<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
001-14223
COMMISSION FILE NUMBER
KNIGHT/TRIMARK GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-2096335
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
525 WASHINGTON BOULEVARD, JERSEY CITY, NJ 07310
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201) 222-9400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days, Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
At November 6, 1998 the number of shares outstanding of the registrant's
Class A common stock was 49,062,184, and the number of shares outstanding of
the registrant's Class B common stock was 3,942,698.
<PAGE>
KNIGHT/TRIMARK GROUP, INC.
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statements of Income...................................................... 3
Consolidated Statements of Financial Condition......................................... 4
Consolidated Statements of Cash Flows.................................................. 5
Notes to Consolidated Financial Statements............................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................. 16
PART II OTHER INFORMATION:
Item 2. Use of Proceeds........................................................................ 17
Signatures..................................................................................... 17
</TABLE>
UNLESS OTHERWISE INDICATED, REFERENCES TO THE "COMPANY" MEAN KNIGHT/TRIMARK
GROUP, INC. AND SUBSIDIARIES OR ROUNDTABLE PARTNERS, L.L.C. AND SUBSIDIARIES,
AS APPROPRIATE. UPON THE CLOSING OF THE COMPANY'S INITIAL PUBLIC OFFERING ON
JULY 13, 1998, ROUNDTABLE PARTNERS, L.L.C. BECAME A WHOLLY-OWNED SUBSIDIARY OF
KNIGHT/TRIMARK GROUP, INC.
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KNIGHT/TRIMARK GROUP, INC.
(SUCCESSOR TO THE BUSINESS OF ROUNDTABLE PARTNERS, L.L.C. (SEE NOTE 2))
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues
Net trading revenue....... $89,962,029 $57,834,882 $233,023,366 $157,665,531
Commissions, net.......... 1,351,033 226,191 1,546,487 535,190
Interest, net............. 1,062,482 510,702 1,884,792 1,441,630
----------- ----------- ------------ ------------
Total revenues.......... 92,375,544 58,571,775 236,454,645 159,642,351
----------- ----------- ------------ ------------
Expenses
Employee compensation and
benefits................. 28,322,403 15,033,857 67,813,652 39,538,742
Payments for order flow... 20,351,538 16,136,468 56,110,690 51,105,705
Execution and clearance
fees..................... 11,773,825 8,576,200 32,203,258 21,859,909
Communications and data
processing............... 3,020,291 1,832,008 7,659,996 4,872,357
Depreciation and amortiza-
tion..................... 1,515,863 1,083,436 4,151,004 3,081,941
Occupancy and equipment
rentals.................. 1,585,667 666,213 3,981,073 1,768,003
Professional fees......... 1,256,418 565,870 2,230,458 1,114,738
Business development...... 606,592 321,581 1,595,490 997,666
Interest on Preferred
Units.................... 36,845 435,036 714,904 1,515,991
Other..................... 823,307 293,840 1,670,755 847,379
----------- ----------- ------------ ------------
Total expenses.......... 69,292,749 44,944,509 178,131,280 126,702,431
----------- ----------- ------------ ------------
Net income before taxes..... 23,082,795 13,627,266 58,323,365 32,939,920
Income tax expense.......... 9,259,200 - 9,259,200 -
----------- ----------- ------------ ------------
Net income.................. $13,823,595 $13,627,266 $ 49,064,165 $ 32,939,920
=========== =========== ============ ============
Basic and diluted earnings
per share.................. $ 0.26 $ 0.93
=========== ============
Pro forma adjustment (see
Note 2):
Net income before taxes..... $23,082,795 $13,627,266 $ 58,323,365 $ 32,939,920
Pro forma income tax ex-
pense.................... 9,925,602 5,859,724 25,079,047 14,164,166
----------- ----------- ------------ ------------
Pro forma net income........ $13,157,193 $ 7,767,542 $ 33,244,318 $ 18,775,754
=========== =========== ============ ============
Pro forma basic and diluted
earnings per share......... $ 0.25 $ 0.15 $ 0.63 $ 0.36
=========== =========== ============ ============
Weighted average shares of
Class A and Class B Stock
outstanding................ 52,554,882 52,554,882
=========== ============
Pro forma shares of Class A
and Class B Stock outstand-
ing........................ 51,504,882 51,504,882
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
KNIGHT/TRIMARK GROUP, INC.
