========== ===========
Diluted............... $ 9.36 $ 23.08 $ 41.54 $ 6.45 $ 20.13
=========== ============ ============ =========== ===========
Weighted average common
units outstanding
Basic................. 341,508 589,948 737,197 738,097 734,497
=========== ============ ============ =========== ===========
Diluted............... 1,351,298 1,683,537 1,252,183 1,710,044 734,497
=========== ============ ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
ROUNDTABLE PARTNERS, L.L.C.
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
FOR THE PERIOD FROM MARCH 27, 1995 (DATE OF INITIAL CAPITALIZATION) THROUGH
DECEMBER 31, 1995, THE YEARS ENDED DECEMBER 31, 1996 AND 1997 AND THE
(UNAUDITED)
THREE MONTH PERIOD ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
COMMON UNITS
------------------- UNDISTRIBUTED
UNITS AMOUNT INCOME TOTAL
------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
Initial capitalization, March
27, 1995..................... 304,407 $3,044,070 $ -- $ 3,044,070
Issuance of Common Units...... 68,241 682,410 -- 682,410
Net income.................... -- -- 11,341,113 11,341,113
Distributions on Common
Units........................ -- -- (2,868,323) (2,868,323)
------- ---------- ----------- -----------
Balance, December 31, 1995.... 372,648 3,726,480 8,472,790 12,199,270
Issuance of Common Units...... 365,449 3,654,490 -- 3,654,490
Net income.................... -- -- 36,760,602 36,760,602
Distributions on Common
Units........................ -- -- (22,627,844) (22,627,844)
------- ---------- ----------- -----------
Balance, December 31, 1996.... 738,097 7,380,970 22,605,548 29,986,518
Net income.................... -- -- 50,077,233 50,077,233
Distributions on Common
Units........................ -- -- (25,742,857) (25,742,857)
Resignation of Member......... (3,600) (36,000) (311,433) (347,433)
------- ---------- ----------- -----------
Balance, December 31, 1997.... 734,497 7,344,970 46,628,491 53,973,461
Net income (unaudited)........ -- -- 14,783,706 14,783,706
Distributions on Common Units
(unaudited).................. -- -- (8,767,185) (8,767,185)
------- ---------- ----------- -----------
Balance, March 31, 1998
(unaudited).................. 734,497 $7,344,970 $52,645,012 $59,989,982
======= ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
ROUNDTABLE PARTNERS, L.L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
MARCH 27, 1995
(DATE
OF INITIAL FOR THE THREE MONTHS
CAPITALIZATION) FOR THE YEARS ENDED ENDED
THROUGH DECEMBER 31, MARCH 31,
DECEMBER 31, ------------------------ ------------------------
1995 1996 1997 1997 1998
--------------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income.............. $11,341,113 $36,760,602 $50,077,233 $10,420,070 $14,783,706
Adjustments to reconcile
net income to net cash
(used in) provided by
operating activities
Depreciation and
amortization........... 1,626,159 2,975,152 4,225,286 936,362 1,291,164
(Increase) decrease in
operating assets
Securities owned....... (33,763,047) (13,017,591) (14,945,407) 7,343,493 (1,764,008)
Receivable from
clearing brokers...... (11,436,653) (11,719,123) (6,995,944) (6,320,762) (47,967,433)
Other assets........... (508,552) (115,061) (225,200) (130,803) (732,532)
Increase (decrease) in
operating liabilities
Securities sold, not
yet purchased......... 11,000,921 8,020,480 2,039,456 (1,474,487) 33,520,287
Accrued compensation
expense............... 1,458,880 2,727,038 1,926,644 391,216 1,828,418
Accrued execution and
clearance fees........ 2,395,353 779,119 791,673 (252,109) (176,679)
Accrued payments for
order flow............ 1,611,636 1,286,965 865,790 (1,334,507) 1,514,006
Accounts payable,
accrued expenses and
other liabilities..... 1,329,886 582,102 (517,700) (1,267,698) 218,282
Interest payable on
Preferred Units....... 433,440 163,438 (171,897) 7,074 (8,494)
----------- ----------- ----------- ----------- -----------
Net cash (used in)
provided by operating
activities............ (14,510,864) 28,443,121 37,069,934 8,317,849 2,506,717
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES
Purchase of general
partnership interest in
Trimark Securities,
L.P.................... (15,273,295) -- -- -- --
Purchase of business and
net assets of
Tradetech Securities,
L.P.................... -- -- (750,000) -- --
Payment of contingent
consideration.......... (1,261,298) (1,351,447) (1,685,385) (218,988) (710,086)
Sale of fixed assets.... -- -- 1,413,115 -- --
Purchases of fixed
assets and leasehold
improvements........... (1,410,283) (3,939,871) (4,429,389) (1,230,863) (1,685,469)
----------- ----------- ----------- ----------- -----------
Net cash used in
investing activities.. (17,944,876) (5,291,318) (5,451,659) (1,449,851) (2,395,555)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Proceeds from issuance
of subordinated notes.. 5,000,000 500,000 -- -- --
Proceeds from issuance
of Mandatorily
Redeemable Preferred A
Units.................. 13,415,300 8,870,410 -- -- --
Proceeds from issuance
of Mandatorily
Redeemable Preferred B
Units.................. 15,000,000 -- -- -- --
Proceeds from issuance
of Common Units........ 3,726,480 2,940,200 -- -- --
Decrease in liability
for capital lease...... (149,700) (267,664) (283,228) (69,404) (73,594)
Redemptions of
Mandatorily Redeemable
Preferred A Units...... -- (3,865,730) (10,147,050) -- --
Resignation of Member... -- -- (422,463) -- --
Distributions on Common
Units.................. (2,868,323) (17,643,870) (22,321,502) (4,983,972) (8,405,326)
----------- ----------- ----------- ----------- -----------
Net cash provided by
(used in) financing
activities............ 34,123,757 (9,466,654) (33,174,243) (5,053,376) (8,478,920)
----------- ----------- ----------- ----------- -----------
Increase (decrease) in
cash and cash
equivalents............ 1,668,017 13,685,149 (1,555,968) 1,814,622 (8,367,758)
Cash and cash
equivalents at
beginning of period.... -- 1,668,017 15,353,166 15,353,166 13,797,198
----------- ----------- ----------- ----------- -----------
Cash and cash
equivalents at end of
period................. $ 1,668,017 $15,353,166 $13,797,198 $17,167,788 $ 5,429,440
=========== =========== =========== =========== ===========
Supplemental disclosure
of cash flow
information
Cash paid for
interest.............. $ 1,150,262 $ 2,470,434 $ 2,652,357 $ 726,773 $ 644,302
=========== =========== =========== =========== ===========
</TABLE>
Supplemental information pertaining to noncash investing and financing
activities
In 1995, the Company incurred a capital lease obligation of $1,487,393, which
represents the present value of future minimum lease payments on certain fixed
assets.
Effective January 1, 1996, Waterhouse Securities exchanged its $5,000,000
subordinated note for 71,429 Common Units and 428,571 Preferred A Units issued
by the Company with an aggregate value of $5,000,000.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
ROUNDTABLE PARTNERS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1998 IS UNAUDITED)
1. ORGANIZATION AND DESCRIPTION OF THE BUSINESS
Roundtable Partners, L.L.C. ("Roundtable"), a Delaware limited liability
corporation, was initially capitalized on March 27, 1995 to own and operate
the securities market-making businesses of Knight Securities, L.P. ("Knight")
and Trimark Securities, L.P. ("Trimark") (collectively, the "Company"). The
Company is owned 20% by key employees of Knight, 20% by key employees of
Trimark (collectively, the "Management Investors") and 60% by a consortium of
independent securities firms and investors (the "Non-Management Investors").
As a limited liability company, the Company has a finite life and must be
dissolved no later than September 30, 2024.
The Company, which operates in one segment and line of business - equity
securities market-making, owns a 99.99% general partnership interest in both
Knight and Trimark. A subchapter S holding corporation owned by the Management
Investors owns a 0.01% limited partnership interest in each entity. Knight, a
New York limited partnership, was organized on February 17, 1995 by Roundtable
to operate as a market maker in over-the-counter equity securities ("OTC
stocks"), principally securities traded on the National Association of
Securities Dealers, Inc.'s ("NASD") Automated Quotation System ("NASDAQ"),
including Small Capitalization listings and securities listed on the OTC
Bulletin Board. Trimark is a New York Limited Partnership which was acquired
by the Company on March 27, 1995 (Note 2). Trimark operates as a market-maker
in equity securities listed on the New York and American Stock Exchanges
("listed stocks"). Knight and Trimark are registered as broker-dealers with
the Securities and Exchange Commission and are members of the NASD.
2. ACQUISITIONS
On March 27, 1995, Trimark Securities, Inc., an unaffiliated securities
firm, contributed its market-making business in listed stocks and the fixed
assets necessary to operate such business to Trimark Securities L.P. for a
99.99% general partnership interest. Immediately thereafter, Trimark
Securities, Inc. sold its 99.99% general partnership interest in Trimark
Securities, L.P. to the Company in exchange for 1.5 million Preferred B Units
of the Company with a fair value of $15 million and contingent consideration.
In connection with that transaction, the Company incurred $348,000 in
acquisition costs. The Company's acquisition of the 99.99% general partnership
interest in Trimark Securities L.P. was recorded under the purchase method and
the carrying values of the assets and liabilities acquired were adjusted to
their fair market values as of the acquisition date. The excess of the
purchase price over the fair value of the net assets acquired of $13,960,195
was recorded as goodwill and is being amortized over a period of ten years.
In connection with the acquisition, the Company entered into an agreement
which entitles Trimark Securities, Inc. to receive additional consideration
during the five years immediately subsequent to the acquisition, equal to 10%
of Trimark's pre-tax earnings, before amortization of goodwill and
depreciation on fixed assets initially purchased. The additional consideration
represents contingent consideration to be paid in connection with the Trimark
acquisition. All amounts paid under this arrangement are being capitalized as
additional purchase price (goodwill) and amortized over the remainder of the
original ten year amortization period.
Pursuant to an agreement effective November 17, 1997, Trimark purchased the
business and the related fixed assets of Tradetech Securities, L.P.
("Tradetech"), an Illinois Limited Partnership, in exchange for $750,000 in
cash and contingent consideration. Tradetech was a direct competitor of
Trimark operating as a market-maker in listed stocks and, after the
acquisition, its business and operations were integrated into Trimark's. The
acquisition was accounted for under the purchase method and the carrying
values of the assets acquired were adjusted to their fair market values as of
the acquisition date. The excess of the purchase price over the fair value of
the assets acquired of $400,000 was recorded as goodwill and is being
amortized over a period of five years.
F-7
<PAGE>
ROUNDTABLE PARTNERS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1998 IS UNAUDITED)
In connection with the acquisition, Trimark entered into an agreement with
Tradetech which entitles Tradetech to additional consideration equal to 10% of
Trimark's pretax earnings during the period from the acquisition date through
December 31, 2000 (the "Earnout Period"). If, after the Earnout Period, the
owners of Tradetech have not received payments which total $3,000,000, the
additional consideration shall continue until the earlier of (i) December 31,
2002, or (ii) an aggregate of $3,000,000 has been paid. All amounts paid under
this arrangement will be capitalized as additional purchase price (goodwill)
and amortized over the remainder of the original five year amortization
period.
The total contingent consideration paid and recorded as goodwill by the
Company was as follows:
<TABLE>
<CAPTION>
TRIMARK TRADETECH
ADDITIONAL ADDITIONAL
CONSIDERATION CONSIDERATION TOTAL
------------- ------------- ----------
<S> <C> <C> <C>
For the period March 27, 1995
through December 31, 1995......... $1,261,297 $ -- $1,261,297
For the year ended December 31,
1996.............................. 1,351,447 -- 1,351,447
For the year ended December 31,
1997.............................. 1,466,812 218,573 1,685,385
For the three months ending March
31, 1998 (unaudited).............. 382,879 327,207 710,086
---------- -------- ----------
$4,462,435 $545,780 $5,008,215
========== ======== ==========
</TABLE>
3. SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation and form of presentation
The accompanying consolidated financial statements include the accounts of
Roundtable, Knight and Trimark. All significant intercompany transactions and
balances have been eliminated.
Cash equivalents
Cash equivalents represent money market accounts, which are payable on
demand. The carrying amount of such cash equivalents approximates fair value
due to the short-term nature of these instruments.
Trading activities
Securities owned and securities sold, not yet purchased, which primarily
consist of listed and OTC stocks, are carried at market value and are recorded
on a trade date basis. Net trading revenue (trading gains, net of trading
losses) and related expenses, including compensation and benefits, execution
and clearance fees and payments for order flow, are also recorded on a trade
date basis. Payments for order flow represent payments to other broker-dealers
for directing their order executions to Knight and Trimark.
Mandatorily redeemable preferred units
The Company's Preferred A and Preferred B Units are mandatorily redeemable,
and have been classified as liabilities in the Consolidated Statements of
Financial Condition, and the related distributions on such units have been
classified as interest expense in the Consolidated Statements of Income.
F-8
<PAGE>
ROUNDTABLE PARTNERS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1998 IS UNAUDITED)
Depreciation, amortization and occupancy
Fixed assets are being depreciated on a straight-line basis over their
estimated useful lives of three to seven years. Leasehold improvements are
being amortized on a straight-line basis over the life of the related office
lease. The Company records rent expense on a straight-line basis over the life
of the lease.
Income taxes
As a limited liability company, the Company is treated as a partnership and,
as such, is not subject to federal, state or local income taxes.
Estimated fair value of financial instruments
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments," requires the disclosure of the fair value of
financial instruments, including assets and liabilities recognized on the
Consolidated Statements of Financial Condition. The Company's securities owned
and securities sold, not yet purchased are carried at market value. Management
estimates that the fair values of other financial instruments recognized on
the Consolidated Statements of Financial Condition (including receivables,
payables, accrued expenses, subordinated debt and mandatorily redeemable
preferred units) approximates their carrying value, as such financial
instruments are short-term in nature, bear interest at current market rates or
are subject to frequent repricing.
Other
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Unaudited interim information
The interim financial statements and related financial information as of
March 31, 1998 and for the three months ended March 31, 1998 and March 31,
1997 are unaudited; however, in the opinion of the Company, the interim
information includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of operations
for the interim periods. The results of operations for the three months ended
March 31, 1998 are not necessarily indicative of the results to be expected
for the full year.
4. FIXED ASSETS AND LEASEHOLD IMPROVEMENTS
Fixed assets and leasehold improvements comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31,
DEPRECIATION --------------------- MARCH 31,
PERIOD 1996 1997 1998
------------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Computer hardware and
software................... 3 years $3,137,877 $5,307,119 $6,471,200
Trading systems............. 5 years 2,660,387 2,648,326 2,812,726
Leasehold improvements...... Life of Lease 1,359,458 1,666,288 1,709,613
Furniture and fixtures...... 7 years 461,463 735,341 970,562
Telephone system............ 5 years 473,167 537,585 580,226
Equipment................... 5 years 58,195 343,513 379,312
---------- ---------- ----------
8,150,547 11,238,172 12,923,639
Less--Accumulated depreciation and
amortization............................. 1,752,435 3,884,743 4,650,032
---------- ---------- ----------
$6,398,112 $7,353,429 $8,273,607
========== ========== ==========
</TABLE>
F-9
<PAGE>
ROUNDTABLE PARTNERS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1998 IS UNAUDITED)
Knight leases its trading system under a noncancelable capital lease. As of
December 31, 1995, 1996, 1997 and March 31, 1998 (unaudited), the net book
value of the trading equipment recorded under such capital lease was
$1,338,654, $1,041,175, $743,697 and $669,327 (unaudited), respectively.
Depreciation of the capitalized asset is included in depreciation and
amortization expense in the Consolidated Statements of Income. As of December
31, 1997, future minimum lease payments under the capital lease and the
determination of the related liability for the capital lease were as follows:
<TABLE>
<S> <C>
Year ending December 31, 1998...................................... $340,800
Year ending December 31, 1999...................................... 340,800
Year ending December 31, 2000...................................... 170,400
--------
Total future minimum lease commitments........................... 852,000
Amount representing interest..................................... (65,199)
--------
Present value of minimum lease payments.......................... $786,801
========
</TABLE>
As of March 31, 1998 (unaudited), future minimum lease payments under the
capital lease and the determination of the related liability for the capital
lease were as follows:
<TABLE>
<S> <C>
For the period from April 1, 1998 through December 31, 1998........ $255,600
Year ending December 31, 1999...................................... 340,800
Year ending December 31, 2000...................................... 170,400
--------
Total future minimum lease commitments........................... 766,800
Amount representing interest..................................... (53,593)
--------
Present value of minimum lease payments.......................... $713,207
========
</TABLE>
5. SUBORDINATED NOTES
On March 24, 1995, the Company entered into a $5,000,000 subordinated note
agreement with Waterhouse Securities, Inc. ("Waterhouse"), a major customer,
which paid interest quarterly at a market rate based on the broker call rate
and matured on March 23, 1997. The subordinated note was senior in liquidation
to the Common Units and Mandatorily Redeemable Preferred A and B Units, but
was subordinate to the claims of all other creditors. Concurrent with the
execution of the subordinated note, the Company granted Waterhouse certain
benefits accorded to holders of Common Units, including the right to receive
additional payments based on the amount of order flow provided by Waterhouse.
Effective January 1, 1996, Waterhouse entered into an agreement with the
Company to exchange the subordinated note for 71,429 Common Units and 428,571
Preferred A Units issued by the Company with an aggregate value of $5,000,000.
As a result of the exchange, the subordinated note was satisfied in full and
canceled. The Common Units owned by Waterhouse are non-voting. In connection
with the issuance of Common Units to Waterhouse, the Management Investors
purchased, in aggregate, 47,620 additional Common Units at a price of $10 per
unit, such that, after the aforementioned transactions, the Management
Investors and the Non-Management Investors owned 40% and 60%, respectively, of
the total outstanding Common Units.
On April 24, 1996, the Company entered into a $500,000 subordinated note
agreement with Brown & Co. Securities Corporation ("Brown"), a major customer,
which pays interest quarterly at a market rate approximating the prevailing
Federal Funds Rate. The subordinated note matures on April 23, 1999, but may
be prepaid by the Company at any time, without penalty. The subordinated note
is senior in liquidation to the Common Units and Mandatorily Redeemable
Preferred A and B Units, but is subordinate to the claims of all other
creditors. Concurrent with the execution of the subordinated note, the Company
granted Brown certain benefits accorded to holders of Common Units, including
the right to receive additional payments based on
F-10
<PAGE>
ROUNDTABLE PARTNERS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1998 IS UNAUDITED)
the amount of order flow provided by Brown. Additionally, the Company granted
Brown the option to purchase 7,143 Common Units at the then prevailing market
price of $10 per Common Unit during the term that the subordinated note
remains outstanding (the "Brown Option"). As of April 24, 1996, the date of
grant, the Brown Option had a de minimis value.
During 1995, the Company made additional payments for order flow totaling
$996,786 to Waterhouse. Similarly, the Company made additional payments for
order flow to Brown totaling $1,088,924, $1,865,222 and $520,360 (unaudited)
during the years ended December 31, 1996 and 1997 and during the three month
period ended March 31, 1998 (unaudited). Such amounts have been included in
payments for order flow expense in the accompanying Consolidated Statements of
Income.
6. MEMBERS' EQUITY
The Company's Common Units, which have one for one voting rights (except for
the units owned by Waterhouse (Note 5)), are owned 40% by Management Investors
and 60% by Non-Management Investors. The Company's net income (after
distributions to holders of Preferred A and B Units) is allocated to holders
of Common Units based upon a formula which considers the volume of order flow
such holders have provided to Knight and Trimark during each period and each
holder's proportionate share of total Common Units. Net losses are shared
ratably in proportion to each member's ownership percentage. On December 31,
1997, the Company declared a distribution to holders of Common Units of
$8,405,326, which was paid on January 23, 1998. On March 31, 1998, the Company
declared a distribution to holders of Common Units of $8,767,185 (unaudited),
payable on April 20, 1998 (unaudited).
The Common Units are generally not transferable, although a member may
resign from the Company at any time by providing written notice to the
Company. The Company shall pay the resigning member $10 for each Common Unit
and Preferred A Unit owned by the resigning member, and any remaining
undistributed income in the resigning member's capital account as of the date
of the written notice (the "Resigning Member Capital Distribution"). During
1997, one member resigned from the Company and received a Resigning Member
Capital Distribution of $422,463, or $10 per unit. There were no resignations
in 1995, 1996 or the three month period ended March 31, 1998 (unaudited).
7. MANDATORILY REDEEMABLE PREFERRED UNITS
The Mandatorily Redeemable Preferred A Units ("Preferred A Units"), which
are owned by the Non-Management Investors, are non-voting and have preference
to all other units in the event of liquidation. The Preferred A Units were
originally issued to the Non-Management Investors for a price of $10 per unit,
simultaneously with the purchase of Common Units, at a ratio of six Preferred
A Units to one Common Unit. The Preferred A Units pay quarterly distributions
at a rate approximating the Federal Funds rate and are subject to mandatory
redemption annually, on April 15th, at a fixed price of $10 per unit, in an
aggregate amount equal to at least 25 percent of the Company's consolidated
net income on an annual basis. Any units not redeemed by the fifth anniversary
of the issuance date are convertible into Common Units on a one-for-one basis,
at the holder's option. There were 2,700,000 Preferred A Units authorized as
of December 31, 1995, 1996 and 1997 and March 31, 1998 (unaudited).
Distributions to holders of Preferred A Units for the period ending December
31, 1995 amounted to $590,903, which included distributions accrued, but not
paid, of $202,891 at December 31, 1995. Distributions to holders of Preferred
A Units for the year ending December 31, 1996 amounted to $1,155,859, which
included distributions accrued, but not paid, of $359,429 at December 31,
1996. Distributions to holders of Preferred A Units for the year ended
December 31, 1997 amounted to $985,737, which included distributions accrued,
but not paid, of $193,035 at December 31, 1997.
F-11
<PAGE>
ROUNDTABLE PARTNERS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1998 IS UNAUDITED)
The Mandatorily Redeemable Preferred B Units ("Preferred B Units"), which
are held by Trimark Securities, Inc., are non-voting and have preference only
to the Common Units in liquidation. The Preferred B Units pay quarterly
distributions at a rate approximating the Federal Funds rate and, after the
redemption of all Preferred A Units, are subject to mandatory redemption
annually, on April 15th, at a fixed price of $10 per unit, in an aggregate
amount equal to at least 25 percent of the Company's consolidated net income
on an annual basis, if certain levels of earnings are achieved in the prior
year. The Preferred B Units are not convertible into Common Units. There were
1,500,000 Preferred B Units authorized as of December 31, 1995, 1996 and 1997
and March 31, 1998 (unaudited). Distributions to holders of Preferred B Units
for the period ending December 31, 1995 amounted to $718,673, which includes
distributions accrued, but not paid, of $230,549 at December 31, 1995.
Distributions to holders of Preferred B Units for the year ending December 31,
1996 amounted to $936,734, which includes distributions accrued, but not paid,
of $237,449 at December 31, 1996. Distributions to holders of Preferred B
Units for the year ended December 31, 1997 amounted to $955,235, which
includes distributions accrued, but not paid, of $231,946 at December 31,
1997. No Preferred B Units were redeemed during the period from March 27, 1995
through December 31, 1995 or the years ending December 31, 1996 or 1997 or the
three months ended March 31, 1998 (unaudited). The following table presents
activity for Preferred A Units and Preferred B Units for the period from March
27, 1995 through December 31, 1995, for the years ended December 31, 1996 and
1997, and for the three months ended March 31, 1998 (unaudited):
<TABLE>
<CAPTION>
PREFERRED A UNITS PREFERRED B UNITS
------------------------ ---------------------
UNITS AMOUNT UNITS AMOUNT
---------- ------------ --------- -----------
<S> <C> <C> <C> <C>
Initial capitalization,
March 27, 1995........... 1,095,864 $ 10,958,640 1,500,000 $15,000,000
Issuance of Preferred A
Units.................... 245,666 2,456,660 -- --
---------- ------------ --------- -----------
Balance, December 31,
1995..................... 1,341,530 13,415,300 1,500,000 15,000,000
Issuance of Preferred A
Units.................... 1,315,612 13,156,120 -- --
Redemption of Preferred A
Units.................... (386,573) (3,865,730) -- --
---------- ------------ --------- -----------
Balance, December 31,
1996..................... 2,270,569 22,705,690 1,500,000 15,000,000
Resignation of Member..... (7,503) (75,030) -- --
Redemption of Preferred A
Units.................... (1,014,705) (10,147,050) -- --
---------- ------------ --------- -----------
Balance, December 31,
1997..................... 1,248,361 12,483,610 1,500,000 15,000,000
---------- ------------ --------- -----------
Balance, March 31, 1998
(unaudited).............. 1,248,361 $ 12,483,610 1,500,000 $15,000,000
========== ============ ========= ===========
</TABLE>
8. RELATED PARTY TRANSACTIONS
A substantial portion of Knight's and Trimark's securities transactions are
conducted with securities firms which own equity interests in the Company (the
"Broker-Dealer Owners"). As measured in share volume, the Broker-Dealer Owners
and Brown accounted for 31%, 35% and 40% of the Company's order flow during
the period ended December 31, 1995 and the years ended December 31, 1996 and
1997, respectively, and 41% (unaudited) for the three months ended March 31,
1998. Moreover, five of these affiliates accounted for 29% of the Company's
total order flow for the year ended December 31, 1997 and 34% (unaudited) of
the Company's total order flow for the three months ended March 31, 1998.
Included within accrued payments for order flow on the Consolidated
Statements of Financial Condition are the following amounts payable to the
Broker-Dealer Owners and Brown:
<TABLE>
<S> <C>
December 31, 1996................................................ $2,032,039
December 31, 1997................................................ 1,990,045
March 31, 1998 (unaudited)....................................... 2,981,311
</TABLE>
F-12
<PAGE>
ROUNDTABLE PARTNERS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1998 IS UNAUDITED)
As of December 31, 1997, Knight and Trimark cleared their securities
transactions through clearing brokers which own equity interests in the
Company. Effective March 9, 1998, Knight began clearing its securities
transactions through an unaffiliated clearing broker (unaudited).
Trimark and Knight lease certain computer and telephone equipment and
furniture from a leasing company which is wholly owned by two key employees of
Trimark. Rental expenses under such leases were as follows:
<TABLE>
<S> <C>
For the period March 27, 1995 through December 31, 1995............ $260,957
For the year ended December 31, 1996............................... 529,852
For the year ended December 31, 1997............................... 539,082
For the three months ended March 31, 1998 (unaudited).............. 117,644
</TABLE>
9. COMMITMENTS AND CONTINGENT LIABILITIES
The Company and its subsidiaries lease office space under noncancelable
operating leases. The office leases contain certain escalation clauses whereby
the rental commitments may be increased if certain conditions are satisfied
and specify yearly adjustments to the lease amounts based on annual
adjustments according to the Consumer Price Index. Rental expense under the
office leases was as follows:
<TABLE>
<S> <C>
For the period March 27, 1995 through December 31, 1995.......... $ 343,935
For the year ended December 31, 1996............................. 810,893
For the year ended December 31, 1997............................. 1,258,827
For the three months ending March 31, 1998 (unaudited)........... 342,669
</TABLE>
Additionally, Knight and Trimark lease computer and other equipment under
noncancelable operating leases. As of December 31, 1997, future minimum rental
commitments under all noncancelable operating leases were as follows:
<TABLE>
<CAPTION>
OFFICE OTHER
LEASES LEASES TOTAL
---------- ---------- -----------
<S> <C> <C> <C>
Year ending December 31, 1998............. $1,440,959 $2,023,951 $ 3,464,910
Year ending December 31, 1999............. 1,375,634 1,706,737 3,082,371
Year ending December 31, 2000............. 1,233,881 550,781 1,784,662
Year ending December 31, 2001............. 1,250,980 -- 1,250,980
Year ending December 31, 2002............. 1,264,181 -- 1,264,181
Thereafter through December 15, 2006...... 4,638,240 -- 4,638,240
-----------
$15,485,344
===========
</TABLE>
F-13
<PAGE>
ROUNDTABLE PARTNERS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1998 IS UNAUDITED)
During 1998, the Company entered into an additional operating lease for
office space. As of March 31, 1998, future minimum rental commitments under
all noncancelable operating leases were as follows (all information is
unaudited):
<TABLE>
<CAPTION>
OFFICE OTHER
LEASES LEASES TOTAL
----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
For the period from April 1, 1998
through December 31, 1998............ $1,474,739 $1,513,864 $ 2,988,603
Year ending December 31, 1999......... 2,005,484 1,762,273 3,767,757
Year ending December 31, 2000......... 1,863,731 578,549 2,442,280
Year ending December 31, 2001......... 1,880,830 -- 1,880,830
Year ending December 31, 2002......... 1,935,468 -- 1,935,468
Thereafter through December 15, 2006.. 6,864,816 -- 6,864,816
-----------
$19,879,754
===========
</TABLE>
As of December 31, 1997 and March 31, 1998 (unaudited), the Company had
deposited an irrevocable letter of credit which was collateralized by U.S.
Treasury securities with market values of $1,541,038 and $1,533,788
(unaudited), respectively, as security for one of its operating leases.
Securities sold, not yet purchased represent obligations of Knight and
Trimark to purchase such securities at a future date. The Company may incur a
loss if the market value of the securities subsequently increases.
10. EARNINGS PER COMMON UNIT
Basic and diluted earnings per common unit ("EPS") have been calculated by
dividing earnings applicable to common units (net income) by the weighted
average common units outstanding during each respective period. Diluted
earnings per common unit also includes the potential dilutive effects of the
Preferred A Units, under the "if-converted" method, which are convertible into
Common Units on a one-for-one basis at the holder's option if outstanding five
years from the date of issuance. In determining diluted EPS, the interest
expense applicable to the Preferred A Units during each respective period has
been added back to net income. Under the "treasury stock" method applicable to
outstanding written call options, the Brown Option did not have a dilutive
effect. The following is a reconciliation of the numerators and denominators
of the basic and diluted earnings per common unit computations:
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
MARCH 27, 1995 (DATE
OF INITIAL
CAPITALIZATION) THROUGH YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997
------------------------- ------------------------- -------------------------
NUMERATOR / DENOMINATOR / NUMERATOR / DENOMINATOR / NUMERATOR / DENOMINATOR /
INCOME SHARES INCOME SHARES INCOME SHARES
----------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Earnings applicable to
Common Units.......... $11,341,113 341,508 $36,760,602 589,948 $50,077,233 737,197
Effect of Dilutive
Securities
Preferred A Units...... 1,309,576 1,009,790 2,092,593 1,093,589 1,940,972 514,986
----------- --------- ----------- --------- ----------- ---------
Diluted EPS............. $12,650,689 1,351,298 $38,853,195 1,683,537 $52,018,205 1,252,183
=========== ========= =========== ========= =========== =========
</TABLE>
F-14
<PAGE>
ROUNDTABLE PARTNERS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1998 IS UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE THREE MONTHS
ENDED MARCH 31, 1997 ENDED MARCH 31, 1998
------------------------- -------------------------
NUMERATOR / DENOMINATOR / NUMERATOR / DENOMINATOR /
INCOME SHARES INCOME SHARES
----------- ------------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Basic EPS
Earnings applicable to
Common Units......... $10,420,070 738,097 $14,783,706 734,497
Effect of Dilutive
Securities
Preferred A Units..... 603,955 971,947 -- --
----------- --------- ----------- -------
Diluted EPS............. $11,024,025 1,710,044 $14,783,706 734,497
=========== ========= =========== =======
</TABLE>
On April 15, 1998, the Company redeemed and retired all of the outstanding
Mandatorily Redeemable Preferred A Units for their carrying value of
$12,483,610 (see Note 15).
11. EMPLOYEE BENEFIT PLANS
Trimark and Knight sponsor a 401(k) Profit Sharing Plan (the "Plan") in
which substantially all of their employees are eligible to participate. Under
the terms of the Plan, Trimark and Knight are required to make annual
contributions to the Plan equal to 50% of the contributions made by their
respective employees, up to certain limitations. The total expense recognized
with respect to the Plans was as follows:
<TABLE>
<S> <C>
For the period March 27, 1995 through December 31, 1995............ $111,544
For the year ended December 31, 1996............................... 478,308
For the year ended December 31, 1997............................... 681,927
For the three months ended March 31, 1998 (unaudited).............. 381,688
</TABLE>
12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
As a market maker of OTC and listed stocks, the majority of the Company's
securities transactions are conducted as principal with broker-dealer
counterparties located in the United States. The Company clears all of its
securities transactions through affiliated clearing brokers on a fully
disclosed basis (see Note 8). Pursuant to the terms of the agreement between
the Company and the clearing brokers, the clearing brokers have the right to
charge the Company for losses that result from a counterparty's failure to
fulfill its contractual obligations. The Company's policy is to monitor the
credit standing of the clearing brokers and all counterparties with which it
conducts business. As of December 31, 1997 and March 31, 1998, the Company's
credit exposures were concentrated with the clearing brokers and amounted to
$30.2 million and $78.1 million (unaudited), respectively. Additionally, as of
December 31, 1997 and March 31, 1998, the clearing brokers held, as custodian,
securities owned by the Company with a market value of $61.7 million and $63.5
million (unaudited), respectively.
The net receivable or (payable) for securities transactions that have not
reached their contractual settlement date amounted to ($6,196,423),
($10,407,524), ($5,126,772) and $17,504,744 (unaudited) at December 31, 1995,
1996, 1997 and March 31, 1998 (unaudited), respectively. Such amounts were
included within receivable from clearing brokers on the Consolidated
Statements of Financial Condition.
13. NET CAPITAL REQUIREMENTS
As registered broker-dealers and NASD member firms, Trimark and Knight are
subject to the Securities and Exchange Commission's Uniform Net Capital Rule
(the "Rule") which requires the maintenance of minimum net capital. Trimark
and Knight have elected to use the basic method, permitted by the Rule, which
requires that they each maintain net capital equal to the greater of
$1,000,000 or 6 2/3% of aggregate indebtedness, as defined.
F-15
<PAGE>
ROUNDTABLE PARTNERS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1998 IS UNAUDITED)
At December 31, 1997, Trimark had net capital of $16,538,514, which was
$15,538,514 in excess of its required net capital of $1 million and Knight had
net capital of $39,941,753, which was $38,941,753 in excess of its required
net capital of $1 million.
At March 31, 1998, Trimark had net capital of $16,124,553 (unaudited), which
was $15,124,553 (unaudited) in excess of its required net capital of $1
million (unaudited) and Knight had net capital of $39,137,608 (unaudited),
which was $38,137,608 (unaudited) in excess of its required net capital of $1
million (unaudited).
14. CONDENSED FINANCIAL STATEMENTS OF ROUNDTABLE PARTNERS, L.L.C. (PARENT)
Presented below are the Condensed Statements of Financial Condition, Income
and Cash Flows for Roundtable Partners, L.L.C., the parent company, on an
unconsolidated basis.
