<PAGE>
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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, 1999
001-14223
COMMISSION FILE NUMBER
Knight/Trimark Group, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction
of incorporation or organization)
52-2096335
(I.R.S. Employer
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 11, 1999 the number of shares outstanding of the registrant's
Class A common stock was 111,434,649 and there were no shares outstanding of the
registrant's Class B common stock.
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KNIGHT/TRIMARK GROUP, INC.
FORM 10-Q QUARTERLY REPORT
For the Quarter Ended September 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
PART I FINANCIAL INFORMATION:
<S> <C> <C>
Item 1. Financial Statements............................................................................ 3
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........... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................... 17
PART II OTHER INFORMATION:
Item 1. Legal Proceedings............................................................................... 18
Item 2. Changes in Securities and Use of Proceeds....................................................... 18
Item 3. Defaults Upon Senior Securities................................................................. 18
Item 4. Submission of Matters to a Vote of Security Holders............................................. 18
Item 5. Other Information............................................................................... 18
Item 6. Exhibits and Reports on Form 8-K................................................................ 18
Signatures
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
KNIGHT/TRIMARK GROUP, INC.
Consolidated Statements of Income
(unaudited)
<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, ended September 30,
=============================== ==============================
1999 1998 1999 1998
============= ============= ============= =============
<S>
Revenues <C> <C> <C> <C>
Net trading revenue $129,434,821 $ 89,941,017 $524,423,136 $233,134,057
Commissions and fees 4,721,877 1,372,247 11,687,933 1,486,701
Interest, net 3,423,430 1,062,482 8,180,381 1,873,185
------------- ------------- ------------- -------------
Total revenues 137,580,128 92,375,746 544,291,450 236,493,943
------------- ------------- ------------- -------------
Expenses
Employee compensation and benefits 36,969,707 28,335,434 164,428,927 68,132,238
Payments for order flow 31,068,700 20,351,538 98,850,716 56,097,708
Execution and clearance fees 19,708,859 11,984,448 57,472,143 32,358,112
Communications and data processing 4,829,222 2,764,860 12,777,707 7,449,224
Business development 3,341,296 608,679 5,355,986 1,620,996
Occupancy and equipment rentals 2,669,230 1,647,143 6,959,035 4,044,607
Depreciation and amortization 2,416,149 1,520,842 6,549,768 4,160,269
Professional fees 978,324 1,256,418 4,198,553 2,207,458
Interest on Preferred Units - 36,845 - 714,904
Other 875,278 786,744 2,536,371 1,385,062
------------- ------------- ------------- -------------
Total expenses 102,856,765 69,292,951 359,129,206 178,170,578
------------- ------------- ------------- -------------
Income before income taxes 34,723,363 23,082,795 185,162,244 58,323,365
Income tax expense 12,880,970 9,259,200 75,718,212 9,259,200
------------- ------------- ------------- -------------
Net income $ 21,842,393 $ 13,823,595 $109,444,032 $ 49,064,165
============= ============= ============= =============
Basic earnings per share $ 0.20 $ 0.13 $ 1.00 $ 0.54
============= ============= ============= =============
Diluted earnings per share $ 0.19 $ 0.13 $ 0.95 $ 0.54
============= ============= ============= =============
Pro forma adjustment (Notes 5 and 6):
Income before income taxes $ 23,082,795 $ 58,323,365
Pro forma income tax expense 9,925,602 25,079,047
------------- -------------
Pro forma net income $ 13,157,193 $ 33,244,318
============= =============
Pro forma basic earnings per share $ 0.13 $ 0.36
============= =============
Pro forma diluted earnings per share $ 0.13 $ 0.36
============= =============
Shares used in basic earnings per share calculation 111,203,800 102,565,439 109,921,171 91,319,460
============= ============= ============= =============
Shares used in diluted earnings per share calculation 116,350,861 102,565,439 114,843,985 91,319,460
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
KNIGHT/TRIMARK GROUP, INC.
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(unaudited)
Assets
<S> <C> <C>
Cash and cash equivalents $ 265,298,079 $ 117,381,556
Securities owned, at market value 100,822,606 100,476,151
Receivable from clearing brokers 107,738,486 107,503,274
Fixed assets and leasehold improvements at cost,
less accumulated depreciation 15,272,283 12,014,991
Goodwill, less accumulated amortization 17,695,978 16,036,859
Income taxes receivable 4,902,306 -
Investments 11,672,934 1,913,000
Other assets 10,752,127 3,534,544
------------------------ -----------------------
Total assets $ 534,154,799 $ 358,860,375
======================== =======================
Liabilities and Stockholders' Equity
Liabilities
Securities sold, not yet purchased, at market value $ 86,789,389 $ 108,909,217
Short-term borrowings - 10,000,000
Accrued compensation expense 21,442,851 16,529,004
Accrued execution and clearance fees 7,947,576 6,898,095
Accrued payments for order flow 8,862,301 8,672,668
Accounts payable, accrued expenses and other liabilities 9,110,418 5,445,112
Income taxes payable - 2,285,620
------------------------ -----------------------
Total liabilities 134,152,535 158,739,716
------------------------ -----------------------
Stockholders' equity
Class A Common Stock, $0.01 par value, 200,000,000 shares authorized;
111,334,154 and 98,124,368 shares issued and outstanding at
September 30, 1999 and December 31, 1998, respectively 1,113,342 981,244
Class B Common Stock, $0.01 par value, 20,000,000 shares authorized;
7,885,396 shares issued and outstanding at
December 31, 1998 - 78,854
Additional paid-in capital 259,634,209 169,249,880
Retained earnings 139,254,713 29,810,681
------------------------ -----------------------
Total stockholders' equity 400,002,264 200,120,659
------------------------ -----------------------
Total liabilities and stockholders' equity $ 534,154,799 $ 358,860,375
======================== =======================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
KNIGHT/TRIMARK GROUP, INC.