(SUCCESSOR TO THE BUSINESS OF ROUNDTABLE PARTNERS, L.L.C. (SEE NOTE 2))
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents........................... $140,504,645 $ 13,797,198
Securities owned, at market value................... 55,005,323 61,726,045
Receivable from clearing brokers.................... 65,639,155 30,151,720
Fixed assets and leasehold improvements, at cost,
less accumulated depreciation and amortization of
$5,536,464 at September 30, 1998 and $3,884,743 at
December 31, 1997.................................. 11,477,422 7,353,429
Goodwill, less accumulated amortization of
$6,098,965 at September 30, 1998 and $4,465,484 at
December 31, 1997.................................. 15,445,407 14,192,840
Other assets........................................ 2,402,017 651,190
------------ ------------
TOTAL ASSETS.................................... $290,473,969 $127,872,422
============ ============
LIABILITIES AND MEMBERS'/STOCKHOLDERS' EQUITY
Liabilities
Securities sold, not yet purchased, at market val-
ue............................................... $ 44,780,469 $ 21,060,857
Short-term borrowings............................. 25,000,000 -
Accrued compensation expense...................... 14,906,898 6,112,562
Accrued execution and clearance fees.............. 4,395,122 3,966,145
Accrued payments for order flow................... 4,982,016 3,764,391
Accounts payable, accrued expenses and other lia-
bilities......................................... 4,587,464 1,394,288
Distributions on Common Units payable to members.. - 8,405,326
Liability for capital lease....................... - 786,801
Interest payable on Preferred Units............... - 424,981
Subordinated note................................. - 500,000
Mandatorily Redeemable Preferred A Units.......... - 12,483,610
Mandatorily Redeemable Preferred B Units.......... - 15,000,000
Income taxes payable.............................. 9,238,200 -
------------ ------------
Total liabilities............................... 107,890,169 73,898,961
------------ ------------
Members' equity
Common units, $10 par value, 734,497 units issued
and outstanding at December 31, 1997............. - 7,344,970
Undistributed income.............................. - 46,628,491
Stockholders' equity
Class A Common Stock, $0.01 par value, 200,000,000
shares authorized, 49,062,184 shares issued and
outstanding at September 30, 1998................ 490,622 -
Class B Common Stock, $0.01 par value, 20,000,000
shares authorized, 3,942,698 shares issued and
outstanding at September 30, 1998................ 39,427 -
Additional paid-in capital........................ 169,779,929 -
Retained earnings................................. 12,273,822 -
------------ ------------
Total members'/stockholders' equity............. 182,583,800 53,973,461
------------ ------------
TOTAL LIABILITIES AND MEMBERS'/STOCKHOLDERS' EQ-
UITY........................................... $290,473,969 $127,872,422
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
KNIGHT/TRIMARK GROUP, INC.
(SUCCESSOR TO THE BUSINESS OF ROUNDTABLE PARTNERS, L.L.C. (SEE NOTE 2))
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................ $ 49,064,165 $ 32,939,920
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization..................... 4,151,004 3,081,941
(Increase) decrease in operating assets
Securities owned................................ 6,720,722 (4,668,717)
Receivable from clearing brokers................ (35,487,435) (27,744,588)
Other assets.................................... (1,750,827) (111,186)
Increase (decrease) in operating liabilities
Securities sold, not yet purchased.............. 23,719,612 13,496,744
Accrued compensation expense.................... 8,794,336 (4,185,918)
Accrued execution and clearance fees............ 428,977 (650,536)
Accrued payments for order flow................. 1,217,625 (110,074)
Income taxes payable............................ 9,238,200 -
Accounts payable, accrued expenses and other li-
abilities...................................... 2,601,141 6,306,880
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES..... 68,697,520 18,354,466
------------ ------------
Cash flows from investing activities
Payment of contingent consideration............. (2,886,048) (892,636)
Purchases of fixed assets and leasehold improve-
ments.......................................... (7,261,263) (1,940,793)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES......... (10,147,311) (2,833,429)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from initial public offering....... 136,811,757 -
Net increase in short-term borrowings........... 25,000,000 -
Decrease in subordinated note................... (500,000) -
Redemptions of Mandatorily Redeemable Preferred
A Units........................................ (12,483,610) (10,147,050)
Redemptions of Mandatorily Redeemable Preferred
B Units........................................ (15,000,000) -
Distributions on Common Units................... (65,670,909) (15,507,868)
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING AC-
TIVITIES..................................... 68,157,238 (25,654,918)
------------ ------------
Increase (decrease) in cash and cash equivalents.. 126,707,447 (10,133,881)
Cash and cash equivalents at beginning of period.. 13,797,198 15,353,166
------------ ------------
Cash and cash equivalents at end of period........ $140,504,645 $ 5,219,285
============ ============
</TABLE>
Noncash financing activity:
During April 1998, the Company terminated a capital lease with a remaining
obligation of $713,207. The net book value of the equipment under such
capital lease was $619,747.
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
KNIGHT/TRIMARK GROUP, INC.
(SUCCESSOR TO THE BUSINESS OF ROUNDTABLE PARTNERS, L.L.C. (SEE NOTE 2))
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 (UNAUDITED)
1. ORGANIZATION AND DESCRIPTION OF THE BUSINESS
Knight/Trimark Group, Inc. ("Knight/Trimark"), was organized in April 1998
for the purpose of succeeding to the business of Roundtable Partners, L.L.C.
("Roundtable") (see Note 2) (references to the "Company" will refer to
Roundtable or Knight/Trimark, as appropriate). Roundtable was initially
capitalized on March 27, 1995 to own and operate the securities market making
businesses of Knight Securities, L.P. and Trimark Securities, L.P.