STATEMENTS OF FINANCIAL CONDITION
ROUNDTABLE PARTNERS, L.L.C. (PARENT)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1996 1997 1998
----------- ----------- -----------
ASSETS (UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents................. $ 2,851,690 $ 1,219,374 $ 730,161
Securities owned, at market value......... 2,035,457 1,541,038 1,533,788
Investments in subsidiaries, equity
method................................... 69,032,590 88,630,081 94,775,413
Other assets.............................. 313,466 222,908 718,835
----------- ----------- -----------
Total assets.......................... $74,233,203 $91,613,401 $97,758,197
=========== =========== ===========
LIABILITIES AND MEMBERS' EQUITY
Liabilities
Distributions on Common Units payable to
members.................................. $ 4,983,972 $ 8,405,326 $ 8,767,185
Interest payable on Preferred Units....... 596,878 424,981 416,486
Accounts payable and accrued expenses..... 460,145 826,023 600,934
Subordinated note......................... 500,000 500,000 500,000
Mandatorily Redeemable Preferred A Units.. 22,705,690 12,483,610 12,483,610
Mandatorily Redeemable Preferred B Units.. 15,000,000 15,000,000 15,000,000
----------- ----------- -----------
Total liabilities......................... 44,246,685 37,639,940 37,768,215
Total members' equity..................... 29,986,518 53,973,461 59,989,982
----------- ----------- -----------
Total liabilities and members' equity..... $74,233,203 $91,613,401 $97,758,197
=========== =========== ===========
</TABLE>
F-16
<PAGE>
ROUNDTABLE PARTNERS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1998 IS UNAUDITED)
STATEMENTS OF INCOME
ROUNDTABLE PARTNERS, L.L.C. (PARENT)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM FOR THE YEARS ENDED FOR THE THREE MONTHS ENDED
MARCH 27, 1995 (DATE DECEMBER 31, MARCH 31,
OF INITIAL CAPITALIZATION) ----------------------- ---------------------------
THROUGH DECEMBER 31, 1995 1996 1997 1997 1998
-------------------------- ----------- ----------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Equity in earnings of
subsidiaries........... $13,411,536 $40,094,824 $54,202,490 $ 11,447,650 $ 15,660,332
Management fee.......... 713,868 -- -- -- --
Other................... -- 216,554 148,533 35,669 97,660
----------- ----------- ----------- ------------- -------------
Total revenues........ 14,125,404 40,311,378 54,351,023 11,483,319 15,757,992
----------- ----------- ----------- ------------- -------------
EXPENSES
Interest on Preferred
Units.................. 1,309,576 2,092,593 1,940,972 603,955 416,486
Payments for order
flow................... 996,786 1,088,924 1,865,222 400,027 520,360
Other................... 477,929 369,259 467,596 59,267 37,440
----------- ----------- ----------- ------------- -------------
Total expenses........ 2,784,291 3,550,776 4,273,790 1,063,249 974,286
----------- ----------- ----------- ------------- -------------
Net income............ $11,341,113 $36,760,602 $50,077,233 $ 10,420,070 $ 14,783,706
=========== =========== =========== ============= =============
</TABLE>
F-17
<PAGE>
ROUNDTABLE PARTNERS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1998 IS UNAUDITED)
STATEMENTS OF CASH FLOWS
ROUNDTABLE PARTNERS, L.L.C. (PARENT)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM
MARCH 27, 1995
(DATE OF INITIAL
CAPITALIZATION FOR THE YEARS ENDED FOR THE THREE MONTHS
THROUGH DECEMBER 31, ENDED MARCH 31,
DECEMBER 31, -------------------------- --------------------------
1995 1996 1997 1997 1998
---------------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERAT-
ING ACTIVITIES
Net income.............. $ 11,341,113 $ 36,760,602 $ 50,077,233 $ 10,420,070 $ 14,783,706
Equity in earnings of
subsidiaries........... (13,411,536) (40,094,824) (54,202,490) (11,447,650) (15,660,332)
(Increase) decrease in
operating assets
Securities owned....... (1,988,879) (46,578) 494,419 136 7,250
Other assets........... (612,104) 298,736 90,557 (2,640) (495,928)
Increase (decrease) in
operating liabilities
Accounts payable,
accrued expenses and
other liabilities..... 594,025 (133,880) 365,879 (42,377) (225,089)
Interest payable on
Preferred Units....... 433,440 163,438 (171,898) 7,074 (8,494)
------------ ------------ ------------ ------------ ------------
Net cash used in
operating activities.. (3,643,941) (3,052,506) (3,346,300) (1,065,387) (1,598,887)
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM
INVESTING ACTIVITIES
Purchase of general
partnership interest in
Trimark Securities,
L.P.................... (15,273,295) -- -- -- --
Capital contributions to
subsidiaries........... (22,307,090)
------------ ------------ ------------ ------------ ------------
Net cash used in
investing activities.. (37,580,385) -- -- -- --
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM
FINANCING ACTIVITIES
Proceeds from issuance
of subordinated notes.. 5,000,000 500,000 -- -- --
Proceeds from issuance
of Common Units........ 3,726,480 2,940,200 -- -- --
Proceeds from issuance
of Mandatorily
Redeemable Preferred A
Units.................. 13,415,300 8,870,410 -- -- --
Proceeds from issuance
of Mandatorily
Redeemable Preferred B
Units.................. 15,000,000 -- -- -- --
Dividends received from
subsidiaries........... 7,862,754 14,191,301 34,604,999 3,404,700 9,515,000
Redemptions of
Mandatorily Redeemable
Preferred A Units...... -- (3,865,730) (10,147,050) -- --
Resignation of Member... -- -- (422,463) -- --
Distributions on Common
Units.................. (2,868,323) (17,643,870) (22,321,502) (4,983,972) (8,405,326)
------------ ------------ ------------ ------------ ------------
Net cash provided by
(used in) financing
activities............ 42,136,211 4,992,311 1,713,984 (1,579,272) 1,109,674
------------ ------------ ------------ ------------ ------------
Increase (decrease) in
cash and cash
equivalents............ 911,885 1,939,805 (1,632,316) (2,644,659) (489,213)
Cash and cash
equivalents at
beginning of period.... -- 911,885 2,851,690 2,851,690 1,219,374
------------ ------------ ------------ ------------ ------------
Cash and cash
equivalents at end of
period................. $ 911,885 $ 2,851,690 $ 1,219,374 $ 207,031 $ 730,161
============ ============ ============ ============ ============
Supplemental disclosure
of cash flow
information
Cash paid for
interest.............. $ 1,045,675 $ 2,016,244 $ 2,144,877 $ 604,724 $ 432,648
============ ============ ============ ============ ============
</TABLE>
Supplemental information pertaining to noncash investing and financing
activities
Effective January 1, 1996, Waterhouse Securities exchanged its $5,000,000
subordinated note for 71,429 Common Units and 428,571 Preferred A Units issued
by the Company with an aggregate value of $5,000,000.
F-18
<PAGE>
ROUNDTABLE PARTNERS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1998 IS UNAUDITED)
15. SUBSEQUENT EVENT--REDEMPTION OF MANDATORILY REDEEMABLE PREFERRED UNITS
On April 15, 1998, the Company redeemed and retired all outstanding
Preferred A Units for $12,483,610 and redeemed and retired 115,290 Preferred B
Units for $1,152,900.
16. PROPOSED REORGANIZATION OF THE COMPANY (UNAUDITED)
The Knight/Trimark Group, Inc. (the "Corporation") was organized in April
1998 for the purpose of succeeding to the business of Roundtable Partners,
L.L.C. (the "Company"). Concurrent with the closing of the Offering, based on
an assumed initial public offering price of $15.00 per share, all of the
member interests of the Company will be exchanged for 41,000,000 shares of
Common Stock of the Company. Certain members, who have so elected, will
receive 1,741,581 additional shares of Class A Common Stock valued at the
initial public offering price with respect to their share of the undistributed
income of the Company through March 31, 1998 (the "Undistributed Profits").
Management of the Company has elected to receive shares of Class A Common
Stock for all of its Undistributed Profits. The Company will receive no
additional consideration in connection with such conversion of member
interests into shares of Common Stock. In connection with the exchange, Knight
Securities, Inc., a newly formed corporation, will become the successor entity
to Knight Securities, L.P., and Trimark Securities, Inc., a newly formed
corporation, will become the successor entity to Trimark Securities, L.P. (the
foregoing transactions, collectively, shall be referred to herein as the
"Reorganization"). Prior to the effective date of the Registration Statement
relating to the Initial Public Offering (the "Offering"), certain members of
the Company, who have so elected, will receive a cash distribution of all or a
portion of their Undistributed Profits. Concurrently with such distribution,
the Company intends to make a cash distribution to each member of an estimate
of its share of the total amount of profits of the Company accruing between
April 1, 1998 and the closing of this Offering.
The Pro Forma Consolidated Statement of Financial Condition as of March 31,
1998 has been presented to give effect to the Reorganization as if it had
occurred as of the close of business on March 31, 1998. In addition, the Pro
Forma Consolidated Statement of Financial Condition gives effect to the
declaration of redemption of the Preferred A and B Units described in Note 15
as of March 31, 1998. The specific pro forma transactions are as follows:
. Exchange of 734,497 Common Units of the Company for 37,054,472 shares of
Class A Common Stock, par value $0.01, of the Corporation ("Class A Stock")
and 3,945,528 shares of Class B Common Stock, par value $0.01, of the
Corporation;
. Purchase of 1,741,581 shares of Class A Stock by members of the Company for
$26,123,719 from Undistributed Income of the Company;
. Declaration of cash distribution on Common Units payable to members of
$26,521,293 from Undistributed Income of the Company;
. Declaration of redemption of 1,248,361 Preferred A Units for $12,483,610;
and
. Declaration of redemption of 115,290 Preferred B Units for $1,152,900.
Additionally, Brown has agreed with the Company that it will exercise its
option to purchase 7,143 Common Units of the Company by purchasing the
equivalent shares of Class A Stock of the Corporation at the closing of the
Offering.
The Corporation contemplates that the Offering will comprise up to
10,000,000 shares of Class A Stock (not including an underwriters' over-
allotment option of shares) comprised of 8,688,246 newly-issued shares
F-19
<PAGE>
ROUNDTABLE PARTNERS, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND 1998 IS UNAUDITED)
and 1,311,754 shares from Selling Shareholders. The Pro Forma Consolidated
Statement of Financial Condition as of March 31, 1998 does not reflect any
adjustments related to the Offering.
Prior to the Reorganization, the Company was a limited liability company and
was not subject to federal or state income taxes. Subsequent to the
Reorganization, the Corporation will be subject to federal income taxes and
state income taxes in New York, New Jersey and other states. The following pro
forma condensed consolidated statements of income give effect to the
Reorganization as if it had occurred on January 1, 1997. Pro forma income tax
expense includes pro forma amounts relating to federal income taxes, as well
as pro forma amounts relating to state income taxes in New York, New Jersey
and other states. The Company's pro forma effective tax rate of 43% differs
from the federal statutory rate of 35% primarily due to state income taxes
(6%), as well as nondeductible expenses, including the amortization of
goodwill and a portion of business development expenses (2%).
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME:
<TABLE>
<CAPTION>
FOR THE
THREE
FOR THE YEAR MONTHS
ENDED ENDED MARCH
DECEMBER 31, 31, 1998
1997 (UNAUDITED)
------------ -----------
<S> <C> <C>
Total revenues........................................ $226,666,646 $63,532,216
Total expenses........................................ 176,589,413 48,748,510
------------ -----------
Net income as reported................................ 50,077,233 14,783,706
------------ -----------
PRO FORMA ADJUSTMENTS
Pro forma income tax expense(1)..................... 21,533,210 6,356,994
============ ===========
Pro forma net income................................ $ 28,544,023 $ 8,426,712
============ ===========
Pro forma earnings per common unit
Basic............................................. $ 38.72 $ 11.47
Diluted........................................... $ 23.68 $ 11.47
Weighted average common units outstanding...........
Basic............................................. 737,197 734,497
Diluted........................................... 1,252,183 734,497
</TABLE>
F-20
<PAGE>
[BACK COVER]
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses of the offering are estimated to be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee........... $ 54,280
NASD filing fee............................................... 18,900
NASDAQ listing fee............................................ 90,000
Legal fees and expenses....................................... 400,000
Accounting fees and expenses.................................. 400,000
Blue Sky fees and expenses (including legal fees)............. 10,000
Printing expenses............................................. 200,000
Transfer Agent fees........................................... 25,000
Miscellaneous................................................. 301,820
----------
TOTAL....................................................... $1,500,000
==========
</TABLE>
--------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company, a Delaware corporation, is empowered by Section 145 of the
Delaware General Corporation Law (the "DGCL"), subject to the procedures and
limitations stated therein, to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding by reason of the fact that such person is or was a
director, officer, employee or agent of the Company, or is or was serving at
the request of the Company as a director, officer, employee or agent of
another corporation or other enterprise, against reasonable expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually incurred by him in connection with such action, suit or proceeding,
if such director, officer, employee or agent acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Company and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The Company is required
by Section 145 to indemnify any person against reasonable expenses (including
attorneys' fees) actually incurred by him in connection with an action, suit
or proceeding in which he is a party because he is or was a director, officer,
employee or agent of the Company or is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation or
other enterprise, if he has been successful, on the merits or otherwise, in
the defense of the action, suit or proceeding. Section 145 also allows a
corporation to purchase and maintain insurance on behalf of any such person
against any liability asserted against him in any such capacity, or arising
out of his status as such, whether or not the corporation would have the power
to indemnify him against such liability under the provisions of Section 145.
In addition, Section 145 provides that indemnification pursuant to its
provisions is not exclusive of other rights of indemnification to which a
person may be entitled under any bylaw, agreement, vote of shareholders or
disinterested directors, or otherwise.
Article 7 of the Company's Certificate of Incorporation (the "Charter")
provides that the Company shall indemnify and hold harmless any person who
was, is, or is threatened to be made a party to a proceeding by reason of the
fact that he or she (i) is or was a director or officer of the Company or (ii)
while a director or officer of the Company, is or was serving at the request
of the Company as a director, officer, partner, venturer, proprietor, trustee,
employee, agent, or similar functionary of another foreign or domestic
corporation, partnership, joint venture, sole proprietorship, trust, employee
benefit plan, or other enterprise, to the fullest extent permitted under the
DGCL. The right to indemnification under Article 7 of the Charter is a
contract right which includes, with respect to directors and officers, the
right to be paid by the Company the expenses incurred in defending any such
proceeding in advance of its disposition.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On March 27, 1995, Roundtable Partners, L.L.C. (the "LLC") sold an aggregate
of 304,407 common units of the LLC ("Common Units") to 22 investors, at a
price of $10 per unit, for an aggregate purchase price of $3,044,070. The LLC
also sold an aggregate of 1,095,864 Series A preferred units of the LLC
("Series A Preferred Units") to 18 investors, at a price of $10 per unit, for
an aggregate purchase price of $10,958,640. In addition, on such date, the LLC
sold an aggregate of 1,500,000 Series B preferred units of the LLC to Trimark
Securities, Inc., at a price of $10 per unit, for an aggregate purchase price
of $15,000,000.
On June 28, 1995, the LLC sold an aggregate of 23,331 Common Units to 5
investors, at a price of $10 per unit, for an aggregate purchase price of
$233,310. The LLC also sold an aggregate of 83,992 Series A Preferred Units to
a single investor, at a price of $10 per unit, for an aggregate purchase price
of $839,920.
On July 26, 1995, the LLC sold an aggregate of 33,574 Common Units to 8
investors, at a price of $10 per unit, for an aggregate purchase price of
$335,740. The LLC also sold an aggregate of 120,866 Series A Preferred Units
to 4 investors, at a price of $10 per unit, for an aggregate purchase price of
$1,208,660.
On October 25, 1995, the LLC sold an aggregate of 7,167 Common Units to 6
investors, at a price of $10 per unit, for an aggregate purchase price of
$71,670. The LLC also sold an aggregate of 25,800 Series A Preferred Units to
2 investors, at a price of $10 per unit, for an aggregate purchase price of
$258,000.
On November 29, 1995, the LLC sold an aggregate of 1,190 Common Units, at a
price of $10 per unit, for an aggregate purchase price of $11,900. The LLC
also sold an aggregate of 4,284 Series A Preferred Units, at a price of $10
per unit, for an aggregate purchase price of $42,840.
On December 27 1995, the LLC sold an aggregate of 2,979 Common Units to 6
investors, at a purchase price of $10 per unit, for an aggregate purchase
price of $29,790. The LLC also sold an aggregate of 10,724 Series A Preferred
Units to 2 investors, at a price of $10 per unit, for an aggregate purchase
price of $107,240.
On January 1, 1996, the LLC sold an aggregate of 120,849 Common Units to 5
investors, at a price of $10 per unit, for an aggregate purchase price of
$1,208,490. The LLC also sold an aggregate of 435,056 Series A Preferred Units
to a single investor, at a price of $10 per unit, for an aggregate purchase
price of $4,350,560.
On January 24, 1996, the LLC sold an aggregate of 1,699 Common Units to 5
investors, at a price of $10 per unit, for an aggregate purchase price of
$16,990. The LLC also sold an aggregate of 6,116 Series A Preferred Units to a
single investor, at a price of $10 per unit, for an aggregate purchase price
of $61,160.
On February 21, 1996, the LLC sold an aggregate of 1,783 Common Units to 5
investors, at a price of $10 per unit, for an aggregate purchase price of
$17,830. The LLC also sold an aggregate of 6,418 Series A Preferred Units to a
single investor, at a price of $10 per unit, for an aggregate purchase price
of $64,180.
On March 27, 1996, the LLC sold an aggregate of 1,190 Common Units to 6
investors, at a price of $10 per unit, for an aggregate purchase price of
$11,900. The LLC sold an aggregate of 4,284 Series A Preferred Units to 2
investors, at a price of $10 per unit, for an aggregate purchase price of
$42,840.
On April 24, 1996, the LLC sold an aggregate of 4,189 Common Units to 5
investors, at a price of $10 per unit, for an aggregate purchase price of
$41,890. The LLC also sold an aggregate of 15,080 Series A Preferred Units to
a single investor, at a price of $10 per unit, for an aggregate purchase price
of $150,800.
On May 29, 1996, the LLC sold an aggregate of 60,160 Common Units to 7
investors, at a price of $10 per unit, for an aggregate purchase price of
$601,600. The LLC also sold an aggregate of 216,575 Series A Preferred Units
to 3 investors, at a price of $10 per unit, for an aggregate purchase price of
$2,165,750.
On June 26, 1996, the LLC sold an aggregate of 29,809 Common Units to 10
investors, at a price of $10 per unit, for an aggregate purchase price of
$298,090. The LLC also sold an aggregate of 107,312 Series A Preferred Units
to 6 investors, at a price of $10 per unit, for an aggregate purchase price of
$1,073,120.
On July 24, 1996, the LLC sold an aggregate of 12,001 Common Units to 7
investors, at a price of $10 per unit, for an aggregate purchase price of
$120,010. The LLC also sold an aggregate of 43,203 Series A Preferred Units to
3 investors, at a price of $10 per unit, for an aggregate purchase price of
$432,030.
II-2
<PAGE>
On October 1, 1996, the LLC sold an aggregate of 133,769 Common Units to 12
investors, at a price of $10 per unit, for an aggregate purchase price of
$1,337,690. The LLC also sold an aggregate of 481,568 Series A Preferred Units
to 8 investors, at a price of $10 per unit, for an aggregate purchase price of
$4,815,680.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits+:
<TABLE>
<C> <S>
*1.1 Form of Underwriting Agreement.
*3.1 Form of Amended and Restated Certificate of Incorporation of the
Registrant.
*3.2 Form of Amended and Restated By-laws of the Registrant.
4.1 Specimen Common Stock certificate.
4.2 Form of Registration Rights Agreement.
*5.1 Form of Opinion of Skadden, Arps, Slate, Meagher & Flom LLP.
++*10.1 Clearing Agreement between Knight Securities, L.P. and
Correspondent Services Corporation, dated April 23, 1997.
++*10.2 Clearing Agreement between Trimark Securities, L.P. and National
Investor Service Corporation, dated June 29, 1997.
10.3 Lease Agreement between Newport L.P.-I, Inc. and Knight Securities,
L.P. dated December 6, 1994 (the "Knight Lease Agreement") for
office space situated in Newport Office Tower, 525 Washington
Boulevard, Jersey City, New Jersey 07310.
10.4 Amendment to the Knight Lease Agreement, dated May 28, 1996.
10.5 Second Amendment to the Knight Lease Agreement, dated September 30,
1997.
10.6 Third Amendment to the Knight Lease Agreement, dated March 18,
1998.
10.7 Lease Agreement between Nestle USA, Inc. and Trimark Securities
L.P., dated March 20, 1996, for the office space situated at 100
Manhattanville Road, Purchase, New York 10577.
10.8 License Agreement between Automated Securities Clearance, Ltd. and
Knight Securities, L.P., dated April 5th, 1995.
10.9 Master Program Product License Agreement between TCAM Systems, Inc.
and Trimark Securities, Inc. dated May 1, 1990.
10.10 Form of Employment Agreement between the Registrant and Kenneth
Pasternak.
10.11 Form of Employment Agreement between the Registrant and Walter
Raquet.
10.12 Form of Employment Agreement between the Registrant and Steven
Steinman.
*10.13 Form of Employment Agreement between the Registrant and Robert
Lazarowitz.
10.14 Form of Employment Agreement between the Registrant and Anthony
Sanfilippo.
10.15 Form of Registrant's 1998 Stock Option and Award Plan.
10.16 Form of Registrant's 1998 Nonemployee Director Stock Option Plan.
10.17 Form of Registrant's Management Incentive Performance Plan.
21.1 Subsidiaries of the Registrant.
*23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (contained in
Exhibit 5.1 hereto).
24.1 Powers of Attorney.
27 Financial Data Schedule.
</TABLE>
- --------
*Filed herewith.
+Previously filed unless otherwise indicated.
++ Confidential treatment has been requested for portions of this exhibit. The
copy filed herewith omits the information subject to the confidentiality
request. Omissions are designated as *****. A complete version of this
exhibit has been filed separately with the Securities and Exchange
Commission.
(b) Consolidated Financial Statement Schedules
All schedules are omitted because the required information is inapplicable
or the information is presented in the Consolidated Financial Statements or
related notes.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN JERSEY CITY, STATE OF
NEW JERSEY, ON THE 29TH DAY OF MAY, 1998.
Knight/Trimark Group, Inc.
/s/ Kenneth D. Pasternak
By: _________________________________
KENNETH D. PASTERNAK Director,
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
* Director, Executive
- ------------------------------------- Vice President and May 29, 1998
(ROBERT I. TURNER) Chief Financial
Officer (principal
financial and
accounting officer)
* Director and
- ------------------------------------- Chairman of the May 29, 1998
(STEVEN L. STEINMAN) Board
* Director and
- ------------------------------------- Executive Vice May 29, 1998
(WALTER F. RAQUET) President
* Director and
- ------------------------------------- Executive Vice May 29, 1998
(ROBERT M. LAZAROWITZ) President
II-5
<PAGE>
SIGNATURE TITLE DATE
* Director and
- ------------------------------------ Executive Vice May 29, 1998
(ANTHONY M. SANFILIPPO) President
* Director
- ------------------------------------ May 29, 1998
(MARTIN AVERBUCH)
* Director
- ------------------------------------ May 29, 1998
(CHARLES V. DOHERTY)
* Director
- ------------------------------------ May 29, 1998
(GENE L. FINN)
* Director
- ------------------------------------ May 29, 1998
(GARY R. GRIFFITH)
* Director
- ------------------------------------ May 29, 1998
(BRUCE R. MCMAKEN)
Director
- ------------------------------------ May 29, 1998
(J. JOE RICKETTS)
* Director
- ------------------------------------ May 29, 1998
(RODGER O. RINEY)
May 29, 1998
Director
- ------------------------------------
(V. ERIC ROACH)
May 29, 1998
Director
- ------------------------------------
(CHARLES A. ZABATTA)
/s/ Kenneth D. Pasternak
*By: _______________________________
ATTORNEY IN FACT
II-6
<PAGE>
INDEX TO EXHIBITS+
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
-------- ----------- ----
<C> <S> <C>
*1.1 Form of Underwriting Agreement.
*3.1 Form of Amended and Restated Certificate of Incorporation of
the Registrant.
*3.2 Form of Amended and Restated By-laws of the Registrant.
4.1 Specimen Common Stock certificate.
4.2 Form of Registration Rights Agreement.
*5.1 Form of Opinion of Skadden, Arps, Slate, Meagher & Flom LLP.
++*10.1 Clearing Agreement between Knight Securities, L.P. and
Correspondent Services Corporation, dated April 23, 1997.
++*10.2 Clearing Agreement between Trimark Securities, L.P. and
National Investor Service Corporation, dated June 29, 1997.
10.3 Lease Agreement between Newport L.P.-I, Inc. and Knight
Securities, L.P. dated December 6, 1994 (the "Knight Lease
Agreement") for office space situated in Newport Office
Tower, 525 Washington Boulevard, Jersey City, New Jersey
07310.
10.4 Amendment to the Knight Lease Agreement, dated May 28, 1996.
10.5 Second Amendment to the Knight Lease Agreement, dated
September 30, 1997.
10.6 Third Amendment to the Knight Lease Agreement, dated March 18,
1998.
10.7 Lease Agreement between Nestle USA, Inc. and Trimark
Securities L.P., dated March 20, 1996, for the office space
situated at 100 Manhattanville Road, Purchase, New York
10577.
10.8 License Agreement between Automated Securities Clearance Ltd.
and Knight Securities, L.P., dated April 5th, 1995.
10.9 Master Program Product License Agreement between TCAM Systems,
Inc. and Trimark Securities, Inc. dated May 1, 1990.
10.10 Form of Employment Agreement between the Registrant and
Kenneth Pasternak.
10.11 Form of Employment Agreement between the Registrant and Walter
Raquet.
10.12 Form of Employment Agreement between the Registrant and Steven
Steinman.
*10.13 Form of Employment Agreement between the Registrant and Robert
Lazarowitz.
10.14 Form of Employment Agreement between the Registrant and
Anthony Sanfilippo.
10.15 Form of Registrant's 1998 Long Term Incentive Plan.
10.16 Form of Registrant's 1998 Nonemployee Director Stock Option
Plan.
10.17 Form of Registrant's Management Incentive Performance Plan.
21.1 Subsidiaries of the Registrant.
*23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (contained
in Exhibit 5.1 hereto).
24.1 Powers of Attorney.
27. Financial Data Schedule.
</TABLE>
- --------
*Filed herewith.
+Previously filed unless otherwise indicated.
++ Confidential treatment has been requested for portions of this exhibit. The
copy filed herewith omits the information subject to the confidentiality
request. Omissions are designated as *****. A complete version of this
exhibit has been filed separately with the Securities and Exchange
Commission.
<PAGE>
BPH DRAFT
4/21/96
-------
____________ SHARES/1/
KNIGHT/TRIMARK GROUP, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
June __, 1998
BANCAMERICA ROBERTSON STEPHENS
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
PAINEWEBBER INCORPORATED
ABN AMRO INCORPORATED
SOUTHWEST SECURITIES, INC.
As Representatives of the several Underwriters
c/o BancAmerica Robertson Stephens
555 California Street
Suite 2600
San Francisco, California 94104
Ladies/Gentlemen:
KNIGHT/TRIMARK GROUP, INC., a Delaware corporation (the "Company"),
and a certain stockholder of the Company named in Schedule B hereto (hereafter
----------
called the "Selling Stockholder") address you as the Representatives of each of
the persons, firms and corporations listed in Schedule A hereto (herein
----------
collectively called the "Underwriters") and hereby confirm their respective
agreements with the several Underwriters as follows:
1. Description of Shares. The Company proposes to issue and sell _________
---------------------
shares of its authorized and unissued Class A Common Stock, $0.01 par value, to
the several Underwriters. The Selling Stockholder, proposes to sell an
aggregate of _____ shares of the Company's authorized and outstanding Class A
Common Stock, $0.01 par value, to the several Underwriters. The _________
shares of Class A Common Stock, $.01 par value, of the Company to be sold by the
Company are hereinafter called the "Company Shares" and the _________ shares of
Class A Common Stock, $0.01 par value, to be sold by the Selling Stockholder are
hereinafter called the "Selling Stockholder Shares." The Company Shares and the
Selling Stockholder Shares are hereinafter collectively referred to as the "Firm
Shares." The Company also proposes to grant to the Underwriters an option to
purchase up to ________ additional shares of the Company's Class A Common Stock,
$0.01 par value, (the "Option Shares"), as provided in Section 7 hereof. As
used in this Agreement, the term "Shares" shall include the Firm Shares and the
Option Shares. All shares of Class A Common Stock, $0.01 par value, of the
Company to be outstanding after giving effect to the sales contemplated hereby,
including the Shares, are hereinafter referred to as "Common Stock."
2. Representations, Warranties and Agreements of the Company and the Selling
-------------------------------------------------------------------------
Stockholder.
- -----------
- ----------------
/1/ Plus an option to purchase up to ______________ additional shares from the
Company to cover over-allotments.
-1-
<PAGE>
I. The Company represents and warrants to and agrees with each
Underwriter and the Selling Stockholder that:
(a) A registration statement on Form S-1 (File No. 333-_____)
with respect to the Shares, including a prospectus subject to completion, has
been prepared by the Company in conformity with the requirements of the
Securities Act of 1933, as amended (the "Act"), and the applicable rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") under the Act and has been filed with the
Commission; such amendments to such registration statement, such amended
prospectuses subject to completion and such abbreviated registration statements
pursuant to Rule 462(b) of the Rules and Regulations as may have been required
prior to the date hereof have been similarly prepared and filed with the
Commission; and the Company will file such additional amendments to such
registration statement, such amended prospectuses subject to completion and such
abbreviated registration statements as may hereafter be required. Copies of such
registration statement and amendments, of each related prospectus subject to
completion (the "Preliminary Prospectuses") and of any abbreviated registration
statement pursuant to Rule 462(b) of the Rules and Regulations have been
delivered to you.
If the registration statement relating to the Shares has been declared
effective under the Act by the Commission, the Company will prepare and promptly
file with the Commission the information omitted from the registration statement
pursuant to Rule 430A(a) or, if BancAmerica Robertson Stephens, on behalf of the
several Underwriters, shall agree to the utilization of Rule 434 of the Rules
and Regulations, the information required to be included in any term sheet filed
pursuant to Rule 434(b) or (c), as applicable, of the Rules and Regulations
pursuant to subparagraph (1), (4) or (7) of Rule 424(b) of the Rules and
Regulations or as part of a post-effective amendment to the registration
statement (including a final form of prospectus). If the registration statement
relating to the Shares has not been declared effective under the Act by the
Commission, the Company will prepare and promptly file an amendment to the
registration statement, including a final form of prospectus, or, if BancAmerica
Robertson Stephens, on behalf of the several Underwriters, shall agree to the
utilization of Rule 434 of the Rules and Regulations, the information required
to be included in any term sheet filed pursuant to Rule 434(b) or (c), as
applicable, of the Rules and Regulations. The term "Registration Statement" as
used in this Agreement shall mean such registration statement, including
financial statements, schedules and exhibits, in the form in which it became or
becomes, as the case may be, effective (including, if the Company omitted
information from the registration statement pursuant to Rule 430A(a) or files a
term sheet pursuant to Rule 434 of the Rules and Regulations, the information
deemed to be a part of the registration statement at the time it became
effective pursuant to Rule 430A(b) or Rule 434(d) of the Rules and Regulations)
and, in the event of any amendment thereto or the filing of any abbreviated
registration statement pursuant to Rule 462(b) of the Rules and Regulations
relating thereto after the effective date of such registration statement, shall
also mean (from and after the effectiveness of such amendment or the filing of
such abbreviated registration statement) such registration statement as so
amended, together with any such abbreviated registration statement. The term
"Prospectus" as used in this Agreement shall mean the prospectus relating to the
Shares as included in such Registration Statement at the time it becomes
effective (including, if the Company omitted information from the Registration
Statement pursuant to Rule 430A(a) of the Rules and Regulations, the information
deemed to be a part of the Registration Statement at the time it became
effective pursuant to Rule 430A(b) of the Rules and Regulations); provided,
--------
however, that if in reliance on Rule 434 of the Rules and Regulations and with
- -------
the consent of BancAmerica Robertson Stephens, on behalf of the several
Underwriters, the Company shall have provided to the Underwriters a term sheet
pursuant to Rule 434(b) or (c), as applicable, prior to the time that a
confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the
term "Prospectus" shall mean the "prospectus subject to completion" (as defined
in Rule 434(g) of the Rules and Regulations) last provided to the Underwriters
by the Company and circulated by the Underwriters to all prospective purchasers
of the Shares (including the information deemed to be a part of the Registration
Statement at the time it became effective pursuant to Rule 434(d) of the Rules
and Regulations). Notwithstanding the foregoing, if any revised prospectus
shall be provided to the Underwriters by the Company for use in connection with
the offering of the Shares that differs from the prospectus referred to in the
immediately preceding sentence (whether or not such revised prospectus is
required to be filed with the Commission pursuant to Rule 424(b) of the Rules
and Regulations), the term "Prospectus" shall refer to such revised prospectus
from and after the time it is first provided to the
-2-
<PAGE>
Underwriters for such use. If in reliance on Rule 434 of the Rules and
Regulations and with the consent of BancAmerica Robertson Stephens, on behalf of
the several Underwriters, the Company shall have provided to the Underwriters a
term sheet pursuant to Rule 434(b) or (c), as applicable, prior to the time that
a confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the
Prospectus and the term sheet, together, will not be materially different from
the prospectus in the Registration Statement.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus or instituted proceedings for
that purpose, and each such Preliminary Prospectus has conformed in all material
respects to the requirements of the Act and the Rules and Regulations and, as of
its date, has not included any untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; and at the time
the Registration Statement became or becomes, as the case may be, effective and
at all times subsequent thereto up to and on the Closing Date (hereinafter
defined) and on any later date on which Option Shares are to be purchased, (i)
the Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained and will contain all material information required to be
included therein by the Act and the Rules and Regulations and will in all
material respects conform to the requirements of the Act and the Rules and
Regulations, (ii) the Registration Statement, and any amendments or supplements
thereto, did not and will not include any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading, and (iii) the Prospectus, and any
amendments or supplements thereto, did not and will not include any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that none of the representations and
-------- -------
warranties contained in this subparagraph (b) shall apply to information
contained in or omitted from the Registration Statement or Prospectus, or any
amendment or supplement thereto, in reliance upon, and in conformity with,
written information relating to any Underwriter furnished to the Company by such
Underwriter specifically for use in the preparation thereof.
(c) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation with full power and authority
(corporate and other) to own, lease and operate its properties and conduct its
business as described in the Prospectus; the Company owns all of the outstanding
capital stock of its subsidiaries free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest; each of the Company and its
subsidiaries is duly qualified to do business as a foreign corporation and is in
good standing in each jurisdiction in which the ownership or leasing of its
properties or the conduct of its business requires such qualification, except
where the failure to be so qualified or be in good standing would not have a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise; no proceeding has been instituted in any such
jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or
curtail, such power and authority or qualification; each of the Company and its
subsidiaries is in possession of and operating in compliance with all
authorizations, licenses, certificates, consents, orders and permits from state,
federal and other regulatory authorities which are material to the conduct of
its business, all of which are valid and in full force and effect; neither the
Company nor any of its subsidiaries is in violation of its respective charter or
bylaws or in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any material bond,
debenture, note or other evidence of indebtedness, or in any material lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument to which the Company or any of its subsidiaries is
a party or by which it or any of its subsidiaries or their respective properties
may be bound; and neither the Company nor any of its subsidiaries is in material
violation of any law, order, rule, regulation, writ, injunction, judgment or
decree of any court, government or governmental agency or body, domestic or
foreign, having jurisdiction over the Company or any of its subsidiaries or over
their respective properties of which it has knowledge. The Company does not own
or control, directly or indirectly, any corporation, association or other entity
other than Knight Securities, Inc. and Trimark Securities, Inc.
(d) The Company has full legal right, power and authority to
enter into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized,
-3-
<PAGE>
executed and delivered by the Company and is a valid and binding agreement on
the part of the Company, enforceable in accordance with its terms, except as
rights to indemnification hereunder may be limited by applicable law and except
as the enforcement hereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles; the performance
of this Agreement and the consummation of the transactions herein contemplated
will not result in a material breach or violation of any of the terms and
provisions of, or constitute a default under, (i) any bond, debenture, note or
other evidence of indebtedness, or under any lease, contract, indenture,
mortgage, deed of trust, loan agreement, joint venture or other agreement or
instrument to which the Company or any of its subsidiaries is a party or by
which it or any of its subsidiaries or their respective properties may be bound,
(ii) the charter or bylaws of the Company or any of its subsidiaries, or (iii)
any law, order, rule, regulation, writ, injunction, judgment or decree of any
court, government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company or any of its subsidiaries or over their
respective properties. No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or body,
domestic or foreign, having jurisdiction over the Company or any of its
subsidiaries or over their respective properties is required for the execution
and delivery of this Agreement and the consummation by the Company or any of its
subsidiaries of the transactions herein contemplated, except such as may be
required under the Act, the Securities Exchange Act of 1934, as amended (the
"Exchange Act") or under state or other securities or Blue Sky laws, all of
which requirements have been satisfied in all material respects.
(e) There is not any pending or, to the best of the Company's
knowledge, threatened action, suit, claim or proceeding against the Company, any
of its subsidiaries or any of their respective officers or any of their
respective properties, assets or rights before any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or any of its subsidiaries or over their respective officers or
properties or otherwise which (i) might result in any material adverse change in
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise or might materially and adversely affect their properties, assets or
rights, (ii) might prevent consummation of the transactions contemplated hereby
or (iii) is required to be disclosed in the Registration Statement or Prospectus
and is not so disclosed; and there are no agreements, contracts, leases or
documents of the Company or any of its subsidiaries of a character required to
be described or referred to in the Registration Statement or Prospectus or to be
filed as an exhibit to the Registration Statement by the Act or the Rules and
Regulations which have not been accurately described in all material respects in
the Registration Statement or Prospectus or filed as exhibits to the
Registration Statement.
(f) All outstanding shares of capital stock of the Company
(including the Selling Stockholder Shares) have been duly authorized and validly
issued and are fully paid and nonassessable, have been issued in compliance with
all federal and state securities laws, were not issued in violation of or
subject to any preemptive rights or other rights to subscribe for or purchase
securities, and the authorized and outstanding capital stock of the Company is
as set forth in the Prospectus under the caption "Capitalization" and conforms
in all material respects to the statements relating thereto contained in the
Registration Statement and the Prospectus (and such statements correctly state
the substance of the instruments defining the capitalization of the Company);
the Company Shares and the Option Shares to be purchased from the Company
hereunder have been duly authorized for issuance and sale to the Underwriters
pursuant to this Agreement and, when issued and delivered by the Company against
payment therefor in accordance with the terms of this Agreement, will be duly
and validly issued and fully paid and nonassessable, and will be sold free and
clear of any pledge, lien, security interest, encumbrance, claim or equitable
interest; and no preemptive right, co-sale right, registration right, right of
first refusal or other similar right of stockholders exists with respect to any
of the Firm Company Shares or Option Shares to be purchased from the Company
hereunder or the issuance and sale thereof other than those that have been
expressly waived prior to the date hereof and those that will automatically
expire upon and will not apply to the consummation of the transactions
contemplated on the Closing Date. No further approval or authorization of any
stockholder, the Board of Directors of the Company or others is required for the
issuance and sale or transfer of the Shares except as may be required under the
Act, the Exchange Act or under state or other securities or Blue Sky laws. All
issued and outstanding shares of capital stock of each subsidiary of the Company
have been duly authorized and validly issued and are fully paid
-4-
<PAGE>
and nonassessable, and were not issued in violation of or subject to any
preemptive right, or other rights to subscribe for or purchase shares and are
owned by the Company free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest. Except as disclosed in the Prospectus
and the financial statements of the Company, and the related notes thereto,
included in the Prospectus, neither the Company nor any subsidiary has
outstanding any options to purchase, or any preemptive rights or other rights to
subscribe for or to purchase, any securities or obligations convertible into, or
any contracts or commitments to issue or sell, shares of its capital stock or
any such options, rights, convertible securities or obligations. The description
of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted and exercised thereunder,
set forth in the Prospectus accurately and fairly presents the information
required to be shown with respect to such plans, arrangements, options and
rights.
(g) Price Waterhouse LLP, which has examined the consolidated
financial statements of the Company, together with the related schedules and
notes, as of March 31, 1996 and 1997 and for each of the years in the three (3)
years ended December 31, 1997 filed with the Commission as a part of the
Registration Statement, which are included in the Prospectus, are independent
accountants within the meaning of the Act and the Rules and Regulations; the
audited consolidated financial statements of the Company, together with the
related schedules and notes, and the unaudited consolidated financial
information, forming part of the Registration Statement and Prospectus, fairly
present the financial position and the results of operations of the Company and
its subsidiaries at the respective dates and for the respective periods to which
they apply; and all audited consolidated financial statements of the Company,
together with the related schedules and notes, and the unaudited consolidated
financial information, filed with the Commission as part of the Registration
Statement, have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved except as may be
otherwise stated therein. The selected and summary financial and statistical
data included in the Registration Statement present fairly the information shown
therein and have been compiled on a basis consistent with the audited financial
statements presented therein. No other financial statements or schedules are
required to be included in the Registration Statement.