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
For the nine months ended September 30,
-----------------------------------------------------
1999 1998
------------------------- -------------------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 109,444,032 $ 49,064,165
Adjustments to reconcile net income to net cash
provided by operating activities
Noncash item included in net income
Depreciation and amortization 6,549,768 4,160,269
(Increase) decrease in operating assets
Securities owned (346,455) 6,720,722
Receivable from clearing brokers (235,212) (35,487,435)
Income taxes receivable (4,902,306) -
Other assets (7,217,582) (1,340,827)
Increase (decrease) in operating liabilities
Securities sold, not yet purchased (22,119,828) 23,719,612
Accrued compensation expense 4,913,847 8,794,336
Accrued execution and clearance fees 1,049,481 428,977
Accrued payments for order flow 189,633 1,217,625
Accounts payable, accrued expenses and other liabilities 3,665,306 2,601,141
Income taxes payable (2,285,620) 9,238,200
------------------------- -------------------------
Net cash provided by operating activities 88,705,064 69,116,785
------------------------- -------------------------
Cash flows from investing activities
Investments (9,759,934) (410,000)
Payment of contingent consideration (4,140,977) (2,886,048)
Purchases of fixed assets and leasehold improvements (7,325,202) (7,270,528)
------------------------- -------------------------
Net cash used in investing activities (21,226,113) (10,566,576)
------------------------- -------------------------
Cash flows from financing activities
Repayment of short-term loan (10,000,000) (500,000)
Increase in short-term loan - 25,000,000
Net proceeds from issuance of common stock 80,219,537 136,811,757
Stock options exercised 3,443,388 -
Income tax credit - stock options 6,774,647 -
Redemptions of Manditorily Redeemable Preferred A Units - (12,483,610)
Redemptions of Manditorily Redeemable Preferred B Units - (15,000,000)
Distributions on Common Units - (65,670,909)
------------------------- -------------------------
Net cash provided by financing activities 80,437,572 68,157,238
------------------------- -------------------------
Increase in cash and cash equivalents 147,916,523 126,707,447
Cash and cash equivalents at beginning of period 117,381,556 13,797,198
------------------------- -------------------------
Cash and cash equivalents at end of period $ 265,298,079 $ 140,504,645
========================= =========================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 945,300 $ 1,712,796
========================= =========================
Cash paid for income taxes $ 84,014,615 $ -
========================= =========================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
KNIGHT/TRIMARK GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
1. Organization and Description of the Business
Knight/Trimark Group, Inc. (''Knight/Trimark'') was organized in April 1998 as
the successor to the business of Roundtable Partners, L.L.C. (''Roundtable'')
(hereafter, references to the ''Company'' refer to Knight/Trimark or Roundtable,
as appropriate) and to own and operate the securities market-making businesses
of its wholly-owned subsidiaries, Knight Securities, Inc. (''Knight'') and
Trimark Securities, Inc. (''Trimark''). As part of an internal restructuring in
July 1999 Knight Securities, Inc. became Knight Securities, L.P.
The Company operates in one segment and line of business--equity securities
market-making. 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'') 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, 1998 included in the Company's Report on
Form 10-K as filed with the SEC.
Certain prior period amounts have been reclassified to conform to the current
period presentation. All share and per share amounts have been adjusted to
reflect the two-for-one stock split described in Note 2.
2. Reorganization, Public Stock Offerings and Stock Split
Concurrent with the closing of the initial public offering of the Company's
Common Stock on July 13, 1998, based on the initial public offering price of
$7.25 per share, all of the member interests of Roundtable were exchanged for
73,324,830 shares of Class A Common Stock of the Company and 7,885,396 shares of
nonvoting Class B Common Stock of the Company (the ''Reorganization'').
The initial public offering of 23,000,000 shares of Class A Stock included
20,376,492 newly-issued shares and 2,623,508 shares from a selling shareholder.
Proceeds received by the Company from the initial public offering, net of the
applicable underwriting discounts and commissions and offering expenses, were
approximately $136.5 million.
On February 25, 1999 a Registration Statement on Form S-1 (No. 333-71559) was
declared effective by the SEC, pursuant to which 18,000,000 shares of Class A
common stock were offered and sold at a price to the public of $17.50 per share.
Of those shares, 4,849,440 were sold by Knight/Trimark, generating net offering
proceeds, after deducting underwriting discounts and commissions and offering
expenses, of approximately $80.2 million. An additional 13,150,560 were sold by
selling shareholders, generating gross offering proceeds to the selling
shareholders of approximately $230.1 million. Certain selling shareholders
granted the underwriters a 30-day option to purchase up to an additional
2,700,000 shares of Class A common stock to cover over-allotments. That option
was exercised in full on March 18, 1999.
6
<PAGE>
In April 1999, the Company's Board of Directors approved a two-for-one stock
split of the Company's Class A and Class B Common Stock. Shareholders of record
as of the close of business on April 30, 1999 received, in the form of a stock
dividend, one additional share for each share held by them. On May 14, 1999, the
transfer agent distributed the additional shares.
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
outstanding Class A common stock up to a total aggregate amount not to exceed
$20 million. On July 21, 1999, the Board of Directors cancelled the repurchase
program. The Company did not repurchase any shares under this program.
3. Investments
Investments consist of strategic ownership interests in privately held
corporations and limited partnerships. Investments in common stock which
represent a 20% or more ownership interest in the corporation, as well as
interests in limited partnerships, are accounted for under the equity method.
All other investments are carried at cost, adjusted only for permanent declines
in value. The largest component of Investments is an 18.92% interest in EASDAQ
(the European Association of Securities Dealers Automated Quotations) which the
Company purchased on July 28, 1999 for approximately $8.2 million. EASDAQ is a
pan-European stock market for international growth and technology companies. The
Company subsequently made an additional investment of approximately $940,000 in
EASDAQ on October 21, 1999, bringing its total ownership interest to
approximately 19.49%.
4. Related Party Transactions and Significant Customers
Before the Reorganization and initial public offering, Roundtable was owned by
a consortium of 31 independent securities firms and investors (the ''Broker
Dealer Owners''). Under Roundtable's limited liability company agreement, the
Broker Dealer Owners, who were considered affiliated companies, shared in
Roundtable's profits in proportion to their equity interests and the quantity of
order flow they directed to the Company. After the initial public offering, this
profit sharing practice was discontinued and, while some of the Broker Dealer
Owners still own common stock in the Company, these Broker Dealer Owners do not
receive any special inducement to provide the Company with order flow.
Subsequent to the initial public offering, the Company considers affiliates to
be holders of 5% or more of the Company's outstanding common stock
(''Affiliates''). For the three months ended September 30, 1999 there were 2
Broker Dealer Owners who were considered Affiliates of the Company. As measured
in share volume, each Affiliate represented 10.3% and 11.8%, respectively, of
the Company's order flow for the three months ended September 30, 1999, and
11.1% and 12.1%, respectively, of the Company's order flow for the nine months
ended September 30, 1999. On September 29, 1999, one of these Affiliates sold a
significant portion of its remaining outstanding shares of the Company's common
stock and will no longer be considered an Affiliate of the Company for
financial reporting purposes.
Included within payments for order flow on the Consolidated Statements of
Income for the three and nine month periods ended September 30, 1999 is
$10,429,032 and $34,390,251, respectively, related to Affiliates. Additionally,
included within payments for order flow on the Consolidated Statements of Income
for the three and nine month periods ended September 30, 1998 is $5,233,909 and
$15,701,583, respectively, related to Affiliates. Included within accrued
payments for order flow on the Consolidated Statement of Financial Condition as
of September 30, 1999 is $3,091,305 related to Affiliates.