Knight/Trimark, as sole member of Roundtable, consented to the dissolution
of Roundtable immediately prior to the opening of business on August 3, 1998
and commenced winding up Roundtable's business. On July 31, 1998, the assets
and business activities of Knight Securities, L.P. were transferred to Knight
Securities, Inc., a Delaware corporation, and became a wholly-owned subsidiary
of the Company (hereafter, references to "Knight" will refer to Knight
Securities, L.P. or Knight Securities, Inc., as appropriate). Simultaneous to
this transaction, the assets and business activities of Trimark Securities,
L.P. were transferred to Trimark Securities, Inc., a Delaware corporation, and
became a wholly-owned subsidiary of the Company (hereafter, references to
"Trimark" will refer to Trimark Securities, L.P. or Trimark Securities, Inc.,
as appropriate).
Knight operates as a market maker in over-the-counter equity securities
("OTC securities"), primarily those traded in the NASDAQ stock market and on
the OTC Bulletin Board. Trimark operates as a market maker in the over-the-
counter market for equity securities that are listed on the New York and
American Stock Exchanges ("listed securities"). Knight and Trimark are
registered as broker-dealers with the Securities and Exchange Commission
("SEC" or the "Commission") and are members of the National Association of
Securities Dealers, Inc. ("NASD").
The accompanying unaudited consolidated financial statements include the
accounts of the Company, Knight and Trimark and, in the opinion of management,
reflect all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods. All
significant intercompany transactions and balances have been eliminated.
Certain footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to SEC rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. The nature of the Company's business is such that
the results of an interim period are not necessarily indicative of the results
for the full year. These consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's audited financial statements as of December 31, 1997 included in the
Company's Registration Statement on Form S-1 (No. 333-51653) as filed with the
Commission on July 8, 1998 (the "Registration Statement").
Certain prior period amounts have been reclassified to conform to the
current period presentation.
2. REORGANIZATION AND INITIAL PUBLIC OFFERING
Upon the closing of an initial public offering (the "Offering") on July 13,
1998, all of the members of Roundtable elected to exchange their membership
interests in Roundtable for shares of Common Stock of Knight/Trimark. Based on
an Offering price of $14.50 per share, all of the membership interests of
Roundtable were exchanged for 36,662,415 voting shares of Class A Common Stock
of Knight/Trimark (the "Class A Stock") and 3,942,698 nonvoting shares of
Class B Common Stock of Knight/Trimark (the "Class B Stock"). Roundtable
received no additional consideration in connection with such conversion of
membership interests into shares of Class A and Class B Stock (the foregoing
transactions, collectively, shall be referred to herein as the
"Reorganization").
6
<PAGE>
The specific transactions of the Reorganization and Offering were as
follows:
-- Exchange of 734,497 Common Units of Roundtable for 36,662,415 shares of
Class A Stock and 3,942,698 shares of Class B Stock;
-- Purchase of 1,513,000 shares of Class A Stock by management of
Roundtable and 288,636 shares of Class A Stock by non-management members
of Roundtable for $26,123,719 from undistributed income of Roundtable
through March 31, 1998 at the Offering price;
-- Certain non-management investors, who had so elected, received a cash
distribution during June of $26,521,293 for their respective
undistributed income in Roundtable through March 31, 1998;
-- The members of Roundtable received a cash distribution of $21,977,097
during June and July representing an estimate of their respective share
of the total amount of undistributed income of Roundtable accruing
between April 1, 1998 and the closing of the Offering;
-- Repayment of the $500,000 subordinated note to Brown & Company
Securities Corporation ("Brown"), the subordinated note holder;
-- Redemption of all outstanding Mandatorily Redeemable Preferred B Units
for $13,847,100;
-- Brown exercised its option to purchase 7,143 Common Units of Roundtable
(the "Brown Option") by purchasing the equivalent shares of Class A
Stock of the Corporation (394,887 shares) at the closing of the Offering
at a total exercise amount of $71,430; and
-- The Offering of 10,000,000 shares of Class A Stock (not including an
underwriters' over-allotment option of 1,500,000 shares (the
"Overallotment Option")) comprised of 8,688,246 newly-issued shares and
1,311,754 shares from a selling shareholder at the Offering price, less
the applicable underwriting discounts of approximately $8.2 million and
offering expenses of approximately $1.6 million, resulting in net
proceeds to the Company of approximately $116.2 million.
On August 3, 1998, the underwriters exercised the Overallotment Option,
pursuant to which the Company issued and sold 1,500,000 additional shares at
the Offering price, less the applicable underwriting discounts and offering
expenses, resulting in net proceeds to the Company of $20.3 million.
Before the Reorganization, Roundtable was a limited liability company and
was not subject to federal or state income taxes. Subsequent to the
Reorganization, the Company was subject to federal income taxes and state
income taxes in New York, New Jersey and other states. Actual income tax
expense on the Consolidated Statements of Income represents income taxes
incurred from July 13, 1998, the date of the Reorganization, through September
30, 1998. Pro forma income tax expense on the Consolidated Statements of
Income 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 as if the Company was a C corporation for the entire three and
nine- month periods. The Company's pro forma effective tax rate of 43% for the
periods presented 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%).