(h) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus, there has not been (i)
any material adverse change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise, (ii) any transaction that is material to the
Company and its subsidiaries considered as one enterprise, except transactions
entered into in the ordinary course of business, (iii) any obligation, direct or
contingent, that is material to the Company and its subsidiaries considered as
one enterprise, incurred by the Company or its subsidiaries, except obligations
incurred in the ordinary course of business, (iv) any change in the capital
stock or outstanding indebtedness of the Company or any of its subsidiaries that
is material to the Company and its subsidiaries considered as one enterprise,
(v) any dividend or distribution of any kind declared, paid or made on the
capital stock of the Company or any of its subsidiaries, or (vi) any loss or
damage (whether or not insured) to the property of the Company or any of its
subsidiaries which has been sustained or will have been sustained which has a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise.
(i) Except as set forth in the Registration Statement and
Prospectus, (i) each of the Company and its subsidiaries has good and marketable
title to all properties and assets described in the Registration Statement and
Prospectus as owned by it, free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest, other than such as would not
have a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise, (ii) the agreements to which the
Company or any of its subsidiaries is a party described in the Registration
Statement and Prospectus are valid agreements, enforceable by the Company and
its subsidiaries (as applicable), except as the enforcement thereof may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles and, to the best of the Company's knowledge, the
other contracting party or parties thereto are not in material breach or
material default under any of such agreements, and (iii) each of the Company and
its subsidiaries has valid and enforceable leases for all properties described
in the
-5-
<PAGE>
Registration Statement and Prospectus as leased by it, except as the enforcement
thereof may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles. Except as set forth in the
Registration Statement and Prospectus, the Company owns or leases all such
properties as are necessary to its operations as now conducted or as proposed to
be conducted.
(j) The Company and its subsidiaries have timely filed all
necessary federal, state and foreign income and franchise tax returns and have
paid all taxes shown thereon as due, and there is no tax deficiency that has
been or, to the best of the Company's knowledge, might be asserted against the
Company or any of its subsidiaries that might have a material adverse effect on
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise; and all tax liabilities are adequately provided for on the books of
the Company and its subsidiaries.
(k) The Company and its subsidiaries maintain insurance with
insurers of recognized financial responsibility of the types and in the amounts
generally deemed adequate for their respective businesses and consistent with
insurance coverage maintained by similar companies in similar businesses,
including, but not limited to, insurance covering real and personal property
owned or leased by the Company or its subsidiaries against theft, damage,
destruction, acts of vandalism and all other risks customarily insured against,
all of which insurance is in full force and effect; neither the Company nor any
such subsidiary has been refused any insurance coverage sought or applied for;
and neither the Company nor any such subsidiary has any reason to believe that
it will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially and
adversely affect the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered as
one enterprise.
(l) To the best of Company's knowledge, no labor disturbance by
the employees of the Company or any of its subsidiaries exists or is imminent
that might be expected to result in a material adverse change in the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company and its subsidiaries considered as one enterprise. No collective
bargaining agreement exists with any of the Company's employees and, to the best
of the Company's knowledge, no such agreement is imminent.
(m) Each of the Company and its subsidiaries owns or possesses
adequate rights to use all patents, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, trade names and copyrights which are
necessary to conduct its businesses as described in the Registration Statement
and Prospectus; the expiration of any patents, patent rights, trade secrets,
trademarks, service marks, trade names or copyrights would not have a material
adverse effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered as
one enterprise; the Company has not received any notice of, and has no knowledge
of, any infringement of or conflict with asserted rights of the Company by
others with respect to any patent, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, trade names or copyrights; and the Company
has not received any notice of, and has no knowledge of, any infringement of or
conflict with asserted rights of others with respect to any patent, patent
rights, inventions, trade secrets, know-how, trademarks, service marks, trade
names or copyrights which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, might have a material adverse effect on
the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise.
(n) The Common Stock has been approved for quotation on The
Nasdaq National Market, subject to official notice of issuance.
(o) The Company has been advised concerning the Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations
thereunder, and has in the past conducted, and intends in the future to conduct,
its affairs in such a manner as to ensure that it will not become an "investment
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<PAGE>
company" or a company "controlled" by an "investment company" within the meaning
of the 1940 Act and such rules and regulations.
(p) The Company has not distributed and will not distribute
prior to the later of (i) the Closing Date, or any date on which Option Shares
are to be purchased, as the case may be, and (ii) completion of the distribution
of the Shares, any offering material in connection with the offering and sale of
the Shares other than any Preliminary Prospectuses, the Prospectus, the
Registration Statement and other materials, if any, permitted by the Act.
(q) Neither the Company nor any of its subsidiaries has at any
time during the last five (5) years (i) made any unlawful contribution to any
candidate for foreign office or failed to disclose fully any contribution in
violation of law, or (ii) made any payment to any federal or state governmental
officer or official, or other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws of the United
States or any jurisdiction thereof.
(r) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares.
(s) Each officer and director of the Company, the Selling
Stockholder and each beneficial owner of shares of Common Stock has agreed in
writing that such person will not, for a period of 180 days from the date that
the Registration Statement is declared effective by the Commission (the "Lock-up
Period"), offer to sell, contract to sell, or otherwise sell, dispose of, loan,
pledge or grant any rights with respect to (collectively, a "Disposition") any
shares of Common Stock, any options or warrants to purchase any shares of Common
Stock or any securities convertible into or exchangeable for shares of Common
Stock (collectively, "Securities") now owned or hereafter acquired, directly or
indirectly, by such person or with respect to which such person has or hereafter
acquires the power of disposition, otherwise than (i) as a bona fide gift or
gifts, provided the donee or donees thereof agree in writing to be bound by this
restriction, (ii) as a distribution to partners or stockholders of such person,
provided that the distributees thereof agree in writing to be bound by the terms
of this restriction or (iii) with the prior written consent of BancAmerica
Robertson Stephens. The foregoing restriction has been expressly agreed to
preclude the holder of the Securities from engaging in any hedging or other
transaction which is designed to or reasonably expected to lead to or result in
a Disposition of Securities during the Lock-up Period, even if such Securities
would be disposed of by someone other than such holder. Such prohibited hedging
or other transactions would include, without limitation, any short sale (whether
or not against the box) or any purchase, sale or grant of any right (including,
without limitation, any put or call option) with respect to any Securities or
with respect to any security (other than a broad-based market basket or index)
that includes, relates to or derives any significant part of its value from
Securities. Furthermore, such person has also agreed and consented to the entry
of stop transfer instructions with the Company's transfer agent against the
transfer of the Securities held by such person except in compliance with this
restriction. The Company has provided to counsel for the Underwriters a complete
and accurate list of all securityholders of the Company and the number and type
of securities held by each securityholder. The Company has provided to counsel
for the Underwriters true, accurate and complete copies of all of the agreements
pursuant to which its officers, directors and stockholders have agreed to such
or similar restrictions (the "Lock-up Agreements") presently in effect or
effected hereby. The Company hereby represents and warrants that it will not
release any of its officers, directors or other stockholders from any Lock-up
Agreements currently existing or hereafter effected without the prior written
consent of BancAmerica Robertson Stephens.
(t) Except as set forth in the Registration Statement and
Prospectus, (i) the Company is in compliance with all rules, laws and
regulations relating to the use, treatment, storage and disposal of toxic
substances and protection of health or the environment ("Environmental Laws")
which are applicable to its business, (ii) the Company has received no notice
from any governmental authority or third party of an asserted claim under
Environmental Laws, which claim is required to be disclosed in the Registration
Statement and the Prospectus, (iii) the Company will not be required to make
future material capital expenditures to comply with Environmental Laws and (iv)
no property which is owned, leased or
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<PAGE>
occupied by the Company has been designated as a Superfund site pursuant to the
Comprehensive Response, Compensation, and Liability Act of 1980, as amended (42
U.S.C. (S) 9601, et seq.), or otherwise designated as a contaminated site under
-- ---
applicable state or local law.
(u) The Company and each of its subsidiaries maintain a system
of internal accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, (iii) access to
assets is permitted only in accordance with management's general or specific
authorization, and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(v) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or guarantees
of indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of them,
except as disclosed in the Registration Statement and the Prospectus.
(w) The Company has complied with all provisions of Section
517.075, Florida Statutes relating to doing business with the Government of Cuba
or with any person or affiliate located in Cuba.
II. The Selling Stockholder, represents and warrants to and agrees
with each Underwriter and the Company that:
(a) Such Selling Stockholder now has and on the Closing Date,
will have valid marketable title to the Shares to be sold by such Selling
Stockholder, free and clear of any pledge, lien, security interest, encumbrance,
claim or equitable interest other than pursuant to this Agreement; and upon
delivery of such Shares hereunder and payment of the purchase price as herein
contemplated, each of the Underwriters will obtain valid marketable title to the
Shares purchased by it from such Selling Stockholder, free and clear of any
pledge, lien, security interest pertaining to such Selling Stockholder or such
Selling Stockholder's property, encumbrance, claim or equitable interest.
(b) Such Selling Stockholder has duly authorized (if
applicable), executed and delivered, in the form heretofore furnished to the
Representatives, an irrevocable Power of Attorney (the "Power of Attorney")
appointing ___________ and ___________ as attorneys-in-fact (collectively, the
"Attorneys" and individually, an "Attorney") and a Letter of Transmittal and
Custody Agreement (the "Custody Agreement") with ______________________________,
as custodian (the "Custodian"); each of the Power of Attorney and the Custody
Agreement constitutes a valid and binding agreement on the part of such Selling
Stockholder, enforceable in accordance with its terms, except as the enforcement
thereof may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles; and each of such Selling
Stockholder's Attorneys, acting alone, is authorized to execute and deliver this
Agreement and the certificate referred to in Section 6(h) hereof on behalf of
such Selling Stockholder, to determine the purchase price to be paid by the
several Underwriters to such Selling Stockholder as provided in Section 3
hereof, to authorize the delivery of the Selling Stockholder Shares under this
Agreement and to duly endorse (in blank or otherwise) the certificate or
certificates representing such Shares or a stock power or powers with respect
thereto, to accept payment therefor, and otherwise to act on behalf of such
Selling Stockholder in connection with this Agreement.
(c) All consents, approvals, authorizations and orders required
for the execution and delivery by such Selling Stockholder of the Power of
Attorney and the Custody Agreement, the execution and delivery by or on behalf
of such Selling Stockholder of this Agreement and the sale and delivery of the
Selling Stockholder Shares under this Agreement (other than, at the time of the
execution hereof (if the Registration Statement has not yet been declared
effective by the Commission), the issuance of the order of the Commission
declaring the Registration Statement effective and such consents, approvals,
authorizations or orders as may be necessary under state or other securities or
Blue Sky laws) have been obtained and are in full
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<PAGE>
force and effect; such Selling Stockholder, if other than a natural person, has
been duly organized and is validly existing in good standing under the laws of
the jurisdiction of its organization as the type of entity that it purports to
be; and such Selling Stockholder has full legal right, power and authority to
enter into and perform its obligations under this Agreement and such Power of
Attorney and Custody Agreement, and to sell, assign, transfer and deliver the
Shares to be sold by such Selling Stockholder under this Agreement.
(d) Such Selling Stockholder will not, during the Lock-up
Period, effect the Disposition of any Securities now owned or hereafter
acquired, directly or indirectly by such Selling Stockholder or with respect to
which such Selling Stockholder has or hereafter acquires the power of
disposition, otherwise than (i) as a bona fide gift or gifts, provided the donee
or donees thereof agree in writing to be bound by this restriction, (ii) as a
distribution to partners or stockholders of such Selling Stockholder, provided
that the distributees thereof agree in writing to be bound by the terms of this
restriction or (iii) with the prior written consent of BancAmerica Robertson
Stephens. The foregoing restriction is expressly agreed to preclude the holder
of the Securities from engaging in any hedging or other transaction which is
designed to or reasonably expected to lead to or result in a Disposition of
Securities during the Lock-up Period, even if such Securities would be disposed
of by someone other than the Selling Stockholder. Such prohibited hedging or
other transactions would including, without limitation, any short sale (whether
or not against the box) or any purchase, sale or grant of any right (including,
without limitation, any put or call option) with respect to any Securities or
with respect to any security (other than a broad-based market basket or index)
that includes, relates to or derives any significant part of its value from
Securities. Such Selling Stockholder also agrees and consents to the entry of
stop transfer instructions with the Company's transfer agent against the
transfer of the securities held by such Selling Stockholder except in compliance
with this restriction.
(e) Certificates in negotiable form for all Shares to be sold by
such Selling Stockholder under this Agreement, together with a stock power or
powers duly endorsed in blank by such Selling Stockholder, have been placed in
custody with the Custodian for the purpose of effecting delivery hereunder.
(f) This Agreement has been duly authorized by the Selling
Stockholder and has been duly executed and delivered by or on behalf of such
Selling Stockholder and is a valid and binding agreement of such Selling
Stockholder, enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as the
enforcement hereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles; and the performance of this
Agreement and the consummation of the transactions herein contemplated will not
result in a breach or violation of any of the terms and provisions of or
constitute a default under any bond, debenture, note or other evidence of
indebtedness, or under any lease, contract, indenture, mortgage, deed of trust,
loan agreement, joint venture or other agreement or instrument to which such
Selling Stockholder is a party or by which such Selling Stockholder, or any
Selling Stockholder Shares hereunder, may be bound or, to the best of such
Selling Stockholder's knowledge, result in any violation of any law, order,
rule, regulation, writ, injunction, judgment or decree of any court, government
or governmental agency or body, domestic or foreign, having jurisdiction over
such Selling Stockholder or over the properties of such Selling Stockholder, or,
if such Selling Stockholder is other than a natural person, result in any
violation of any provisions of the charter, bylaws or other organizational
documents of such Selling Stockholder.
(g) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price of the
Common Stock to facilitate the sale or resale of the Shares.
(h) Such Selling Stockholder has not distributed and will not
distribute any prospectus or other offering material in connection with the
offering and sale of the Shares.
(i) All information furnished by or on behalf of such Selling
Stockholder relating to such Selling Stockholder and the Selling Stockholder
Shares that is contained in the representations
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<PAGE>
and warranties of such Selling Stockholder in such Selling Stockholder's Power
of Attorney or set forth in the Registration Statement or the Prospectus is, and
at the time the Registration Statement became or becomes, as the case may be,
effective and at all times subsequent thereto up to and on the Closing Date, was
or will be, true, correct and complete, and does not, and at the time the
Registration Statement became or becomes, as the case may be, effective and at
all times subsequent thereto up to and on the Closing Date (hereinafter defined)
will not, contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make such
information not misleading.
(j) Such Selling Stockholder will review the Prospectus and will
comply with all agreements and satisfy all conditions on its part to be complied
with or satisfied pursuant to this Agreement on or prior to the Closing Date and
will advise one of its Attorneys and BancAmerica Robertson Stephens prior to the
Closing Date if any statement to be made on behalf of such Selling Stockholder
in the certificate contemplated by Section 6(h) would be inaccurate if made as
of the Closing Date.
(k) Such Selling Stockholder does not have, or has waived prior
to the date hereof, any preemptive right, co-sale right or right of first
refusal or other similar right to purchase any of the Shares that are to be sold
by the Company to the Underwriters pursuant to this Agreement; such Selling
Stockholder does not have, or has waived prior to the date hereof, any
registration right or other similar right to participate in the offering made by
the Prospectus, other than such rights of participation as have been satisfied
by the participation of such Selling Stockholder in the transactions to which
this Agreement relates in accordance with the terms of this Agreement; and such
Selling Stockholder does not own any warrants, options or similar rights to
acquire, and does not have any right or arrangement to acquire, any capital
stock, rights, warrants, options or other securities from the Company, other
than those described in the Registration Statement and the Prospectus.
3. Purchase, Sale and Delivery of Shares. On the basis of the
-------------------------------------
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company and the Selling Stockholder
agree, to sell to the Underwriters, and each Underwriter agrees, severally and
not jointly, to purchase from the Company and the Selling Stockholder, at a
purchase price of $_____ per share, the respective number of Company Shares as
hereinafter set forth and Selling Stockholder Shares set forth opposite the
names of the Company and the Selling Stockholder in Schedule B hereto. The
----------
obligation of each Underwriter to the Company and to the Selling Stockholder
shall be to purchase from the Company or such Selling Stockholder that number of
Company Shares or Selling Stockholder Shares, as the case may be, which (as
nearly as practicable, as determined by you) is in the same proportion to the
number of Company Shares or Selling Stockholder Shares, as the case may be, set
forth opposite the name of the Company or such Selling Stockholder in
Schedule B hereto as the number of Firm Shares which is set forth opposite the
- ----------
name of such Underwriter in Schedule A hereto (subject to adjustment as provided
----------
in Section 10) is to the total number of Firm Shares to be purchased by
all the Underwriters under this Agreement.
The certificates in negotiable form for the Selling Stockholder Shares
have been placed in custody (for delivery under this Agreement) under the
Custody Agreement. The Selling Stockholder agrees that the certificates for the
Selling Stockholder Shares of such Selling Stockholder so held in custody are
subject to the interests of the Underwriters hereunder, that the arrangements
made by such Selling Stockholder for such custody, including the Power of
Attorney is to that extent irrevocable and that the obligations of such Selling
Stockholder hereunder shall not be terminated by the act of such Selling
Stockholder or by operation of law, whether by the death or incapacity of such
Selling Stockholder or the occurrence of any other event, except as specifically
provided herein or in the Custody Agreement. If the Selling Stockholder should
die or be incapacitated, or if any other such event should occur, before the
delivery of the certificates for the Selling Stockholder Shares hereunder, the
Selling Stockholder Shares to be sold by such Selling Stockholder shall, except
as specifically provided herein or in the Custody Agreement, be delivered by the
Custodian in accordance with the terms and conditions of this Agreement as if
such death, incapacity or other event had not occurred, regardless of whether
the Custodian shall have received notice of such death or other event.
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<PAGE>
Delivery of definitive certificates for the Firm Shares to be
purchased by the Underwriters pursuant to this Section 3 shall be made against
payment of the purchase price therefor by the several Underwriters by certified
or official bank check or checks drawn in next-day funds, payable to the order
of the Company with regard to the Shares being purchased from the Company, and
to the order of the Custodian for the account of the Selling Stockholder with
regard to the Shares being purchased from such Selling Stockholder (and the
Company and such Selling Stockholder agree not to deposit and to cause the
Custodian not to deposit any such check in the bank on which it is drawn, and
not to take any other action with the purpose or effect of receiving immediately
available funds, until the business day following the date of its delivery to
the Company or the Custodian, as the case may be, and, in the event of any
breach of the foregoing, the Company or the Selling Stockholder, as the case may
be, shall reimburse the Underwriters for the interest lost and any other
expenses borne by them by reason of such breach), at the offices of Skadden,
Arps, Slate, Meagher & Flom, LLP, 919 Third Avenue, New York, New York 10022-
3897 (or at such other place as may be agreed upon among the Representatives and
the Company and the Attorneys), at 10:00 A.M., New York time (a) on the third
(3rd) full business day following the first day that Shares are traded, (b) if
this Agreement is executed and delivered after 4:30 P.M., New York time, the
fourth (4th) full business day following the day that this Agreement is executed
and delivered or (c) at such other time and date not later than seven (7) full
business days following the first day that Shares are traded as the
Representatives and the Company and the Attorneys may determine (or at such time
and date to which payment and delivery shall have been postponed pursuant to
Section 10 hereof), such time and date of payment and delivery being herein
called the "Closing Date;" provided, however, that if the Company has not made
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available to the Representatives copies of the Prospectus within the time
provided in Section 4(d) hereof, the Representatives may, in their sole
discretion, postpone the Closing Date until no later than two (2) full business
days following delivery of copies of the Prospectus to the Representatives. The
certificates for the Firm Shares to be so delivered will be made available to
you at such office or such other location including, without limitation, in New
York City, as you may reasonably request for checking at least one (1) full
business day prior to the Closing Date and will be in such names and
denominations as you may request, such request to be made at least two (2) full
business days prior to the Closing Date. If the Representatives so elect,
delivery of the Firm Shares may be made by credit through full fast transfer to
the accounts at The Depository Trust Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the Closing
Date for the Firm Shares to be purchased by such Underwriter or Underwriters.
Any such payment by you shall not relieve any such Underwriter or Underwriters
of any of its or their obligations hereunder.
After the Registration Statement becomes effective, the several
Underwriters intend to make an initial public offering (as such term is
described in Section 11 hereof) of the Firm Shares at an initial public offering
price of $_____ per share. After the initial public offering, the several
Underwriters may, in their discretion, vary the public offering price.
The information set forth in the last paragraph on the front cover
page (insofar as such information relates to the Underwriters), on the inside
front cover concerning stabilization and over-allotment by the Underwriters, and
under the _____ and _____ paragraphs under the caption "Underwriting" in any
Preliminary Prospectus and in the Prospectus constitutes the only information
furnished by the Underwriters to the Company for inclusion in any Preliminary
Prospectus, the Prospectus or the Registration Statement, and you, on behalf of
the respective Underwriters, represent and warrant to the Company and the
Selling Stockholder that the statements made therein do not include any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
4. Further Agreements of the Company. The Company agrees with the several
---------------------------------
Underwriters that:
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<PAGE>
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the time
and date that this Agreement is executed and delivered by the parties hereto, to
become effective as promptly as possible; the Company will use its best efforts
to cause any abbreviated registration statement pursuant to Rule 462(b) of the
Rules and Regulations as may be required subsequent to the date the Registration
Statement is declared effective to become effective as promptly as possible; the
Company will notify you, promptly after it shall receive notice thereof, of the
time when the Registration Statement, any subsequent amendment to the
Registration Statement or any abbreviated registration statement has become
effective or any supplement to the Prospectus has been filed; if the Company
omitted information from the Registration Statement at the time it was
originally declared effective in reliance upon Rule 430A(a) of the Rules and
Regulations, the Company will provide evidence satisfactory to you that the
Prospectus contains such information and has been filed, within the time period
prescribed, with the Commission pursuant to subparagraph (1) or (4) of Rule
424(b) of the Rules and Regulations or as part of a post-effective amendment to
such Registration Statement as originally declared effective which is declared
effective by the Commission; if the Company files a term sheet pursuant to Rule
434 of the Rules and Regulations, the Company will provide evidence satisfactory
to you that the Prospectus and term sheet meeting the requirements of Rule
434(b) or (c), as applicable, of the Rules and Regulations, have been filed,
within the time period prescribed, with the Commission pursuant to subparagraph
(7) of Rule 424(b) of the Rules and Regulations; if for any reason the filing of
the final form of Prospectus is required under Rule 424(b)(3) of the Rules and
Regulations, it will provide evidence satisfactory to you that the Prospectus
contains such information and has been filed with the Commission within the time
period prescribed; it will notify you promptly of any request by the Commission
for the amending or supplementing of the Registration Statement or the
Prospectus or for additional information; promptly upon your request, it will
prepare and file with the Commission any amendments or supplements to the
Registration Statement or Prospectus which, in the opinion of counsel for the
several Underwriters ("Underwriters' Counsel"), may be necessary or advisable in
connection with the distribution of the Shares by the Underwriters; it will
promptly prepare and file with the Commission, and promptly notify you of the
filing of, any amendments or supplements to the Registration Statement or
Prospectus which may be necessary to correct any statements or omissions, if, at
any time when a prospectus relating to the Shares is required to be delivered
under the Act, any event shall have occurred as a result of which the Prospectus
or any other prospectus relating to the Shares as then in effect would include
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; in case any Underwriter is required
to deliver a prospectus nine (9) months or more after the effective date of the
Registration Statement in connection with the sale of the Shares, it will
prepare promptly upon request, but at the expense of such Underwriter, such
amendment or amendments to the Registration Statement and such prospectus or
prospectuses as may be necessary to permit compliance with the requirements of
Section 10(a)(3) of the Act; and it will file no amendment or supplement to the
Registration Statement or Prospectus which shall not previously have been
submitted to you a reasonable time prior to the proposed filing thereof or to
which you shall reasonably object in writing, subject, however, to compliance
with the Act and the Rules and Regulations and the provisions of this Agreement.
(b) The Company will advise you, promptly after it shall
receive notice or obtain knowledge, of the issuance of any stop order by the
Commission suspending the effectiveness of the Registration Statement or of the
initiation or threat of any proceeding for that purpose; and it will promptly
use its best efforts to prevent the issuance of any stop order or to obtain its
withdrawal at the earliest possible moment if such stop order should be issued .
(c) The Company will use its best efforts to qualify the Shares
for offering and sale under the securities laws of such jurisdictions as you may
designate and to continue such qualifications in effect for so long as may be
required for purposes of the distribution of the Shares, except that the Company
shall not be required in connection therewith or as a condition thereof to
qualify as a foreign corporation or to execute a general consent to service of
process in any jurisdiction in which it is not otherwise required to be so
qualified or to so execute a general consent to service of process. In each
jurisdiction in which the Shares shall have been qualified as above provided,
the Company will make and file such statements and reports in each year as are
or may be required by the laws of such jurisdiction.
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<PAGE>
(d) The Company will furnish to you, as soon as available, and,
in the case of the Prospectus and any term sheet or abbreviated term sheet under
Rule 434, in no event later than the first (1st) full business day following the
first day that Shares are traded, copies of the Registration Statement (three of
which will be signed and which will include all exhibits), each Preliminary
Prospectus, the Prospectus and any amendments or supplements to such documents,
including any prospectus prepared to permit compliance with Section 10(a)(3) of
the Act, all in such quantities as you may from time to time reasonably request.
Notwithstanding the foregoing, if BancAmerica Robertson Stephens, on behalf of
the several Underwriters, shall agree to the utilization of Rule 434 of the
Rules and Regulations, the Company shall provide to you copies of a Preliminary
Prospectus updated in all respects through the date specified by you in such
quantities as you may from time to time reasonably request.
(e) The Company will make generally available to its
securityholders as soon as practicable, but in any event not later than the
forty-fifth (45th) day following the end of the fiscal quarter first occurring
after the first anniversary of the effective date of the Registration Statement,
an earnings statement (which will be in reasonable detail but need not be
audited) complying with the provisions of Section 11(a) of the Act and covering
a twelve (12) month period beginning after the effective date of the
Registration Statement.
(f) During a period of five (5) years after the date hereof,
the Company will furnish to its stockholders as soon as practicable after the
end of each respective period, annual reports (including financial statements
audited by independent certified public accountants) and unaudited quarterly
reports of operations for each of the first three quarters of the fiscal year,
and will furnish to you and the other several Underwriters hereunder, upon
request (i) concurrently with furnishing such reports to its stockholders,
statements of operations of the Company for each of the first three (3) quarters
in the form furnished to the Company's stockholders, (ii) concurrently with
furnishing to its stockholders, a balance sheet of the Company as of the end of
such fiscal year, together with statements of operations, of stockholders'
equity, and of cash flows of the Company for such fiscal year, accompanied by a
copy of the certificate or report thereon of independent certified public
accountants, (iii) as soon as they are available, copies of all reports
(financial or other) mailed to stockholders, (iv) as soon as they are available,
copies of all reports and financial statements furnished to or filed with the
Commission, any securities exchange or the NASD, (v) every material press
release and every material news item or article in respect of the Company or its
affairs which was generally released to stockholders or prepared by the Company
or any of its subsidiaries, and (vi) any additional information of a public
nature concerning the Company or its subsidiaries, or its business which you may
reasonably request. During such five (5) year period, if the Company shall have
active subsidiaries, the foregoing financial statements shall be on a
consolidated basis to the extent that the accounts of the Company and its
subsidiaries are consolidated, and shall be accompanied by similar financial
statements for any significant subsidiary which is not so consolidated.
(g) The Company will apply the net proceeds from the sale of
the Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(h) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a registrar
(which may be the same entity as the transfer agent) for its Common Stock.
(i) If the transactions contemplated hereby are not consummated
by reason of any failure, refusal or inability on the part of the Company or the
Selling Stockholder to perform any agreement on their respective part to be
performed hereunder or to fulfill any condition of the Underwriters' obligations
hereunder, or if the Company shall terminate this Agreement pursuant to Section
11(a) hereof, or if the Underwriters shall terminate this Agreement pursuant to
Section 11(b)(i), the Company will reimburse the several Underwriters for all
out-of-pocket expenses (including fees and disbursements of Underwriters'
Counsel) incurred by the Underwriters in investigating or preparing to market or
marketing the Shares.
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(j) If at any time during the ninety (90) day period after the
Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
after written notice from you advising the Company to the effect set forth
above, forthwith prepare, consult with you concerning the substance of and
disseminate a press release or other public statement, reasonably satisfactory
to you, responding to or commenting on such rumor, publication or event.
(k) During the Lock-up Period, the Company will not, without
the prior written consent of BancAmerica Robertson Stephens, effect the
Disposition of, directly or indirectly, any Securities other than the sale of
the Company Shares and the Option Shares to be sold by the Company hereunder and
the Company's issuance of options or Common Stock under the Company's presently
authorized ___________ (the "Option Plan").
(l) During a period of ninety (90) days from the effective date
of the Registration Statement, the Company will not file a registration
statement registering shares under the Option Plan or other employee benefit
plan.
5. Expenses.
--------
(a) The Company and the Selling Stockholder agree with each
Underwriter that:
(i) The Company and the Selling Stockholder will pay and
bear all costs and expenses in connection with the preparation, printing and
filing of the Registration Statement (including financial statements, schedules
and exhibits), Preliminary Prospectuses and the Prospectus and any amendments or
supplements thereto; the printing of this Agreement, the Agreement Among
Underwriters, the Selected Dealer Agreement, the Preliminary Blue Sky Survey and
any Supplemental Blue Sky Survey, the Underwriters' Questionnaire and Power of
Attorney, and any instruments related to any of the foregoing; the issuance and
delivery of the Shares hereunder to the several Underwriters, including transfer
taxes, if any, the cost of all certificates representing the Shares and transfer
agents' and registrars' fees; the fees and disbursements of counsel for the
Company; all fees and other charges of the Company's independent certified
public accountants; the cost of furnishing to the several Underwriters copies of
the Registration Statement (including appropriate exhibits), Preliminary
Prospectus and the Prospectus , and any amendments or supplements to any of the
foregoing; NASD filing fees and the cost of qualifying the Shares under the laws
of such jurisdictions as you may designate (including filing fees and fees and
disbursements of Underwriters' Counsel in connection with such NASD filings and
Blue Sky qualifications); and all other expenses directly incurred by the
Company and the Selling Stockholder in connection with the performance of their
obligations hereunder. Any additional expenses incurred as a result of the sale
of the Shares by the Selling Stockholder will be borne collectively by the
Company and the Selling Stockholder. The provisions of this Section 5(a)(i) are
intended to relieve the Underwriters from the payment of the expenses and costs
which the Selling Stockholder and the Company hereby agree to pay, but shall not
affect any agreement which the Selling Stockholder and the Company may make, or
may have made, for the sharing of any of such expenses and costs. Such
agreements shall not impair the obligations of the Company and the Selling
Stockholder hereunder to the several Underwriters.
(ii) In addition to its other obligations under Section
8(a) hereof, the Company agrees that, as an interim measure during the pendency
of any claim, action, investigation, inquiry or other proceeding described in
Section 8(a) hereof, it will reimburse the Underwriters on a monthly basis for
all reasonable legal or other expenses incurred in connection with investigating
or defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Company's obligation to reimburse the Underwriters for
such expenses and the possibility that such payments might later be held to have
been improper by a court of competent
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jurisdiction. To the extent that any such interim reimbursement payment is so
held to have been improper, the Underwriters shall promptly return such payment
to the Company together with interest, compounded daily, determined on the basis
of the prime rate (or other commercial lending rate for borrowers of the highest
credit standing) listed from time to time in The Wall Street Journal which
represents the base rate on corporate loans posted by a substantial majority of
the nation's thirty (30) largest banks (the "Prime Rate"). Any such interim
reimbursement payments which are not made to the Underwriters within thirty (30)
days of a request for reimbursement shall bear interest at the Prime Rate from
the date of such request.
(iii) In addition to its other obligations under
Section 8(b) hereof, the Selling Stockholder agrees that, as an interim measure
during the pendency of any claim, action, investigation, inquiry or other
proceeding described in Section 8(b) hereof relating to such Selling
Stockholder, it will reimburse the Underwriters on a monthly basis for all
reasonable legal or other expenses incurred in connection with investigating or
defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of such Selling Stockholder's obligation to reimburse the
Underwriters for such expenses and the possibility that such payments might
later be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Underwriters shall promptly return such payment to the Selling
Stockholder, together with interest, compounded daily, determined on the basis
of the Prime Rate. Any such interim reimbursement payments which are not made to
the Underwriters within thirty (30) days of a request for reimbursement shall
bear interest at the Prime Rate from the date of such request.
(iv) In addition to their other obligations under
Section 8(c) hereof, the Underwriters, severally and not jointly, agree that, as
an interim measure during the pendency of any claim, action, investigation,
inquiry or other proceeding described in Section 8(c) hereof, they will
reimburse the Company and the Selling Stockholder on a monthly basis for all
reasonable legal or other expenses incurred in connection with investigating or
defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Underwriters' obligation to reimburse the Company and such
Selling Stockholder for such expenses and the possibility that such payments
might later be held to have been improper by a court of competent jurisdiction.
To the extent that any such interim reimbursement payment is so held to have
been improper, the Company and such Selling Stockholder shall promptly return
such payment to the Underwriters together with interest, compounded daily,
determined on the basis of the Prime Rate. Any such interim reimbursement
payments which are not made to the Company and such Selling Stockholder within
thirty (30) days of a request for reimbursement shall bear interest at the Prime
Rate from the date of such request.
(b) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in Sections
5(a)(ii), 5(a)(iii) and 5(a)(iv) hereof, including the amounts of any requested
reimbursement payments, the method of determining such amounts and the basis on
which such amounts shall be apportioned among the reimbursing parties, shall be
settled by arbitration conducted under the provisions of the Constitution and
Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant
to the Code of Arbitration Procedure of the NASD. Any such arbitration must be
commenced by service of a written demand for arbitration or a written notice of
intention to arbitrate, therein electing the arbitration tribunal. In the event
the party demanding arbitration does not make such designation of an arbitration
tribunal in such demand or notice, then the party responding to said demand or
notice is authorized to do so. Any such arbitration will be limited to the
operation of the interim reimbursement provisions contained in Sections
5(a)(ii), 5(a)(iii) and 5(a)(iv) hereof and will not resolve the ultimate
propriety or enforceability of the obligation to indemnify for expenses which is
created by the provisions of Sections 8(a), 8(b) and 8(c) hereof or the
obligation to contribute to expenses which is created by the provisions of
Section 8(e) hereof.
6. Conditions of Underwriters' Obligations. The obligations of the
---------------------------------------
several Underwriters to purchase and pay for the Shares as provided herein shall
be subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased, as the case may be, of
the representations and warranties of the Company and the Selling Stockholder
herein, to the performance by the
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Company and the Selling Stockholder of their respective obligations hereunder
and to the following additional conditions:
(a) The Registration Statement shall have become effective not
later than 5:00 P.M., New York time, on the date following the date of this
Agreement, or such later date as shall be consented to in writing by you; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the knowledge of
the Company, the Selling Stockholder or any Underwriter, threatened by the
Commission, and any request of the Commission for additional information (to be
included in the Registration Statement or the Prospectus or otherwise) shall
have been complied with to the satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in
connection with this Agreement, the form of Registration Statement and the
Prospectus, and the registration, authorization, issue, sale and delivery of the
Shares, shall have been reasonably satisfactory to Underwriters' Counsel, and
such counsel shall have been furnished with such papers and information as they
may reasonably have requested to enable them to pass upon the matters referred
to in this Section.
(c) Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date, or any later date on which Option Shares are to
be purchased, as the case may be, there shall not have been any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one enterprise from
that set forth in the Registration Statement or Prospectus, which, in your sole
judgment, is material and adverse and that makes it, in your sole judgment,
impracticable or inadvisable to proceed with the public offering of the Shares
as contemplated by the Prospectus; and
(d) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, the
following opinion of counsel for the Company and the Selling Stockholder, dated
the Closing Date or such later date on which Option Shares are to be purchased
addressed to the Underwriters and with reproduced copies or signed counterparts
thereof for each of the Underwriters, to the effect that:
(i) The Company and each Significant Subsidiary (as that
term is defined in Regulation S-X of the Act) has been duly incorporated
and is validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation;
(ii) The Company and each Significant Subsidiary has the
corporate power and authority to own, lease and operate its properties and
to conduct its business as described in the Prospectus;
(iii) The Company and each Significant Subsidiary is
duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction, if any, in which the ownership or leasing of
its properties or the conduct of its business requires such qualification,
except where the failure to be so qualified or be in good standing would
not have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise. To such
counsel's knowledge, the Company does not own or control, directly or
indirectly, any corporation, association or other entity other than Knight
Securities, Inc. and Trimark Securities, Inc.
(iv) The authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectus under the caption
"Capitalization" as of the dates stated therein, the issued and outstanding
shares of capital stock of the Company (including the Selling Stockholder
Shares) have been duly and validly issued and are fully paid and
nonassessable, and, to such counsel's knowledge, will not have been issued
in violation of or subject to any preemptive right, co-sale right,
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registration right, right of first refusal or other similar right;
(v) All issued and outstanding shares of capital stock
of each Significant Subsidiary of the Company have been duly authorized and
validly issued and are fully paid and nonassessable, and, to such counsel's
knowledge, have not been issued in violation of or subject to any
preemptive right, co-sale right, registration right, right of first refusal
or other similar right and are owned by the Company free and clear of any
pledge, lien, security interest, encumbrance, claim or equitable interest;
(vi) The Firm Shares or the Option Shares, as the case
may be, to be issued by the Company pursuant to the terms of this Agreement
have been duly authorized and, upon issuance and delivery against payment
therefor in accordance with the terms hereof, will be duly and validly
issued and fully paid and nonassessable, and will not have been issued in
violation of or subject to any preemptive right, co-sale right,
registration right, right of first refusal or other similar right.