Trimark clears its securities transactions through an Affiliate. Knight clears
its securities transactions through an unaffiliated clearing broker. Included
within execution and clearance fees on the Consolidated Statement of Income for
the three and nine month periods ended September 30, 1999 is $7,198,421 and
$24,083,851, respectively, related to this Affiliate. Additionally, included
within execution and clearance fees on the Consolidated Statement of Income for
the three and nine month periods ended September 30, 1998 is $5,233,909 and
$15,701,583 related to this Affiliate. Included within accrued execution and
clearance fees on the Consolidated Statement of Financial Condition as of
September 30, 1999 is $2,468,927 related to this Affiliate.
One customer not considered an Affiliate provided 9.8% and 10.7% of the
Company's order flow for the three and nine month periods ended September 30,
1999, respectively.
7
<PAGE>
5. Income Taxes
The Company and its subsidiaries file a consolidated federal income tax
return. 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 is subject to federal income taxes and state income
taxes in New York, New Jersey and other states.
Pro forma income represents net income adjusted to reflect pro forma income
taxes as if the Company was a C Corporation for the three and nine month periods
ended September 30, 1998.
6. Earnings per Share
Basic earnings per share has been calculated by dividing net income by the sum
of the weighted average shares of Class A Common Stock and Class B Common Stock
outstanding during each respective period. The diluted earnings per share
calculation includes the effect of dilutive stock options, as calculated under
the treasury stock method. All shares of Class B Common Stock, which are non-
voting, were held by a single shareholder. Except for voting rights, the Class B
Common Stock has identical rights and rewards as the Class A Common Stock and
must be automatically converted to Class A Common Stock in the event of a sale
or a transfer by the current owner. All outstanding shares of Class B Common
Stock were sold by their holder on September 29, 1999 and were automatically
converted into shares of Class A Common Stock.
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations:
<TABLE>
<CAPTION>
Three months ended September 30, 1999 Three months ended September 30, 1998
------------------------------------- -------------------------------------
Numerator / Numerator / Denominator /
net Denominator / pro forma pro forma
income shares income shares
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C>
Shares and income used in basic calculations $ 21,842,393 111,203,800 $ 13,157,193 102,565,439
Effect of dilutive stock options - 5,147,061 - -
--------------------------------------- -------------------------------------
Shares and income used in diluted calculations $ 21,842,393 116,350,861 $ 13,157,193 102,565,439
======================================== ====================================
Basic earnings per share $ 0.20 $ 0.13
====================== ===================
Diluted earnings per share $ 0.19 $ 0.13
====================== ===================
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30, 1999 Nine months ended September 30, 1998
--------------------------------------- -------------------------------------
Numerator / Numerator / Denominator /
net Denominator / pro forma pro forma
income shares income shares
--------------------------------------- ------------------------------------
<S> <C> <C> <C> <C>
Shares and income used in basic calculations $ 109,444,032 109,921,171 $ 33,244,318 91,319,460
Effect of dilutive stock options - 4,922,814 - -
--------------------------------------- -----------------------------------
Shares and income used in diluted calculations $ 109,444,032 114,843,985 $ 33,244,318 91,319,460
======================================== ====================================
Basic earnings per share $ 1.00 $ 0.36
====================== ===================
Diluted earnings per share $ 0.95 $ 0.36
====================== ===================
</TABLE>
8
<PAGE>
Pro forma shares outstanding for the three and nine months periods ended
September 30, 1998 have been determined as if the Reorganization described in
Note 2 occurred as of January 1, 1998.
7. Net Capital Requirements
As registered broker-dealers and NASD member firms, Knight and Trimark are
subject to the SEC'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 $1.0 million or 6 2/3 % of aggregate
indebtedness, as defined.
At September 30, 1999, Knight had net capital of $190,171,967, which was
$188,046,353 in excess of its required net capital of $2,125,614 and Trimark had
net capital of $36,407,054 which was $35,407,054 in excess of its required net
capital of $1 million.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of our results of operations should be read in
conjunction with our consolidated financial statements and notes thereto
included in our audited financial statements as of December 31, 1998 included
within our report on Form 10-K. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results may differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including, but not limited to, those set forth
elsewhere in this document.
9
<PAGE>
We are the leading market maker in Nasdaq securities, other OTC equity
securities, and NYSE- and AMEX-listed equity securities in the Third Market.
Through our wholly-owned subsidiary, Knight, we make markets in over 7,300
equity securities in Nasdaq and on the NASD's OTC Bulletin Board. Through our
wholly-owned subsidiary, Trimark, we make 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 The AutEx Group, a widely recognized
industry reporting service that publishes daily trading volume and market share
statistics reported by broker-dealer market makers, Knight was ranked first in
AutEx's Nasdaq/OTC Securities rankings, with a 14.55% market share during
September 1999. Knight's share volume totaled 14.0 billion and 6.7 billion, or
78% and 71% of our total share volume, for the three months ended September 30,
1999, and 1998, respectively. Trimark has held the #1 market share ranking in
trading of NYSE- and AMEX-listed securities in the Third Market for over three
years. Trimark's share volume totaled 3.8 billion and 2.8 billion, or 22% and
29% of our total share volume for the three months ended September 30, 1999 and
1998, respectively.
We have experienced and expect to continue to experience, significant
fluctuations in quarterly operating results due to a variety of factors,
including the value of our securities positions and our ability to manage the
risks attendant thereto, the volume of our market-making activities, volatility
in the securities markets, our 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 our market
making services declines and we are unable to adjust our cost structure on a
timely basis, our operating results could be materially and adversely affected.
We have experienced, and may experience in the future, significant seasonality
in our business.
Due to all of the foregoing factors, period-to-period comparisons of our
revenues and operating results are not necessarily meaningful and such
comparisons cannot be relied upon as indicators of future performance. There
also can be no assurance that we will be able to sustain the rates of revenue
growth that we have experienced in the past, that we will be able to improve our
operating results or that we will be able to sustain our profitability on a
quarterly basis.
Revenues
Our revenues consist principally of net trading revenue from equity securities
market-making activities. Net trading revenue, which represents trading gains
net of trading losses, is primarily affected by changes in trade and share
volumes from customers, our ability to derive trading gains by taking
proprietary positions primarily to facilitate customer transactions, changes in
our execution standards and by regulatory changes and evolving industry customs
and practices. Our net trading revenue per trade for OTC securities has
historically exceeded the net trading revenue per trade for listed securities.