3. NET CAPITAL REQUIREMENTS
As SEC-registered broker-dealers and NASD member firms, Knight and Trimark
are subject to the Commission's Uniform Net Capital Rule (the "Rule") which
requires the maintenance of minimum net capital. Knight and Trimark 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.
As of September 30, 1998, Knight had net capital of $85,524,714, which was
$83,656,050 in excess of its required net capital of $1,868,664 and Trimark
had net capital of $30,774,127, which was $29,774,127 in excess of its
required net capital of $1,000,000.
7
<PAGE>
4. RELATED PARTY TRANSACTIONS
A substantial portion of Knight's and Trimark's securities transactions are
conducted with broker-dealers that owned membership interests in Roundtable
prior to the closing of the Offering and own common stock of Knight/Trimark
subsequent to the closing of the Offering. Included within payments for order
flow on the Consolidated Statements of Income are the following amounts
related to these broker-dealer owners and the subordinated note holder:
<TABLE>
<S> <C>
For the three-month period ended September 30, 1998............. $14,254,303
For the three-month period ended September 30, 1997............. 12,334,364
For the nine-month period ended September 30, 1998.............. 38,831,895
For the nine-month period ended September 30, 1997.............. 39,905,792
</TABLE>
As measured in share volume, such broker-dealer owners accounted for 39% of
the Company's order flow during the three-month periods ended September 30,
1998 and 1997 and 40% and 39% for the nine-month periods ended September 30,
1998 and 1997, respectively. Moreover, five of these affiliates accounted for
32% and 33% of the Company's total order flow for the three and nine-month
periods ended September 30, 1998, respectively. In addition, one of these
affiliates accounted for 11% and 10% of the Company's total order flow for the
three and nine-month periods ended September 30, 1998, respectively
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 the subordinated note holder:
<TABLE>
<S> <C>
September 30, 1998................................................ $3,643,626
December 31, 1997................................................. 1,990,045
</TABLE>
As of December 31, 1997, Knight and Trimark cleared their securities
transactions through clearing brokers that owned equity interests in the
Company. Effective March 9, 1998, Knight began clearing its securities
transactions through an unaffiliated clearing broker.
Included within clearance and execution fees on the Consolidated Statements
of Income are the following amounts related to the affiliated clearing
brokers:
<TABLE>
<S> <C>
For the three-month period ended September 30, 1998............. $ 5,233,909
For the three-month period ended September 30, 1997............. 6,082,294
For the nine-month period ended September 30, 1998.............. 17,282,969
For the nine-month period ended September 30, 1997.............. 15,686,562
</TABLE>
Included within accrued clearance and execution fees on the Consolidated
Statements of Financial Condition are the following amounts payable to the
affiliated clearing brokers:
<TABLE>
<S> <C>
September 30, 1998................................................ $1,778,796
December 31, 1997................................................. 2,703,657
</TABLE>
5. SHORT-TERM FINANCING
On June 19, 1998, the Company entered into an unsecured $30,000,000 loan
agreement with an affiliate of one of its clearing brokers. Such loan pays
interest monthly based on the London Interbank Offered Rate and matures on
June 19, 1999. The proceeds from the loan were used to pay undistributed
profits to the Company's members (see Note 2). The loan agreement allows for
scheduled principal pre-payments without penalty. The Company made principal
pre-payments under the loan of $5 million and $9 million on September 15, 1998
and October 20, 1998, respectively.
8
<PAGE>
6. EARNINGS PER SHARE
Basic and diluted earnings per common share have been calculated by dividing
net income by the weighted average Class A Stock and Class B Stock outstanding
during each respective period. Upon sale or transfer, the Class B Stock are
exchangeable for Class A Stock. The Company's outstanding options do not have
a dilutive effect on earnings and, as such, are not included within the
calculation. The following is a reconciliation of the numerators and
denominators of the basic and diluted earnings per share computations:
<TABLE>
<CAPTION>
3 MONTHS ENDED 9/30/98 3 MONTHS ENDED 9/30/97
------------------------ ------------------------
NUMERATOR/ NUMERATOR/ DENOMINATOR/
PRO FORMA DENOMINATOR/ PRO FORMA PRO FORMA
INCOME SHARES INCOME SHARES
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
$13,157,193 52,554,882 $ 7,767,542 51,504,882
- - - -
----------- ----------- ----------- -----------
$13,157,193 52,554,882 $ 7,767,542 51,504,882
=========== =========== =========== ===========
Basic and diluted EPS...... $ 0.25 $ 0.15
=========== ===========
<CAPTION>
9 MONTHS ENDED 9/30/98 9 MONTHS ENDED 9/30/97
------------------------ ------------------------
NUMERATOR/ NUMERATOR/ DENOMINATOR/
PRO FORMA DENOMINATOR/ PRO FORMA PRO FORMA
INCOME SHARES INCOME SHARES
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
$33,244,318 52,554,882 $18,775,754 51,504,882
- - - -
----------- ----------- ----------- -----------
$33,244,318 52,554,882 $18,775,754 51,504,882
=========== =========== =========== ===========
Basic and diluted EPS...... $ 0.63 $ 0.36
=========== ===========
</TABLE>
Pro forma net income represents net income adjusted to reflect pro forma
income taxes as if the Company was a C Corporation for the full period (see
Note 2). The pro forma shares outstanding used for the three and nine-month
periods prior to the Offering represent shares outstanding immediately
subsequent to the Reorganization and Offering, but assume that the 30-day
option to purchase an additional 1,500,000 shares of Class A Stock granted to
the underwriters of the Company's initial public offering was not exercised.