(vii) The Company has the corporate power and authority
to enter into this Agreement and to issue, sell and deliver to the
Underwriters the Shares to be issued and sold by it hereunder;
(viii) This Agreement has been duly authorized by all
necessary corporate action on the part of the Company and has been duly
executed and delivered by the Company and, assuming due authorization,
execution and delivery by you, is a valid and binding agreement of the
Company, enforceable in accordance with its terms, except insofar as
indemnification provisions may be limited by applicable law and except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws relating to or affecting creditors' rights
generally or by general equitable principles;
(ix) The Registration Statement has become effective
under the Act and, to such counsel's knowledge, no stop order suspending
the effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
threatened under the Act;
(x) The Registration Statement and the Prospectus, and
each amendment or supplement thereto (other than the financial statements
(including supporting schedules) and financial data derived therefrom as to
which such counsel need express no opinion), as of the effective date of
the Registration Statement, complied as to form in all material respects
with the requirements of the Act and the applicable Rules and Regulations;
(xi) The information in the Prospectus under the
captions "Risk Factors Government Regulation," "Risk Factors Effect of Net
Capital Requirements," "Risk Factors Anti-Takeover Effects of Certain
Provisions of Delaware Law and the Company's Charter and By-laws," "Risk
Factors Shares Eligible for Future Sale," "Business-Government Regulation,"
"Business - Net Capital Requirements," "Business - Legal Proceedings,"
"Management Stock Option Plans," "Certain Transactions," "Description of
Capital Stock," "Shares Eligible for Future Sale" and in items 14 and 15 of
the Registration Statement, to the extent that any of the foregoing
contains summaries of documents or matters of law or legal conclusions, has
been reviewed by such counsel and is a fair summary of such matters and
conclusions; and the forms of certificates evidencing the Common Stock and
filed as exhibits to the Registration Statement comply with Delaware law;
(xii) The description in the Registration Statement and
the Prospectus of the charter and bylaws of the Company and of statutes are
accurate and fairly present the information required to be presented by the
Act and the applicable Rules and Regulations;
(xiii) To such counsel's knowledge, there are no
agreements, contracts, leases or documents to which the Company is a party
of a character required to be described or referred
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<PAGE>
to in the Registration Statement or Prospectus or to be filed as an exhibit
to the Registration Statement which are not described or referred to
therein or filed as required;
(xiv) The performance of this Agreement and the
consummation of the transactions herein contemplated (other than
performance of the Company's indemnification obligations hereunder,
concerning which no opinion need be expressed) will not (a) result in any
violation of the Company's charter or bylaws or (b) to such counsel's
knowledge, result in a material breach or violation of any of the terms and
provisions of, or constitute a default under, any bond, debenture, note or
other evidence of indebtedness, or any lease, contract, indenture,
mortgage, deed of trust, loan agreement, joint venture or other agreement
or instrument known to such counsel to which the Company is a party or by
which its properties are bound, or any applicable statute, rule or
regulation known to such counsel or, to such counsel's knowledge, any
order, writ or decree of any court, government or governmental agency or
body having jurisdiction over the Company or any of its subsidiaries, or
over any of their properties or operations;
(xv) No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or body
having jurisdiction over the Company or any of its subsidiaries, or over
any of their properties or operations is necessary in connection with the
consummation by the Company of the transactions herein contemplated, except
such as have been obtained under the Act or such as may be required under
state or other securities or Blue Sky laws in connection with the purchase
and the distribution of the Shares by the Underwriters;
(xvi) To such counsel's knowledge, there are no legal
or governmental proceedings pending or threatened against the Company or
any of its subsidiaries of a character required to be disclosed in the
Registration Statement or the Prospectus by the Act or the Rules and
Regulations, other than those described therein;
(xvii) To such counsel's knowledge, neither the Company
nor any of its subsidiaries is presently (a) in material violation of its
respective charter or bylaws, or (b) in material breach of any applicable
statute, rule or regulation known to such counsel or, to such counsel's
knowledge, any order, writ or decree of any court or governmental agency or
body having jurisdiction over the Company or any of its subsidiaries, or
over any of their properties or operations; and
(xviii) To such counsel's knowledge, except as set
forth in the Registration Statement and Prospectus, no holders of Common
Stock or other securities of the Company have registration rights with
respect to securities of the Company and, except as set forth in the
Registration Statement and Prospectus, all holders of securities of the
Company having rights known to such counsel to registration of such shares
of Common Stock or other securities, because of the filing of the
Registration Statement by the Company have, with respect to the offering
contemplated thereby, waived such rights or such rights have expired by
reason of lapse of time following notification of the Company's intent to
file the Registration Statement or have included securities in the
Registration Statement pursuant to the exercise of and in full satisfaction
of such rights;
(xix) The Selling Stockholder has full right, power and
authority to enter into and to perform its obligations under the Power of
Attorney and Custody Agreement to be executed and delivered by it in
connection with the transactions contemplated herein; the Power of Attorney
and Custody Agreement of the Selling Stockholder has been duly authorized;
the Power of Attorney and Custody Agreement of the Selling Stockholder has
been duly executed and delivered by or on behalf of such Selling
Stockholder; and the Power of Attorney and Custody Agreement of the Selling
Stockholder constitutes the valid and binding agreement of such Selling
Stockholder, enforceable in accordance with its terms, except as the
enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles;
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<PAGE>
(xx) The Selling Stockholder has full right, power and
authority to enter into and to perform its obligations under this Agreement
and to sell, transfer, assign and deliver the Shares to be sold by such
Selling Stockholder hereunder;
(xxi) This Agreement has been duly authorized by the
Selling Stockholder and has been duly executed and delivered by or on
behalf of the Selling Stockholder; and
(xxii) Upon the delivery of and payment for the Shares
as contemplated in this Agreement, each of the Underwriters will receive
valid marketable title to the Shares purchased by it from such Selling
Stockholder, free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest. In rendering such opinion, such
counsel may assume that the Underwriters are without notice of any defect
in the title of the Shares being purchased from the Selling Stockholder.
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which such conferences the
contents of the Registration Statement and Prospectus and related matters were
discussed, and although they have not verified the accuracy or completeness of
the statements contained in the Registration Statement or the Prospectus,
nothing has come to the attention of such counsel which leads them to believe
that, at the time the Registration Statement became effective and at all times
subsequent thereto up to and on the Closing Date and on any later date on which
Option Shares are to be purchased, the Registration Statement and any amendment
or supplement thereto (other than the financial statements including supporting
schedules and other financial and statistical information derived therefrom, as
to which such counsel need express no comment) contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or at the
Closing Date or any later date on which the Option Shares are to be purchased,
as the case may be, the Registration Statement, the Prospectus and any amendment
or supplement thereto (except as aforesaid) contained any untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
Counsel rendering the foregoing opinion may rely as to questions of
law not involving the laws of the United States or the States of New York and
Delaware upon opinions of local counsel, and as to questions of fact upon
representations or certificates of officers of the Company, the Selling
Stockholder or officers of the Selling Stockholder (when the Selling Stockholder
is not a natural person), and of government officials, in which case their
opinion is to state that they are so relying and that they have no knowledge of
any material misstatement or inaccuracy in any such opinion, representation or
certificate. Copies of any opinion, representation or certificate so relied
upon shall be delivered to you, as Representatives of the Underwriters, and to
Underwriters' Counsel.
(e) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, an
opinion of Brobeck, Phleger & Harrison LLP, in form and substance satisfactory
to you, with respect to the sufficiency of all such corporate proceedings and
other legal matters relating to this Agreement and the transactions contemplated
hereby as you may reasonably require, and the Company shall have furnished to
such counsel such documents as they may have requested for the purpose of
enabling them to pass upon such matters.
(f) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, a
letter from Price Waterhouse LLP addressed to the Underwriters, dated the
Closing Date or such later date on which Option Shares are to be purchased, as
the case may be, confirming that they are independent certified public
accountants with respect to the Company within the meaning of the Act and the
applicable published Rules and Regulations and based upon the procedures
described in such letter delivered to you concurrently with the execution of
this Agreement (herein called the "Original Letter"), but carried out to a date
not more than five (5) business days prior to the Closing Date or
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such later date on which Option Shares are to be purchased, as the case may be,
(i) confirming, to the extent true, that the statements and conclusions set
forth in the Original Letter are accurate as of the Closing Date or such later
date on which Option Shares are to be purchased, as the case may be, and (ii)
setting forth any revisions and additions to the statements and conclusions set
forth in the Original Letter which are necessary to reflect any changes in the
facts described in the Original Letter since the date of such letter, or to
reflect the availability of more recent financial statements, data or
information. The letter shall not disclose any change in the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company and its subsidiaries considered as one enterprise from that set
forth in the Registration Statement or Prospectus, which, in your sole judgment,
is material and adverse and that makes it, in your sole judgment, impracticable
or inadvisable to proceed with the public offering of the Shares as contemplated
by the Prospectus. The Original Letter from Price Waterhouse LLP shall be
addressed to or for the use of the Underwriters in form and substance
satisfactory to the Underwriters and shall (i) represent, to the extent true,
that they are independent certified public accountants with respect to the
Company within the meaning of the Act and the applicable published Rules and
Regulations, (ii) set forth their opinion with respect to their examination of
the consolidated balance sheet of the Company as of [________], 199[ ] and
related consolidated statements of operations, stockholders' equity, and cash
flows for the twelve (12) months ended [_________], 199[ ], (iii) state that
Price Waterhouse LLP has performed the procedures set out in Statement on
Auditing Standards No. 71 ("SAS 71") for a review of interim financial
information and providing the report of Price Waterhouse LLP as described in SAS
71 on the financial statements for each of the quarters in the nine quarter
period ended March 31, 1998 (the "Quarterly Financial Statements"), (iv) state
that in the course of such review, nothing came to their attention that leads
them to believe that any material modifications need to be made to any of the
Quarterly Financial Statements in order for them to be in compliance with
generally accepted accounting principles consistently applied across the periods
presented, and (v) address other matters agreed upon by Price Waterhouse LLP and
you. In addition, you shall have received from Price Waterhouse LLP a letter
addressed to the Company and made available to you for the use of the
Underwriters stating that their review of the Company's system of internal
accounting controls, to the extent they deemed necessary in establishing the
scope of their examination of the Company's consolidated financial statements as
of December 31, 1997, did not disclose any weaknesses in internal controls that
they considered to be material weaknesses.
(g) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, a
certificate of the Company, dated the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, signed by the Chief
Executive Officer and Chief Financial Officer of the Company, to the effect
that, and you shall be satisfied that:
(i) The representations and warranties of the Company in
this Agreement are true and correct, as if made on and as of the Closing
Date or any later date on which Option Shares are to be purchased, as the
case may be, and the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied at or
prior to the Closing Date or any later date on which Option Shares are to
be purchased, as the case may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose
have been instituted or are pending or threatened under the Act;
(iii) When the Registration Statement became effective
and at all times subsequent thereto up to the delivery of such certificate,
the Registration Statement and the Prospectus, and any amendments or
supplements thereto, contained all material information required to be
included therein by the Act and the Rules and Regulations and in all
material respects conformed to the requirements of the Act and the Rules
and Regulations, the Registration Statement, and any amendment or
supplement thereto, did not and does not include any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, the
Prospectus, and any amendment or supplement thereto, did not and does not
include any untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, and,
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since the effective date of the Registration Statement, there has occurred
no event required to be set forth in an amended or supplemented Prospectus
which has not been so set forth; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, there
has not been (a) any material adverse change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise, (b) any
transaction that is material to the Company and its subsidiaries considered
as one enterprise, except transactions entered into in the ordinary course
of business, (c) any obligation, direct or contingent, that is material to
the Company and its subsidiaries considered as one enterprise, incurred by
the Company or its subsidiaries, except obligations incurred in the
ordinary course of business, (d) any change in the capital stock or
outstanding indebtedness of the Company or any of its subsidiaries that is
material to the Company and its subsidiaries considered as one enterprise,
(e) any dividend or distribution of any kind declared, paid or made on the
capital stock of the Company or any of its subsidiaries, or (f) any loss or
damage (whether or not insured) to the property of the Company or any of
its subsidiaries which has been sustained or will have been sustained which
has a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise.
(h) You shall be satisfied that, and you shall have received a
certificate, dated the Closing Date from the Attorneys for the Selling
Stockholder to the effect that, as of the Closing Date, they have not been
informed that:
(i) The representations and warranties made by such
Selling Stockholder herein are not true or correct in any material respect
on the Closing Date; or
(ii) Such Selling Stockholder has not complied with any
obligation or satisfied any condition which is required to be performed or
satisfied on the part of such Selling Stockholder at or prior to the
Closing Date.
(i) The Company shall have obtained and delivered to you an
agreement from each officer and director of the Company, the Selling Stockholder
and each beneficial owner of shares of Common Stock in writing prior to the date
hereof that such person will not, during the Lock-up Period, effect the
Disposition of any Securities now owned or hereafter acquired directly by such
person or with respect to which such person has or hereafter acquires the power
of disposition, otherwise than (i) as a bona fide gift or gifts, provided the
donee or donees thereof agree in writing to be bound by this restriction, (ii)
as a distribution to partners or stockholders of such person, provided that the
distributees thereof agree in writing to be bound by the terms of this
restriction, (iii) to the extent that such person is a "Nasdaq market maker" (as
defined in Rule 4200(17) of the Marektplace Rules of the NASD), any Dispositiion
of Securities in connection with market-making activities in the ordinary course
of the business of such person, or (iv) with the prior written consent of
BancAmerica Robertson Stephens. Except as otherwise specifically contemplated by
subparagraph (iii) above, the foregoing restriction shall have been expressly
agreed to preclude the holder of the Securities from engaging in any hedging or
other transaction which is designed to or reasonably expected to lead to or
result in a Disposition of Securities during the Lock-up Period, even if such
Securities would be disposed of by someone other than the such holder. Such
prohibited hedging or other transactions would including, without limitation,
any short sale (whether or not against the box) or any purchase, sale or grant
of any right (including, without limitation, any put or call option) with
respect to any Securities or with respect to any security (other than a broad-
based market basket or index) that includes, relates to or derives any
significant part of its value from Securities. Furthermore, such person will
have also agreed and consented to the entry of stop transfer instructions with
the Company's transfer agent against the transfer of the Securities held by such
person except in compliance with this restriction.
(j) The Company and the Selling Stockholder shall have
furnished to you such further certificates and documents as you shall reasonably
request (including certificates of officers of the
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Company, the Selling Stockholder or officers of the Selling Stockholder (when
the Selling Stockholder is not a natural person) as to the accuracy of the
representations and warranties of the Company and the Selling Stockholder
herein, as to the performance by the Company and the Selling Stockholder of
their respective obligations hereunder and as to the other conditions concurrent
and precedent to the obligations of the Underwriters hereunder.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel. The Company and the Selling Stockholder will furnish
you with such number of conformed copies of such opinions, certificates, letters
and documents as you shall reasonably request.
7. Option Shares.
-------------
(a) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company hereby grants to the several Underwriters, for the purpose of
covering over-allotments in connection with the distribution and sale of the
Firm Shares only, a nontransferable option to purchase up to an aggregate of
________ Option Shares at the purchase price per share for the Firm Shares set
forth in Section 3 hereof. Such option may be exercised by the Representatives
on behalf of the several Underwriters on one (1) or more occasions in whole or
in part during the period of thirty (30) days after the date on which the Firm
Shares are initially offered to the public, by giving written notice to the
Company. The number of Option Shares to be purchased by each Underwriter upon
the exercise of such option shall be the same proportion of the total number of
Option Shares to be purchased by the several Underwriters pursuant to the
exercise of such option as the number of Firm Shares purchased by such
Underwriter (set forth in Schedule A hereto) bears to the total number of Firm
----------
Shares purchased by the several Underwriters (set forth in Schedule A
----------
hereto), adjusted by the Representatives in such manner as to avoid
fractional shares.
Delivery of definitive certificates for the Option Shares to be
purchased by the several Underwriters pursuant to the exercise of the option
granted by this Section 7 shall be made against payment of the purchase price
therefor by the several Underwriters by certified or official bank check or
checks drawn in next-day funds, payable to the order of the Company (and the
Company agrees not to deposit any such check in the bank on which it is drawn,
and not to take any other action with the purpose or effect of receiving
immediately available funds, until the business day following the date of its
delivery to the Company). In the event of any breach of the foregoing, the
Company shall reimburse the Underwriters for the interest lost and any other
expenses borne by them by reason of such breach. Such delivery and payment
shall take place at the offices of Skadden, Arps, Slate, Meagher & Flom, LLP,
919 Third Avenue, New York, New York 10022-3897 or at such other place as may be
agreed upon among the Representatives and the Company (i) on the Closing Date,
if written notice of the exercise of such option is received by the Company at
least two (2) full business days prior to the Closing Date, or (ii) on a date
which shall not be later than the third (3rd) full business day following the
date the Company receives written notice of the exercise of such option, if such
notice is received by the Company less than two (2) full business days prior to
the Closing Date.
The certificates for the Option Shares to be so delivered will be made
available to you at such office or such other location including, without
limitation, in New York City, as you may reasonably request for checking at
least one (1) full business day prior to the date of payment and delivery and
will be in such names and denominations as you may request, such request to be
made at least two (2) full business days prior to such date of payment and
delivery. If the Representatives so elect, delivery of the Option Shares may be
made by credit through full fast transfer to the accounts at The Depository
Trust Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the date of
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payment and delivery for the Option Shares to be purchased by such Underwriter
or Underwriters. Any such payment by you shall not relieve any such Underwriter
or Underwriters of any of its or their obligations hereunder.
(b) Upon exercise of any option provided for in Section 7(a)
hereof, the obligations of the several Underwriters to purchase such Option
Shares will be subject (as of the date hereof and as of the date of payment and
delivery for such Option Shares) to the accuracy of and compliance with the
representations, warranties and agreements of the Company and the Selling
Stockholder herein, to the accuracy of the statements of the Company, the
Selling Stockholder and officers of the Company made pursuant to the provisions
hereof, to the performance by the Company and the Selling Stockholder of their
respective obligations hereunder, to the conditions set forth in Section 6
hereof, and to the condition that all proceedings taken at or prior to the
payment date in connection with the sale and transfer of such Option Shares
shall be satisfactory in form and substance to you and to Underwriters' Counsel,
and you shall have been furnished with all such documents, certificates and
opinions as you may request in order to evidence the accuracy and completeness
of any of the representations, warranties or statements, the performance of any
of the covenants or agreements of the Company and the Selling Stockholder or the
satisfaction of any of the conditions herein contained.
8. Indemnification and Contribution.
--------------------------------
(a) The Company agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject (including, without
limitation, in its capacity as an Underwriter or as a "qualified independent
underwriter" within the meaning of Rule 2720 of the Conduct Rules of the NASD),
under the Act, the Exchange Act or otherwise, specifically including, but not
limited to, losses, claims, damages or liabilities (or actions in respect
thereof) arising out of or based upon (i) any breach of any representation,
warranty, agreement or covenant of the Company herein contained, (ii) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement or any amendment or supplement thereto, or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or (iii) any
untrue statement or alleged untrue statement of any material fact contained in
any Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading, and
agrees to reimburse each Underwriter for any legal or other expenses reasonably
incurred by it in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the Company shall
-------- -------
not be liable in any such case to the extent that any such loss, claim, damage,
liability or action arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement, such Preliminary Prospectus or the Prospectus, or any
such amendment or supplement thereto, in reliance upon, and in conformity with,
written information relating to any Underwriter furnished to the Company by such
Underwriter, directly or through you, specifically for use in the preparation
thereof and, provided further, that the indemnity agreement provided in this
Section 8(a) with respect to any Preliminary Prospectus shall not inure to the
benefit of any Underwriter from whom the person asserting any losses, claims,
damages, liabilities or actions based upon any untrue statement or alleged
untrue statement of material fact or omission or alleged omission to state
therein a material fact purchased Shares, if a copy of the Prospectus in which
such untrue statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent or given to such person within the time
required by the Act and the Rules and Regulations, unless such failure is the
result of noncompliance by the Company with Section 4(d) hereof.
The indemnity agreement in this Section 8(a) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each person, if
any, who controls any Underwriter within the meaning of the Act or the Exchange
Act. This indemnity agreement shall be in addition to any liabilities which the
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Company may otherwise have.
(b) The Selling Stockholder agrees to indemnify and hold
harmless each Underwriter against any losses, claims, damages or liabilities,
joint or several, to which such Underwriter may become subject (including,
without limitation, in its capacity as an Underwriter or as a "qualified
independent underwriter" within the meaning of Rule 2720 of the Conduct Rules of
the NASD) under the Act, the Exchange Act or otherwise, specifically including,
but not limited to, losses, claims, damages or liabilities (or actions in
respect thereof) arising out of or based upon (i) any breach of any
representation, warranty, agreement or covenant of such Selling Stockholder
herein contained, (ii) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (iii) any untrue statement or alleged untrue
statement of any material fact contained in any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, in the case of subparagraphs (ii) and (iii) of this Section 8(b) to
the extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company or such Underwriter
by such Selling Stockholder, directly or through such Selling Stockholder's
representatives, specifically for use in the preparation thereof, and agrees to
reimburse each Underwriter for any legal or other expenses reasonably incurred
by it in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the indemnity agreement
-------- -------
provided in this Section 8(b) with respect to any Preliminary Prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting any
losses, claims, damages, liabilities or actions based upon any untrue statement
or alleged untrue statement of a material fact or omission or alleged omission
to state therein a material fact purchased Shares, if a copy of the Prospectus
in which such untrue statement or alleged untrue statement or omission or
alleged omission was corrected had not been sent or given to such person within
the time required by the Act and the Rules and Regulations, unless such failure
is the result of noncompliance by the Company with Section 4(d) hereof.
The indemnity agreement in this Section 8(b) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each person, if
any, who controls any Underwriter within the meaning of the Act or the Exchange
Act. This indemnity agreement shall be in addition to any liabilities which
such Selling Stockholder may otherwise have.
(c) Each Underwriter, severally and not jointly, agrees to
indemnify and hold harmless the Company and the Selling Stockholder against any
losses, claims, damages or liabilities, joint or several, to which the Company
or such Selling Stockholder may become subject under the Act or otherwise,
specifically including, but not limited to, losses, claims, damages or
liabilities (or actions in respect thereof) arising out of or based upon (i) any
breach of any representation, warranty, agreement or covenant of such
Underwriter herein contained, (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (iii) any untrue statement or alleged
untrue statement of any material fact contained in any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or the omission or
alleged omission to state therein a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, in the case of subparagraphs (ii) and (iii) of this
Section 8(c) to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by such
Underwriter, directly or through you, specifically for use in the preparation
thereof, and agrees to reimburse the Company and the such Selling Stockholder
for any legal or other expenses reasonably incurred by the Company and such
Selling Stockholder in connection with investigating or defending any such loss,
claim, damage, liability or action.
The indemnity agreement in this Section 8(c) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each officer of
the Company who signed the Registration Statement and each director of the
Company, the Selling Stockholder and each person, if any, who controls the
Company or
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<PAGE>
the Selling Stockholder within the meaning of the Act or the Exchange Act. This
indemnity agreement shall be in addition to any liabilities which each
Underwriter may otherwise have.
(d) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against any indemnifying
party under this Section 8, notify the indemnifying party in writing of the
commencement thereof but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under this Section 8. In case any such action is brought against
any indemnified party, and it notified the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it shall elect by written notice delivered to
the indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party; provided, however, that if the
-------- -------
defendants in any such action include both the indemnified party
and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified party or
parties. Upon receipt of notice from the indemnifying party to such indemnified
party of the indemnifying party's election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section 8 for any legal
or other expenses subsequently incurred by such indemnified party in connection
with the defense thereof unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding sentence
(it being understood, however, that the indemnifying party shall not be liable
for the expenses of more than one separate counsel (together with appropriate
local counsel) approved by the indemnifying party representing all the
indemnified parties under Section 8(a), 8(b) or 8(c) hereof who are parties to
such action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of commencement of the action or (iii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party. In no event shall any
indemnifying party be liable in respect of any amounts paid in settlement of any
action unless the indemnifying party shall have approved the terms of such
settlement; provided that such consent shall not be unreasonably withheld. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in respect
of which any indemnified party is or could have been a party and indemnification
could have been sought hereunder by such indemnified party, unless such
settlement includes an unconditional release of such indemnified party from all
liability on all claims that are the subject matter of such proceeding.
(e) In order to provide for just and equitable contribution in
any action in which a claim for indemnification is made pursuant to this Section
8 but it is judicially determined (by the entry of a final judgment or decree by
a court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 8 provides for
indemnification in such case, all the parties hereto shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that, except as set forth
in Section 8(f) hereof, the Underwriters severally and not jointly are
responsible pro rata for the portion represented by the percentage that the
underwriting discount bears to the initial public offering price, and the
Company and the Selling Stockholder are responsible for the remaining portion,
provided, however, that (i) no Underwriter shall be required to
- -------- -------
contribute any amount in excess of the amount by which the underwriting discount
applicable to the Shares purchased by such Underwriter exceeds the amount of
damages which such Underwriter has otherwise required to pay and (ii) no person
guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who is not guilty of
such fraudulent misrepresentation. The contribution agreement in this Section
8(e) shall extend upon the same terms and conditions to, and shall inure to the
benefit of, each person, if any, who controls any Underwriter, the Company or
the Selling Stockholder within the meaning of the Act or the Exchange Act and
each officer of the Company who signed the Registration Statement and each
director of the Company.
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<PAGE>
(f) The liability of the Selling Stockholder under the
representations, warranties and agreements contained herein and under the
indemnity agreements contained in the provisions of this Section 8 shall be
limited to an amount equal to the initial public offering price of the Selling
Stockholder Shares sold by such Selling Stockholder to the Underwriters minus
the amount of the underwriting discount paid thereon to the Underwriters by such
Selling Stockholder. The Company and such Selling Stockholder may agree, as
among themselves and without limiting the rights of the Underwriters under this
Agreement, as to the respective amounts of such liability for which they each
shall be responsible.
(g) The parties to this Agreement hereby acknowledge that they
are sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this Section 8, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 8 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act.
9. Representations, Warranties, Covenants and Agreements to Survive
----------------------------------------------------------------
Delivery. All representations, warranties, covenants and agreements of the
- --------
Company, the Selling Stockholder and the Underwriters herein or in certificates
delivered pursuant hereto, and the indemnity and contribution agreements
contained in Section 8 hereof shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any Underwriter
or any person controlling any Underwriter within the meaning of the Act or the
Exchange Act, or by or on behalf of the Company or the Selling Stockholder, or
any of their officers, directors or controlling persons within the meaning of
the Act or the Exchange Act, and shall survive the delivery of the Shares to the
several Underwriters hereunder or termination of this Agreement.
10. Substitution of Underwriters. If any Underwriter or Underwriters
----------------------------
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such Firm
Shares in accordance with the terms hereof, and if the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining Underwriters
shall be obligated, severally in proportion to their respective commitments
hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter
or Underwriters.
If any Underwriter or Underwriters so defaults and the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters agreed
but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for twenty-
four (24) hours to allow the several Underwriters the privilege of substituting
within twenty-four (24) hours (including non-business hours) another underwriter
or underwriters (which may include any nondefaulting Underwriter) satisfactory
to the Company. If no such underwriter or underwriters shall have been
substituted as aforesaid by such postponed Closing Date, the Closing Date may,
at the option of the Company, be postponed for a further twenty-four (24) hours,
if necessary, to allow the Company the privilege of finding another underwriter
or underwriters, satisfactory to you, to purchase the Firm Shares which the
defaulting Underwriter or Underwriters so agreed but failed to purchase. If it
shall be arranged for the remaining Underwriters or substituted underwriter or
underwriters to take up the Firm Shares of the defaulting Underwriter or
Underwriters as provided in this Section 10, (i) the Company shall have the
right to postpone the time of delivery for a period of not more than seven (7)
full business days, in order to effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement, supplements to the Prospectus or other
such documents which may thereby be made necessary, and (ii) the respective
number of Firm Shares to be purchased by the remaining Underwriters and
substituted underwriter or underwriters shall be taken as the basis of their
underwriting
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obligation. If the remaining Underwriters shall not take up and pay for all such
Firm Shares so agreed to be purchased by the defaulting Underwriter or
Underwriters or substitute another underwriter or underwriters as aforesaid and
the Company shall not find or shall not elect to seek another underwriter or
underwriters for such Firm Shares as aforesaid, then this Agreement shall
terminate.
In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 10, neither the Company nor the Selling
Stockholder shall be liable to any Underwriter (except as provided in Sections 5
and 8 hereof) nor shall any Underwriter (other than an Underwriter who shall
have failed, otherwise than for some reason permitted under this Agreement, to
purchase the number of Firm Shares agreed by such Underwriter to be purchased
hereunder, which Underwriter shall remain liable to the Company, the Selling
Stockholder and the other Underwriters for damages, if any, resulting from such
default) be liable to the Company or the Selling Stockholder (except to the
extent provided in Sections 5 and 8 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 10.
11. Effective Date of this Agreement and Termination.
------------------------------------------------
(a) This Agreement shall become effective at the earlier of (i)
9:30 A.M., New York time, on the first full business day following the effective
date of the Registration Statement, or (ii) the time of the initial public
offering of any of the Shares by the Underwriters after the Registration
Statement becomes effective. The time of the initial public offering shall mean
the time of the release by you, for publication, of the first newspaper
advertisement relating to the Shares, or the time at which the Shares are first
generally offered by the Underwriters to the public by letter, telephone,
telegram or telecopy, whichever shall first occur. By giving notice as set forth
in Section 12 before the time this Agreement becomes effective, you, as
Representatives of the several Underwriters, or the Company, may prevent this
Agreement from becoming effective without liability of any party to any other
party, except as provided in Sections 4(i), 5 and 8 hereof.
(b) You, as Representatives of the several Underwriters, shall
have the right to terminate this Agreement by giving notice as hereinafter
specified at any time on or prior to the Closing Date or on or prior to any
later date on which Option Shares are to be purchased, as the case may be, (i)
if the Company or the Selling Stockholder shall have failed, refused or been
unable to perform any agreement on its part to be performed, or because any
other condition of the Underwriters' obligations hereunder required to be
fulfilled is not fulfilled, including, without limitation, any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company and its subsidiaries considered as one enterprise from
that set forth in the Registration Statement or Prospectus, which, in your sole
judgment, is material and adverse, or (ii) if additional material governmental
restrictions, not in force and effect on the date hereof, shall have been
imposed upon trading in securities generally or minimum or maximum prices shall
have been generally established on the New York Stock Exchange or on the
American Stock Exchange or in the over the counter market by the NASD, or
trading in securities generally shall have been suspended on either such
exchange or in the over the counter market by the NASD, or if a banking
moratorium shall have been declared by federal, New York or California
authorities, or (iii) if the Company shall have sustained a loss by strike,
fire, flood, earthquake, accident or other calamity of such character as to
interfere materially with the conduct of the business and operations of the
Company regardless of whether or not such loss shall have been insured, or (iv)
if there shall have been a material adverse change in the general political or
economic conditions or financial markets as in your reasonable judgment makes it
inadvisable or impracticable to proceed with the offering, sale and delivery of
the Shares, or (v) if there shall have been an outbreak or escalation of
hostilities or of any other insurrection or armed conflict or the declaration by
the United States of a national emergency which, in the reasonable opinion of
the Representatives, makes it impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus. In the event of
termination pursuant to subparagraph (i) above, the Company shall remain
obligated to pay costs and expenses pursuant to Sections 4(i), 5 and 8 hereof.
Any termination pursuant to any of subparagraphs (ii) through (v) above shall be
without liability of any party to any other party except as provided in Sections
5 and 8 hereof.
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If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 11, you shall promptly
notify the Company by telephone, telecopy or telegram, in each case confirmed by
letter. If the Company shall elect to prevent this Agreement from becoming
effective, the Company shall promptly notify you by telephone, telecopy or
telegram, in each case, confirmed by letter.
12. Notices. All notices or communications hereunder, except as herein
-------
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to you c/o BancAmerica Robertson Stephens, 555 California
Street, Suite 2600, San Francisco, California 94104, telecopier number (415)
781-0278, Attention: General Counsel; if sent to the Company, such notice shall
be mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to Knight/Trimark Group, Inc., Newport Tower, 525
Washington Blvd., Jersey City, New Jersey 07310, telecopier number (201) 222-
1799, Attention: Kenneth Pasternak, Chief Executive Officer; if sent to the
Selling Stockholder, such notice shall be sent mailed, delivered, telegraphed
(and confirmed by letter) or telecopied (and confirmed by letter) to [NAME OF
ATTORNEY-IN-FACT FOR SELLING STOCKHOLDER], as Attorney-in-Fact for the Selling
Stockholder, at [ADDRESS OF COMPANY], telecopier number (___) ________.
13. Parties. This Agreement shall inure to the benefit of and be
-------
binding upon the several Underwriters and the Company and the Selling
Stockholder and their respective executors, administrators, successors and
assigns. Nothing expressed or mentioned in this Agreement is intended or shall
be construed to give any person or entity, other than the parties hereto and
their respective executors, administrators, successors and assigns, and the
controlling persons within the meaning of the Act or the Exchange Act, officers
and directors referred to in Section 8 hereof, any legal or equitable right,
remedy or claim in respect of this Agreement or any provisions herein contained,
this Agreement and all conditions and provisions hereof being intended to be and
being for the sole and exclusive benefit of the parties hereto and their
respective executors, administrators, successors and assigns and said
controlling persons and said officers and directors, and for the benefit of no
other person or entity. No purchaser of any of the Shares from any Underwriter
shall be construed a successor or assign by reason merely of such purchase.
In all dealings with the Company and the Selling Stockholder under
this Agreement, you shall act on behalf of each of the several Underwriters, and
the Company and the Selling Stockholder shall be entitled to act and rely upon
any statement, request, notice or agreement made or given by you jointly or by
BancAmerica Robertson Stephens on behalf of you.
14. Applicable Law. This Agreement shall be governed by, and construed
--------------
in accordance with, the laws of the State of New York.
15. Counterparts. This Agreement may be signed in several counterparts,
------------
each of which will constitute an original.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-28-
<PAGE>
If the foregoing correctly sets forth the understanding among the Company,
the Selling Stockholder and the several Underwriters, please so indicate in
the space provided below for that purpose, whereupon this letter shall
constitute a binding agreement among the Company, the Selling Stockholder
and the several Underwriters.
Very truly yours,
KNIGHT/TRIMARK GROUP, INC.
By:
----------------------------------------
SELLING STOCKHOLDER
By:
----------------------------------------
Attorney-in-Fact for the Selling
Stockholder
Accepted as of the date first above written:
BANCAMERICA ROBERTSON STEPHENS
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
PAINEWEBBER INCORPORATED
ABN AMRO INCORPORATED
SOUTHWEST SECURITIES, INC.
On their behalf and on behalf of each of the
several Underwriters named in Schedule A hereto.
----------
By: BANCAMERICA ROBERTSON STEPHENS
By:
----------------------------------------
Authorized Signatory
-29-
<PAGE>
SCHEDULE A
NUMBER OF
FIRM SHARES
UNDERWRITERS TO BE PURCHASED
- ------------------------------------------------------ ----------------
BANCAMERICA ROBERTSON STEPHENS.........................
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED...
PAINEWEBBER INCORPORATED.............................
ABN AMRO INCORPORATED................................
SOUTHWEST SECURITIES, INC............................
TOTAL.................................................
-30-
<PAGE>
SCHEDULE B
GRUNTAL & CO., INC.
-31-
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
----------------------------------------------------------------
Pursuant to Sections 242 and 245 of the
Delaware General Corporation Law
----------------------------------------------------------------
Knight/Trimark Group, Inc.(the "Corporation"), a corporation organized
and existing under the General Corporation Law of the State of Delaware (the
"GCL"), does hereby certify as follows:
(1) The name of the Corporation is Knight/Trimark Group, Inc. The
Corporation was originally incorporated under the name Knight/Trimark Group,
Inc. The original certificate of incorporation of the Corporation was filed
with the office of the Secretary of State of the State of Delaware on April 14,
1998.
(2) This Amended and Restated Certificate of Incorporation was duly
adopted by the Board of Directors of the Corporation (the "Board of Directors")
and by the stockholders of the Corporation in accordance with Sections 242 and
245 of the GCL.
<PAGE>
(3) This Amended and Restated Certificate of Incorporation restates
and integrates and further amends the certificate of incorporation of the
Corporation, as heretofore amended or supplemented.
(4) Upon the filing (the "Effective Time") of this Amended and
Restated Certificate of Incorporation pursuant to the GCL, each share of the
Corporation's common stock, $.01 par value per share, issued and outstanding
immediately prior to the Effective Time (the "Old Common Stock") shall be
reclassified as and changed into one share of validly issued, fully paid, and
non-assessable Class A Common Stock authorized by subparagraph (a) of Article
FOURTH of this Amended and Restated Certificate of Incorporation (totaling 40
shares of Class A Common Stock), without any action by the holder thereof (the
"Reclassification"). Each certificate that theretofore represented a share or
shares of Old Common Stock shall thereafter represent that number of shares of
Class A Common Stock into which the share or shares of Old Common Stock
represented by such certificate shall have been reclassified.
(5) The text of the Certificate of Incorporation is amended and
restated in its entirety as follows:
2
<PAGE>
FIRST: The name of the Corporation is Knight/Trimark Group, Inc. (the
-----
"Corporation").
SECOND: The address of the registered office of the Corporation in the
------
State of Delaware is 1209 Orange Street, in the City of Wilmington, County of
New Castle. The name of its registered agent at that address is The Corporation
Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
-----
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware (the "GCL").