We continue to focus on increasing our sales to 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 we earn commissions on a per share basis. We also
receive fees for providing certain information to market data providers.
Commissions and fees are primarily affected by changes in our trade and share
volumes in listed securities.
We also earn interest income from our cash and securities positions held at
banks and in trading accounts at 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 and short-term debt. 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.
Expenses
Our operating expenses largely consist of employee compensation and benefits,
payments for order flow and execution and clearance fees. Substantial portions
of each expense are variable in nature. Employee compensation and
10
<PAGE>
benefits expense, which is largely profitability based, fluctuates, for the most
part, based on changes in net trading revenue and our 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 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 our overall profitability.
Approximately 77% of our employees are directly involved in market-making, sales
or customer service activities. Compensation for employees engaged in market
making and sales activities, the largest component of employee compensation and
benefits, is determined primarily based on a percentage of gross trading profits
net of expenses, including related payments for order flow, execution and
clearance costs and overhead allocations. Employee compensation and benefits
will, therefore, be affected by changes in payments for order flow, execution
and clearance costs and the costs we allocate to employees engaged in market
making and sales activities.
Payments for order flow represent customary payments to broker-dealers, in the
normal course of business, for directing their order flow to us. We only pay
broker-dealers for orders that provide us with a profit opportunity. For
example, we make payments on market orders, but do not pay on limit orders.
Execution and clearance fees primarily represent clearance fees paid to
clearing brokers for OTC and listed securities, transaction fees paid to Nasdaq,
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, commonly referred to as ECNs. Execution and
clearance fees are higher for listed securities than for OTC securities. Due to
our significant growth in share and trade volume, we have 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.
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 us 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 businesses of Trimark and
Tradetech Securities, L.P., which we acquired in November 1997.
Occupancy and equipment rentals expense primarily consists of rental payments
on office and equipment leases.
Professional fees primarily consist of fees paid to computer programming and
systems consultants, as well as legal fees and other professional fees.
Business development expense primarily consists of marketing expenses,
including promotion and advertising costs and travel and entertainment.
Interest on Preferred Units represents required interest payments on our
Mandatorily Redeemable Preferred A and B Units at a rate approximating the
Federal Funds rate. All Preferred Units were redeemed during 1998.
Other expenses primarily consist of administrative expenses and other
operating costs incurred in connection with our business growth, as well as
director fees.
Income Tax
Prior to our initial public offering, we were a limited liability company and
were not subject to federal or state income taxes. Subsequent to our
reorganization from a limited liability company to a corporation, which occurred
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immediately before the closing of our initial public offering, we became subject
to federal income taxes and state income taxes in New York, New Jersey and other
states.
Results of Operations
Three Months Ended September 30, 1999 and 1998
Revenues
Net trading revenue increased 43.9% to $129.4 million for the three months
ended September 30, 1999, from $89.9 million for the comparable period in 1998.
This increase was primarily due to higher trading volume, partially offset by
decreased average revenue per trade and per share. Total trade volume increased
94.5% to 20.4 million trades for the three months ended September 30, 1999, from
10.5 million trades for the comparable period in 1998. Total share volume
increased 87.9% to 17.8 billion shares traded for the three months ended
September 30, 1999, from 9.5 billion shares traded for the comparable period in
1998.
Commissions and fees increased to $4.7 million for the three months ended
September 30, 1999, from $1.4 million for the comparable period in 1998. This
increase is primarily due to higher trade and share volumes from institutional
customers in listed securities and the receipt of fees in 1999 for providing
certain information to market data providers.
Interest, net increased to $3.4 million for the three months ended September
30, 1999, from $1.1 million for the comparable period in 1998. This increase was
primarily due to larger cash balances held at banks and our clearing brokers as
a result of our initial and follow-on stock offerings, which was offset in part
by increased transaction-related interest expense resulting from a higher level
of securities sold, not yet purchased.
Expenses
Employee compensation and benefits expense increased 30.5% to $37.0 million
for the three months ended September 30, 1999, from $28.3 million for the
comparable period in 1998. As a percentage of net trading revenue, employee
compensation and benefits expense decreased to 28.6% for the three months ended
September 30, 1999, from 31.5% for the comparable period in 1998. The increase
on a dollar basis was primarily due to increased gross trading profits and
growth in the number of employees. The decrease as a percentage of net trading
revenue was primarily due to reductions in our market maker compensation
formula. Due to increased net trading revenue, profitability based compensation
increased 31.2% to $27.8 million for the three months ended September 30, 1999,
from $21.2 million for the comparable period in 1998, and represented 75.3% and
74.9% of total employee compensation and benefits expense for the three months
ended September 30, 1999 and 1998, respectively. The number of employees
increased to 587 employees as of September 30, 1999, from 428 employees as of
September 30, 1998.
Payments for order flow increased 52.7% to $31.1 million for the three months
ended September 30, 1999, from $20.4 million for the comparable period in 1998.
As a percentage of net trading revenue, payments for order flow increased to
24.0% for the three months ended September 30, 1999 from 22.6% for the
comparable period in 1998. The increase in payments for order flow on a dollar
basis was primarily due to an 87.9% increase in shares traded for the three
months ended September 30, 1999 to 17.8 billion shares, up from 9.5 billion for
the comparable period in 1998, partially offset by a decrease in our average
revenue per share. The increase in payments for order flow as a percentage of
net trading revenue was primarily due to a decrease in our average revenue per
share.
Execution and clearance fees increased 64.5% to $19.7 million for the three
months ended September 30, 1999, from $12.0 million for the comparable period in
1998. As a percentage of net trading revenue, execution and clearance fees
increased to 15.2% for the three months ended September 30, 1999 from 13.3% for
the comparable period in 1998. The increase on a dollar basis was primarily due
to a 94.5% increase in trades for the three months ended September 30, 1999,
which was offset, in part, by a decrease in clearance rates charged by clearing
brokers, volume discounts and a decrease in our average revenue per trade. The
decrease in our execution and clearance fees as a percentage of net trading
revenue was primarily due to a decrease in clearance rates charged by clearing
brokers, volume discounts and growth in the volume of OTC securities
transactions.
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Communications and data processing expense increased 74.7% to $4.8 million for
the three months ended September 30, 1999, from $2.8 million for the comparable
period in 1998. This increase was generally attributable to higher trading
volumes and an increase in the number of employees.
Business development expense increased to $3.3 million for the three months
ended September 30, 1999, from $609,000 for the comparable period in 1998. This
increase was primarily the result of the launch of our advertising campaign and
higher travel and entertainment costs consistent with the growth in our business
and our increased focus on the institutional sales business.