Such option was exercised on August 3, 1998.
7. REDEMPTION OF MANDATORILY REDEEMABLE PREFERRED UNITS
On July 17, 1998, Roundtable redeemed and retired all outstanding
Mandatorily Redeemable Preferred B Units for $13,847,100.
8. LONG-TERM INCENTIVE PLAN
In connection with the Reorganization and Offering, the Company established
the Knight/Trimark Group, Inc. 1998 Long Term Incentive Plan and the
Knight/Trimark Group, Inc. 1998 Non-employee Stock Option Plan (together, the
"Plans") to provide long-term incentive compensation to selected employees and
directors of Knight/Trimark and its subsidiaries. The Plans are administered
by the compensation committee of the Company's Board of Directors, and allow
for the grant of options, restricted stock and restricted stock units, as
defined by the Plans. The maximum number of shares of stock reserved for the
grant of awards under the Plans is 7,409,500, subject to adjustment. In
addition, the Plans limit the number of shares which may be granted to a
single individual, and the Plans also limit the number of shares of restricted
stock which may be awarded.
Simultaneous with the closing of the Offering, the Company issued to
employees and directors of the Company options to purchase shares of the
Company's Class A Stock at an exercise price of $14.50 per share. Such options
vest over a four-year period and expire on the tenth anniversary of the grant
date. The following is a reconciliation of option activity for the Plans
through September 30, 1998:
9
<PAGE>
<TABLE>
<CAPTION>
1998 LONG-TERM 1998 NON-EMPLOYEE
INCENTIVE PLAN STOCK OPTION PLAN
-------------- -----------------
<S> <C> <C>
Granted during quarter...................... 5,027,000 72,000
Surrendered during quarter.................. (26,000) -
--------- ------
Outstanding at September 30, 1998........... 5,001,000 72,000
========= ======
</TABLE>
In addition, simultaneous with the closing of the Offering, the Company
granted a total of 15,000 shares of restricted Class A Stock to certain
directors of the Company under the 1998 Non-employee Stock Option Plan. The
Company expensed $217,500 related to this transaction which is included within
Other Expenses on the Consolidated Statements of Income.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the results of operations of the Company should
be read in conjunction with the consolidated financial statements and notes
thereto included in the Company's audited financial statements as of December
31, 1997 included within the Registration Statement.
The Company is a leading market maker in NASDAQ securities, in other over-
the-counter ("OTC") securities, and in the OTC market in exchange-listed
equity securities (the "Third Market"), primarily consisting of equity
securities listed on the New York Stock Exchange ("NYSE") and American Stock
Exchange ("AMEX"). Through its wholly-owned subsidiary, Knight, the Company
makes markets in approximately 7,800 over-the-counter equity securities.
Through its wholly-owned subsidiary, Trimark, the Company makes markets in all
NYSE- and AMEX-listed equity securities in the Third Market.
VARIABILITY OF RESULTS
The Company has experienced and expects to continue to experience,
significant fluctuations in quarterly operating results due to a variety 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 net trading 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. 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.
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.
REVENUES
The Company's revenues consist principally of net trading revenue from
market-making activities. To date, the Company has only traded equity
securities. 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, by regulatory changes and
10
<PAGE>
by evolving industry customs and practices. The Company's net trading revenue
per trade for OTC securities has historically exceeded the net revenue per
trade for listed securities.
In addition, the Company has expanded its institutional sales business which
executes both listed and OTC transactions for institutional customers. OTC
securities transactions with institutional customers are executed as
principal, and all related profits and losses are included within net trading
revenue. Listed securities transactions with institutional customers are
executed on an agency basis, for which the Company earns commissions on a per
share basis. Commissions are recorded net of soft dollar expenses. The Company
also earns interest income from the Company's cash and securities positions
held at banks and in trading accounts at clearing brokers, net of transaction-
related interest expense resulting from a higher level of securities sold, not
yet purchased.
EXPENSES
The Company's operating expenses largely consist of employee compensation
and benefits, payments for order flow and execution and clearance fees. A
substantial portion of these expenses is variable in nature. 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. 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 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").
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 and
broker-dealer customers whose policy is to not receive payments for order
flow. As a result of the new Order Handling Rules implemented by the SEC in
1997, the Company changed its order flow payment policy in 1997 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 from prior year levels.
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, for
executing trades primarily 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.
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
REVENUES
Net trading revenue increased 56% to $90.0 million for the three months
ended September 30, 1998, from $57.8 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 and commissions per trade. Total trade volume
increased 89% to 10.5 million trades for the three months
11
<PAGE>
ended September 30, 1998, from 5.5 million trades for the comparable period in
1997. Total share volume increased 88% to 9.5 billion shares traded for the
three months ended September 30, 1998, from 5.0 billion shares traded for the
comparable period in 1997. Commissions increased to $1.4 million for the three
months ended September 30, 1998, from $226,000 for the comparable period in
1997, as the Company continued to expand its institutional sales business.