FOURTH: (a) Authorized Capital Stock. The total number of shares of
------ ------------------------
stock which the Corporation shall have authority to issue is 240,000,000 shares
of capital stock, consisting of (i) 200,000,000 shares of class A common
stock, par value $.01 per share (the "Class A Common Stock"), (ii) 20,000,000
shares of Class B common stock, par value $.01 per share (the "Class B Common
Stock" and, together with the Class A Common Stock, the "Common Stock"), and
(iii) 20,000,000 shares of preferred stock, par value $.01 per share (the
"Preferred Stock").
3
<PAGE>
(b) Common Stock. The powers, preferences and rights, and the
------------
qualifications, limitations and restrictions, of each class of the Common Stock
are as follows:
(1) Ranking. Except as otherwise expressly provided in this
-------
Amended and Restated Certificate of Incorporation, the powers, preferences and
rights of the holders of Class A Common Stock and holders of Class B Common
Stock, and the qualifications, limitations and restrictions thereof, shall be in
all respects identical.
(2) Voting Rights of Class A Common Stock. Except as otherwise
-------------------------------------
expressly required by law or provided in this Amended and Restated Certificate
of Incorporation, and subject to any voting rights provided to holders of
Preferred Stock at any time outstanding, the holders of any outstanding shares
of Class A Common Stock shall vote together as a single class on all matters
with respect to which stockholders are entitled to vote under applicable law,
this Amended and Restated Certificate of Incorporation or the By-Laws of the
Corporation, or upon which a vote of stockholders is otherwise duly called for
by the Corporation. At each annual or special meeting of stockholders, each
holder of record of shares of Class A Common Stock on the
4
<PAGE>
relevant record date shall be entitled to cast one vote in person or by proxy
for each share of the Class A Common Stock standing in such holder's name on the
stock transfer records of the Corporation.
(3) Voting Rights of Class B Common Stock. Except as otherwise
-------------------------------------
expressly required by law, holders of Class B Common Stock shall have no voting
rights.
(4) No Cumulative Voting. The holders of shares of Class A Common
--------------------
Stock shall not have cumulative voting rights.
(5) Dividends; Stock Splits. Subject to the rights of the holders of
-----------------------
Preferred Stock, and subject to any other provisions of this Amended and
Restated Certificate of Incorporation, as it may be amended from time to time,
holders of shares of Class A Common Stock and shares of Class B Common Stock
shall be entitled to receive such dividends and other distributions in cash,
stock or property of the Corporation when, as and if declared thereon by the
Board of Directors from time to time out of assets or funds of the Corporation
legally available therefor. Holders of Class B Common Stock shall in no event
receive dividends or distributions in the form of Class A Common Stock or other
voting securities or rights, options or
5
<PAGE>
warrants to purchase Class A Common Stock or other voting securities. If, at any
time, a dividend or other distribution in cash or other property (other than
dividends or other distributions payable in shares of Class A Common Stock or
other voting securities of the Corporation or shares of Class B Common Stock, or
rights, options or warrants to purchase shares of Class A Common Stock or other
voting securities of the Corporation or to purchase shares of Class B Common
Stock or securities convertible into or exchangeable for shares of Class A
Common Stock or other voting securities of the Corporation or shares of Class B
Common Stock) is declared or paid on the shares of Class A Common Stock or
shares of Class B Common Stock, a like dividend or other distribution in cash or
other property shall also be declared or paid, as the case may be, on shares of
Class B Common Stock or shares of Class A Common Stock, as the case may be, in
an equal amount per share. If, at any time, a dividend or other distribution
payable in shares of Class A Common Stock or other voting securities of the
Corporation or shares of Class B Common Stock, or rights, options or warrants to
purchase shares of Class A Common Stock or other voting securities of the
Corporation or to purchase shares of Class B Common Stock, or securities
convertible into or exchange-
6
<PAGE>
able for shares of Class A Common Stock or other voting securities of the
Corporation is paid or declared on shares of Class A Common Stock, a like
dividend or other distribution shall also be paid or declared, as the case may
be, on shares of Class B Common Stock, in an equal amount per share; provided,
--------
that, for this purpose, if shares of Class A Common Stock or other voting
securities of the Corporation, or rights, options or warrants to purchase shares
of Class A Common Stock or other voting securities of the Corporation or
securities convertible into or exchangeable for shares of Class A Common Stock
or other voting securities of the Corporation, are paid on shares of Class A
Common Stock, and shares of Class B Common Stock or non-voting securities
identical in all other respects to the other voting securities paid on the
shares of Class A Common Stock or rights, options or warrants to purchase shares
of Class B Common Stock or such other non-voting securities or securities
convertible into or exchangeable for shares of Class B Common Stock or such
other non-voting securities, are paid on shares of Class B Common Stock, in an
equal amount per share of Class A Common Stock and Class B Common Stock, such
dividend or other distribution shall be deemed to be a like dividend or other
distribution. In the case of any split, subdivision, combination or
7
<PAGE>
reclassification of shares of Class A Common Stock or Class B Common Stock, the
shares of Class B Common Stock or Class A Common Stock, as the case may be,
shall also be split, subdivided, combined or reclassified so that the number of
shares of Class A Common Stock and Class B Common Stock outstanding immediately
following such split, subdivision, combination or reclassification shall bear
the same relationship to each other as did the number of shares of Class A
Common Stock and Class B Common Stock outstanding immediately prior to such
split, subdivision, combination or reclassification.
(6) Liquidation, Dissolution, etc. In the event of any liquidation,
------------------------------
dissolution or winding up (either voluntary or involuntary) of the Corporation,
the holders of shares of Class A Common Stock and the holders of shares of Class
B Common Stock shall be entitled to receive the assets and funds of the
Corporation available for distribution after payments to creditors and to the
holders of any Preferred Stock of the Corporation that may at the time be
outstanding, in proportion to the number of shares held by them, respectively,
without regard to class.
8
<PAGE>
(7) Merger, etc. In the event of a merger or consolidation of the
------------
Corporation with or into another entity (whether or not the Corporation is the
surviving entity), the holders of each share of Class A Common Stock and Class B
Common Stock shall be entitled to receive the same per share consideration
without regard to class.
(8) No Preemptive or Subscription Rights. No holder of shares of
------------------------------------
Class A Common Stock or Class B Common Stock shall be entitled to preemptive or
subscription rights.
(9) Power to Sell and Purchase Shares. Subject to the requirements of
---------------------------------
applicable law, the Corporation shall have the power to issue and sell all or
any part of any shares of any class of stock herein or hereafter authorized to
such persons, and for such consideration, as the Board of Directors shall from
time to time, in its discretion, determine, whether or not greater consideration
could be received upon the issue or sale of the same number of shares of another
class, and as otherwise permitted by law. Subject to the requirements of
applicable law, the Corporation shall have the power to purchase any shares of
any class of stock herein or hereafter authorized from such persons, and for
such consideration, as the Board of Directors shall from time
9
<PAGE>
to time, in its discretion, determine, whether or not less consideration could
be paid upon the purchase of the same number of shares of another class, and as
otherwise permitted by law.
(10) At any time and from time to time each holder of Class A Common
Stock shall be entitled to convert any or all of such holder's shares into the
same number of shares of Class B Common Stock, and each holder of Class B Common
Stock shall be entitled to convert any or all of such holder's shares into the
same number of shares of Class A Common Stock; provided, however, that,
-------- -------
notwithstanding anything to the contrary contained in this paragraph, no person
subject to the provisions of Regulation Y shall, and no person shall permit any
of its Regulation Y Affiliates to, convert any shares of Class B Common Stock
into shares of Class A Common Stock, if after giving effect to such conversion,
such person would own or control or have owned or controlled shares of Class A
Common Stock, including all shares of Class A Common Stock held by such person
while such person was subject to Regulation Y, representing 5% or more of the
outstanding Class A Common Stock; Provided, Further, that any person subject to
-------- -------
Regulation Y shall, and any such person shall permit any of its Regulation Y
Affiliates to, transfer
10
<PAGE>
Class B Common Stock only to an unaffiliated third party (a) in a widely
dispersed public offering, (b) to one or more investors, in one or more transac-
tions, none of whom, after such purchase would hold more than 2% of the voting
securities of the Corporation then outstanding assuming that the Class B Common
Stock being transferred to such investor has been fully converted by such
investor, (c) to any person that already controls the Corporation prior to such
transfer, (d) in a transaction that complies with Rule 144 (or any successor
thereto) of the Securities Act of 1933, as amended, or (e) in any other
transaction approved in advance by the Federal Reserve System. "Regulation Y
Affiliate" shall mean, with respect to any person subject to Regulation Y, (i)
if such person is a bank holding company, any company directly or indirectly
Controlled by such Bank Holding Company, and (ii) otherwise, the bank holding
company that Controls such person and any company (other than such Person)
directly or indirectly Controlled by such bank holding company. "Regulation Y"
shall mean Regulation Y promulgated by the Board of Governors of the Federal
Reserve System or any successor regulation.
11
<PAGE>
(c) Preferred Stock. The Board of Directors is hereby expressly
---------------
authorized to provide for the issuance of all or any shares of the Preferred
Stock in one or more classes or series, and to fix for each such class or series
such voting powers, full or limited, or no voting powers, and such designations,
preferences and relative, participating, optional or other special rights and
such qualifications, limitations or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions adopted by the Board of Directors
providing for the issuance of such class or series, including, without
limitation, the authority to provide that any such class or series may be (i)
subject to redemption at such time or times and at such price or prices; (ii)
entitled to receive dividends (which may be cumulative or non-cumulative) at
such rates, on such conditions, and at such times, and payable in preference to,
or in such relation to, the dividends payable on any other class or classes or
any other series; (iii) entitled to such rights upon the dissolution of, or upon
any distribution of the assets of, the Corporation; or (iv) convertible into, or
exchangeable for, shares of any other class or classes of stock, or of any other
series of the same or any other class or classes of stock, of the Corporation at
12
<PAGE>
such price or prices or at such rates of exchange and with such adjustments; all
as may be stated in such resolution or resolutions.
FIFTH: The following provisions are inserted for the management of the
-----
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
(a) The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors.
(b) The number of directors of the Corporation shall be as from time
to time fixed by, or in the manner provided in, the By-Laws of the Corporation.
Election of directors need not be by written ballot unless the By-Laws so
provide.
(c) A director shall hold office until the annual meeting for the year
in which his or her term expires and until his or her successor shall be elected
and shall qualify, subject, however, to prior death, resignation, retirement,
disqualification or removal from office.
13
<PAGE>
(d) Subject to the terms of any one or more classes or series of
Preferred Stock, any vacancy on the Board of Directors that results from an
increase in the number of directors may be filled by a majority of the Board of
Directors then in office, provided that a quorum is present, and any other
vacancy occurring on the Board of Directors may be filled by a majority of the
Board of Directors then in office, even if less than a quorum, or by a sole
remaining director. Any director elected to fill a vacancy not resulting from
an increase in the number of directors shall have the same remaining term as
that of his predecessor. Subject to the rights, if any, of the holders of
shares of Preferred Stock then outstanding, any or all of the directors of the
Corporation may be removed from office at any time, but only for cause and only
by the affirmative vote of the holders of at least a majority of the voting
power of the Corporation's then outstanding capital stock entitled to vote
generally in the election of directors. Notwithstanding the foregoing, whenever
the holders of any one or more classes or series of Preferred Stock issued by
the Corporation shall have the right, voting separately by class or series, to
elect directors at an annual or special meeting of stockholders, the election,
term of office, filling of vacancies and other features of such directorships
shall be governed by the
14
<PAGE>
terms of this Amended and Restated Certificate of Incorporation applicable
thereto, and such directors so elected shall not be divided into classes
pursuant to this Article FIFTH unless expressly provided by such terms.
(e) In addition to the powers and authority hereinbefore or by statute
expressly conferred upon them, the directors are hereby empowered to exercise
all such powers and do all such acts and things as may be exercised or done by
the Corporation, subject, nevertheless, to the provisions of the GCL, this
Amended and Restated Certificate of Incorporation, and any By-Laws adopted by
the stockholders; provided, however, that no By-Laws hereafter adopted by the
-------- -------
stockholders shall invalidate any prior act of the directors which would have
been valid if such By-Laws had not been adopted.
SIXTH: No director shall be personally liable to the Corporation or any of
-----
its stockholders for monetary damages for breach of fiduciary duty as a
director, except to the extent such exemption from liability or limitation
thereof is not permitted under the GCL as the same exists or may hereafter be
amended. If the GCL is amended hereafter to authorize the further elimination
or limitation of the liability of directors, then the liability of a director of
the
15
<PAGE>
Corporation shall be eliminated or limited to the fullest extent authorized by
the GCL, as so amended. Any repeal or modification of this Article SIXTH by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification with respect to acts or omissions occurring prior to such repeal
or modification.
SEVENTH: The Corporation shall indemnify its directors and officers to the
-------
fullest extent authorized or permitted by law, as now or hereafter in effect,
and such right to indemnification shall continue as to a person who has ceased
to be a director or officer of the Corporation and shall inure to the benefit of
his or her heirs, executors and personal and legal representatives; provided,
--------
however, that, except for proceedings to enforce rights to indemnification, the
- -------
Corporation shall not be obligated to indemnify any director or officer (or his
or her heirs, executors or personal or legal representatives) in connection with
a proceeding (or part thereof) initiated by such person unless such proceeding
(or part thereof) was authorized or consented to by the Board of Directors. The
right to indemnification conferred by this Article SEV-
16
<PAGE>
ENTH shall include the right to be paid by the Corporation the expenses incurred
in defending or otherwise participating in any proceeding in advance of its
final disposition.
The Corporation may, to the extent authorized from time to time by the
Board of Directors, provide rights to indemnification and to the advancement
of expenses to employees and agents of the Corporation similar to those
conferred in this Article SEVENTH to directors and officers of the Corporation.
The rights to indemnification and to the advancement of expenses
conferred in this Article SEVENTH shall not be exclusive of any other right
which any person may have or hereafter acquire under this Amended and Restated
Certificate of Incorporation, the By-Laws of the Corporation, any statute,
agreement, vote of stockholders or disinterested directors or otherwise.
Any repeal or modification of this Article SEVENTH by the stockholders
of the Corporation shall not adversely affect any rights to indemnification
and to the advancement of expenses of a director or officer of the Corporation
existing at the time of such repeal or modification with respect to any acts or
omissions occurring prior to such repeal or modification.
17
<PAGE>
EIGHTH: Meetings of stockholders may be held within or without the State
------
of Delaware, as the By-Laws may provide. The books of the Corporation may be
kept (subject to any provision contained in the GCL) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the By-Laws of the Corporation.
NINTH: Any action required or permitted to be taken by the stockholders
-----
of the Corporation must be effected at a duly called Annual or Special Meeting
of Stockholders of the Corporation and may not be effected by any consent in
writing by such stockholders unless all of the stockholders entitled to vote
thereon consent thereto in writing.
TENTH: In furtherance and not in limitation of the powers conferred upon
-----
it by the laws of the State of Delaware, the Board of Directors shall have the
power to adopt, amend, alter or repeal the Corporation's By-Laws. The
affirmative vote of at least a majority of the entire Board of Directors shall
be required to adopt, amend, alter or repeal the Corporation's By-Laws. The
Corporation's By-Laws also may be adopted, amended, altered or repealed by
18
<PAGE>
the affirmative vote of the holders of at least a majority of the voting power
of the shares entitled to vote at an election of directors.
ELEVENTH: The Corporation reserves the right to amend, alter, change or
--------
repeal any provision contained in this Amended and Restated Certificate of
Incorporation in the manner now or hereafter prescribed by statute and all
rights herein conferred upon stockholders are granted subject to such
reservation.
19
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Amended and
Restated Certificate of Incorporation to be executed on its behalf this ~Date
day of ~Month, ~Year.
Knight/Trimark Group, Inc.
By:________________________
Name:
Title:
20
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED
BY-LAWS
of
KNIGHT/TRIMARK GROUP, INC.
A Delaware Corporation
Effective May __ , 1998
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
ARTICLE I
OFFICES............................................................................... 1
Section 1. Registered Office................................................... 1
Section 2. Other Offices....................................................... 1
ARTICLE II
MEETINGS OF STOCKHOLDERS.............................................................. 1
Section 1. Place of Meetings................................................... 2
Section 2. Annual Meetings..................................................... 2
Section 3. Special Meetings.................................................... 2
Section 4. Quorum.............................................................. 3
Section 5. Proxies............................................................. 4
Section 6. Voting.............................................................. 6
Section 7. Consent of Stockholders in Lieu of Meeting.......................... 6
Section 8. Nature of Business at Meetings of Stockholders...................... 7
Section 9. List of Stockholders Entitled to Vote............................... 7
Section 10. Stock Ledger........................................................ 8
Section 11. Record Date......................................................... 8
Section 12. Inspectors of Election.............................................. 11
Section 13. Conduct of Meetings................................................. 12
ARTICLE III
DIRECTORS............................................................................. 13
Section 1. Number and Election of Directors.................................... 13
Section 2. Nomination of Directors............................................. 13
Section 3. Vacancies........................................................... 14
Section 4. Duties and Powers................................................... 15
Section 5. Organization........................................................ 15
Section 6. Resignations and Removals of Directors.............................. 16
Section 7. Meetings............................................................ 17
Section 8. Quorum.............................................................. 17
Section 9. Actions of Board.................................................... 18
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Section 10. Meetings by Means of Conference Telephone........................... 18
Section 11. Committees.......................................................... 19
Section 12. Compensation........................................................ 20
Section 13. Interested Directors................................................ 20
ARTICLE IV
OFFICERS.............................................................................. 21
Section 1. General............................................................. 21
Section 2. Election............................................................ 22
Section 3. Voting Securities Owned by the Corporation.......................... 23
Section 4. Chairman of the Board of Directors.................................. 23
Section 5. President........................................................... 24
Section 6. Executive Vice Presidents........................................... 25
Section 7. Secretary........................................................... 25
Section 8. Treasurer........................................................... 27
Section 9. Assistant Secretaries............................................... 28
Section 10. Assistant Treasurers................................................ 28
Section 11. Other Officers...................................................... 29
ARTICLE V
STOCK................................................................................. 29
Section 1. Form of Certificates................................................ 29
Section 2. Signatures.......................................................... 30
Section 3. Lost, Destroyed, Stolen or Mutilated Certificates................... 30
Section 4. Transfers........................................................... 31
Section 5. Transfer and Registry Agents........................................ 32
Section 6. Beneficial Owners................................................... 32
ARTICLE VI
NOTICES............................................................................... 32
Section 1. Notices............................................................. 32
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Section 2. Waivers of Notice................................................... 33
ARTICLE VII
GENERAL PROVISIONS.................................................................... 34
Section 1. Dividends........................................................... 34
Section 2. Disbursements....................................................... 35
Section 3. Fiscal Year......................................................... 35
Section 4. Corporate Seal...................................................... 35
ARTICLE VIII
INDEMNIFICATION....................................................................... 35
Section 1. Power to Indemnify in Actions, Suits or Proceedings Other
than Those by or in the Right of the Corporation................... 35
Section 2. Power to Indemnify in Actions, Suits or Proceedings by or
in the Right of the Corporation.................................... 37
Section 3. Authorization of Indemnification.................................... 38
Section 4. Good Faith Defined.................................................. 39
Section 5. Indemnification by a Court.......................................... 40
Section 6. Expenses Payable in Advance......................................... 41
Section 7. Nonexclusivity of Indemnification and Advancement of Expenses....... 42
Section 8. Insurance........................................................... 42
Section 9. Certain Definitions................................................. 43
Section 10. Survival of Indemnification and Advancement of Expenses............. 44
Section 11. Limitation on Indemnification....................................... 45
Section 12. Indemnification of Employees and Agents............................. 45
ARTICLE IX
AMENDMENTS............................................................................ 45
Section 1. Amendments.......................................................... 45
Section 2. Entire Board of Directors........................................... 46
</TABLE>
iii
<PAGE>
AMENDED AND RESTATED
BY-LAWS
OF
KNIGHT/TRIMARK GROUP, INC.
(hereinafter called the "Corporation")
ARTICLE I
OFFICES
-------
Section 1. Registered Office. The registered office of the
--------- -----------------
Corporation shall be in the City of Wilmington, County of New Castle, State of
Delaware.
Section 2. Other Offices. The Corporation may also have offices at
--------- -------------
such other places, both within and without the State of Delaware, as the Board
of Directors may from time to time determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
<PAGE>
Section 1. Place of Meetings. Meetings of the stockholders for the
--------- -----------------
election of directors or for any other purpose shall be held at such time and
place, either within or without the State of Delaware, as shall be designated
from time to time by the Board of Directors and stated in the notice of the
meeting or in a duly executed waiver of notice thereof.
Section 2. Annual Meetings. The annual meetings of stockholders
--------- ---------------
shall be held on such date and at such time as shall be designated from time to
time by the Board of Directors and stated in the notice of the meeting, at which
meetings the stockholders shall elect directors, and transact such other
business as may properly be brought before the meeting. Written notice of the
annual meeting stating the place, date and hour of the meeting shall be given to
each stockholder entitled to vote at such meeting not less than ten nor more
than sixty days before the date of the meeting.
Section 3. Special Meetings. Unless otherwise prescribed by law or
--------- ----------------
by the certificate of incorporation of the Corporation, as amended and restated
from time to time (the "Certificate of Incorporation"), special meetings of
stockholders, for any purpose or purposes, may be called by the Chief Executive
Officer or a majority of the directors then in office. Any such re-
2
<PAGE>
quest for a special meeting of the stockholders shall state the purpose or
purposes of the proposed meeting, and at the special meeting, only such business
shall be conducted as shall be specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors.
Written notice of a special meeting stating the place, date and hour of the
meeting and the purpose or purposes for which the meeting is called shall be
given not less than ten nor more than sixty days before the date of the meeting
to each stockholder entitled to vote at such meeting.
Section 4. Quorum. Except as otherwise required by law or by the
--------- ------
Certificate of Incorporation, the holders of a majority of the capital stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business. A quorum, once established, shall
not be broken by the withdrawal of enough votes to leave less than a quorum. If,
however, such quorum shall not be present or represented at any meeting of the
stockholders, the stockholders entitled to vote thereat, present in person or
represented by proxy, shall have power to adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum
3
<PAGE>
shall be present or represented. At such adjourned meeting at which a quorum
shall be present or represented, any business may be transacted which might have
been transacted at the meeting as originally noticed. If the adjournment is for
more than thirty days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder entitled to vote at the meeting not less than ten nor more than
sixty days before the date of the meeting.
Section 5. Proxies. Any stockholder entitled to vote may do so in
--------- -------
person or by his or her proxy appointed by an instrument in writing subscribed
by such stockholder or by his or her attorney thereunto authorized, delivered to
the Secretary of the meeting; provided, however, that no proxy shall be voted or
-------- -------
acted upon after three years from its date, unless said proxy provides for a
longer period. Without limiting the manner in which a stockholder may authorize
another person or persons to act for him or her as proxy, either of the
following shall constitute a valid means by which a stockholder may grant such
authority:
(i) A stockholder may execute a writing authorizing another
person or persons to act for him or her as
4
<PAGE>
proxy. Execution may be accomplished by the stockholder or his or her
authorized officer, director, employee or agent signing such writing or
causing his or her signature to be affixed to such writing by any
reasonable means, including, but not limited to, by facsimile signature.
(ii) A stockholder may authorize another person or persons to
act for him or her as proxy by transmitting or authorizing the transmission
of a telegram or other means of electronic transmission to the person who
will be the holder of the proxy or to a proxy solicitation firm, proxy
support service organization or like agent duly authorized by the person
who will be the holder of the proxy to receive such transmission, provided
that any such telegram or other means of electronic transmission must
either set forth or be submitted with information from which it can be
determined that the telegram or other electronic transmission was
authorized by the stockholder.
Any copy, facsimile telecommunication or other reliable reproduction of the
writing or transmission authorizing another person or persons to act as proxy
5
<PAGE>
for a stockholder may be substituted or used in lieu of the original writing or
transmission for any and all purposes for which the original writing or
transmission could be used; provided that such copy, facsimile telecommunication
--------
or other reproduction shall be a complete reproduction of the entire original
writing or transmission.
Section 6. Voting. At all meetings of the stockholders at which a
--------- ------
quorum is present, except as otherwise required by law, the Certificate of
Incorporation or these By-Laws, any question brought before any meeting of
stockholders shall be decided by the affirmative vote of the holders of a
majority of the total number of votes of the capital stock present in person or
represented by proxy and entitled to vote on such question, voting as a single
class. The Board of Directors, in its discretion, or the officer of the
Corporation presiding at a meeting of stockholders, in his or her discretion,
may require that any votes cast at such meeting shall be cast by written ballot.
Section 7. Consent of Stockholders in Lieu of Meeting. Any action
--------- ------------------------------------------
required or permitted to be taken by the stockholders of the Corporation must be
effected at a duly called Annual or Special Meeting of Stockholders of the
Corporation and may not be effected by any consent in writing by such
6
<PAGE>
stockholders unless all of the stockholders entitled to vote thereon consent
thereto in writing.
Section 8. Nature of Business at Meetings of Stockholders. No
--------- ----------------------------------------------
business may be transacted at an annual meeting of stockholders, other than
business that is either (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors (or
any duly authorized committee thereof), (b) otherwise properly brought before
the annual meeting by or at the direction of the Board of Directors (or any duly
authorized committee thereof) or (c) otherwise properly brought before the
annual meeting by any stockholder of the Company who is a record or beneficial
owner of shares on the record date for the determination of stockholders
entitled to vote at such annual meeting. If the Chairman of an annual meeting
determines that business was not properly brought before the annual meeting in
accordance with this section 8, the Chairman shall declare to the meeting that
the business was not properly brought before the meeting and such business shall
not be transacted.
Section 9. List of Stockholders Entitled to Vote. The officer of
--------- -------------------------------------
the Corporation who has charge of the stock ledger of the Corporation shall
7
<PAGE>
prepare and make, at least ten days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder of the Corporation who is
present.
Section 10. Stock Ledger. The stock ledger of the Corporation shall
---------- ------------
be the only evidence as to who are the stockholders entitled to examine the
stock ledger, the list required by Section 9 of this Article II or the books of
the Corporation, or to vote in person or by proxy at any meeting of
stockholders.
Section 11. Record Date.
---------- -----------
8
<PAGE>
(a) In order that the Corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action, the Board of Directors may fix a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted by the Board of Directors and which record date: (1) in
the case of determination of stockholders entitled to vote at any meeting of
stockholders or adjournment thereof, shall not be more than sixty nor less than
ten days before the date of such meeting; and (2) in the case of any other
action, shall not be more than sixty days prior to such other action. If no
record date is fixed: (1) the record date for determining stockholders entitled
to notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held; and (2) the record date for determining stockholders
for any other purpose shall be at the close of business on the day on which the
Board of
9
<PAGE>
Directors adopts the resolution relating thereto. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
-------- -------
that the Board of Directors may fix a new record date for the adjourned meeting.
(b) In order that the Corporation may determine the stockholders
entitled to consent to corporate action in writing without a meeting, the Board
of Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors, and which record date shall not be more than ten days after the date
upon which the resolution fixing the record date is adopted by the Board of
Directors. If no record date has been fixed by the Board of Directors, the
record date for determining stockholders entitled to consent to corporate action
in writing without a meeting, when no prior action by the Board of Directors is
required by law, shall be the first date on which a signed written consent
setting forth the action taken or proposed to be taken is delivered to the
Corporation by delivery to its registered office in the State of Delaware, its
principal place of business, or an officer or agent of the Corporation having
custody of the book in which proceedings of meetings of stockholders are
10
<PAGE>
recorded. Delivery made to a corporation's registered office shall be by hand or
by certified or registered mail, return receipt requested. If no record date has
been fixed by the Board of Directors and prior action by the Board of Directors
is required by law, the record date for determining stockholders entitled to
consent to corporate action in writing without a meeting shall be at the close
of business on the day on which the Board of Directors adopts the resolutions
taking such prior action.
Section 12. Inspectors of Election. In advance of any meeting of
---------- ----------------------
stockholders, the Board by resolution or the Chairman or President shall appoint
one or more inspectors of election to act at the meeting and make a written
report thereof. One or more other persons may be designated as alternate
inspectors to replace any inspector who fails to act. If no inspector or
alternate is present, ready and willing to act at a meeting of stockholders, the
Chairman of the meeting shall appoint one or more inspectors to act at the
meeting. Unless otherwise required by law, inspectors may be officers,
employees or agents of the Corporation. Each inspector, before entering upon
the discharge of his or her duties, shall take and sign an oath faithfully to
execute the duties of inspector with strict impartiality and according to the
best of his or her ability. The inspector shall have the duties prescribed by
law and shall
11
<PAGE>
take charge of the polls and, when the vote is completed, shall make a
certificate of the result of the vote taken and of such other facts as may be
required by law.
Section 13. Conduct of Meetings. The Board of Directors of the
---------- -------------------
Corporation may adopt by resolution such rules and regulations for the conduct
of the meeting of the stockholders as it shall deem appropriate. Except to the
extent inconsistent with such rules and regulations as adopted by the Board of
Directors, the chairman of any meeting of the stockholders shall have the right
and authority to prescribe such rules, regulations and procedures and to do all
such acts as, in the judgment of such chairman, are appropriate for the proper
conduct of the meeting. Such rules, regulations or procedures, whether adopted
by the Board of Directors or prescribed by the chairman of the meeting, may
include, without limitation, the following: (i) the establishment of an
agenda or order of business for the meeting; (ii) the determination of when the
polls shall open and close for any given matter to be voted on at the meeting;
(iii) rules and procedures for maintaining order at the meeting and the safety
of those present; (iv) limitations on attendance at or participation in the
meeting to stockholders of record of the corporation, their duly authorized and
constituted proxies or such other persons as the chairman of the meeting
12
<PAGE>
shall determine; (v) restrictions on entry to the meeting after the time fixed
for the commencement thereof; and (vi) limitations on the time allotted to
questions or comments by participants.
ARTICLE III
DIRECTORS
---------
Section 1. Number and Election of Directors. The Board of Directors
--------- --------------------------------
shall consist of not less than one nor more than [twenty-five] members, the
exact number of which shall initially be fixed by the Incorporator and
thereafter from time to time by the Board of Directors. Except as provided in
Section 3 of this Article III, directors shall be elected by a plurality of the
votes cast at the Annual Meetings of Stockholders and each director so elected
shall hold office until the next Annual Meeting of Stockholders and until such
director's successor is duly elected and qualified, or until such director's
earlier death, resignation or removal. Any director may resign at any time upon
written notice to the Corporation. Directors need not be stockholders.
Section 2. Nomination of Directors. Only persons who are nominated
--------- -----------------------
in accordance with the following procedures shall be eligible for
13
<PAGE>
election as directors of the Company, except as may be otherwise provided in the
Certificate of Incorporation with respect to the right of holders of preferred
stock of the Corporation to nominate and elect a specified number of directors
in certain circumstances. Nominations of persons for election to the Board of
Directors may be made at any annual meeting of stockholders, or at any special
meeting of stockholders called for the purpose of electing directors, (a) by or
at the direction of the Board of Directors (or any duly authorized committee
thereof) or (b) by any stockholder of the Company who is a record or beneficial
owner of shares on the record date for the determination of stockholders
entitled to vote at such meeting.
No person shall be eligible for election as a director of the Company
unless nominated in accordance with this Section 2. If the Chairman of the
meeting determines that a nomination was not made in accordance with this
Section 2, the Chairman shall declare to the meeting that the nomination was
defective and such defective nomination shall be disregarded.
Section 3. Vacancies. Subject to the terms of any one or more
--------- ---------
classes or series of preferred stock, any vacancy on the Board of Directors that
results from an increase in the number of directors may be filled by a majority
14
<PAGE>
of the directors then in office, provided that a quorum is present, and any
other vacancy occurring on the Board of Directors may be filled by a majority of
the Board of Directors then in office, even if less than a quorum, or by a sole
remaining director. Notwithstanding the foregoing, whenever the holders of any
one or more class or classes or series of preferred stock of the Corporation
shall have the right, voting separately as a class, to elect directors at an
annual or special meeting of stockholders, the election, term of office, filling
of vacancies and other features of such directorships shall be governed by the
Certificate of Incorporation.
Section 4. Duties and Powers. The business of the Corporation shall
--------- -----------------
be managed by or under the direction of the Board of Directors which may
exercise all such powers of the Corporation and do all such lawful acts and
things as are not by statute or by the Certificate of Incorporation or by these
By-Laws required to be exercised or done by the stockholders.
Section 5. Organization. At each meeting of the Board of Directors,
--------- ------------
the Chairman of the Board of Directors, or, in his or her absence, a director
chosen by a majority of the directors present, shall act as Chairman. The
Secretary of the Corporation shall act as Secretary at each meeting of the
15
<PAGE>
Board of Directors. In case the Secretary shall be absent from any meeting of
the Board of Directors, an Assistant Secretary shall perform the duties of
Secretary at such meeting; and in the absence from any such meeting of the
Secretary and all the Assistant Secretaries, the Chairman of the meeting may
appoint any person to act as Secretary of the meeting.
Section 6. Resignations and Removals of Directors. Any director of
--------- --------------------------------------
the Corporation may resign at any time, by giving written notice to the Chairman
of the Board of Directors, the President or the Secretary of the Corporation.
Such resignation shall take effect at the time therein specified or, if no time
is specified, immediately; and, unless otherwise specified in such notice, the
acceptance of such resignation shall not be necessary to make it effective.
Except as otherwise required by law and subject to the rights, if any, of the
holders of shares of preferred stock then outstanding, any director or the
entire Board of Directors may be removed from office at any time, but only for
cause, and only by the affirmative vote of the holders of at least a majority in
voting power of the issued and outstanding capital stock of the Corporation
entitled to vote in the election of directors.
16
<PAGE>
Section 7. Meetings. The Board of Directors of the Corporation may
--------- --------
hold meetings, both regular and special, either within or without the State of
Delaware. Regular meetings of the Board of Directors may be held at such time
and at such place as may from time to time be determined by the Board of
Directors and, unless required by resolution of the Board of Directors, without
notice. Special meetings of the Board of Directors may be called by the Chief
Executive Officer or a majority of the directors then in office. Notice thereof
stating the place, date and hour of the meeting shall be given to each director
either by mail not less than forty-eight (48) hours before the date of the
meeting, or by telephone, facsimile or telegram on twenty-four (24) hours'
notice.
Section 8. Quorum. Except as may be otherwise required by law, the
--------- ------
Certificate of Incorporation or these By-Laws, at all meetings of the Board of
Directors, a majority of the entire Board of Directors, shall constitute a
quorum for the transaction of business and the act of a majority of the
directors present at any meeting at which there is a quorum shall be the act of
the Board of Directors. If a quorum shall not be present at any meeting of the
Board of Directors, the directors present thereat may adjourn the meeting from
17
<PAGE>
time to time, without notice other than announcement at the meeting of the time
and place of the adjourned meeting, until a quorum shall be present.
Section 9. Actions of Board. Unless otherwise provided by the
--------- ----------------
Certificate of Incorporation or these By-Laws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all the members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
Section 10. Meetings by Means of Conference Telephone. Unless
---------- -----------------------------------------
otherwise provided by the Certificate of Incorporation or these By-Laws, members
of the Board of Directors of the Corporation, or any committee designated by the
Board of Directors, may participate in a meeting of the Board of Directors or
such committee by means of a conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this Section 10 shall
constitute presence in person at such meeting.
18
<PAGE>
Section 11. Committees. The Board of Directors may, by resolution
---------- ----------
passed by a majority of the entire Board of Directors, designate one or more
committees, each committee to consist of one or more of the directors of the
Corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of any such committee. In the absence or disqualification
of a member of a committee, and in the absence of a designation by the Board of
Directors of an alternate member to replace the absent or disqualified member,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any absent or disqualified member. Any committee, to the extent permitted by law
and provided in the resolution establishing such committee, shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation. Each committee shall
keep regular minutes and report to the Board of Directors when required.
19
<PAGE>
Section 12. Compensation. The directors may be paid their expenses,
---------- ------------
if any, of attendance at each meeting of the Board of Directors and may be paid
a fixed sum for attendance at each meeting of the Board of Directors or a stated
salary, or such other emoluments as the Board of Directors shall from time to
time determine. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
Section 13. Interested Directors. No contract or transaction between
---------- --------------------
the Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof which
authorizes the contract or transaction, or solely because such person's or their
votes are counted for such purpose if (i) the material facts as to such person's
or their relationship or interest and as to the contract or transaction are
disclosed or are
20
<PAGE>
known to the Board of Directors or the committee, and the Board of Directors or
committee in good faith authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested directors, even though the
disinterested directors be less than a quorum; or (ii) the material facts as to
such person's or their relationship or interest and as to the contract or
transaction are disclosed or are known to the stockholders entitled to vote
thereon, and the contract or transaction is specifically approved in good faith
by vote of the stockholders; or (iii) the contract or transaction is fair as to
the Corporation as of the time it is authorized, approved or ratified, by the
Board of Directors, a committee thereof or the stockholders. Common or
interested directors may be counted in determining the presence of a quorum at a
meeting of the Board of Directors or of a committee which authorizes the
contract or transaction.
ARTICLE IV
OFFICERS
--------
Section 1. General. The officers of the Corporation shall be chosen
--------- -------
by the Board of Directors and shall be a President, a Secretary and a Treasurer.
The Board of Directors, in its discretion, may also choose a
21
<PAGE>
Chairman of the Board of Directors (who must be a director) and one or more
Executive Vice Presidents, Assistant Secretaries, Assistant Treasurers and other
officers. Any number of offices may be held by the same person, unless otherwise
prohibited by law, the Certificate of Incorporation or these By-Laws. The
officers of the Corporation need not be stockholders of the Corporation nor,
except in the case of the Chairman of the Board of Directors, need such officers
be directors of the Corporation.