Occupancy and equipment rentals expense increased 62.1% to $2.7 million for
the three months ended September 30, 1999, from $1.6 million for the comparable
period in 1998. This increase was primarily attributable to additional office
space and increased computer equipment lease expense. We occupied 93,687 square
feet of office space at September 30, 1999, up from 75,768 square feet of office
space at September 30, 1998.
Depreciation and amortization expense increased 58.9% to $2.4 million for the
three months ended September 30, 1999, from $1.5 million for the comparable
period in 1998. This increase was primarily due to the purchase of approximately
$3.0 million of additional fixed assets and leasehold improvements during the
three months ended September 30, 1999 and the amortization of goodwill related
to the acquisition of the listed securities market-making businesses of Trimark
and Tradetech.
Professional fees decreased 22.1% to $978,000 for the three months ended
September 30, 1999, down from $1.3 million for the comparable period in 1998.
This decrease was primarily due to increased consulting expenses in 1998 related
to our establishment of an institutional sales office in London.
Interest on Preferred Units was zero for the three months ended September 30,
1999, and $37,000 for the comparable period in 1998. This decrease is due to our
redemption of all of the remaining Preferred A and B Units during the third
quarter of 1998.
Other expenses increased 11.3% to $875,000 for the three months ended
September 30, 1999, from $787,000 for the comparable 1998 period. This was
primarily the result of increased operating costs in connection with our overall
business growth.
Income Tax
Our effective tax rate for the three months ended September 30, 1999 and pro
forma effective tax rate for the three months ended September 30, 1998 differ
from the federal statutory rate of 35% due to state income taxes, as well as
nondeductible expenses, including the amortization of goodwill resulting from
the acquisition of Trimark and a portion of business development expenses. Our
effective tax rate declined to 37% for the three months ended September 30, 1999
due to lower state and local income taxes.
Nine Months Ended September 30, 1999 and 1998
Revenues
Net trading revenue increased 124.9% to $524.4 million for the nine months
ended September 30, 1999, from $233.1 million for the comparable period in 1998.
This increase was primarily due to higher trading volume and increased average
revenue per trade and per share. Total trade volume increased 123.6% to 60.6
million trades for the nine months ended September 30, 1999, from 27.1 million
trades for the comparable period in 1998. Total share volume increased 108.9% to
55.1 billion shares traded for the nine months ended September 30, 1999, from
26.4 billion shares traded for the comparable period in 1998.
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Commissions and fees increased to $11.7 million for the nine months ended
September 30, 1999, from $1.5 million for the comparable period in 1998. This
increase is primarily due to higher trade and share volumes from institutional
customers in listed securities and the receipt of fees in 1999 for providing
certain information to market data providers.
Interest, net increased to $8.2 million for the nine months ended September
30, 1999, from $1.9 million for the comparable period in 1998. This increase was
primarily due to larger cash balances held at banks and our clearing brokers as
a result of our initial and follow-on stock offerings, which was offset in part
by increased transaction-related interest expense resulting from a higher level
of securities sold, not yet purchased.
Expenses
Employee compensation and benefits expense increased 141.3% to $164.4 million
for the nine months ended September 30, 1999, from $68.1 million for the
comparable period in 1998. As a percentage of net trading revenue, employee
compensation and benefits expense increased to 31.4% for the nine months ended
September 30, 1999, from 29.2% for the comparable period in 1998. The increase
on a dollar basis was primarily due to increases in gross trading profits and
growth in the number of employees. The increase as a percentage of net trading
revenue was primarily due to increased profitability, and decreases in payments
for order flow as a percentage of net trading revenue which increased market
maker compensation. Due to increased net trading revenue and profitability,
profitability based compensation increased 173.1% to $139.1 million for the nine
months ended September 30, 1999, from $50.9 million for the comparable period in
1998, and represented 84.6% and 75.1% of total employee compensation and
benefits expense for the nine months ended September 30, 1999 and 1998,
respectively. The number of employees increased to 587 employees as of
September 30, 1999, from 428 employees as of September 30, 1998.
Payments for order flow increased 76.2% to $98.9 million for the nine months
ended September 30, 1999, from $56.1 million for the comparable period in 1998.
As a percentage of net trading revenue, payments for order flow decreased to
18.8% for the nine months ended September 30, 1999 from 24.1% for the comparable
period in 1998. The increase in payments for order flow on a dollar basis was
primarily due to a 108.9% increase in shares traded for the nine months ended
September 30, 1999 to 55.1 billion shares, up from 26.4 billion for the
comparable period in 1998. The decrease in payments for order flow as a
percentage of net trading revenue resulted from increased average revenue per
share and growth in our institutional business.
Execution and clearance fees increased 77.6% to $57.5 million for the nine
months ended September 30, 1999, from $32.4 million for the comparable period in
1998. As a percentage of net trading revenue, execution and clearance fees
decreased to 11.0% for the nine months ended September 30, 1999 from 13.9% for
the comparable period in 1998. The increase on a dollar basis was primarily due
to a 123.6% increase in trades for the nine months ended September 30, 1999,
which was offset, in part, by a decrease in clearance rates charged by clearing
brokers and volume discounts. The decrease in execution and clearance fees as a
percentage of net trading revenue was due to the decrease in clearance rates
charged by clearing brokers, volume discounts, increased average revenue per
trade and growth in the volume of OTC securities transactions.
Communications and data processing expense increased 71.5% to $12.8 million
for the nine months ended September 30, 1999, from $7.4 million for the
comparable period in 1998. This increase was generally attributable to higher
trading volumes and an increase in the number of employees.
Business development expense increased to $5.4 million for the nine months
ended September 30, 1999, from $1.6 million for the comparable period in 1998.
This increase was primarily the result of the launch of our advertising campaign
and higher travel and entertainment costs consistent with the growth in our
business and our increased focus on the institutional sales business.
Occupancy and equipment rentals expense increased 72.1% to $7.0 million for
the nine months ended September 30, 1999, from $4.0 million for the comparable
period in 1998. This increase was primarily attributable to additional office
space and increased computer equipment lease expense. We occupied 93,687 square
feet of office space at September 30, 1999, up from 75,768 square feet of office
space at September 30, 1998.
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Depreciation and amortization expense increased 57.4% to $6.5 million for the
nine months ended September 30, 1999, from $4.2 million for the comparable
period in 1998. This increase was primarily due to the purchase of approximately
$7.3 million of additional fixed assets and leasehold improvements during the
nine months ended September 30, 1999 and the amortization of goodwill related to
the acquisition of the listed securities market-making businesses of Trimark and
Tradetech.
Professional fees increased 90.2% to $4.2 million for the nine months ended
September 30, 1999, up from $2.2 million for the comparable period in 1998. This
increase was primarily due to increased consulting expenses related to our
investments in technology, as well as legal fees and other professional fees.