Average net trading revenue and commissions per trade decreased 17% to $8.69
per trade for three months ended September 30, 1998, from $10.46 per trade for
the comparable period in 1997. The decrease in average net trading revenue and
commissions per trade was primarily due to the SEC's 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 108% to $1.1 million for the three months ended
September 30, 1998, from $511,000 for the comparable period in 1997. This
increase was primarily due to higher cash balances held at banks as a result
of the proceeds from the Offering.
EXPENSES
Employee compensation and benefits expense increased 88% to $28.3 million
for the three months ended September 30, 1998, from $15.0 million for the
comparable period in 1997. As a percentage of net trading revenue and
commissions, employee compensation increased to 31% for the three months ended
September 30, 1998, from 26% for the comparable period in 1997. The increase
on a dollar basis and as a percentage of net trading revenue and commissions
was primarily due to the Company's increased profitability and an increase in
the number of employees. Due to increased net trading revenue, commissions and
profitability, Profitability Based Compensation increased 75% to $21.2 million
for the three months ended September 30, 1998, from $12.1 million for the
comparable period in 1997. The number of employees increased to 428 employees
as of September 30, 1998, from 270 employees as of September 30, 1997.
Payments for order flow increased 26% to $20.4 million for the three months
ended September 30, 1998, from $16.1 million for the comparable period in
1997. As a percentage of net trading revenue and commissions, payments for
order flow decreased to 22% for the three months ended September 30, 1998 from
28% for the comparable period in 1997. The decrease in payments for order flow
as a percentage of net trading revenue and commissions resulted from changes
in the mix of market orders versus limit orders and changes in customer mix.
Execution and clearance fees increased 37% to $11.8 million for the three
months ended September 30, 1998, from $8.6 million for the comparable period
in 1997. As a percentage of net trading revenue and commissions, execution and
clearance fees decreased to 13% for the three months ended September 30, 1998,
from 15% for the comparable period in 1997. The increase on a dollar basis was
primarily due to a 89% 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 decrease in execution and clearance fees as a percentage of
net trading revenue and commissions was primarily due to a decrease in
clearance rates charged by clearing brokers.
Communications and data processing expense increased 65% to $3.0 million for
the three months ended September 30, 1998, from $1.8 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 40% to $1.5 million for the
three months ended September 30, 1998, from $1.1 million for the comparable
period in 1997. This increase was primarily due to the purchase of additional
fixed assets and leasehold improvements to support the Company's expanded
operations, and the amortization of goodwill recognized as part of Trimark's
acquisition of Tradetech Securities, L.P., which was completed in November
1997.
12
<PAGE>
Occupancy and equipment rental expense increased 138% to $1.6 million for
the three months ended September 30, 1998, from $666,000 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 September 30, 1998, up from 49,032
square feet of office space at September 30, 1997.
Professional fees increased 122% to $1.3 million for the three months ended
September 30, 1998, from $566,000 for the comparable period in 1997. This
increase was primarily due to increased consulting expenses related to the
Company's investments in technology and the Company's efforts to establish an
institutional sales office in London.
Business development expense increased 89% to $607,000 for the three months
ended September 30, 1998, from $322,000 for the comparable period in 1997.
This increase was primarily the result of higher travel and entertainment
costs consistent with the growth in the business of the Company and its focus
on the institutional sales business.
Interest on Mandatorily Redeemable Preferred Units decreased 92% to $37,000
for the three months ended September 30, 1998, from $435,000 for the
comparable period in 1997. This decrease was primarily due to the redemption
and retirement of $12.5 million Mandatorily Redeemable Preferred A Units and
$15 million Mandatorily Redeemable Preferred B Units by the Company in April
and July 1998.
Other expenses increased 180% to $823,000 for the three months ended
September 30, 1998, from $294,000 for the comparable period in 1997. This was
primarily the result of directors' fees, restricted stock granted to directors
in connection with the initial public offering and increased office expenses
and other operating costs of the Company incurred in connection with its
business growth.
INCOME TAXES
Before the Reorganization, Roundtable was a limited liability company and
was not subject to federal or state income taxes. After the Reorganization,
the Company is subject to federal income taxes and state income taxes in New
York, New Jersey and other states. Actual income tax expense on the
Consolidated Statements of Income represents income taxes incurred from July
13, 1998, the date of the Company's Reorganization, through September 30,
1998. 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, as if the Company was a C
Corporation for the entire period. Pro forma income tax expense was determined
using an effective tax rate of 43% for the three months ended September 30,
1998 and 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
REVENUES
Net trading revenue increased 48% to $233.0 million for the nine months
ended September 30, 1998, from $157.7 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 and commissions per trade. Total trade volume
increased 101% to 27.1 million trades during the nine-month period ended
September 30, 1998, from 13.5 million trades in 1997. Total share volume
increased 119% to 26.4 billion shares traded in the nine month period ended
September 30, 1998, from 12.0 billion shares traded in the comparable 1997
period. Commissions increased to $1.5 million for the nine months ended
September 30, 1998 from $535,000 for the comparable period in 1997, as the
Company continued to expand its institutional sales business.