Section 2. Election. The Board of Directors at its first meeting
--------- --------
held after each Annual Meeting of Stockholders (or action by written consent of
stockholders in lieu of the Annual Meeting of Stockholders) shall elect the
officers of the Corporation who shall hold their offices for such terms and
shall exercise such powers and perform such duties as shall be determined from
time to time by the Board of Directors; and all officers of the Corporation
shall hold office until their successors are chosen and qualified, or until
their earlier resignation or removal. Any officer elected by the Board of
Directors may be removed at any time by the affirmative vote of a majority of
the Board of Directors. Any vacancy occurring in any office of the Corporation
shall be
22
<PAGE>
filled by the Board of Directors. The salaries of all officers of the
Corporation shall be fixed by the Board of Directors.
Section 3. Voting Securities Owned by the Corporation. Powers of
--------- ------------------------------------------
attorney, proxies, waivers of notice of meeting, consents and other instruments
relating to securities owned by the Corporation may be executed in the name of
and on behalf of the Corporation by the President or any Executive Vice
President and any such officer may, in the name of and on behalf of the
Corporation, take all such action as any such officer may deem advisable to vote
in person or by proxy at any meeting of security holders of any corporation in
which the Corporation may own securities and at any such meeting shall possess
and may exercise any and all rights and power incident to the ownership of such
securities and which, as the owner thereof, the Corporation might have exercised
and possessed if present. The Board of Directors may, by resolution, from time
to time confer like powers upon any other person or persons or withdraw such
powers.
Section 4. Chairman of the Board of Directors. The Chairman of the
--------- ----------------------------------
Board of Directors, if there be one, shall preside at all meetings of the
stockholders and of the Board of Directors. The Chairman of the Board of
23
<PAGE>
Directors shall also perform such other duties and may exercise such other
powers as from time to time may be assigned to him or her by these By-Laws or by
the Board of Directors.
Section 5. President. The President shall, subject to the control of
--------- ---------
the Board of Directors, have general supervision of the business of the
Corporation and shall see that all orders and resolutions of the Board of
Directors are carried into effect. The President shall be the Chief Executive
Officer of the Corporation. The President shall execute all bonds, mortgages,
contracts and other instruments of the Corporation requiring a seal, under the
seal of the Corporation, except where required or permitted by law to be
otherwise signed and executed and except that the other officers of the
Corporation may sign and execute documents when so authorized by these By-Laws,
the Board of Directors or the President. In the absence or disability of the
Chairman of the Board of Directors, or if there be none, the President shall
preside at all meetings of the stockholders and the Board of Directors. The
President shall also perform such other duties and may exercise such other
powers as from time to time may be assigned to him or her by these By-Laws or by
the Board of Directors.
24
<PAGE>
Section 6. Executive Vice Presidents. At the request of the
--------- -------------------------
President or in his or her absence or in the event of his or her inability or
refusal to act (and if there be no Chairman of the Board of Directors), the
Executive Vice President or the Executive Vice Presidents if there is more than
one (in the order designated by the Board of Directors) shall perform the duties
of the President, and when so acting, shall have all the powers of and be
subject to all the restrictions upon the President. Each Executive Vice
President shall perform such other duties and have such other powers as the
Board of Directors from time to time may prescribe. If there be no Chairman of
the Board of Directors and no Executive Vice President, the Board of Directors
shall designate the officer of the Corporation who, in the absence of the
President or in the event of the inability or refusal of the President to act,
shall perform the duties of the President, and when so acting, shall have all
the powers of and be subject to all the restrictions upon the President.
Section 7. Secretary. The Secretary shall attend all meetings of the
--------- ---------
Board of Directors and all meetings of stockholders and record all the
proceedings thereat in a book or books to be kept for that purpose; the
Secretary shall also perform like duties for the standing committees when
required.
25
<PAGE>
The Secretary shall give, or cause to be given, notice of all meetings of the
stockholders and special meetings of the Board of Directors, and shall perform
such other duties as may be prescribed by the Board of Directors or President,
under whose supervision the Secretary shall be. If the Secretary shall be unable
or shall refuse to cause to be given notice of all meetings of the stockholders
and special meetings of the Board of Directors, and if there be no Assistant
Secretary, then either the Board of Directors or the President may choose
another officer to cause such notice to be given. The Secretary shall have
custody of the seal of the Corporation and the Secretary or any Assistant
Secretary, if there be one, shall have authority to affix the same to any
instrument requiring it and when so affixed, it may be attested by the signature
of the Secretary or by the signature of any such Assistant Secretary. The Board
of Directors may give general authority to any other officer to affix the seal
of the Corporation and to attest the affixing by his or her signature. The
Secretary shall see that all books, reports, statements, certificates and other
documents and records required by law to be kept or filed are properly kept or
filed, as the case may be.
26
<PAGE>
Section 8. Treasurer. The Treasurer shall have the custody of the
--------- ---------
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all transactions as Treasurer and of the financial condition of the Corporation.
If required by the Board of Directors, the Treasurer shall give the Corporation
a bond in such sum and with such surety or sureties as shall be satisfactory to
the Board of Directors for the faithful performance of the duties of the office
of Treasurer and for the restoration to the Corporation, in case of the
Treasurer's death, resignation, retirement or removal from office, of all books,
papers, vouchers, money and other property of whatever kind in the Treasurer's
possession or under control of the Treasurer belonging to the Corporation.
27
<PAGE>
Section 9. Assistant Secretaries. Except as may be otherwise provided
--------- ---------------------
in these By-Laws, Assistant Secretaries, if there be any, shall perform such
duties and have such powers as from time to time may be assigned to them by the
Board of Directors, the President, any Executive Vice President, if there be
one, or the Secretary, and in the absence of the Secretary or in the event of
his or her disability or refusal to act, shall perform the duties of the
Secretary, and when so acting, shall have all the powers of and be subject to
all the restrictions upon the Secretary.
Section 10. Assistant Treasurers. Assistant Treasurers, if there be
---------- --------------------
any, shall perform such duties and have such powers as from time to time may be
assigned to them by the Board of Directors, the President, any Executive Vice
President, if there be one, or the Treasurer, and in the absence of the
Treasurer or in the event of the Treasurer's disability or refusal to act, shall
perform the duties of the Treasurer, and when so acting, shall have all the
powers of and be subject to all the restrictions upon the Treasurer. If required
by the Board of Directors, an Assistant Treasurer shall give the Corporation a
bond in such sum and with such surety or sureties as shall be satisfactory to
the Board of Directors for the faithful performance of the duties of the office
28
<PAGE>
of Assistant Treasurer and for the restoration to the Corporation, in case of
the Assistant Treasurer's death, resignation, retirement or removal from office,
of all books, papers, vouchers, money and other property of whatever kind in the
Assistant Treasurer's possession or under control of the Assistant Treasurer
belonging to the Corporation.
Section 11. Other Officers. Such other officers as the Board of
---------- --------------
Directors may choose shall perform such duties and have such powers as from time
to time may be assigned to them by the Board of Directors. The Board of
Directors may delegate to any other officer of the Corporation the power to
choose such other officers and to prescribe their respective duties and powers.
ARTICLE V
STOCK
-----
Section 1. Form of Certificates. Every holder of stock in the
--------- --------------------
Corporation shall be entitled to have a certificate signed, in the name of the
Corporation, (i) by the Chairman of the Board of Directors, the President or an
Executive Vice President and (ii) by the Treasurer or an Assistant Treasurer,
29
<PAGE>
or the Secretary or an Assistant Secretary of the Corporation, certifying the
number of shares owned by such holder of stock in the Corporation.
Section 2. Signatures. Any or all of the signatures on a certificate
--------- ----------
may be a facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if such person were such officer, transfer agent or registrar at the date of
issue.
Section 3. Lost, Destroyed, Stolen or Mutilated Certificates. The
--------- -------------------------------------------------
Board of Directors may direct a new certificate to be issued in place of any
certificate theretofore issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate, or such person's legal
representative, to advertise the same in such manner as the Board of Directors
30
<PAGE>
shall require and/or to give the Corporation a bond in such sum as it may direct
as indemnity against any claim that may be made against the Corporation with
respect to the certificate alleged to have been lost, stolen or destroyed.
Section 4. Transfers. Stock of the Corporation shall be
--------- ---------
transferable in the manner prescribed by law and in these By-Laws. Transfers of
stock shall be made on the books of the Corporation only by the person named in
the certificate or by such person's attorney lawfully constituted in writing and
upon the surrender of the certificate therefor, properly endorsed for transfer
and payment of all necessary transfer taxes; provided, however, that such
-------- -------
surrender and endorsement or payment of taxes shall not be required in any case
in which the officers of the Corporation shall determine to waive such
requirement. Every certificate exchanged, returned or surrendered to the
Corporation shall be marked "Cancelled," with the date of cancellation, by the
Secretary or Assistant Secretary of the Corporation or the transfer agent
thereof. No transfer of stock shall be valid as against the Corporation for any
purpose until it shall have been entered in the stock records of the Corporation
by an entry showing from and to whom transferred.
31
<PAGE>
Section 5. Transfer and Registry Agents. The Corporation may from
--------- ----------------------------
time to time maintain one or more transfer offices or agencies and registry
offices or agencies at such place or places as may be determined from time to
time by the Board of Directors.
Section 6. Beneficial Owners. The Corporation shall be entitled to
--------- -----------------
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
law.
ARTICLE VI
NOTICES
Section 1. Notices. Whenever written notice is required by law, the
--------- -------
Certificate of Incorporation or these By-Laws, to be given to any director,
member of a committee or stockholder, such notice may be given by mail,
addressed to such director, member of a committee or stockholder, at such
32
<PAGE>
person's address as it appears on the records of the Corporation, with postage
thereon prepaid, and such notice shall be deemed to be given at the time when
the same shall be deposited in the United States mail. Written notice may also
be given personally or by telegram, facsimile, telex or cable.
Section 2. Waivers of Notice.
--------- -----------------
(a) Whenever any notice is required by law, the Certificate of
Incorporation or these By-Laws, to be given to any director, member of a
committee or stockholder, a waiver thereof in writing, signed, by the person or
persons entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent to notice. Attendance of a person at a
meeting, present by person or represented by proxy, shall constitute a waiver of
notice of such meeting, except where the person attends the meeting for the
express purpose of objecting at the beginning of the meeting to the transaction
of any business because the meeting is not lawfully called or convened.
(b) Neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the stockholders, directors or members of
a committee of directors need be specified in any written waiver
33
<PAGE>
of notice unless so required by law, the Certificate of Incorporation or these
By-Laws.
ARTICLE VII
GENERAL PROVISIONS
Section 1. Dividends. Subject to the requirements of the GCL and the
--------- ---------
provisions of the Certificate of Incorporation, dividends upon the capital
stock of the Corporation may be declared by the Board of Directors at any
regular or special meeting of the Board of Directors (or any action by written
consent in lieu thereof), and may be paid in cash, in property, or in shares of
the Corporation's capital stock. Before payment of any dividend, there may be
set aside out of any funds of the Corporation available for dividends such sum
or sums as the Board of Directors from time to time, in its absolute discretion,
deems proper as a reserve or reserves to meet contingencies, or for purchasing
any of the shares of capital stock, warrants, rights, options, bonds,
debentures, notes, scrip or other securities or evidences of indebtedness of the
Corporation as may exist, or for equalizing dividends, or for repairing or
maintaining any
34
<PAGE>
property of the Corporation, or for any other proper purpose, and the Board of
Directors may modify or abolish any such reserve.
Section 2. Disbursements. All checks or demands for money and
--------- -------------
notes of the Corporation shall be signed by such officer or officers or such
other person or persons as the Board of Directors may from time to time
designate.
Section 3. Fiscal Year. The fiscal year of the Corporation shall
--------- -----------
be fixed by resolution of the Board of Directors.
Section 4. Corporate Seal. The corporate seal shall have inscribed
--------- --------------
thereon the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware". The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
ARTICLE VIII
INDEMNIFICATION
Section 1. Power to Indemnify in Actions, Suits or Proceedings Other
--------- ---------------------------------------------------------
than Those by or in the Right of the Corporation. Subject to Section 3 of this
- ------------------------------------------------
Article VIII, the Corporation shall indemnify any person who was or is
35
<PAGE>
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that such person is or was a director or officer of the
Corporation, or is or was a director or officer of the Corporation serving at
the request of the Corporation as a director or officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, such person had no reasonable cause to believe his or her conduct
was unlawful. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that such person did not
act in good faith and in a manner which such person reasonably believed to be in
or not opposed to the best interests of the Corporation, and,
36
<PAGE>
with respect to any criminal action or proceeding, had reasonable cause to
believe that his or her conduct was unlawful.
Section 2. Power to Indemnify in Actions, Suits or Proceedings by
--------- ------------------------------------------------------
or in the Right of the Corporation. Subject to Section 3 of this Article VIII,
- ----------------------------------
the Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that such person is or was a director or officer of the
Corporation, or is or was a director or officer of the Corporation serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
Corporation; except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Court of
Chancery or
37
<PAGE>
the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Section 3. Authorization of Indemnification. Any indemnification
--------- --------------------------------
under this Article VIII (unless ordered by a court) shall be made by the
Corporation only as authorized in the specific case upon a determination that
indemnification of the director or officer is proper in the circumstances
because such person has met the applicable standard of conduct set forth in
Section 1 or Section 2 of this Article VIII, as the case may be. Such
determination shall be made, with respect to a person who is a director or
officer at the time of such determination, (i) by a majority vote of the
directors who are not parties to such action, suit or proceeding, even though
less than a quorum, or (ii) by a committee of such directors designated by a
majority vote of such directors, even though less than a quorum, or (iii) if
there are no such directors, or if such directors so direct, by independent
legal counsel in a written opinion or (iv) by the stockholders. Such
determination shall be made, with
38
<PAGE>
respect to former directors and officers, by any person or persons having the
authority to act on the matter on behalf of the Corporation. To the extent,
however, that a present or former director or officer of the Corporation has
been successful on the merits or otherwise in defense of any action, suit or
proceeding described above, or in defense of any claim, issue or matter
therein, such person shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by such person in connection therewith,
without the necessity of authorization in the specific case.
Section 4. Good Faith Defined. For purposes of any determination
--------- ------------------
under Section 3 of this Article VIII, a person shall be deemed to have acted in
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the Corporation, or, with respect to any
criminal action or proceeding, to have had no reasonable cause to believe his or
her conduct was unlawful, if such person's action is based on the records or
books of account of the Corporation or another enterprise, or on information
supplied to such person by the officers of the Corporation or another enterprise
in the course of their duties, or on the advice of legal counsel for the
Corporation or another enterprise or on information or records given or reports
made
39
<PAGE>
to the Corporation or another enterprise by an independent certified public
accountant or by an appraiser or other expert selected with reasonable care by
the Corporation or another enterprise. The term "another enterprise" as used in
this Section 4 shall mean any other corporation or any partnership, joint
venture, trust, employee benefit plan or other enterprise of which such person
is or was serving at the request of the Corporation as a director, officer,
employee or agent. The provisions of this Section 4 shall not be deemed to be
exclusive or to limit in any way the circumstances in which a person may be
deemed to have met the applicable standard of conduct set forth in Section 1 or
2 of this Article VIII, as the case may be.
Section 5. Indemnification by a Court. Notwithstanding any contrary
--------- --------------------------
determination in the specific case under Section 3 of this Article VIII, and
notwithstanding the absence of any determination thereunder, any director or
officer may apply to the Court of Chancery of the State of Delaware for
indemnification to the extent otherwise permissible under Sections 1 and 2 of
this Article VIII. The basis of such indemnification by a court shall be a
determination by such court that indemnification of the director or officer is
proper in the circumstances because such person has met the applicable
40
<PAGE>
standards of conduct set forth in Section 1 or 2 of this Article VIII, as the
case may be. Neither a contrary determination in the specific case under Section
3 of this Article VIII nor the absence of any determination thereunder shall be
a defense to such application or create a presumption that the director or
officer seeking indemnification has not met any applicable standard of conduct.
Notice of any application for indemnification pursuant to this Section 5 shall
be given to the Corporation promptly upon the filing of such application.
If successful, in whole or in part, the director or officer seeking
indemnification shall also be entitled to be paid the expense of prosecuting
such application.
Section 6. Expenses Payable in Advance. Expenses incurred by a
--------- ---------------------------
director or officer in defending or investigating a threatened or pending
action, suit or proceeding shall be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that such person is not entitled to be
indemnified by the Corporation as authorized in this Article VIII.
41
<PAGE>
Section 7. Nonexclusivity of Indemnification and Advancement of
--------- ----------------------------------------------------
Expenses. The indemnification and advancement of expenses provided by or
- --------
granted pursuant to this Article VIII shall not be deemed exclusive of any other
rights to which those seeking indemnification or advancement of expenses may be
entitled under the Certificate of Incorporation or any By-Law, agreement,
contract, vote of stockholders or disinterested directors or pursuant to the
direction (howsoever embodied) of any court of competent jurisdiction or
otherwise, both as to action in such person's official capacity and as to action
in another capacity while holding such office, it being the policy of the
Corporation that indemnification of the persons specified in Section 1 and 2 of
this Article VIII shall be made to the fullest extent permitted by law. The
provisions of this Article VIII shall not be deemed to preclude the
indemnification of any person who is not specified in Section 1 or 2 of this
Article VIII but whom the Corporation has the power or obligation to indemnify
under the provisions of the GCL, or otherwise.
Section 8. Insurance. The Corporation may purchase and maintain
--------- ---------
insurance on behalf of any person who is or was a director or officer of the
Corporation, or is or was a director or officer of the Corporation serving at
the
42
<PAGE>
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise against any liability asserted against such person and incurred by
such person in any such capacity, or arising out of such person's status as
such, whether or not the Corporation would have the power or the obligation to
indemnify such person against such liability under the provisions of this
Article VIII.
Section 9. Certain Definitions. For purposes of this Article VIII,
--------- -------------------
references to "the Corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors or officers, so that any person who is or was a director or officer of
such constituent corporation, or is or was a director or officer of such
constituent corporation serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise, shall stand in
the same position under the provisions of this Article VIII with respect to the
43
<PAGE>
resulting or surviving corporation as such person would have with respect to
such constituent corporation if its separate existence had continued. For
purposes of this Article VIII, references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the Corporation" shall include any
service as a director, officer, employee or agent of the Corporation which
imposes duties on, or involves services by, such director or officer with
respect to an employee benefit plan, its participants or beneficiaries; and a
person who acted in good faith and in a manner such person reasonably believed
to be in the interest of the participants and beneficiaries of an employee
benefit plan shall be deemed to have acted in a manner "not opposed to the best
interests of the Corporation" as referred to in this Article VIII.
Section 10. Survival of Indemnification and Advancement of Expenses.
---------- -------------------------------------------------------
The indemnification and advancement of expenses provided by, or granted pursuant
to, this Article VIII shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director or officer and
shall inure to the benefit of the heirs, executors and administrators of such
a person.
44
<PAGE>
Section 11. Limitation on Indemnification. Notwithstanding anything
---------- -----------------------------
contained in this Article VIII to the contrary, except for proceedings to
enforce rights to indemnification (which shall be governed by Section 5 hereof),
the Corporation shall not be obligated to indemnify any director or officer (or
his or her heirs, executors or personal or legal representatives) or advance
expenses in connection with a proceeding (or part thereof) initiated by such
person unless such proceeding (or part thereof) was authorized or consented to
by the Board of Directors of the Corporation.
Section 12. Indemnification of Employees and Agents. The Corporation
---------- ---------------------------------------
may, to the extent authorized from time to time by the Board of Directors,
provide rights to indemnification and to the advancement of expenses to
employees and agents of the Corporation similar to those conferred in this
Article VIII to directors and officers of the Corporation.
ARTICLE IX
AMENDMENTS
Section 1. Amendments. These By-Laws may be altered, amended or
--------- ----------
repealed, in whole or in part, or new By-Laws may be adopted by
45
<PAGE>
the stockholders or by the Board of Directors, provided, however, that notice of
such alteration, amendment, repeal or adoption of new By-Laws be contained in
the notice of such meeting of stockholders or Board of Directors as the case may
be. All such amendments must be approved by either the holders of a majority of
the outstanding capital stock entitled to vote thereon or by a majority of the
entire Board of Directors.
Section 2. Entire Board of Directors. As used in this Article IX
--------- -------------------------
and in these By-Laws generally, the term "entire Board of Directors" means the
total number of directors which the Corporation would have if there were no
vacancies.
* * *
Adopted as of: _______________
Last Amended as of: __________
46
<PAGE>
[SASM&F Letterhead]
June 1, 1998
Knight/Trimark Group, Inc.
Newport Tower, 30/th/ Floor
525 Washington Boulevard
Jersey City, NJ 07310
Re: Knight/Trimark Group, Inc.
--------------------------
Registration Statement on Form S-1
------------------------------------
Ladies and Gentlemen:
We have acted as special counsel to Knight/Trimark Group, Inc., a
Delaware corporation (the "Company"), in connection with the initial public
offering (the "IPO") by the Company of up to 10,188,246 shares (including
1,500,000 shares subject to an over-allotment option) (the "Company Shares") and
the sale by Gruntal & Co., L.L.C., as selling stockholder (the "Selling
Stockholder") of 1,311,754 shares (the "Selling Stockholder Shares", and
together with the Company Shares, the "Shares") of the Company's Common Stock,
par value $0.01 per share (the "Com mon Stock").
Each of the members of Roundtable Partners, L.L.C. (the "LLC"),
including the Selling Stockholder, entered into a contribution agreement (the
"Contribution Agreement"), dated April 18, 1998, by and among the LLC, the
Company and the members of the LLC, pursuant to which such members agreed to
contribute all of their interests in the LLC to the Company, concurrently with
the closing of the IPO, in exchange for shares of Common Stock. Pursuant to a
letter agreement, dated April 29, 1998 (the "Gruntal Letter Agreement"), the
Company has agreed to allow the Selling Stockholder to sell in the IPO all of
the shares of Common Stock it will acquire pursuant to the Contribution
Agreement.
<PAGE>
Knight/Trimark Group, Inc.
June 1, 1998
Page 2
This opinion is being furnished in accordance with the requirements of
Item 601(b)(5) of Regulation S-K under the Securities Act of 1933, as amended
(the "Act").
In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of (i) the Registration
Statement on Form S-1 (File No. 333-51653) as filed with the Securities and Ex
change Commission (the "Commission") on May 1, 1998 under the Act, Amendment No.
1 thereto as filed with the Commission on May 22, 1998, and Amendment No. 2
thereto as filed with the Commission on June 1, 1998 (such Registration
Statement, as so amended, being hereinafter referred to as the "Registration
Statement"); (ii) the Contribution Agreement; (iii) the Gruntal Letter
Agreement; (iv) the form of the Underwriting Agreement (the "Underwriting
Agreement") proposed to be entered into between the Company, as issuer, and the
Selling Stockholder, and BancAmerica Robertson Stephens, Merrill Lynch, Pierce,
Fenner & Smith Incorporated, PaineWebber Incorporated, ABN AMRO Incorporated and
Southwest Securities, Inc. as representatives of the several underwriters named
therein (the "Underwrit ers"), filed as an exhibit to the Registration
Statement; (v) a specimen certificate representing the Common Stock; (vi) the
Certificate of Incorporation of the Com pany, as presently in effect; (vii) the
By-Laws of the Company, as presently in effect; and (viii) certain resolutions
of the Board of Directors of the Company relating to the issuance and sale of
the Shares, the Contribution Agreement and related matters and drafts of certain
resolutions of the Board of Directors of the Company (the "Draft Resolu tions").
We have also examined originals or copies, certified or otherwise identified to
our satisfaction, of such records of the Company and such agreements,
certificates of public officials, certificates of officers or other
representatives of the Company and others, and such other documents,
certificates and records as we have deemed necessary or appropriate as a basis
for the opinions set forth herein.
In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
sub mitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, conformed or photostatic copies and the
authenticity of the originals of such latter documents. In making our
examination of documents executed or to be executed by parties other than the
Company, we have assumed that such parties had or will have the power, corporate
or other, to enter into and perform all obligations thereunder and have also
assumed the due authorization by all
<PAGE>
Knight/Trimark Group, Inc.
June 1, 1998
Page 3
requisite action, corporate or other, and execution and delivery by such parties
of such documents and the validity and binding effect thereof. As to any facts
material to the opinions expressed herein which we have not independently
established or verified, we have relied upon statements and representations of
officers and other representatives of the Company and others.
Members of our firm are admitted to the bar in the State of New York,
and we do not express any opinion as to the laws of any other jurisdiction
other than the General Corporation Law of the State of Delaware.
Based upon and subject to the foregoing, we are of the opinion that
when (i) the Registration Statement becomes effective; (ii) the Draft
Resolutions have been adopted by the Board of Directors; (iii) the price at
which the Company Shares are to be sold to the Underwriters pursuant to the
Underwriting Agreement has been approved by the Board of Directors and related
matters (iv) the Underwriting Agreement has been duly executed and delivered;
(v) certificates representing the Shares in the form of the specimen
certificates examined by us have been manually signed by an authorized officer
of the transfer agent and registrar for the Common Stock and registered by such
transfer agent and registrar; (vi) the certificates representing the Selling
Stockholder Shares are delivered to the Selling Stockholder in exchange for
their membership interests in the LLC; and (vii) the certificates representing
the Com pany Shares are delivered to and paid for by the Underwriters at a price
per share not less than the per share par value of Common Stock as contemplated
by the Under writing Agreement, the issuance and sale of the Shares will have
been duly autho rized, and the Shares will be validly issued, fully paid and
nonassessable.
<PAGE>
Knight/Trimark Group, Inc.
June 1, 1998
Page 4
We hereby consent to the filing of this opinion with the Commission as
an exhibit to the Registration Statement. We also consent to the reference to
our firm under the caption "Legal Matters" in the Registration Statement. In
giving this consent, we do not thereby admit that we are included in the
category of persons whose consent is required under Section 7 of the Act or the
rules and regulations of the Commission.
Very truly yours,
Skadden, Arps, Slate, Meagher & Flom
<PAGE>
Confidential treatment has been requested for portions of this exhibit. The copy
filed herewith omits the information subject to the confidentiality request.
Omissions are designated as ******. A complete version of this exhibit has been
filed separately with the Securities and Exchange Commission.
EXHIBIT 10.1
CLEARING AGREEMENT
This agreement, made this 25 day of April, 1997 (the "Agreement") between
Correspondent Services Corporation (hereinafter referred to as "CSC"), and
Knight Securities LP (hereinafter referred to as the "Correspondent").
WITNESSETH THAT:
WHEREAS, the Correspondent is desirous of availing itself of clearing, execution
and other services related to the securities business as more fully set forth
herein; and Whereas, CSC desires to extend the foregoing types of services to
the Correspondent; now therefore, in consideration of the mutual covenants
hereinafter set forth and other good and valuable consideration the receipt of
which is hereby acknowledged, the parties hereto hereby covenant and agree as
follows:
I. Services
--------
A. Services to be Performed by CSC
-------------------------------
(i) CSC will execute orders for the Correspondent's proprietary
accounts and/or the Correspondent's customers whose cash and/or
margin accounts have been accepted by CSC ("Introduced
Accounts"), but only insofar as such orders are transmitted by
the Correspondent or its designee to CSC.
(ii) CSC will generate, prepare and/or transmit the appropriate data
to effect the production of and cause to be mailed confirmations
respecting transactions effected by each of the Introduced
Accounts.
(iii) CSC will prepare and mail the summary monthly statements (or
quarterly statements if no activity in any Introduced Account
occurs during any quarter covered by such statement) to every
Introduced Account.
(iv) CSC will settle contracts and transactions in securities
(including options to buy or sell securities) (i) between the
Correspondent and other brokers and dealers, (ii) between the
Correspondent and the Introduced Accounts, and (iii) between the
Correspondent and persons other than the Introduced Accounts or
other brokers and dealers.
(v) CSC will engage in all cashiering functions for the Introduced
Accounts, including the receipt, delivery and transfer of
securities purchased, sold, borrowed and loaned, receiving and
distributing payment therefore, holding
1
<PAGE>
in custody and safekeeping all securities and payments so
received, the handling of cash and margin accounts, including
paying and charging of interest, the receipt and distribution of
dividends and other distributions, and the processing of exchange
offers, rights offerings, warrants, tender offers and
redemptions. Exclusively for purposes of the Securities and
Exchange Commission's financial responsibility rules and SIPC
requirements, the Correspondent's customers will be considered
customers of CSC and not customers of the Correspondent. Nothing
herein shall cause the Correspondent's customers to be construed
or interpreted as customers of CSC for any other purpose, or to
negate the intent of any other section of this agreement,
including, but not limited to, the delineation of
responsibilities as set forth elsewhere in this agreement. Upon
mutual written agreement of the parties hereto, the cashiering
functions with respect to the receipt of securities and the
making and receiving payments therefor may be relinquished to the
Correspondent.
(vi) CSC will construct and maintain books and records of all
transactions executed or cleared through it and not specifically
charged to the Correspondent pursuant to the terms of this
Agreement, including a daily record of required margin and other
information required by Rule 432(a) of the rules of the Board of
Directors of the New York Stock Exchange, Inc. (the "Rules"), or
by the constitution, articles of incorporation, by-laws (or
comparable instruments) or rules, regulations or other
instruments corresponding to the foregoing, and the stated
policies or practices of any other securities exchange (the
"Standards"), including but not otherwise limited to any national
securities exchanges registered under the Securities Exchange Act
of 1934, as amended ("National Securities Exchange").
B. Services Which Shall Not be Performed by CSC
--------------------------------------------
Unless otherwise agreed to in a writing executed by the parties hereto, CSC
shall not engage in any of the following services on behalf of the
Correspondent:
(i) Accounting, bookkeeping or recordkeeping, cashiering, or any
other services with respect to commodity transactions, and/or any
transaction other than securities (including options,
derivatives, etc.) transactions.
(ii) Preparation of the Correspondent's payroll records, financial
statements or any analysis or review thereof or any
recommendations relating thereto.
(iii) Preparation or issuance of checks in payment of the
Correspondent's expenses, other than expenses incurred by CSC on
behalf of the Correspondent pursuant to this Agreement.
2
<PAGE>
(iv) Payment of commissions, salaries or other remuneration to the
Correspondent's salespersons or any other employees of the
Correspondent.
(v) Preparation and filing of reports (the "Reports") with the
Securities and Exchange Commission, and state securities
commission, any National Securities Exchange, or other securities
exchange or securities association or any other regulatory or
self-regulatory body or agency with which the Correspondent is
associated and/or by which it is regulated. Furthermore, CSC
will, at the request of the Correspondent, furnish the
Correspondent with any necessary information and data contained
in books and records kept by CSC and not otherwise reasonably
available to the Correspondent if such information is required in
connection with the preparation and filing of Reports by the
Correspondent.
(vi) Making and maintaining reports and records required to be kept by
the Correspondent by the Currency and Foreign Transactions
Reporting Act of 1970 and the regulations promulgated pursuant
thereto, or any similar laws or regulations enacted or adopted
hereafter.
(vii) Verification of the address changes of any Introduced Account.
(viii) Obtaining (except for bona fide institutional accounts) and
verifying new account information, and insuring that such
information meets the requirements of Rule 405 {1} of the Rules
and any other Rules or applicable standards.
(ix) Maintaining a record of all personal and financial information
concerning any Introduced Account and all orders received
therefrom, and maintaining all documents and agreements executed
by any Introduced Account, except as required by CSC.
(x) Holding for safekeeping of the securities of any Introduced
Account registered in the name of the Introduced Account.
(xi) Accepting deposits from the Correspondent in the form of coin or
currency of the United States or any other country.
II. Clearing Charges
----------------
See Schedule "A" attached hereto and incorporated herein by reference.
Correspondent shall have sole discretion to determine the amount of
commission/mark up and/or fees charged to its Introduced Accounts cleared
by CSC. CSC agrees to pay
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Correspondent all commissions and/or sales credits received by CSC with
respect to business introduced by Correspondent less any amounts due to CSC
under this Agreement or otherwise and any expenses or other sums paid to
third parties by CSC paid on the Correspondent's behalf.
In no event shall the fees charged in this Article II for the above
services be in contravention of the Securities Act of 1933, as amended, the
Securities Exchange Act of 1934, the Investment Advisers Act of 1940, as
amended, or the Employee Retirement Income Security Act of 1974, as
amended, or any rules or regulations thereunder, or any other law, rule or
regulation, Federal, State or Local, or any constitution, by-law, rule,
regulation or instrument correspondent to the foregoing, or stated policy
or practice of any national securities exchange or other securities
exchange or association or other regulatory or self-regulatory body or
agency ("Laws and Regulations"). In the event that such fees are deemed by
CSC or the Correspondent to be in contravention of the Laws and
Regulations, they shall be replaced with fees mutually agreed upon in
writing by CSC and the Correspondent.
III. Notation on Statements, Confirmation and Other Written Material
---------------------------------------------------------------
CSC shall carry all Introduced Accounts in the names of the Correspondent's
customers, with a notation on its books and records that such Introduced
Accounts were introduced by the Correspondent, and all monthly or quarterly
statements and confirmations relating to such Introduced Accounts shall
also indicate that the Introduced Accounts were introduced by the
Correspondent. In addition, account statements will indicate that customer
funds and securities received by CSC will be held at CSC and will contain
the telephone number of a contact area at CSC. Inadvertent omission of such
notations shall not be deemed to constitute a breach of this Agreement.
Copies of the forms covering the foregoing shall be furnished by CSC to the
Correspondent.
IV. Opening of Accounts
-------------------
(i) At the time of the opening of each Introduced Account,
Correspondent shall furnish CSC with all financial and personal
information concerning such Introduced Accounts as CSC may
reasonably require. At the time of the opening of any Introduced
Accounts which are margin accounts, the Correspondent shall
furnish CSC with executed customers' agreements, hypothecation
agreements and consents to loans of securities (collectively, the
"margin agreement"). CSC shall supply the Correspondent with
margin agreement forms regarding margin accounts in sufficient
quantities, such forms to be submitted to CSC upon their
completion by the correspondent. If any Introduced Account may
have been opened without CSC having previously received a
properly executed margin agreement, failure of CSC to receive
such margin agreements shall not be deemed to be a waiver of the
information requirements set forth herein. Upon the written or
oral
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request of CSC, the Correspondent shall furnish CSC with any
other documents and agreements executed by the Introduced Account
on forms which shall be supplied by CSC in sufficient quantities
and which may reasonably be required by CSC in connection with
the opening, operating or maintaining of any Introduced Account.
CSC may, at its option, mail margin agreements, option
agreements, "new account" forms or any other form at its
discretion directly to the Introduced Accounts upon notification
of the Correspondent, and/or require completion of said margin
agreements, "new account" forms and/or other forms, and, if
required, option account agreements for the Introduced Accounts.
The Correspondent shall promptly provide CSC with basic data and
copies of documents relating to each of the Introduced Accounts,
including, but not otherwise limited to, copies of records of any
receipts of the Introduced Accounts' funds and/or securities
received directly by the Correspondent, as shall be necessary for
CSC to discharge its service obligations hereunder.
(ii) All transactions in any Introduced Account are to be considered
cash transactions until such time as CSC has received margin
agreements, duly and validly executed in respect of such
Introduced Account. Nevertheless, it is intended that
Correspondent will obtain executed margin agreements within the
time periods set forth in procedural manuals provided by CSC or
any entity affiliated with CSC. In the event credit is
inadvertently extended with respect to such Introduced Accounts,
Correspondent shall indemnify and hold CSC harmless from and
against all loss, liability, damage, cost and expense (including
but not otherwise limited to seasonable fees and expenses of
legal counsel) arising therefrom.
(iii) At the time of the opening of any Introduced Account, the
Correspondent shall furnish CSC with the name of any principal if
other than the account name, for whom the Correspondent is acting
as agent, and written evidence of such authority.
(iv) The Correspondent shall have the sole and exclusive
responsibility for compliance with Rule 405(3) of the Rules and
shall specifically approve the opening of any new account before
forwarding such account to CSC as a potential Introduced Account.
CSC, in its reasonable business judgement, reserves the right to
reject any account which the Correspondent may forward to CSC as
a potential Introduced Account. CSC also reserves the right to
terminate any account previously accepted by it as an Introduced
Account. By mutual agreement, CSC may open institutional accounts
on behalf of Correspondents, if said institution deals directly
with CSC or any affiliated organization.
(v) Pursuant to written notification received by the Correspondent
and
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<PAGE>
forwarded to CSC, any account of the Correspondent may choose to
reject the services to be performed by CSC pursuant to this
Agreement and thus choose not to be serviced as an Introduced
Account pursuant hereto. Upon notice from another member
organization that an Introduced Account intends to transfer his
account thereto, CSC shall expedite such transfer and shall have
the sole and exclusive responsibility for compliance with Rule
412 of the Rules.
(vi) It shall be the sole and exclusive responsibility of the
Correspondent to make every reasonable effort to ascertain the
essential facts relative to any Introduced Account and any order
therefore, in compliance with Rule 405(1) of the Rules, including
but not otherwise limited to ascertaining the authority of all
orders for Introduced Accounts, and the genuineness of
certificates, papers and signatures provided by each Introduced
Account. Any investment advice to include selection of a
qualified money manager furnished to an Introduced Account by the
Correspondent shall be the sole and exclusive responsibility of
the Correspondent.
(vii) The Correspondent shall be solely and exclusively responsible for
the handling and supervisory review of any Introduced Accounts
over which the Correspondent's partners, officers or employees
have discretionary authority, as required by Rule 408 of the
Rules and any other applicable Laws and Regulations. The
Correspondent shall furnish CSC with such documentation with
respect thereto as may be requested by CSC. The Correspondent
hereby agrees to indemnify and hold CSC harmless against any
loss, liability, damage, cost or expense (including but not
otherwise limited to fees and expenses of legal counsel) suffered
or incurred by CSC directly or indirectly as a result of any
liabilities or claims arising from the exercise by the
Correspondent, its partners, officers or employees of
discretionary authority over Introduced Accounts. The
Correspondent hereby warrants that with regard to any orders or
instructions given by the Correspondent with respect to such
discretionary accounts, its partners, officers or employees shall
have been fully and properly authorized relative thereto and that
the execution of such orders shall not be in violation of the
Laws and Regulations. Furthermore, the Correspondent hereby
agrees to indemnify and hold CSC harmless against any loss,
liability, damage, cost or expense (including but not otherwise
limited to fees and expenses of legal counsel) suffered or
incurred by CSC directly or indirectly as a result of any breach
of the Correspondent's said warranty.