Interest on Preferred Units was zero for the nine months ended September 30,
1999, and $715,000 for the comparable period in 1998. This decrease is due to
our redemption of all of the remaining Preferred A and B Units during 1998.
Other expenses increased 83.1% to $2.5 million for the nine months ended
September 30, 1999, from $1.4 million for the comparable 1998 period. This was
primarily the result of increased operating costs in connection with our overall
business growth.
Income Tax
Our effective tax rate for the nine months ended September 30, 1999 and pro
forma effective tax rate for the nine months ended September 30, 1998 differ
from the federal statutory rate of 35% due to state income taxes, as well as
nondeductible expenses, including the amortization of goodwill resulting from
the acquisition of Trimark and a portion of business development expenses. Our
effective tax rate declined to 41% for the nine months ended September 30, 1999
due to lower state and local income taxes.
Liquidity and Capital Resources
Historically, we have financed our business primarily through cash generated
by operations, as well as the proceeds from our stock offerings, the private
placement of preferred and common units and borrowings under subordinated notes.
As of September 30, 1999, we had $534.2 million in assets, 89% 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, net of amounts related to securities 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 that trade in Nasdaq and on the NYSE and AMEX markets.
Net income plus depreciation and amortization was $24.3 million and $14.7
million during the three months ended September 30, 1999 and 1998, respectively.
Depreciation and amortization expense, which related to fixed assets and
goodwill, was $2.4 million and $1.5 million during the three months ended
September 30, 1999 and 1998, respectively. Capital expenditures were $3.0
million and $2.1 million for the three months ended September 30, 1999 and 1998,
respectively, primarily related to the purchase of data processing and
communications equipment, as well as leasehold improvements and additional
office facilities to support our growth. Additionally, we made cash payments of
$198,000 for the three months ended September 30, 1999 in connection with our
acquisitions of the listed securities market-making businesses of Trimark in
1995 and Tradetech in 1997. We anticipate that we will meet our 1999 capital
expenditure needs out of operating cash flows.
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 ($2.1 million and $1.0 million,
respectively as of September 30, 1999). These regulations also prohibit a
broker-dealer from repaying subordinated borrowings, paying cash 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 their parents,
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
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prohibit or restrict such transactions if the result is detrimental to the
financial integrity of the broker-dealer. At September 30, 1999, Knight had net
capital of $190.2 million, which was $188.1 million in excess of its required
net capital of $2.1 million and Trimark had net capital of $36.4 million, which
was $35.4 million in excess of its required net capital of $1.0 million.
PaineWebber Capital Inc., an affiliate of PaineWebber Incorporated, loaned
$30.0 million to Roundtable under a loan agreement dated as of June 19, 1998.
Roundtable used the proceeds from this loan to make distributions of
undistributed profits to the members of Roundtable before our reorganization
from a limited liability company to a Delaware corporation immediately before
our initial public offering. In connection with the dissolution of Roundtable,
we assumed all of Roundtable's obligations under the loan. We subsequently
repaid the entire loan from our operating cash flows, making principal pre-
payments of $5.0 million, $9.0 million, $6.0 million and $10.0 million on
September 15, 1998, October 20, 1998, December 15, 1998 and January 19, 1999,
respectively.
We currently anticipate that available cash resources and credit facilities
will be sufficient to meet our anticipated working capital and capital
expenditure requirements for at least the next 12 months.
In April 1999, our Board of Directors approved a two-for-one stock split of
our Class A and Class B Common Stock. Shareholders of record as of the close of
business on April 30, 1999 received, in the form of a stock dividend, one
additional share for each share held by them. On May 14, 1999, the transfer
agent distributed the additional shares.
Recent Developments
In October 1999, Knight began clearing and settling all of its securities
transactions through Broadcort Capital Corp., Merrill Lynch's clearing and
settlement subsidiary.
Year 2000 Compliance
Many currently installed computer systems and software products are coded to
accept or recognize 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, computer systems and/or software
used by many companies and governmental agencies may need to be upgraded to
comply with such Year 2000 requirements or risk system failure or
miscalculations causing disruptions of normal business activities.
State of Readiness. We have made an assessment of the Year 2000 readiness of
our trading-related, communications and data processing systems. Our readiness
plan consists of: (1) quality assurance testing of our main trading-related
systems including all customer interfaces and links to exchanges and utilities;
(2) contacting third-party vendors and licensors of material hardware, software
and services that relate directly and indirectly to the main trading systems;
(3) contacting vendors of critical non-trading related communications and data
processing systems; (4) contacting our clearing brokers; (5) assessment of
repair or replacement requirements; (6) repair or replacement; (7)
implementation; and (8) creation of contingency plans for possible Year 2000
failures. Additionally, we participated in the Securities Industry Association
''streetwide'' testing in March 1999. We believe that our main trading-related
systems are currently Year 2000 compliant. We have required vendors of material
hardware and software components of our information technology systems to
provide assurances of their Year 2000 compliance. We have recently received
certification from all mission-critical vendors of information equipment. We
have also completed testing of all internal trading systems and the majority of
our trading interfaces.
Costs. To date, we have incurred approximately $500,000 in costs in connection
with identifying and evaluating Year 2000 compliance issues. Most of our
expenses have related to, and are expected to continue to relate to, the
operating costs associated with time spent by employees in the evaluation
process and Year 2000 compliance matters generally. At this time, we estimate
that the total cost of the Year 2000 project to be approximately $550,000.
Risks. We are not currently aware of any Year 2000 compliance problems
relating to our main trading-related, communications or data processing systems
that would have a material adverse effect on our business, financial condition
and operating results, without taking into account our efforts to avoid or fix
such problems. We cannot assure that we will not discover Year 2000 compliance
problems that will require substantial revisions. In addition, we cannot assure
you that third-party software, hardware or services incorporated into our
systems will not need to be revised or replaced, all of which could be time
consuming and expensive. If we fail to fix our trading-related, communications
or data processing systems or to fix or replace third-party software, hardware
or services on a timely basis our business, financial condition and operating
results could be materially adversely affected. Moreover, the failure to
adequately address Year 2000 compliance issues in our main trading-related,
communications or data processing systems could result in litigation, which
could be costly and time-consuming to defend.
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In addition, we cannot assure you that customers, governmental agencies,
utility companies, securities exchanges, Internet access companies, third-party
service providers, including our clearing brokers, and others outside our
control will be Year 2000 compliant. The failure by these entities to be Year
2000 compliant could result in a systemic failure beyond our control, such as a
prolonged Internet, telecommunications or electrical failure, which could also
prevent us from delivering our services to our customers and could have a
material adverse effect on our business, results of operations and financial
condition.