Average net trading revenue and commissions per trade decreased 26% to $8.66
per trade during the nine months ended September 30, 1998, from $11.74 per
trade during the nine months ended September 30, 1997,
13
<PAGE>
principally as a result of the SEC's new Order Handling Rules, which were
implemented during 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 31% to $1.9 million during the nine months ended
September 30, 1998, from $1.4 million during the comparable 1997 period. This
increase was primarily due to higher cash balances held at banks, as a result
of the proceeds from the Offering, and higher cash balances held at the
Company's clearing brokers from changes in the levels of securities owned and
securities sold, not yet purchased, partially offset by increased transaction-
related interest expense resulting from a higher level of securities sold, not
yet purchased.
EXPENSES
Employee compensation and benefits expense increased 72% to $67.8 million
during the nine months ended September 30, 1998, from $39.5 million during the
nine months ended September 30, 1997. As a percentage of net trading revenue
and commissions, employee compensation and benefits expense increased to 29%
during the nine months ended September 30, 1998, from 25% during the
comparable 1997 period. The increase on a dollar basis and as a percentage of
net trading revenue and commissions was primarily due to the Company's
increased profitability and growth in the number of employees. Due to
increased net trading revenue, commissions and profitability, Profitability
Based Compensation increased 64% to $50.9 million, from $31.0 million in the
comparable 1997 period. The number of employees increased to 428 employees as
of September 30, 1998, from 270 employees as of September 30, 1997.
Payments for order flow increased 10% to $56.1 million during the nine
months ended September 30, 1998, from $51.1 million in the comparable 1997
period. As a percentage of net trading revenue and commissions, payments for
order flow decreased to 24% for the nine months ended September 30, 1998,
compared to 32% during the nine months ended September 30, 1997. The decrease
in payments for order flow as a percentage of net trading revenue and
commissions 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.
Execution and clearance fees increased 47% to $32.2 million during the nine-
month period ended September 30, 1998, from $21.9 million in the comparable
1997 period. As a percentage of net trading revenue and commissions, execution
and clearance fees remained constant at 14% for the nine months ended
September 30, 1998 and during the nine months ended September 30, 1997. 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.
Communications and data processing expense increased 57% to $7.7 million
during the nine months ended September 30, 1998, from $4.9 million during the
comparable 1997 period. This increase was generally attributable to higher
trading volumes, and an increase in the number of employees.
Depreciation and amortization expense increased 35% to $4.2 million during
the nine-month period ended September 30, 1998, from $3.1 million during the
nine-month period ended September 30, 1997. This increase was primarily due to
the purchase of additional fixed assets and leasehold improvements to support
the Company's expanded operations and the amortization of goodwill recognized
as part of Trimark's acquisition of Tradetech Securities, L.P., which was
completed in November 1997.
Occupancy and equipment rental expense increased 125% to $4.0 million during
the nine-month period ended September 30, 1998, from $1.8 million in the
comparable 1997 period. 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 September 30, 1998, up from
49,032 square feet of office space at September 30, 1997.
Professional fees increased 100% to $2.2 million for the three months ended
September 30, 1998, from $1.1 million for the comparable period in 1997. This
increase was primarily due to increased consulting expenses
14
<PAGE>
related to the Company's investments in technology and the Company's efforts
to establish an institutional sales office in London.
Business development expense increased 60% to $1.6 million for the nine
months ended September 30, 1998, from $998,000 during the nine months ended
September 30, 1997. This increase was primarily the result of higher travel
and entertainment costs consistent with the growth in the business of the
Company and its focus on the institutional sales business.
Interest on Mandatorily Redeemable Preferred Units decreased 53% to $715,000
during the nine months ended September 30, 1998, from $1.5 million during the
nine months ended September 30, 1997. This decrease was primarily due to the
redemption and retirement of $12.5 million Mandatorily Redeemable Preferred A
Units and $15 million Mandatorily Redeemable Preferred B Units by the Company
in April and July 1998.
Other expenses increased 97% to $1.7 million for the nine months ended
September 30, 1998, from $847,000 for the comparable period in 1997. This was
primarily the result of directors' fees, restricted stock granted to directors
in connection with the initial public offering and increased office expenses
and other operating costs of the Company incurred in connection with its
business growth.
INCOME TAXES
Pro forma income tax expense was determined using an effective tax rate of
43% for the nine months ended September 30, 1998 and 1997.
LIQUIDITY
Before the Offering, the Company 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. Currently, the
Company finances its business through cash generated by operations as well as
the proceeds from the Offering. As of September 30, 1998, the Company had
$290.5 million in assets, 90% 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 on NASDAQ and on the NYSE and AMEX
markets.
The Company used a portion of its capital resources before the Offering 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 Mandatorily Redeemable Preferred A and B Units bore interest at a
rate approximating the Federal Funds rate. All outstanding Mandatorily
Redeemable 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 Mandatorily Redeemable Preferred B Units for
approximately $1.2 million in cash. The Company used $13.8 million of the
proceeds of the Offering to redeem all of the remaining outstanding
Mandatorily Redeemable Preferred B Units on July 17, 1998.