(viii) The Correspondent shall have the sole and exclusive
responsibility for the handling and supervisory review of any
Introduced Account for an employee or officer of any member
organization, self-regulatory organization, bank, trust company,
insurance company or other
6
<PAGE>
organization engaged in the securities business, and for
compliance with Rule 407 of the Rules relating thereto. The
Correspondent shall furnish CSC with such documentation with
respect thereto as may be requested by CSC.
(xi) The Correspondent shall have the sole and exclusive
responsibility to insure that those of its customers who become
Introduced Accounts hereunder shall not be minors or subject to
those prohibitions existing under the Laws and Regulations
generally relating to the incapacity of any Introduced Account or
any conflict of interest relating to such Introduced Account.
(x) The Correspondent shall be solely and exclusively responsible for
any loss, liability, damage, cost or expense (including but not
otherwise limited to fees and expenses of legal counsel)
sustained or incurred by either itself or CSC, arising out of or
resulting from any orders the Correspondent has taken from an
Introduced Account residing or being domiciled in jurisdictions
in which the Correspondent has not been or is no longer
authorized to do business.
(xi) It shall be the sole and exclusive responsibility of the
Correspondent to comply with the Laws and Regulations relating to
each Introduced Account which effect listed option transactions
including, but not limited to, approval by the Correspondent's
Registered Options Principal or Senior Registered Options
Principal (as applicable), delivery of required Options
Disclosure Documents (and Supplements where applicable) and
option documentation.
V. Transactions and Margin
-----------------------
(i) It is understood that with respect to Introduced Accounts which
are margin accounts, CSC is responsible for compliance with
Regulation T, 12 C.F.R. Part 220, the Federal margin regulation
promulgated by the Board of Governors of the Federal Reserve
System (the "Board"), and any interpretative ruling issued by the
Board, and letter rulings of the Federal Reserve Bank of New
York, Rules and Interpretations of the New York Stock Exchange,
Inc. and any other applicable margin and margin maintenance
requirements of the Laws and Regulations. The Correspondent is
responsible to CSC for the collection of the margin required to
support each transaction, and to maintain the proper margin in
each Introduced Account and to insure that such margin is in
conformity with the above margin and margin maintenance
requirements. After such initial margin on each transaction has
been received, maintenance margin calls shall be generated by CSC
and made by CSC or by the
7
<PAGE>
Correspondent at the instructions of CSC. CSC shall have the
right to modify, in its sole discretion, the margin
requirements of any Introduced Account from time to time so
that CSC may call for additional margin. Therefore, CSC
shall be the sole judge as to the amount of margin to be
required of and maintained by Introduced Accounts. CSC may
impose such margin by individual security, by individual
Correspondent fusion or by a specified Introduced Account
and such margin need not be of general application to all
accounts.
(ii) On all transactions, the Correspondent shall be solely and
exclusively responsible to CSC for any loss, liability,
damage, cost or expense (including but not otherwise limited
to fees and expenses of legal counsel) incurred or sustained
by the Correspondent or CSC as result of the failure of any
Introduced Account to make timely payment for the securities
purchased by it or timely and good delivery of securities
sold for it, or timely compliance by it with margin or
margin maintenance calls (provided that CSC has timely
issued such call and/or given notice thereof to the
Correspondent or if conditions creating such call should be
reasonably known by Correspondent), whether or not any cash
and/or margin extensions have been granted by CSC pursuant
to the request of the Correspondent. Interest will be
charged by CSC for cash debits in cash accounts past
settlement date and/or margin debits in all Introduced
Accounts. The Correspondent agrees to be solely and
exclusively responsible for the payment and delivery of all
"when issued" or "when distributed" transactions which CSC
may accept, forward or execute for Introduced Accounts.
(iii) On all over-the-counter transactions for Introduced
Accounts, the Correspondent shall furnish CSC with the names
of the respective purchasing and selling (contra) broker-
dealers) except as otherwise provided in paragraph (iv) of
this Section, as set forth below), the names of the
purchasing and selling customers, the wholesale and retail
purchase/sale prices and mark-ups/mark-downs.
(iv) Should the Correspondent entrust the execution of an order
in an over-the-counter security to CSC or any entity
affiliated with CSC and the counter party is left at CSC's
discretion, CSC will assume the responsibility of paying the
Correspondent that which the counter party has failed to pay
pursuant to the over-the-counter order transaction (counter
party risk). In the case the Correspondent executes its own
over-the-counter order or designates the counter party, it
shall be understood that in the event the over-the-counter
dealer with whom the Correspondent dealt or whom it
designated fails to live up to its part of the transaction,
the Correspondent will assume the counter party risk and
reimburse CSC for any loss
8
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sustained thereby.
(v) The Correspondent shall be solely and exclusively responsible for
all orders placed on behalf of or by the Introduced Accounts. The
Correspondent is also responsible for establishing procedures to
insure that such orders are transmitted properly to CSC for
execution. CSC, in its reasonable business judgement, reserves
the right to reject any order which the Correspondent or its
designate may transmit to CSC for execution.
(vi) The Correspondent shall be solely and exclusively responsible for
the supervisory review of all orders for the Introduced Accounts
and shall insure that any orders and instructions given by it or
any of its employees to CSC pursuant to the terms of this
Agreement shall have been properly authorized in advance.
(vii) The Correspondent shall be solely and exclusively responsible for
sales and purchases for the Introduced Accounts that may create
or result in violation of any of the Laws and Regulations.
(viii) All transactions pursuant to the terms of this Agreement shall be
subject to the constitution, rules, by-laws, regulations, stated
practices, and customs and any modifications thereof of any
national securities exchange or other securities exchange or
market and its clearing house, if any, where executed, and the
Laws and Regulations. It is understood that the Correspondent
assumes sole and exclusive responsibility for compliance with the
Laws and Regulations in the same manner and to the same degree as
if the Correspondent were performing the services for the
Introduced Accounts that have been assumed by CSC pursuant to
this Agreement, except insofar as CSC may pursuant to paragraph
(iv) of this Section, as set forth above, select the counter
party to a particular transaction.
(ix) All transactions heretofore had between the Correspondent and CSC
with respect to orders given by or for the Introduced Accounts
and cleared through CSC shall be subject to the Provisions of
this Agreement.
VI. Supervisory Responsibility
--------------------------
(i) Correspondent shall have the sole and exclusive responsibility
for the review of all Introduced Accounts and for compliance with
any supervisory responsibilities under Rule 405(2) of the Rules,
including but not otherwise limited to matters involving the
investment objectives of the Introduced Accounts, the reasonable
basis for recommendations made to Introduced Accounts, and the
frequency of trading in the Introduced Accounts, whether or not
such transactions are instituted by the Correspondent, its
9
<PAGE>
PAGE>
partners, officers, employees or any registered investment
advisor.
(ii) The Correspondent and CSC shall each be responsible for
compliance with any supervisory procedures under Rule 342 of
the Rules and, to the extent applicable, any other provisions
of the Laws and Regulations, including but not otherwise
limited to supervising the activities and training of their
respective registered representatives, as well as all of their
other respective employees in the performance of functions
specifically allocated to them pursuant to the terms of this
Agreement.
VII. Information to be provided by the Correspondent
-----------------------------------------------
(i) The Correspondent shall provide CSC with copies of all
financial information and reports filed by the Correspondent
with the New York Stock Exchange, Inc. (if a member), the
National Association of Securities Dealers, Inc., the
Securities and Exchange Commission, and any other National
Securities Exchange (where a member) (including but not
otherwise limited to monthly and quarterly Financial and
Operational Combined Uniform Single Reports, i.e., "FOCUS"
Reports) simultaneous with the filing therewith.
(ii) The Correspondent shall submit to CSC on an annual basis the
audited financial statements of the Correspondent, its parent
organization (if applicable) and, when requested by CSC, its
affiliated entities. In addition, the Correspondent shall
submit to CSC upon request, information and reports relating to
the financial integrity of Correspondent, its parent
organization (if applicable) and its affiliated entities,
including but not otherwise limited to information regarding
the Correspondent's aggregate indebetedness ratio and net
capital.
(iii) The Correspondent shall provide CSC with all appropriate data
in its possession pertinent to the performance and supervision
of any function or responsibility specifically allocated to CSC
pursuant to the terms of this Agreement.
(iv) The Correspondent shall provide CSC with any amendment or
supplement to the Form BD of the Correspondent.
VIII. Information to be provided by CSC
---------------------------------
CSC shall provide the Correspondent with all appropriate data in its
possession pertinent to the proper performance and supervision of any
function specifically allocated to the Correspondent pursuant to the
terms of this Agreement. The Correspondent shall be responsible for and
shall promptly reimburse CSC for all costs incurred by CSC in
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<PAGE>
connection with the preparation and mailing of such information.
IX. Customer Notification and Correspondence
----------------------------------------
(i) The Correspondent shall be solely and exclusively responsible for
informing its customers in a written correspondence, the form and
substance of which will be mutually agreed upon, prior to the
effective date of this Agreement, as to the general nature of the
services to be provided by CSC pursuant to this agreement and the
right of such customers to reject the services provided herein.
Any new customers of the Correspondent shall also be informed as
provided herein. Any new customers of the Correspondent shall
also be informed as provided herein, verbally prior to such
customers becoming Introduced Accounts and in writing, once the
new accounts have been opened and accepted. The Correspondent
shall be solely and exclusively responsible for the payment of
all costs incurred in connection with the preparation and mailing
of such customer correspondence.
(ii) The Correspondent shall inform its customers pursuant to such
written correspondence that all inquiries and correspondence
should be directed to the Correspondent. All customer
correspondence shall be reviewed and responded to by the party
responsible for the specific area to which the inquiry or
compliant relates pursuant to the terms of this Agreement. In the
event such correspondence is improperly directed to either party,
the Correspondent or CSC shall expeditiously forward such
correspondence to the appropriate party.
X. Errors, Controversies and Indemnities
-------------------------------------
(i) Errors, misunderstandings or controversies, except those
specifically otherwise covered in this Agreement, between the
Introduced Accounts and the Correspondent or any of its
employees, which shall arise out of acts or omissions of the
Correspondent or any of its employees (including, without
limiting the foregoing, the failure of the Correspondent to
deliver promptly to CSC any instructions received by the
Correspondent from an Introduced Account with respect to the
voting, tender or exchange of shares held in such Introduced
Account), shall be the sole and exclusive responsibility and
liability of the Correspondent. In the event, however, that by
reason of such error, misunderstanding or controversy, the
Correspondent in its discretion deems it advisable to commence an
action or proceeding against an Introduced Account, the
Correspondent shall indemnify and hold CSC harmless from any
loss, liability, damage, cost or expense (including but not
otherwise limited to reasonable fees and expenses of legal
counsel) which CSC may incur or sustain in connection therewith
or under any settlement thereto. If such error, misunderstanding
or controversy shall
11
<PAGE>
result in the bringing of an action or proceeding against CSC,
the Correspondent shall indemnify and hold CSC harmless from any
loss, liability, damage, cost or expense (including but not
otherwise limited to reasonable fees and expenses of legal
counsel) which CSC incur or sustain in connection therewith or
under any settlement thereof.
(ii) Errors, misunderstandings or controversies, except those
specifically otherwise covered in this Agreement, between the
Introduced Accounts and the Correspondent or any of its
employees, which shall arise out of acts or omissions of CSC or
any of its employees, shall be the sole and exclusive
responsibility and liability of CSC. In the event, however, that
by reason of such error, misunderstanding or controversy, CSC in
its discretion deems it advisable to commence an action or
proceeding against an Introduced Account, CSC shall indemnify and
hold the Correspondent harmless from any loss, liability, damage,
cost or expense (including but not otherwise limited to
reasonable fees and expenses of legal counsel) which the
Correspondent may incur or sustain in connection therewith or
under any settlement thereof. If such error, misunderstanding or
controversy shall result in the bringing of an action or
proceeding against the Correspondent, CSC shall indemnify and
hold the Correspondent harmless from any loss, liability, damage,
cost or expense (including but not otherwise limited to
reasonable fees and expenses of legal counsel) which the
Correspondent may incur or sustain in connection therewith or
under any settlement thereof.
(iii) CSC and the Correspondent both agree to indemnify the other and
hold the other harmless from and against any loss, liability,
damage, cost or expense (including but not otherwise limited to
reasonable fees and expenses of legal counsel) arising out of or
resulting from any failure by the indemnifying party or any of
its employees to carry out fully the duties and responsibilities
assigned to the indemnifying party herein or any breach of any
representation or warranty herein by the indemnifying party under
this Agreement. The Correspondent hereby agrees to indemnify and
hold CSC harmless from and against any loss, liability, damage,
cost or expense (including but not otherwise limited to
reasonable fees and expenses of legal counsel) sustained or
incurred in connection herewith in the event any Introduced
Account fails to fully pay for a cash transaction or to meet any
initial margin call or subsequent maintenance calls, in
conformity with Section V hereof.
(iv) The indemnification provisions in this Agreement, shall remain
operative and in full force and effect, regardless of the
termination of this Agreement, and shall survive any such
termination.
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(v) Correspondent agrees to maintain, and to provide evidence
thereof to CSC, at least $250,000 blanket bond indemnity
bond insurance covering any and all acts of its
employees, agents and partners, with an insurance company
reasonably acceptable to CSC, listing CSC as an insured
party and permitting CSC to assume the policy in the
event of the Correspondent ceasing operations.
XI. Representations and Warranties
------------------------------
(a) The Correspondent represents and warrants as follows:
(i) The Correspondent will maintain at all times while this
Agreement is in full force and effect stated net capital
of not less than $100,000 unless CSC has otherwise agreed
in writing. The Correspondent will not carry customer,
broker or dealer accounts and will not receive or hold
funds under Rule 15c3-1 of the Securities Exchange Act of
1934, as amended, for those persons. The Correspondent
will immediately notify CSC when [i] its Aggregate
Indebtedness Ratio reaches or exceeds 10 to 1, [ii] if
the Correspondent has elected to operate under paragraph
[f] or Rule 15c3-1 of the Securities Exchange Act of
1934, as amended, when its net capital is less than 5% of
aggregate debit items computed in accordance with Rule
15c3-3, [iii] when the aggregate amount of any
withdrawals of equity capital and/or unsecured advances
or loans exceed 20% of excess net capital in any 30 day
period or 30% of excess net capital in any 90 day period
or [iv] its stated net capital is less than the minimum
amount required under this Agreement.
(ii) The Correspondent is a member of good standing of the
National Association of Securities Dealers, Inc. The
Correspondent will promptly notify CSC of any additional
exchange memberships or affiliations. The Correspondent
shall also comply with whatever non-member access rules
have been promulgated by any National Securities Exchange
or any other securities exchange of which it is not a
member.
(iii) The Correspondent is and during the term of this
Agreement will remain duly registered or licensed and in
good standing as a broker/dealer under all applicable
Laws and Regulations.
(iv) The Correspondent has all the requisite authority in
conformity with all applicable Laws and Regulations to
enter into this Agreement and to retain the services of
CSC in accordance with the terms thereof.
(v) The Correspondent is in compliance, and during the term
of this Agreement will remain in compliance with [i] the
capital and financial
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reporting requirements of every national securities exchange or
other securities exchange and/or other securities association of
which the Correspondent is a member, [ii] the capital requirements
of the Securities and Exchange Commission, and [iii] the capital
requirements of every state in which the Correspondent is licensed
as a broker/dealer.
(vi) The Correspondent shall not generate and/or prepare any statements,
billings or confirmations respecting any Introduced Account unless
expressly so instructed in writing by CSC.
(vii) The Correspondent shall keep confidential any information it may
acquire as a result of this Agreement regarding the business and
affairs of CSC, which requirement shall survive the life of this
Agreement.
(b) CSC represents and warrants as follows:
(i) CSC is a member in good standing of the National Association of
Securities Dealers, Inc., and the New York Stock Exchange, Inc.
(ii) CSC is and during the term of this Agreement will remain duly
licensed and in good standing as a broker/dealer under all
applicable Laws and Regulations.
(iii) CSC has all the requisite authority, in conformity with all
applicable Laws and Regulations, to enter into and perform this
Agreement.
(iv) CSC is in compliance, and during the term of this Agreement, will
remain in compliance, with [i] the capital and financial reporting
requirements of every national securities exchange and/or other
securities exchange or association of which it is a member, [ii] the
capital requirements of the Securities and Exchange Commission, and
[iii] the capital requirements of every state in which it is
licensed as a broker/dealer.
(v) CSC represents and warrants that the names and addresses of the
Correspondent's customers which have or which may come to its
attention in connection with the clearing and related functions it
has assumed under this Agreement are confidential and shall not be
utilized by CSC except in connection with the functions performed
by CSC pursuant to this Agreement. CSC shall send no written
information to such customers other than statements, bills or
notices of transactions in connection with its role as clearing
agent. Notwithstanding the foregoing, should an Introduced Account
request, on an unsolicited basis, that CSC or any entity affiliated
with CSC become its broker, acceptance or such Introduced Account by
CSC or any entity affiliated with CSC shall in no way violate
14
<PAGE>
this representation and warranty, nor result in a breach of this
Agreement.
(vi) CSC shall keep confidential any information it may acquire as a
result of this Agreement regarding the business and affairs of
the Correspondent, which requirement shall survive the life of
this Agreement.
XII. Termination - Event of Default
------------------------------
Notwithstanding any provision in this Agreement, the following events or
occurrences shall constitute an Event of Default under this Agreement:
(i) Either CSC or the Correspondent shall fail to perform or observe
any term, covenant or condition to be performed or observed by it
hereunder and such failure shall continue to be unremedied for a
period of 30 days after written notice from the non-defaulting
party to the defaulting party specifying the failure and
demanding that the same be remedied; or
(ii) Any representation or warranty made by either CSC or the
Correspondent herein shall provide to be incorrect at any time in
any material respect; or
(iii) A receiver, liquidator or trustee of either CSC or the
Correspondent, or of its property, held by either party,
appointed by court order and such order remains in effect for
more than 30 days; or either CSC or the Correspondent is
adjudicated bankrupt or insolvent; or any of its property is
sequestered by court order and such order mains in effect for
more than 30 days; or a petition is filed against CSC or the
Correspondent under any bankruptcy, reorganization, arrangement,
insolvency, readjustment of debt, dissolution or liquidation law
of any jurisdiction, whether now or hereafter in effect, and is
not dismissed within 30 days after such filing; or
(iv) Either CSC or the Correspondent or the respective parent
organization files a petition in voluntary bankruptcy or seeking
relief under any provision of any bankruptcy, reorganization,
arrangement, insolvency, readjustment of debt, dissolution or
liquidation law of the jurisdiction, whether now or hereinafter
in effect, or consents to filing of any petition against it under
any such law; or
(v) Either CSC or the Correspondent makes an assignment for the
benefit of its creditors, or admits in writing its inability to
pay its debts generally as they become due, or consents to the
appointment of a receiver, trustee or liquidator of either CSC or
the Correspondent, or of any property held by either party; or
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(vi) Either CSC or the Correspondent or their affiliated entities
hereto knowingly and willfully solicits or causes to solicit for
employment the employees of either party or their
affiliates/subsidiaries, successors or assignees without
prior consent of the other party; or
(vii) If research is provided by CSC or any entity affiliated with CSC
to the Correspondent and the Correspondent knowingly and
willfully reproduces or reprints in any fashion same or
represents to customers or to an unrelated third party that the
research supplied by CSC or such affiliated entity is that of the
Correspondent.
Upon the occurrence of any Event of Default, the non-defaulting party
may, at its option, by notice to the defaulting party declare that this
Agreement shall be thereby terminated and such termination shall be
effective as of the date such notice has been sent or communicated to the
defaulting party.
XIII. Remedies Cumulative
-------------------
The enumeration herein of specific remedies shall not be exclusive of
any other remedies. Any delay or failure by any party of this Agreement
to exercise any right, power, remedy or privilege herein contained, or
now or hereafter existing under any applicable statute or law, shall not
be construed to be a waiver of such right, power, remedy or privilege or
to limit the exercise of such right, power, remedy or privilege. No
single, partial or other exercise of any such right, power, remedy or
privilege shall preclude the further exercise thereof or the exercise of
any other right, power, remedy or privilege.
XIV. Miscellaneous
-------------
(1) As of the effective date of this Agreement, CSC will not convert
or allow to be converted to its records as Introduced Accounts
customer accounts of the Correspondent that are partially or
totally unsecured, securities in the name of the Correspondent's
customers, or legal transfer securities (securities in the name
of estates, trust, joint ownership, foreign ownership and such),
unless previously approved in writing by CSC. If in error such
accounts are converted to CSC books or records, CSC reserves the
right to convert back to the Correspondent or its previous
clearing firm said customer accounts and the positions.
(ii) CSC shall have the power to place open orders as instructed by
the Correspondent as of the effective date of this Agreement, and
appropriate adjustments shall be made by CSC to reflect that CSC
will now act as broker on open orders previously placed with
specialists on any national securities exchange or other
securities exchange.
16
<PAGE>
(iii) CSC shall have the power to effect appropriate adjustments with
respect to pending dividends and other distributions from the
effective date of this Agreement through the last payable date of
such pending dividends.
(vi) The Correspondent shall be responsible for providing annual
dividend and distribution information as contained in IRS Form
1087 (to include individual 1099 filings) and any other
information required to be reported by Federal, state or local
tax laws, rules and regulations, to its customers until the
effective date of this Agreement, whereupon CSC shall assume this
function as to Introduced Accounts.
(v) CSC shall have the power to allocate and make appropriate
adjustments for fails, reorganization accounts, other work in
process accounts, and overages relating to accounts of the
customers of the Correspondent that have become Introduced
Accounts pursuant to the terms of this Agreement.
(vi) The Correspondent shall assume all liabilities in connection with
the bad debts of all Introduced Accounts. Unsecured debits in the
Introduced Accounts shall be paid within 30 days of their origin
date, and it shall be the responsibility of the Correspondent to
collect such payments from its customers and transmit them to CSC
within such 30-day period. If any unsecured debit balances remain
outstanding beyond such 30-day period, CSC is authorized to apply
as payment of such debit balances commission fees owed to the
Correspondent in connection with transactions pursuant to this
Agreement.
(vii) Transfers of securities relating to Introduced Accounts shall be
frozen ten business days prior to the effective date of this
Agreement.
(viii) CSC shall limit its services pursuant to the terms of this
Agreement to that of clearing and execution functions and related
services expressly set forth herein. Correspondent shall not hold
itself out as an agent of CSC or any of the subsidiaries or
companies controlled directly or indirectly by or affiliated with
CSC or its parent.
(ix) This Agreement supersedes any previous agreement and may be
modified only in writing, signed by both CSC and the
Correspondent. Such modification shall not be deemed as a
cancellation of this Agreement.
(x) This Agreement shall be submitted to and/or approved by any
national securities exchange, or other regulatory and self-
regulatory bodies vested with the authority to review and/or
approve this Agreement or any amendment or modifications hereto.
In the event of any such disapproval, the parties hereto agree to
bargain in good faith to achieve the requisite
17
<PAGE>
approval. CSC will file a fully executed copy of this
agreement with the New York Stock Exchange.
(xi) This Agreement may be canceled by either of the parties
hereto upon sixty (60) days' written notice; provided,
however, that this Agreement may be canceled by either party
upon thirty (30) days' written notice if (i) the net
capital ratio of the other party exceeds 10 to 1, (ii) if
the other party has elected to operate under paragraph [f]
of Rule 15c3-1 of the Securities Exchange Act of 1934, as
amended, when its net capital is less than 5% of aggregate
debit items computed in accordance with Rule 15c3-3, (iii)
when the aggregate amount of any withdrawals of equity
capital and/or unsecured advances or loans exceed 20% of
excess net capital in any 30 day period or 30% of excess net
capital in any 90 day period or (iv) its stated net capital
is less than the minimum amount required under this
Agreement; and provided, further, that this Agreement may be
canceled by CSC at any time between the date on which this
Agreement is executed and the effective date of this
Agreement, if there is a material change in the control or
management of the Correspondent.
(xii) Any dispute or controversy between the Correspondent and CSC
relating to or arising out of this Agreement shall be
settled by arbitration before and under the rules of the
Arbitration Committee of the New York Stock Exchange, Inc.,
unless the transaction which gave rise to such dispute or
controversy was effected in another exchange or market which
provides arbitration facilities, in which case it shall be
settled by arbitration under such facilities.
(xiii) CSC will not be bound to make any investigation into the
facts surrounding any transaction that it may have with the
Correspondent on a principal or agency basis or that the
Correspondent may have with its customers or other persons,
nor will CSC be under any responsibility for compliance by
the Correspondent with any Laws and Regulations which may be
applicable to the Correspondent. It is understood that CSC
will assist the Correspondent in any investigation conducted
by the Correspondent.
(xiv) To facilitate the keeping of records by CSC the
Correspondent will turn over promptly to CSC any and all
cash remittances and securities which the Correspondent
receives from its customer. Concurrently with the delivery
of such funds or securities to the Correspondent, it shall
furnish CSC with such information as may be relevant or
necessary to enable CSC to record promptly an properly such
cash remittances and securities in the respective Introduced
Accounts.
18
<PAGE>
(xv) This Agreement shall be binding upon all successors, assigns
or transferees of both parties hereto, irrespective of any
change with regard to the name of or the personnel of the
Correspondent or CSC. Any assignments of this Agreement
shall be subject to the requisite review and/or approval of
any regulatory or self-regulatory agency or body whose
review and/or approval must be obtained prior to the
effectiveness and validity of such assignment. Except as
indicated below, no assignment of this Agreement by either
party shall be valid unless consented to in writing by the
other party. Any assignment by CSC to any subsidiary or to a
company affiliated with or controlled directly or indirectly
by CSC will be deemed valid and enforceable in the absence
of any consent from Correspondent. Neither this Agreement
nor any operation hereunder is intended to be, shall not be
deemed to be, and shall not be treated as a general or
limited partnership, association or joint venture or agency
relationship between the Correspondent and CSC.
(xvi) Should the Correspondent in any way attempt to hold itself
out as, advertise or in any way represent that it is the
agent of CSC or any affiliated entity, CSC shall have the
power, at is option, to terminate the Agreement and the
Correspondent shall be liable for any loss, liability,
damage, cost or expense (including but not otherwise limited
to reasonable fees and expenses of legal counsel) sustained
or incurred by CSC as a result of such representation of
agency or apparent authority to act as an agent of CSC, or
any affiliated entity, or agency by estoppel.
(xvii) The Correspondent shall not, without having obtained the
prior written approval of CSC, agree to place or place any
advertisement in any newspaper, publication, periodical or
any other media if such advertisement in any manner makes
reference to CSC, to any person or entity that directly, or
indirectly through one or more intermediaries, controls or
is controlled by, or is under common control with CSC and to
the clearing arrangements and/or any of the services
embodied in this Agreement.
(xviii) The Laws and Regulations require that CSC must have proper
documentation to support any account opened on its books,
including Introduced Accounts. If, after reasonable requests
therefor, the necessary documents so as to enable CSC to
comply with such account documentation requirements of the
Laws and Regulations have not been received by CSC, the
Correspondent shall receive notification that no further
orders will be accepted for the Introduced Accounts
involved. Should it happen that inadvertent orders are
placed for such accounts after this notice is received, no
commission credit will be granted from such order. On
receipt of the necessary documents, this restriction will be
lifted on future commissions, but any commissions withheld
will not be credited
19
<PAGE>
or paid. This Agreement is not in any way intended to limit the
responsibility of CSC under the Laws and Regulations with respect
to Introduced Accounts.
(xix) The construction and effect of every provision of this Agreement,
the rights of the parties hereunder and any questions arising out
of this Agreement, shall be subject to the statutory and common
law of the State of New York.
(xx) The headings preceding the text, articles and sections hereof
have been inserted for convenience and reference only and shall
not be construed to affect the meaning, construction or effect of
this Agreement.
(xxi) This Agreement shall cover only the type of services set forth
herein and is in no way intended nor shall be construed to bestow
upon the Correspondent any special treatment regarding any other
arrangements, agreements or understandings which presently exist
between Correspondent and CSC or which may hereinafter exist. The
Correspondent shall be under no obligation whatsoever to deal
with CSC or any of its subsidiaries or any companies controlled
directly or indirectly by or affiliated with CSC or its parent,
in any capacity other than as set forth in this Agreement.
Likewise, CSC shall be under no obligation whatsoever to deal
with the Correspondent or any of its affiliates in any capacity
other than as set forth in this Agreement.
(xxii) If any provision or condition of this Agreement shall be held to
be invalid or unenforceable by any court, or regulatory or
self-regulatory agency or body, such invalidity or
unenforceability shall attach only to such provision or
condition. The validity of the remaining provisions and
conditions shall not be affected thereby and this Agreement shall
be carried out as if any such invalid or unenforceable provision
or condition were not contained herein.
(xxiii) In the event that CSC assumes any contractual obligation on
behalf of the Correspondent relative to communications equipment,
the Correspondent hereby agrees to immediately absorb the
remaining portion of said contract if Correspondent terminates
the relationship with CSC. The Correspondent further agrees to
absorb any all costs associated with the removal or relocation of
any communications equipment installed by or at the direction of
CSC, if this agreement is terminated by the Correspondent.
(xxiv) Any unsecured debit residing in a customer account as a result of
the failure to perform on behalf of the customer and/or the
Correspondent will be the responsibility of the Correspondent.
Thirty (30) calendar days will
20
<PAGE>
be allowed for collection. If funds are not received, CSC
reserves the right to debit the Correspondent; bad debit,
collateral and/or commission refund account the amount of the
unsecured balance plus interest at the rate of 1/2% above the
prevailing broker call loan rate.
(xxv) The interest and handling expense (to include day charges) for
any DVP transaction that does not settle on a normal or regular
way basis or is rejected by the agent for any reason other than
CSC negligence is the responsibility of the Correspondent.
(xxvi) For the purposes of any and all notices, consents, directions,
approvals, restrictions, requests or other communications
required or permitted to be delivered hereunder, CSC's address
shall be 1000 Harbor Boulevard, 7th Floor, Building "A",
Weehawken, New Jersey 07087 and the Correspondent's address shall
be 525 Washington Blvd, Jersey City, NJ and either party may
change its address for notice purposes by giving written notice
pursuant to registered mail of the new address to the other
party.
(xxvii) This Agreement shall become effective on or about 5/5/97 or such
date mutually agreed upon by the parties hereto.
Made and executed at S.F. on the date hereinabove set forth.
Accepted and Agreed to:
CORRESPONDENT FIRM
By: [SIGNATURE ILLEGIBLE]
------------------------------------
Title: Managing Director
------------------------------------
Date: 4/25/97
------------------------------------
Accepted and Agreed to:
CORRESPONDENT SERVICES CORPORATION (CSC)
By: [SIGNATURE ILLEGIBLE]
-------------------------------
Title: President
-------------------------------
Date: 4/30/97
-------------------------------
21
<PAGE>
KNIGHT SECURITIES, L.P.
SCHEDULE A
CLEARANCE FEES:
- --------------
EQUITIES (LISTED/OTC) ONLY
DEALER:
<TABLE>
<CAPTION>
Daily Transaction Fee
----------------- ---
<S> <C>
****** trades and above *** per trade
****** to ****** trades *** per trade
up to ****** trades *** per trade
</TABLE>
CUSTOMER (COD):
*** per transaction
PLUS: FLOOR BROKERAGE/EXECUTION*:
<TABLE>
<S> <C> <C>
EQUITIES: *** per share Automated Market Orders (Up to 25,000 shares)
*** per share Limit Orders
*** Per share All others to include CSC Block Orders
</TABLE>
*If CSC is utilized for execution.
FINANCING CONSIDERATIONS
- ------------------------
DEBIT BALANCES:
Margin debit balances in proprietary accounts will be charged ***
FREE CREDIT BALANCES:
Interest will be paid on all free credit balances in proprietary accounts
***
SHORT INTEREST REBATES:
Rebates on short positions will be ***
***** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
<TABLE>
<CAPTION>
OTHER CONSIDERATIONS
--------------------
<S> <C>
- ---------------------------------------------------------------------------------
Average Price Transactions Not applicable
- ---------------------------------------------------------------------------------
Communications Costs predicated on number of devices,
locations and entitlements. National discount
packages available.
- ---------------------------------------------------------------------------------
D/K Charges **************
- ---------------------------------------------------------------------------------
Draft Charges Bank draft plus interest (if outside NYC).
- ---------------------------------------------------------------------------------
Electronic Mailbox ********* maintenance fee for
downloads users.
- ---------------------------------------------------------------------------------
Ex-Clearing ********* per transaction
- ---------------------------------------------------------------------------------
Extensions *******************
- ---------------------------------------------------------------------------------
Foreign Settlements To be decided.
- ---------------------------------------------------------------------------------
General Ledger Package Pricing available upon request.
- ---------------------------------------------------------------------------------
Miscellaneous Special Customized forms; Promotional
materials; Special Computer/Systems related
requests; Exchange fees *********
- ---------------------------------------------------------------------------------
New Account Credit Review *********
- ---------------------------------------------------------------------------------
Post Settlement Trade Correction *********
- ---------------------------------------------------------------------------------
Tenders and Exchanges Negotiated
- ---------------------------------------------------------------------------------
Trailer Processing Fee Mutual Funds, Insurance, RAPs, SWPs, etc.:
********* per item.
- ---------------------------------------------------------------------------------
Transfer Fees Accommodation transfer *********
Legal transfer *********
For restricted (Rule 144) legal transfers
some agents may assess additional fees.
- ---------------------------------------------------------------------------------
Unsecured Debits Interest will be charged until payment
received or debit reserved. Timeframes
allotted for collection determined by size of
unsecured balance.
- ---------------------------------------------------------------------------------
CHARGES APPLICABLE DIRECTLY TO RETAIL CLIENTS
---------------------------------------------
- ---------------------------------------------------------------------------------
ACAT Exit Fee ********* per account*
- ---------------------------------------------------------------------------------
Bank Fees; Returned Checks and ********* per item
Stop Payments
- ---------------------------------------------------------------------------------
Cash Accounts Debits Interest charged per *********
- ---------------------------------------------------------------------------------
Inactive Fee ********* per annum*
- ---------------------------------------------------------------------------------
Product Related Costs (IRAs, At rates currently in effect.
RMAs BSAs, etc.)
- ---------------------------------------------------------------------------------
Transaction Fee ********* per confirmation
- ---------------------------------------------------------------------------------
Wired (FED) Funds ********* per item
- ---------------------------------------------------------------------------------
</TABLE>
*Revenue shared evenly with Knight
***** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
2
<PAGE>
Confidential treatment has been requested for portions of this exhibit. The copy
filed herewith omits the information subject to the confidentiality request.
Omissions are designated as ******. A complete version of this exhibit has been
filed separately with the Securities and Exchange Commission.
Exhibit 10.2
CLEARING AGREEMENT
BETWEEN NATIONAL INVESTOR SERVICES CORP.
-and-
TRIMARK SECURITIES, L.P.
This agreement (the "Agreement"), dated as of June 24, 1997, between NATIONAL
INVESTOR SERVICES CORP. (hereinafter referred to as "NISC") and TRIMARK
SECURITIES, L.P. (hereinafter referred to as "TRIMARK"), sets forth the terms
and conditions under which NISC will provide execution and clearing services, on
a fully disclosed basis, to TRIMARK.
I. APPLICABLE LAWS AND RULES AND APPROVAL BY NYSE
----------------------------------------------
This Agreement and the obligations of the parties hereunder are subject to
all applicable provisions of federal, state and local laws, rules and
regulations and the constitution, by-laws, rules, regulations and stated
policies of the New York Stock Exchange, Inc. ("NYSE"), the National Association
of Securities Dealers ("NASD"), and any other securities exchange or association
or regulatory or self-regulatory organization vested with authority over the
parties and/or the transactions contemplated hereby (collectively, the "Laws and
Rules"). This Agreement will be submitted for approval by the NYSE, and will
become effective upon such approval. In the event of disapproval, the parties
will bargain in good faith to achieve the requisite approval.
II. SERVICES
--------
Services to be Performed by NISC. Subject to compliance by TRIMARK with its
--------------------------------
obligations under this Agreement and the Laws and Rules, NISC will perform the
following services:
1. Clearance of orders for TRIMARK's proprietary accounts (the
"Accounts"). Such Accounts shall not include accounts for any customers or
employees of TRIMARK.
2. Settlement of contracts and transactions in securities.
3. Execution of orders for the Accounts through the NYSE, including its
Superdot system, and other applicable exchanges, but only insofar as such orders
are transmitted by TRIMARK to NISC in accordance with Section IV.A. of this
Agreement.
4. Preparation and mailing of trade confirmations, which confirmations may
be in the form of a summary trade list, and monthly statements respecting each
of the Accounts in accordance with Section V.A. of this Agreement.
5. Engaging in all cashiering functions for the Accounts, including the
receipt, delivery and transfer of securities purchased, sold, borrowed and
loaned, receiving and
<PAGE>
distributing payment therefore, holding in custody and safekeeping all
securities and payments so received, the handling of margin accounts, including
paying and charging of interest, the receipt and distribution of dividends and
other distributions, and the processing of exchange offers, rights offerings,
warrants, tender offers and redemptions.
6. Withholding and payment to the United States Internal Revenue Service
of any amounts that NISC may be required to withhold and pay pursuant to the
Internal Revenue Code of 1986, as amended.
Any Additional services to be performed will be subject to the mutual
agreement of the parties.
Ill. TRANSMISSION AND ACCEPTANCE OF ORDERS
-------------------------------------
A. Transmission of Orders. All orders in Accounts will be transmitted to
----------------------
NISC by TRIMARK in accordance with such procedures as NISC may implement for
that purpose. NISC will have no duty of inquiry or investigation with respect to
any orders transmitted to it for execution or clearance nor any obligation to
verify the validity of, or proper authorization for, any orders or instructions
received by NISC from TRIMARK. TRIMARK will be responsible for the timely and
accurate transmission of all orders to NISC. as well as for any errors or
discrepancies therein.