Business Continuity Plan. We have finalized our business continuity plan and
have formulated action steps to be taken in the event of a Year 2000 related
failure.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our market-making and trading activities expose our 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 we have
virtually no control.
We employ an automated proprietary trading and risk management system which
provides real time, on-line risk management and inventory control. We monitor
our risks by a constant review of trading positions. For each market maker, we
have established a system whereby transactions 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.
In the normal course of our market-making business, we maintain inventories of
exchange-listed and OTC securities. The fair value of these securities at
September 30, 1999 was $100.8 million in long positions and $86.8 million in
short positions. The potential change in fair value, using a hypothetical 10.0%
decline in prices, is estimated to be a $1.4 million loss as of September 30,
1999 due to the offset of losses in long positions with gains in short
positions.
For working capital purposes, we invest in money market funds or maintain
interest bearing balances in our trading accounts with clearing brokers, which
are classified as cash equivalents and receivable from clearing brokers,
respectively, in 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. Since its
inception, neither Knight/Trimark nor any of its subsidiaries has traded or
otherwise transacted in derivatives.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are 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
our business, financial condition or operating results. We and certain of our
officers and employees have been subject to legal proceedings in the past and
may be subject to legal proceedings in the future.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 10.1 Clearing Agreement between Knight Securities, L.P.
and Broadcort Capital Corp. (the "Knight Clearing Agreement")
dated September 28, 1999.
Exhibit 10.2 Amendment to the Knight Clearing Agreement, dated October 18,
1999.
Exhibit 27. Financial Data Schedule.
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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.
/s/ Robert I. Turner
-----------------------------
By: Robert I. Turner
Title: Director, Treasurer, Executive Vice President,
and Chief Financial Officer (principal
financial and accounting officer)
Date: November 11, 1999
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EXHIBIT 10.1
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.
CLEARING AGREEMENT
This agreement, made as of the date indicated on the signature page hereof
(the "Agreement") between Broadcort Capital Corp. (hereinafter referred to as
the "Clearing Firm") and Knight Securities, L.P. (hereinafter referred to as the
"Introducing Firm"),
WITNESSETH THAT:
WHEREAS, the Introducing Firm is desirous of availing itself of clearing,
execution and other services related to the securities business as more fully
set forth herein; and
WHEREAS, the Clearing Firm desires to extend the foregoing types of services
to the Introducing Firm.
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 the Clearing Firm
---------------------------------------------
1. The Clearing Firm will execute orders for the Introducing Firm's
customers whose cash or margin accounts have been accepted by
Clearing Firm ("Introduced Accounts"), but only insofar as such
orders are transmitted by the Introducing Firm to the Clearing
Firm.
2. The Clearing Firm will generate, prepare and, to the extent
mutually agreed upon by the parties hereto, mail confirmations
respecting each of the Introduced Accounts. Upon mutual
agreement of the parties hereto, the Clearing Firm may transmit
the necessary information via the Sales Support communication
network in order to effect the printing of confirmations at the
location of the Introducing Firm.
3. The Clearing Firm 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.
4. The Clearing Firm will settle contracts and transactions in
securities (including options to buy or sell securities) (i)
between the Introducing Firm and other brokers and dealers, (ii)
between the Introducing Firm and the Introduced Accounts, and
(iii) between the Introducing Firm and persons other than the
Introduced Accounts or other brokers and dealers.
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5. The Clearing Firm 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 therefor, holding in custody and safekeeping
all securities and payments so received, the handling of margin
accounts, the receipt and distribution of dividends and other
distributions, and the processing of exchange offers, rights
offerings, warrants, tender offers and redemptions. Upon mutual
agreement of the parties hereto, the cashiering functions with
respect to the receipt of securities and the making and receiving
payment therefor may be relinquished to the Introducing Firm.
6. The Clearing Firm will construct and maintain prescribed books
and records of all transactions executed or cleared through it
and not specifically charged to the Introducing Firm 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 exchange registered under the Securities Exchange Act
of 1934, as amended ("National Securities Exchange").
B. Services Which Shall Not be Performed by the Clearing Firm
----------------------------------------------------------
Unless otherwise agreed to in a writing executed by the parties hereto, the
Clearing Firm shall not engage in any of the following services on behalf of the
Introducing Firm:
1. Accounting, bookkeeping or recordkeeping, cashiering, or any
other services with respect to commodity transactions, and/or any
transaction other than securities transactions.
2. Preparation of the Introducing Firm's payroll records, financial
statements or any analysis or review thereof or any
recommendations relating thereto.
3. Preparation or issuance of checks in payment of the Introducing
Firm's expenses, other than expenses incurred by the Clearing
Firm on behalf of the Introducing Firm pursuant to this
Agreement.
4. Payment of commissions, salaries or other remuneration to the
Introducing Firm's salesmen or any other employees of the
Introducing Firm.
5. Preparation and filing of reports (the "Reports") with the
Securities and Exchange Commission, any 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
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Introducing Firm is associated and/or by which it is regulated.
Notwithstanding the foregoing, the Clearing Firm will, at the
request of the Introducing Firm, furnish the Introducing Firm
with any necessary information and data contained in books and
records kept by the Clearing Firm and not otherwise reasonably
available to the Introducing Firm if such information is required
in connection with the preparation and filing of Reports by the
Introducing Firm.
6. Making and maintaining reports and records required to be kept by
the Introducing Firm by the Currency and Foreign Transactions
Reporting Act of 1970 and the regulations promulgated pursuant
thereto, or any similar law or regulations enacted or adopted
hereafter.
7. Verification of the address changes of any Introduced Account.
8. Obtaining 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.
9. 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.
10. Holding for safekeeping of the securities of any Introduced
Account registered in the name of the Introduced Account.
11. Accepting deposits from the Introducing Firm 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.
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, as amended, the Investment Advisers Act of
1940, as amended, and 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 corresponding 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 the Clearing Firm to be
in contravention of the Laws and Regulations, they shall be replaced with fees
mutually agreed upon by the Clearing Firm and the Introducing Firm.
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III. Interest
--------
Interest income earned through charges on debit balances in any Introduced
Account shall be proprietary to and fully retained by the Clearing Firm. No
interest shall be paid or credit given for any credit balances which from time
to time may be left on deposit with the Clearing Firm, unless otherwise mutually
agreed upon by the Clearing Firm and the Introducing Firm.