PaineWebber Capital Inc., an affiliate of PaineWebber, loaned $30,000,000 to
Roundtable pursuant to a loan agreement dated as of June 19, 1998 (the
"PaineWebber Loan"). Roundtable used the proceeds from the PaineWebber Loan to
make distributions of undistributed profits to the members of Roundtable
before the Reorganization. In connection with the dissolution of Roundtable,
Knight/Trimark assumed all of Roundtable's obligations under the PaineWebber
Loan. The Company made principal pre-payments under the loan of $5 million and
$9 million on September 15, 1998 and October 20, 1998, respectively.
15
<PAGE>
The Company and its subsidiaries currently anticipate that net proceeds from
the 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.
On October 8, 1998, the Company's Board of Directors approved a program to
repurchase, over a period of up to eighteen months, up to 3 million shares of
the Company's outstanding Class A common stock up to a total aggregate amount
not to exceed $20 million. The Company may repurchase shares from time to time
in the open market or through privately negotiated transactions, depending on
prevailing market conditions, alternative use of capital and other factors. To
date, the Company has not repurchased any shares under this program.
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 a little over a year, 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, test, and modify when
necessary, its communications and data processing systems in anticipation of
the Year 2000. The Company's main trading-related systems have been certified
as Year 2000 compliant. The Company plans to have its other computer systems
certified by the end of the first quarter of 1999.
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 major securities industry service
organizations. The Company is taking steps to determine the status of these
other entities' Year 2000 compliance and to test them individually. The
Company's plan includes participating in industry-wide testing during the
first quarter of 1999.
There can be no assurance that the Company's schedule for Year 2000
compliance will be met. Furthermore, there can be no assurance that the
systems of other companies on which the Company's business depends will be
tested and/or certified in a timely manner. Such failure to test and/or
certify Year 2000 compliance by another company could have an adverse effect
on the Company's business, financial condition and operating results. Because
of this, the Company is in the process of establishing contingency plans in
the event of material adverse effects caused by non-Year 2000 compliant
systems. The Company's progress under its Year 2000 compliance plan is
reviewed and monitored by senior management.
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 $300,000 of such costs as of September 30, 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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 nor its subsidiaries
have traded or otherwise transacted in derivatives.
In the normal course of its market-making business, the Company maintains
inventories of listed and OTC securities. The fair value of these securities
at September 30, 1998 was $55.0 and $44.8 million, respectively, in long
positions and short positions. The potential loss in fair value, using a
hypothetical 10.0% decline in prices, is estimated to be approximately $1.0
million as of September 30, 1998 due to the offset of losses in long positions
with gains in short positions.
16
<PAGE>
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, on the Consolidated Statements 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.
PART II. OTHER INFORMATION
ITEM 2. USE OF PROCEEDS
On July 8, 1998, the Registration Statement was declared effective by the
SEC, pursuant to which 8,688,246 shares of the Company's Class A Stock were
offered and sold for the account of the Company at a price of $14.50 per
share, generating gross offering proceeds of $126.0 million. An additional
1,311,754 shares of the Company's Class A Stock were offered and sold for the
account of a selling stockholder at a price of $14.50 per share, generating
gross offering proceeds to the selling shareholder of $19.0 million. The
managing underwriters of the Offering were BancAmerica Robertson Stephens;
Merrill Lynch, Pierce, Fenner & Smith Incorporated; PaineWebber Incorporated;
ABN AMRO Incorporated; and Southwest Securities, Inc.
The net proceeds to the Company from the sales of the 8,688,246 shares of
Class A Stock offered by the Company were approximately $116.2 million at the
Offering price of $14.50 per share after deducting underwriting discounts and
commissions of approximately $8.2 million and Offering expenses of
approximately $1.6 million paid by the Company. On August 3, 1998, the
underwriters' exercised an over-allotment option to purchase 1.5 million
shares at the Offering price of $14.50. Before deducting underwriting
discounts and commissions, the underwriters' exercise of the overallotment
option generated gross proceeds of approximately $21.7 million for the
Company. The net proceeds to the Company from the overallotment option were
approximately $20.3 million after deducting underwriting discounts and
commissions of $1.4 million. See the Company's Registration Statement on Form
S-1 dated July 8, 1998 as filed with the Commission for a more complete
description of these transactions.
The principal purposes of the Offering were to increase the Company's
working capital and equity base, to provide a public market for its Class A
Stock, to permit future acquisitions using cash or publicly tradable Class A
Stock, and to facilitate future access to capital markets. From the proceeds
of the Offering, the Company used $13.8 million to redeem all of the
outstanding Mandatorily Redeemable Preferred B Units of Roundtable. 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 transactions. Pending such uses, the Company intends
to invest the net proceeds of the Offering in short-term, investment-grade,
interest-bearing securities.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto until duly authorized.
Knight/Trimark Group, Inc.
--------------------------------
By: Robert I. Turner
Title: Treasurer, Executive Vice
President, Chief Financial and
Accounting Officer
Date: November 6, 1998
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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