B. Acceptance of Orders Orders accepted by NISC for execution and
--------------------
clearance will be executed and cleared in accordance with NISC's standard
practices and the Laws and Rules. NISC reserves the absolute right, exercisable
in its sole discretion, without prior notice to TRIMARK to reject for execution
and clearance any trades which exceed established limits or are otherwise
unacceptable to NISC. Notwithstanding its rights hereunder, NISC shall undertake
reasonable efforts to provide advance notice to TRIMARK of its intention to
reject any such trade.
C. Designation of Contra Brokers. Whenever TRIMARK directs NISC to route
-----------------------------
an order to a particular broker, dealer, or market for execution, including,
without limitation, designating the contra broker in an over-the-counter
transaction for an Account, TRIMARK shall be responsible to NISC for all aspects
of the transaction, including, without limitation, any duty of best execution or
any failure by such contra broker or dealer to settle the transaction for any
reason whatsoever, and TRIMARK will immediately reimburse NISC for any losses or
expenses sustained by NISC in connection therewith.
D. Margin Accounts. Prior to the execution or clearance of any margin
---------------
transaction in an Account, TRIMARK will obtain and provide NISC with a margin
agreement, hypothecation agreement and consent to loan of securities
(collectively, "margin agreement") executed by TRIMARK, such agreement to be in
form and substance satisfactory to NISC. TRIMARK understands and acknowledges
that Accounts shall be subject to all applicable
-2-
<PAGE>
margin requirements under Regulation T or any other provisions of the Laws and
Rules.
E. Order Limits; Position and Credit Limits TRIMARK will be responsible
----------------------------------------
for maintaining continuing familiarity and compliance with all limits on order
size and all position and credit limits which have been or may be established by
NISC with respect to transactions in the Accounts, which limits may be changed
from time to time by NISC in its sole discretion. TRIMARK agrees to notify NISC
and obtain its approval prior to the entry of any trade in an Account which
would exceed such limits.
F. Tender Offers and Rights Offerings During a tender period in which
----------------------------------
there are competing and counter tender offers for a security, NISC will tender
only upon the written instructions of TRIMARK and only on a trade date basis the
number of shares net long in the Account as of either the proration or
withdrawal date, which number will, at NISC's request, be confirmed in writing
by TRIMARK. At NISC's request, TRIMARK will also confirm in writing that such
tender is being made upon the instructions of persons authorized to direct the
disposition of the shares.
In connection with a rights offering, NISC will exercise rights only upon
the written instructions of TRIMARK and only on a trade date basis the number of
rights relating to shares net long in the Account, which number will, at NISC's
request, be confirmed in writing by TRIMARK. At NISC's request, TRIMARK will
also confirm in writing that such exercise is being made upon the instructions
of persons authorized to do so.
IV. CONFIRMATIONS AND STATEMENTS
----------------------------
A. Preparation and Transmission. NISC will prepare and mail to TRIMARK for
----------------------------
its proprietary accounts confirmations and monthly statements of account in
connection with all transactions executed or cleared through NISC. Such
confirmations may be in the form of a summary trade list.
B. Examination and Notification of Errors. TRIMARK will examine promptly
------------------------------- ------
all reports of executions and monthly statements of account and any other
statements or reports provided to TRIMARK by NISC. All such reports and
statements will be deemed accurate and correct, and TRIMARK will be deemed to
have waived any claim with respect to the accuracy or correctness of the
information therein, unless, within one (1) business day following the trade
date with respect to reports of executions and ten (10) business days of receipt
with respect to statements, TRIMARK notifies NISC of any alleged errors or
discrepancies therein. Any notice of error shall be accompanied by such
documentation as may be necessary to substantiate TRIMARK's claim. Upon the
request of NISC, TRIMARK will promptly provide any additional documentation NISC
reasonably believes is necessary or desirable to substantiate and correct any
such alleged error or discrepancy.
-3-
<PAGE>
NISC will inform TRIMARK as to any discrepancies regarding TRIMARK trades
immediately or as soon as practicable but not later than one (1) business day
from the discovery of such discrepancy.
V. BOOKS AND RECORDS
-----------------
NISC will prepare and maintain stock records and other prescribed books and
records of the services performed and transactions effected by NISC for the
Accounts on a basis consistent with generally accepted practices in the
securities industry and with the Laws and Rules governing clearing brokers. Any
reports relating to the Accounts which under the Laws and Rules are required to
be prepared and filed with the SEC or any other regulatory or self-regulatory
organization by, respectively, TRIMARK or NISC will remain the responsibility of
the respective parties, and NISC and TRIMARK each agrees promptly to provide the
other with any information in its possession necessary to enable the other to
prepare and file any such reports.
VI. CLEARING FEES
-------------
TRIMARK agrees to pay NISC the clearing fees and other amounts set forth in
Schedule A hereto for the execution, clearing and related services to be
provided under this Agreement. Schedule A is hereby incorporated in and made an
integral part of this Agreement. Schedule A may be amended from time to time as
may be agreed in writing by the parties.
VII. SECURITY FOR OBLIGATIONS OF TRIMARK
-----------------------------------
A. Lien and Security Interest. In order to secure the performance by
--------------------------
TRIMARK of all of its obligations under this Agreement, TRIMARK hereby grants
NISC a continuing lien, security interest in and right of setoff against the
Accounts or any other funds, securities or other property of TRIMARK held by
NISC. TRIMARK further agrees that NISC may debit any cash balances and/or
liquidate any securities of TRIMARK held by NISC and credit the proceeds to NISC
in such amounts as are necessary to satisfy TRIMARK's obligations under this
Agreement as NISC in its sole discretion deems appropriate. The lien, security
interest and right of setoff created hereunder will survive the termination of
this Agreement until such time as, in the sole discretion of NISC, security for
the performance of TRIMARK's obligations is no longer required.
B. Settlement Account and Security Deposit. NISC reserves the right, in
---------------------------------------
its sole discretion, upon written notice to TRIMARK, at any time, to require a
Security Deposit (the "Security Deposit") to be maintained by TRIMARK in an
account with NISC (the "Settlement Account"). The Settlement Account will
contain cash and/or securities issued or guaranteed as to principal and interest
by the United States ("U.S. Government Securities"). NISC reserves the right, in
its sole discretion, on written notice to TRIMARK, at any time, to
-4-
<PAGE>
increase the amount of the Security Deposit required to be maintained by
TRIMARK. TRIMARK agrees that if this Agreement is terminated for any reason,
NISC may deduct from the Security Deposit any amounts TRIMARK owes NISC because
of failure to meet any of TRIMARK's obligations under this Agreement.
C. Additional Remedies of NISC. In the event that TRIMARK fails to timely
---------------------------
perform any of its financial responsibilities, or NISC in its sole discretion
deems it necessary for its protection, NISC is authorized, upon providing
notification to TRIMARK:
1. To Sell any or all securities or other property which may be in
its possession, or which NISC may be carrying for the Account, and to apply the
proceeds of such sale and any cash in the Account to amounts owed to NISC
hereunder.
2. To buy in any securities or other property of which the account
may be short.
3. To cancel any outstanding order.
4. To take such other steps as NISC may in its sole discretion
determine appropriate under the circumstances.
Any sale or purchase made pursuant to this Section VIII.C shall be made,
at the sole discretion of NISC, on the securities exchange or other market where
such business is then usually transacted, or at public auction or at private
sale, without advertising the same and without notice to TRIMARK or upon its
employees, officers or directors and NISC may purchase the whole or any part
thereof free from any right of redemption, with TRIMARK remaining liable for any
deficiency. It is hereby understood that a prior tender, demand or call of any
kind from NISC or prior notice from NISC of the time and place of such sale or
purchase shall not be considered a wavier of NISC's right to sell or buy any
securities and/or other property held by NISC or owed NISC by TRIMARK at any
time. TRIMARK agrees to reimburse NISC for any expenses incurred by NISC in
exercising its remedies under this Section VIII.C, including attorney's fees.
VIII. INFORMATION TO BE SUPPLIED BY TRIMARK
-------------------------------------
A. Financial Statements and Other Reports. On or before the execution of
--------------------------------------
this Agreement, TRIMARK will have supplied NISC with copies of its most recent
audited annual financial statements and its most recent unaudited quarterly
financial statements. Throughout the term of this Agreement, TRIMARK will
continue to promptly provide NISC with copies of its audited annual and
unaudited quarterly financial statements, together with any amendments thereto,
for each subsequent fiscal year and quarterly period. TRIMARK will advise NISC
in writing of any material errors in or omissions from such financial
statements, or of any material adverse change in its financial condition or
business prospects, immediately upon becoming aware of such error, omission or
change. In addition, simultaneously with their
-5-
<PAGE>
filing, TRIMARK will supply NISC with copies of all financial information and
reports filed by TRIMARK with the SEC, the NYSE, the NASD and any other national
securities exchange or association of which it is a member, including but not
limited to its monthly and quarterly Financial and Operational Combined Uniform
Single ("FOCUS") Reports, any amendment or supplement to its Form BD, and any
reports on Form U-4 or Form U-5 relating to TRIMARK's principals, together with
any amendments or supplements to any of the foregoing information or reports.
TRIMARK will promptly supply NISC with such other information or reports
relating to TRIMARK or its principals or representatives as reasonably requested
by NISC.
B. Suspension or Restriction In the event that TRIMARK or any registered
-------------------------
representative of TRIMARK becomes subject to revocation, suspension, bar,
restriction, censure or other formal disciplinary action by the SEC, NYSE, NASD,
or any other regulatory body having jurisdiction over TRIMARK, TRIMARK will
notify NISC immediately.
IX. INDEMNIFICATION
---------------
A. Indemnification Obligation of TRIMARK. TRIMARK hereby agrees to
-------------------------------------
indemnify, defend and hold harmless NISC and its officers, directors, employees,
affiliates and agents, successors and assigns (collectively "NISC Indemnitees")
from and against all claims, demands, proceedings, suits and actions made or
brought against NISC Indemnitees and all of NISC Indemnitees' liabilities,
losses, damages, sanctions, judgments, expenses, attorneys' fees and costs
(collectively "claims") arising out of one or more of the following:
1. Failure of TRIMARK to make payment when due for the securities
purchased or to deliver when due securities sold for the Account.
2. Default or error by any broker-dealer other than NISC with whom
TRIMARK executes a transaction for the Account.
3. Failure of TRIMARK properly to satisfy or perform any of its other
responsibilities under this Agreement or commission by TRIMARK of any error for
which TRIMARK is responsible under the terms of this Agreement.
4. Any claim by any third party based on conduct or omissions of
TRIMARK or arising from the clearing relationship between TRIMARK and NISC
except to the extent such claim has resulted from NISC's gross negligence or
willful misconduct.
5. Any adverse claims with respect to any customer securities
delivered or cleared by NISC.
6. Any dishonest, fraudulent, grossly negligent or criminal act or
omission on the part of any of TRIMARK's officers, partners, employees, agents
or customers.
-6-
<PAGE>
7. Breach by TRIMARK of any representation or warranty made by it
under this Agreement.
B. Indemnification Obligation of NISC. NISC hereby agrees to indemnify,
----------------------------------
defend and hold harmless TRIMARK and its officers, directors, employees,
affiliiates and agents, successors and assigns (collectively "TRIMARK
Indemnitees") from and against all claims, demands, proceedings, suits and
actions made or brought against TRIMARK Indemnitees and all of TRIMARK
Indemnitees' liabilities, losses, damages, sanctions, judgments, expenses,
attorneys' fees and costs (collectively "claims") arising out of one or more of
the following:
1. Failure of NISC to make any payment due for securities sold or
delivered when due securities purchased for the Account.
2. Failure of NISC properly to satisfy or perform any of its
responsibilities under this Agreement or commission by NISC of any error for
which NISC is responsible under this Agreement.
3. Any dishonest, fraudulent, grossly negligent or criminal act or
omission on the part of any of NISC's officers, partners, employees, agents or
customers.
4. Breach by NISC of any representation or warranty made by NISC
under this Agreement.
C. Indemnification Procedures. Promptly upon receipt of notice of any
--------------------------
claim with respect to which a party hereto is entitled to indemnification under
Section 8(a) or (b) above, Indemnitor shall institute defense of such claim at
its sole expense, using counsel reasonably acceptable to Indemnitee. Indemnitor
shall keep Indemnitee informed of the status of defense of such claim, and
Indemnitor shall not agree to any settlement without the consent of Indemnitee
which consent shall not be unreasonably withheld. If, within ten (10) days
following receipt of notice of such claim, Indemnitor shall fail to properly
institute the defense of such claim, Indemnitee shall have the right to defend
against the same at Indemnitor's cost and expense. In the event that Indemnitee
is required to institute legal proceedings to enforce Indemnitor's
indemnification obligations, Indemnitee shall be entitled to recover from
Indemnitor its costs and expenses, including attorneys' fees, incurred in such
proceedings.
X. LIMITATION OF LIABILITY OF NISC
-------------------------------
A. In no event will NISC be responsible to TRIMARK, or to any other person
for indirect or consequential damages arising from or relating to any actual or
alleged failure by NISC to perform the functions or provide the services
required by this Agreement, regardless of whether NISC has been advised of or
might otherwise have anticipated the possibility of such damages. NISC's sole
responsibility and liability for any such actual or alleged failure will be to
TRIMARK, and notwithstanding anything to the contrary in this Agreement, NISC
will have
-7-
<PAGE>
no liability whatsoever for any losses, damages, costs or expenses which are not
finally determined by a court of competent jurisdiction to have been caused
solely by its own gross negligence or willful misconduct. NISC will not be bound
to make any investigation into the facts surrounding any transaction that it may
have with TRIMARK or that TRIMARK may have with or on behalf of other persons,
nor will NISC be responsible for compliance by TRIMARK with the Laws and Rules
in connection with any Account or the performance by TRIMARK of its obligations
under this Agreement. TRIMARK acknowledges and agrees that this Agreement
significantly limits the liability of NISC and that such limitation is fair and
reasonable in light of the limited responsibilities of NISC, and the amounts
payable to NISC for its services, under this Agreement.
B. NISC shall use its best efforts to promptly notify TRIMARK of any
systems or communications failures. To the extent that TRIMARK is unaware of any
such systems or communications failures known to NISC, NISC shall be responsible
for any orders accepted from TRIMARK but not transmitted to the appropriate
exchange as a direct result therefrom, except that NISC shall not be responsible
in those circumstances where the appropriate exchange is itself unable to accept
the order flow from NISC. Under no circumstances shall NISC be responsible for
any loss, expense or damage suffered by TRIMARK as a result of any systems or
communications failures after providing notice to TRIMARK of such occurrence. In
any event, whether or not NISC has been advised of or might otherwise have
anticipated the possibility of such damages, NISC will not be responsible for
any indirect or consequential damages which TRIMARK may incur or experience as a
result of the foregoing.
XI. ADDITIONAL REPRESENTATIONS, WARRANTIES AND COVENANTS
----------------------------------------------------
A. Representations, Warranties and Covenants of TRIMARK. TRIMARK
----------------------------------------------------
represents, warrants and covenants to NISC as follows:
1. TRIMARK is and will remain during the term of this Agreement duly
registered and in good standing as a broker-dealer with the SEC, a member firm
in good standing of the NASD, and a member in good standing of every national
securities exchange and association of which it is a member.
2. TRIMARK has all requisite authority in conformity with all Laws
and Rules to enter into and perform this Agreement and has taken all necessary
actions to authorize the execution of this Agreement and the performance of its
obligations hereunder.
3. TRIMARK and each of the other TRIMARK Parties is and during the
term of this Agreement will remain in compliance with the Laws and Rules,
including but not limited to the registration, qualification, capital, financial
reporting, customer protection, and similar requirements of the SEC, the NASD,
any other securities exchange or association of which it is a member, and every
state to which jurisdiction it is subject.
-8-
<PAGE>
4. TRIMARK will at all times during the term of this Agreement
maintain minimum net capital equal to or greater than the amount required under
the Law and Rules.
5. All orders and instructions transmitted to NISC by TRIMARK shall
be valid and shall have been duly and properly authorized.
6. There is no action, suit, investigation, inquiry or proceeding
(formal or informal) pending or threatened against or affecting TRIMARK or any
of the other TRIMARK Parties, by or before any court or other tribunal,
arbitrator , governmental agency, instrumentality or authority or any self-
regulatory or clearing organization, as to which NISC has not been informed and
provided with copies of relevant documents. In the event any such action, suit,
investigation, inquiry or proceeding is initiated or threatened at any time
during the term of this Agreement, TRIMARK will promptly notify NISC in writing
and provide it with copies of all relevant documents related thereto.
7. TRIMARK will maintain blanket bond insurance policies satisfactory
to NISC covering any and all acts, errors, and omissions of any of the TRIMARK
Parties and adequate fully to protect and indemnify NISC against any loss,
liability, damage, claim, cost or expense (including but not limited to
attorneys' fees) which NISC may suffer or incur directly or indirectly as a
result of any such act, error, or omission.
B. Representations, Warranties and Covenants of NISC. NISC represents,
-------------------------------------------------
warrants and covenants to TRIMARK as follows:
1. NISC is duly registered and in good standing as a broker-dealer
with the SEC, is a member firm in good standing of the NASD and the NYSE, and is
a member in good standing of every national securities exchange and association
of which it is a member.
2. NISC has all requisite authority in conformity with all Laws and
Rules to enter into and perform this Agreement and has taken all necessary
actions to authorize the execution of this Agreement and the performance of its
obligations hereunder.
XII. NO PARTNERSHIP OR AGENCY
------------------------
Neither this Agreement nor any activity hereunder will create a general or
limited partnership, association, joint venture, branch or agency relationship
between TRIMARK and NISC. TRIMARK will not hold itself out as an agent of NISC
or of any subsidiary or company controlled directly or indirectly by or
affiliated with NISC, nor will it employ NISC's name in any manner that creates
the impression that the relationship created or intended between them is
anything other than that of clearing broker and introducing broker. TRIMARK will
not, without the prior written approval of NISC. place any advertisement in
-9-
<PAGE>
any newspaper, publication, periodical or any other media if such advertisement
in any manner makes reference to NISC or to the clearing arrangements
contemplated by this Agreement.
XIII. CONFIDENTIALITY
---------------
TRIMARK and NISC will each keep confidential any information acquired as a
result of this Agreement regarding the business and affairs of the other, except
such information as may be required to be disclosed pursuant to subpoena, court
order or in any regulatory or self-regulatory inquiry, investigation, proceeding
or other matter. TRIMARK and NISC shall each give the other prompt notice of the
receipt of any such court order or subpoena prior to such party's compliance
therewith. TRIMARK agrees not to disclose the terms of this Agreement to any
person or entity except to regulatory bodies with appropriate jurisdiction and
to authorized employees of TRIMARK on a need-to-know basis. The confidentiality
provisions of this Agreement will survive the termination of this Agreement.
XIV. TERM AND TERMINATION
--------------------
A. This Agreement shall remain in effect until terminated by either party
upon sixty (60) days prior written notice to the other party.
B. Termination of this Agreement will not affect any of the rights or
liabilities of the parties relating to business transacted prior to the
effective date of such termination. From the date of termination until transfer
or delivery of all Accounts, the rights and liabilities of the parties relating
to any business transacted after such termination shall be governed by the same
terms as those set forth in this Agreement.
XV. NOTICES
-------
Except as otherwise expressly provided herein, any notice or instruction
required or permitted to be given under this Agreement shall be in writing,
shall be effective upon receipt and shall be sent by hand or by certified mail,
in either case, return receipt requested, to the parties at the following
addresses, or at such other address as to which notice in writing shall have
been given:
If to NISC:
NATIONAL INVESTOR SERVICES CORP. With copy to:
55 Water Street Richard H Neiman, General Counsel
New York, NY 10005 100 Wall Street
Attn: Mr. Peter Wigger New York, NY 10005
Fax No: (212) 968-0400 Fax No. (212) 509-8099
-10-
<PAGE>
If to TRIMARK: Trimark Securities, L.P.
Attn: Robert Lazarowitz
100 Manhattanville Road
Purchase, NY 10577
Fax No: (914) 251-5839
XVI. MISCELLANEOUS
-------------
A. Exchange of Information. Each party will promptly supply the other
-----------------------
with all appropriate information in its possession necessary or appropriate to
enable the other party properly to perform its obligations under this Agreement.
B. No Third-Party Beneficiaries. This Agreement is between NISC and
----------------------------
TRIMARK only, and is not intended to confer any benefits or rights upon any
other persons (other than NISC Indemnitees) not expressly made parties hereto.
C. Remedies Cumulative. The enumeration herein of specific remedies shall
-------------------
not be exclusive of any other remedies. Any delay or failure by any party to
this Agreement to exercise any right or remedy under this Agreement or under the
Laws and Rules, or the single or partial exercise of any such right or remedy,
will not be construed to be a waiver of any such rights or remedies, or to limit
the exercise of such rights or remedies.
D. Compliance with NYSE Rules. Whenever the responsibility for compliance
--------------------------
with any Rule of the NYSE is allocated to TRIMARK under this Agreement, TRIMARK
shall be responsible to NISC for such compliance to the same extent as if it
were, and regardless of whether it actually is, a member firm of the NYSE.
TRIMARK specifically agrees to be responsible for the supervision of its
employees in accordance with NYSE Rule 342.
E. Merger; Amendment. This Agreement supersedes all other understandings
-----------------
and agreements between the parties with respect to the subject matter hereof.
This Agreement may not be amended except by a writing signed by the parties
hereto.
F. Assignment. This Agreement shall be binding upon and inure to the
----------
benefit of the respective successors and authorized assigns of the parties.
Neither party may assign this Agreement without the prior written consent of the
other party.
G. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of New York, without regard to its
conflict of laws principles.
H. Arbitration. Any controversy arising out of or relating in any way to
-----------
this Agreement will be submitted to arbitration conducted only under the
provisions of the Constitution and Rules of the NYSE or pursuant to the Code of
Arbitration of the NASD.
-11-
<PAGE>
Arbitration must be initiated by service upon the other party of a written
demand for arbitration or notice of intention to arbitrate. Judgment upon any
award rendered by the arbitrator may be entered in any court having
jurisdiction.
I. Force Majeure. Neither NISC nor TRIMARK shall be liable for any
-------------
default resulting from any circumstances beyond its reasonable control,
including without limitation computer malfunctions, labor disputes, natural
disasters and acts of God.
J. Headings. The headings contained herein have been inserted for
--------
convenience and ease of reference only and shall not be construed to affect the
meaning, construction or effect of this Agreement.
L. Enforceability. If any provision or condition of this Agreement is
--------------
held to be invalid or unenforceable by any court, arbitration tribunal or
regulatory or self-regulatory agency or body, the validity of the remaining
provisions and conditions will not be affected thereby and this Agreement will
be carried out as if any such invalid or unenforceable provision or condition
were not contained herein.
M. Counterparts. This Agreement may be executed in counterparts, each of
------------
which will constitute an original, and all of which together will constitute one
and the same agreement.
IN WITNESS WHEREOF the parties have executed this Agreement as of the date first
written above.
NATIONAL INVESTOR SERVICES CORP. TRIMARK SECURITIES, L.P.
By: /s/ Joseph N. Barra By: /s/ Robert Lazarowitz
-------------------------- ----------------------------
Joseph N. Barra Robert Lazarowitz
President Senior Vice President
-12-
<PAGE>
================================================================================
Exhibit A
================================================================================
Trimark Pricing Schedule
Third Market $ *** per trade
Institutional Clearance ***** per trade
Exchange Fees Pass Thru*
Interest Charges
- ----------------
Debit balances: *************************
Interest Income
- ---------------
Free Credit Balances
Based upon the *****************
********************************
Short Sale Balances
Based upon *********************
********************************
********************************
*NISC shall use its best efforts to negotiate monthly with Exchange Floor
Specialists in an effort to obtain lowest possible execution fees for DOT
orders. The actual rates NISC is able to negotiate will be passed on directly to
Trimark and will be payable upon presentation of DOT bills.
***** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of the
____ day of May, 1998, between KNIGHT/TRIMARK GROUP, INC. (the "Company"), a
corporation of the State of Delaware, and ROBERT LAZAROWITZ ("the Employee").
WITNESSETH
WHEREAS, the Employee is one of the founders and initial members of
the Company, which, through its subsidiaries, is engaged in the business of
operating a wholesale over-the-counter market maker business and a third-market
broker-dealer business;
WHEREAS, the Company recognizes that the Employee has special skills,
knowledge and expertise essential to the Company's operations; and
WHEREAS, the Company desires to employ the Employee and the Employee
desires to be employed by the Company on the terms provided herein.
NOW, THEREFORE, the Company and the Employee, in consideration of the
agreements contained herein, agree as follows:
<PAGE>
1. EMPLOYMENT.
The Company shall employ the Employee to perform the duties described in
this Agreement, upon the terms and conditions set forth herein, and the Employee
accepts such employment.
2. DUTIES.
The Employee shall serve as Executive Vice President of the Company and
Chief Operating Officer of Trimark Securities, Inc., or such other position or
positions as may be agreed in writing between the Employee and the Company, and
shall perform such duties, services and responsibilities incident to such
position or positions as determined from time to time by the Board of Directors
of the Company (the "Board of Directors"). The Employee shall devote his full
business time, attention and skill to the performance of such duties, services
and responsibilities, and will use his best efforts to promote the interests of
the Company. The Employee will not, without the prior written approval of the
Board of Directors, engage in any other business activity which would interfere
with the performance of his duties, services and responsibilities hereunder or
which is in violation of policies established from time to time by the Company.
<PAGE>
3. EMPLOYMENT TERM.
The term of employment under this Agreement (the "Employment Term") shall
be for a period beginning on the date of the closing of the Initial Public
Offering (the "Closing") and ending on the fourth anniversary thereof (the
"Initial Termination Date"), unless earlier terminated as provided herein;
provided, however, that the Employment Term shall be automatically extended for
- --------- -------
one-year periods unless either the Company or the Employee provides the other
party with written notice at least 60 days prior to any extension date that it
or he desires to terminate the Employee's employment under this Agreement. The
term of this Agreement shall be coincident with the Employment Term and the
Employment Term shall include any extensions provided in this Section 3.
4. COMPENSATION.
As full compensation for his services to the Company, and on the condition
that the Employee faithfully keeps and performs every condition and covenant
hereunder:
(a) SALARY. The Company shall during the Employment Term pay the Employee
a salary (the "Salary") at an annual rate of $250,000, payable in equal monthly
installments on the first day of each month ("Salary"). From time to time, the
Board of Directors may increase the Salary as it deems appropriate.
(b) BONUS. (i) The Company agrees to adopt, effective on the first day of
the Employment Term, the Knight/Trimark Group, Inc. 1998 Management
3
<PAGE>
Incentive Performance Plan (the "Plan"). The Plan is incorporated herein by
reference. The Employee shall be eligible to be paid a bonus (the "Bonus") from
the Plan pursuant to the terms and conditions provided therein.
(ii) Immediately following each of the Company's fiscal years
following the date hereof through March 31, 2000, the Company shall pay the
Employee a bonus (the "Earnings Bonus", and collectively with the Profit Pool
Bonus, the "Bonus") equal to five percent (5%) of the pre-tax earnings for such
fiscal year of Trimark Securities, Inc.
(c) BENEFITS. In addition to the payment of Salary and any Bonus which may
become payable as described above, the Employee shall be entitled to health,
disability and life insurance benefits generally available to management
employees of the Company having comparable responsibilities and for the
reimbursement of all reasonable and documented business expenses.
(d) SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN. In addition to the Salary
Bonus and Benefits described above, the Company agrees to adopt, effective on
the first day of the Employment Term, a Supplemental Executive Retirement Plan
("SERP"). The SERP is incorporated herein by reference. The employee shall be
eligible to participate in the SERP pursuant to the terms and conditions
provided therein.
The Salary and Bonus shall be payable in accordance with the normal payroll
practices of the Company then in effect and subject to all applicable taxes
required to be withheld by the Company pursuant to federal, state or local law.
4
<PAGE>
The Employee shall be solely responsible for income and earnings taxes imposed
on the Employee by reason of any cash or non-cash compensation and benefits
provided hereunder.
5. TERMINATION.
The Employee's employment with the Company will terminate at the end of the
Employment Term or upon the earlier occurrence of any of the following events:
(a) The death of the Employee.
(b) The mutual agreement between the Company and the Employee on an
early termination date.
(c) The termination of employment by the Company's unilateral action
without "Cause" (as defined below).
(d) The termination of employment by the Company's unilateral action with
Cause.
(e) The termination of employment by the Employee's unilateral action.
In the event of termination of this Agreement, for whatever reason, the
Employee agrees to cooperate with the Company and to be reasonably available to
the Company with respect to continuing and/or future matters arising out of the
Employee's employment or any other relationship with the Company, whether such
matters are business-related, legal or otherwise. For purposes of this
Agreement, the term "Cause" shall mean (i) misappropriation of any material
5
<PAGE>
amount of money or other assets or properties of the Company or any affiliate of
the Company, (ii) a material breach by the Employee of the terms of this
Agreement, which breach shall remain unremedied for 30 days after notice of the
same shall have been given to the Employee by the Company and (iii) the
conviction of the Employee for a felony. The provisions of this paragraph shall
survive termination of this Agreement.
6. SEVERANCE.
If the Employee's employment with the Company terminates pursuant to
Sections 5(a), (b) or (c), the Company will pay the Employee (i) in one lump sum
within 30 days following such termination a severance payment equal to $500,000
and (ii) any amount which would have been payable, and at such time as payment
would have been required under Section 4(b)(ii) hereof. The severance payments
referred to in the preceding sentence shall constitute the exclusive payments
due the Employee upon termination under this Agreement, including any payment
which may otherwise be payable pursuant to any other separation or severance
policy established or maintained by the Company.
7. EMPLOYEE COVENANTS.
(a) NON-COMPETE. (i) Subject to section 7(a)(iii), the Employee
agrees that the Employee will not, during the Employment Term and for a period
of two years thereafter, directly or indirectly own, manage, operate, join,
control,
6
<PAGE>
be employed by, or participate in the ownership, management, operation or
control of or be connected in any manner, including but not limited to holding
the positions of shareholder, director, officer, consultant, independent
contractor, employee, partner, or investor, with any Competing Enterprise
(defined below); provided, however, that the Employee may invest in stocks,
-------- -------
bonds, or other securities of any person, firm, corporation or their business
organization (but without otherwise participating in the business thereof) if
(i) such stocks, bonds, or other securities are listed on any national
securities exchange or are registered under Section 12(g) of the Securities
Exchange Act of 1934, and (ii) his investment does not exceed, in the case of
any class of the capital stock of any one issuer, one percent of the issued and
outstanding shares, or in the case of bonds or other securities, one percent of
the aggregate principal amount thereof issued and outstanding.
(ii) The term "Competing Enterprise" shall mean any person,
corporation, partnership or other entity that is engaged in the business of
operating a wholesale over-the-counter market maker business or a third market
broker-dealer business.
(iii) Notwithstanding anything to the contrary contained herein,
the provisions of Section 7(a)(i) shall not apply from and after the Employee's
termination of employment pursuant to Section 5(b) or Section 5(c) above.
(b) TRADE SECRETS. The Employee agrees and understands that in the
Employee's position with the Company, the Employee will be exposed to and
7
<PAGE>
receive information relating to the confidential affairs of the Company,
including but not limited to business and marketing plans, membership lists,
strategies, customer information, other information concerning the Company's
services, development, financing, expansion plans, business policies and
practices, and other forms of information considered by the Company to be
confidential and in the nature of trade secrets. The Employee agrees that
during the Employment Term and at all times thereafter the Employee will keep
such information confidential and not disclose such information, either directly
or indirectly, to any third person or entity without the prior written consent
of the Company. This confidentiality covenant has no temporal, geographical or
territorial restriction. Upon termination of this Agreement, the Employee will
promptly supply to the Company all property, keys, notes, memoranda, writings,
lists, files, reports, customer lists, correspondence, tapes, disks, cards,
surveys, maps, logs, machines, technical data or any other tangible product or
document which has been produced by, received by or otherwise submitted to the
Employee during or prior to the Employment Term.
(c) NON-SOLICITATION. The Employee agrees that (i) if his employment is
terminated for any reason he will not for one year following the termination of
employment directly or indirectly solicit for employment, including without
limitation recommending to any subsequent employer the solicitation for
employment of, any key employee employed by the Company, and (ii) he will not at
any time during his employment or at any time after termination of employment,
8
<PAGE>
publish any statement or make any statement (under circumstances reasonably
likely to become public or that he might reasonably expect to become public)
critical of the Company, or in any way adversely affecting or otherwise
maligning the business or reputation of the Company or any of its affiliates.
(d) REMEDY. The Employee further agrees that any breach of the terms of
this Section 7 would result in irreparable injury and damage to the Company for
which the Company would have no adequate remedy at law; the Employee therefore
also agrees that in the event of said breach or any threat of breach, the
Company shall be entitled to an immediate injunction and restraining order to
prevent such breach and/or threatened breach and/or continued breach by the
Employee and/or any and all persons and/or entities acting for and/or with the
Employee, without having to prove damages, and to all costs and expenses,
including reasonable attorneys' fees and costs, in addition to any other
remedies to which the Company may be entitled at law or in equity. The terms of
this paragraph shall not prevent the Company from pursuing any other available
remedies for any breach or threatened breach hereof, including but not limited
to the recovery of damages from the Employee.
(e) SURVIVAL. The provisions of this Section 7 shall survive any
termination of this Agreement and the Employment Term, and the existence of any
claim or cause of action by the Employee against the Company, whether predicated
on this Agreement or otherwise, shall not constitute a defense to the
enforcement by the Company of the covenants and agreements of this Section 7.
9
<PAGE>
8. INDEMNIFICATION.
The Company shall indemnify and hold harmless the Employee to the fullest
extent permitted by law from and against any and all losses, claims, demands,
costs, damages, liabilities (joint or several), expenses of any nature
(including reasonable attorneys' fees and disbursements), judgments, fines,
settlements, and other amounts arising from any and all claims, demands,
actions, suits, or proceedings, whether civil, criminal, administrative or
investigative, in which the Employee may be involved, or threatened to be
involved as a party or otherwise, arising out of or incidental to the formation,
business, or activities of or relating to the Company in the Employee's capacity
as an employee, officer, member or representative of the Company, regardless of
whether the Employee continues to be an employee, officer, member or
representative at the time any such liability or expense is paid or incurred;
provided, however, that this provision shall not eliminate or limit the
- -------- -------
liability of the Employee (i) for any breach of the Employee's duty of loyalty
to the Company or its members, (ii) for acts or omissions which involve
intentional misconduct or a knowing violation of law, (iii) for any transaction
from which the Employee received any improper personal benefit and (iv) for any
breach of any provision of this Agreement.
10
<PAGE>
9. NOTICES.
All notices, demands, requests or other communications which may be or are
required to be given, served, or sent by a party pursuant to this Agreement
shall be in writing and shall be hand delivered (including delivery by courier),
mailed by first-class, registered or certified mail, return-receipt requested,
postage prepaid, or transmitted by telegram, telex or facsimile transmission,
addressed as follows:
(a) If to the Company:
Knight/Trimark Group, Inc.
525 Washington Blvd.
Jersey City, New Jersey 07310
Attn: Mr. Kenneth Pasternak
(a) If to the Employee:
Robert Lazarowitz
427 Windham Court North
Wyckoff Lake, New Jersey 07481
Each Party may designate by notice in writing a new address to which any
notice, demand, request or communication may thereafter be so given, served or
sent.
10. SEVERABILITY.
The invalidity of any one or more provisions hereof shall not affect the
remaining portions of this Agreement, all of which are inserted conditionally on
their being held valid in law; and in the event that one or more of the
provisions
11
<PAGE>
contained herein should be invalid, or should operate to render this Agreement
invalid, this Agreement shall be construed as if such invalid provisions had not
been inserted.
11. WAIVERS.
Neither the waiver by either party of a breach of or a default under any of
the provisions of this Agreement, nor the failure of either party, on one or
more occasions, to enforce any of the provisions of this Agreement or to
exercise any right, remedy or privilege hereunder, shall thereafter be construed
as a waiver of any subsequent breach or default of a similar nature, or as a
waiver of any such provisions, rights, remedies or privileges hereunder.
12. ENTIRE AGREEMENT, AMENDMENTS.
This Agreement contains the entire agreement between the parties
with respect to the transactions contemplated herein, and supersedes all prior
oral or written agreements, commitments or understandings with respect to the
matters provided for herein and therein. Any amendment or change relating
hereto shall be in writing and duly executed by the Employee and the Company.
12
<PAGE>
13. GOVERNING LAW.
This Agreement, the rights and obligations of the parties hereto, and
any claims or disputes relating thereto, shall be governed by and construed in
accordance with the laws of the State of New York (but not including the choice
of law rules thereof).
14. ASSIGNMENT.
All of the provisions hereof shall be binding upon and inure to the benefit
of the parties and the heirs, executors, administrators and permitted assigns of
Employee and the successors and assigns of the Company; provided that Employee's
obligations hereunder are personal and nondelegable, whether by operation of law
or otherwise, and except pursuant to the laws of testate or intestate
distribution upon the death of Employee, Employee's rights hereunder are not
assignable whether by operation of law or otherwise. The Company's rights and
obligations hereunder may be freely assigned provided such assignee assumes all
of the Company's duties and obligations hereunder.
13
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Employment
Agreement as of the date first above written.
KNIGHT/TRIMARK GROUP, INC.
By:
_________________________________
Kenneth Pasternak, President and
Chief Executive Officer
ROBERT LAZAROWITZ
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14
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Amendment No. 2 to the Prospectus
constituting part of this Registration Statement on Form S-1 of our report
dated February 10, 1998, except as to Note 15, which is as of April 15, 1998,
relating to the consolidated financial statements of Roundtable Partners
L.L.C., which appears in such Prospectus. We also consent to the references to
us under the heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
New York, New York
May 29, 1998