IV. Notations on Statements, Confirmations and Other Written Material
-----------------------------------------------------------------
The Clearing Firm shall carry all Introduced Accounts in the name of the
Introducing Firm's customer, with a notation on its books and records that such
Introduced Accounts were introduced by the Introducing Firm, and all monthly or
quarterly statements, confirmations and notices of funds or securities due
relating to such Introduced Accounts shall also indicate that the Introduced
Accounts were introduced by the Introducing Firm, that the role of the Clearing
Firm is to perform only the clearing functions and related services expressly
set forth herein, and that the Introducing Firm will continue as broker for the
Introduced Accounts. Inadvertent omission of such notations shall not be deemed
to constitute a breach of this Agreement. Copies of the forms covering all of
the foregoing shall be furnished by the Clearing Firm to the Introducing Firm.
If the Introducing Firm does not assume any cashiering function with respect
to any Introduced Accounts, the account statements of the Clearing Firm sent to
Introduced Accounts will contain a provision substantially in the following
form:
The funds and securities specified in this account statement are under
the possession or control of Merrill Lynch, Pierce, Fenner & Smith
Incorporated, and not with the securities firm that introduced this account
to Broadcort Capital Corp., the clearing firm. If you have any questions
regarding your account, please contact Customer Services at Broadcort
Capital Corp., at 212-670-0600, if your Introducing Firm is unable to
assist you.
V. Opening of Accounts
-------------------
A. At the time of the opening of each Introduced Account, the Introducing
Firm shall furnish the Clearing Firm with all financial and personal information
concerning such Introduced Accounts as the Clearing Firm may reasonably require.
At the time of the opening of Introduced Accounts that are margin accounts, the
Introducing Firm shall furnish the Clearing Firm with executed customers'
agreements, hypothecation agreements and consents to loans of securities
(collectively, the "margin agreement"). The Clearing Firm shall supply the
Introducing Firm with "new account" and margin agreement forms regarding margin
accounts in sufficient quantities, such forms to be submitted to the Clearing
Firm upon their completion by the Introducing Firm. If any Introduced Account
may have been opened without the Clearing Firm having previously received the
foregoing information or, in the case of a margin account, without the Clearing
Firm having previously received properly executed margin agreements, failure of
the Clearing Firm to receive such information or margin agreements shall not be
deemed to be a waiver of the information requirements set forth herein. Upon
the written or oral request of the Clearing Firm, the Introducing Firm shall
furnish the Clearing Firm with any other documents
4
<PAGE>
and agreements executed by the Introduced Account on forms which shall be
supplied by the Clearing Firm in sufficient quantities and which may reasonably
be required by the Clearing Firm in connection with the opening, operating or
maintaining of Introduced Accounts. The Clearing Firm may, at its election, mail
margin agreement or "new account" forms directly to the Introduced Accounts upon
notification by the Introducing Firm, and/or require completion of its own
margin agreement or "new account" forms and, if required, option account
agreements for the Introduced Accounts. The Introducing Firm shall promptly
provide the Clearing Firm 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 Introducing Firm, as shall be necessary for the
Clearing Firm to discharge its service obligations hereunder.
B. All transactions in any Introduced Account are to be considered cash
transactions until such time as the Clearing Firm has received margin
agreements, duly and validly executed in respect of such Introduced Account.
Nevertheless, it is intended that the Introducing Firm will obtain executed
margin agreements within the time periods set forth in the Clearing Firm's
procedural manuals. In the event credit is inadvertently extended with respect
to such Introduced Accounts, the Introducing Firm shall indemnify and hold the
Clearing Firm harmless from and against all loss, liability, damage, cost and
expense (including but not otherwise limited to fees and expenses of legal
counsel) arising therefrom.
C. At the time of the opening of any agency Introduced Account, the
Introducing Firm shall furnish the Clearing Firm with the name of any principal
for whom the Introducing Firm is acting as agent, and written evidence of such
authority.
D. The Introducing Firm 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 the Clearing Firm
as a potential Introduced Account. The Clearing Firm, in its reasonable business
judgment, reserves the right to reject any account which the Introducing Firm
may tender to the Clearing Firm as a potential Introduced Account. The Clearing
Firm also reserves the right to terminate any account previously accepted by it
as an Introduced Account.
E. Pursuant to written notification received by the Introducing Firm and
forwarded to the Clearing Firm, any account of the Introducing Firm may choose
to reject the services to be performed by the Clearing Firm 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, the Clearing Firm shall expedite such
transfer and shall have the sole and exclusive responsibility for compliance
with Rule 412 of the Rules.
F. It shall be the sole and exclusive responsibility of the Introducing
Firm to make every reasonable effort to ascertain the essential facts relative
to any Introduced Account and any order therefor, 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 all certificates,
papers and signatures provided by each Introduced Account. Any investment advice
furnished to an Introduced Account shall be the sole and exclusive
responsibility of the Introducing Firm.
5
<PAGE>
G. The Introducing Firm shall be solely and exclusively responsible for the
handling and supervisory review of any Introduced Accounts over which the
Introducing Firm's partners, officers or employees have discretionary authority,
as required by Rule 408 of the Rules and any other applicable Laws and
Regulations. The Introducing Firm shall furnish the Clearing Firm with such
documentation with respect thereto as may be requested by the Clearing Firm. The
Introducing Firm hereby agrees to indemnify and hold the Clearing Firm harmless
against any loss, liability, damage, cost or expense (including but not
otherwise limited to fees and expenses of legal counsel), as incurred, suffered
or incurred by the Clearing Firm directly or indirectly as a result of any
liabilities or claims arising from the exercise by the Introducing Firm, its
partners, officers or employees of discretionary authority over Introduced
Accounts. The Introducing Firm hereby warrants that with regard to any orders or
instructions given by the Introducing Firm 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 Introducing Firm
hereby agrees to indemnify and hold the Clearing Firm harmless against any loss,
liability, damage, cost or expense (including but not otherwise limited to fees
and expenses of legal counsel), as incurred, suffered or incurred by the
Clearing Firm directly or indirectly as a result of any breach of the
Introducing Firm's said warranty. The Introducing Firm hereby agrees and
warrants that it will maintain appropriate blanket brokers bond insurance
policies covering any and all acts of its employees, agents and partners
adequate to fully protect and indemnify the Clearing Firm against any loss,
liability, damage, cost or expense (including but not otherwise limited to fees
and expenses of legal counsel) which the Clearing Firm may suffer or incur,
directly or indirectly, as a result of any act of the Introducing Firm's
employees, agents or partners.
H. The Introducing Firm 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 organization engaged in the
securities business, and for compliance with Rule 407 of the Rules relating
thereto. The Introducing Firm shall furnish the Clearing Firm with such
documentation with respect thereto as may be requested by the Clearing Firm.
I. The Introducing Firm 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.
J. The Introducing Firm 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 the
Introducing Firm or the Clearing Firm, arising out of or resulting from any
orders the Introducing Firm has taken from Introduced Accounts residing or being
domiciled in jurisdictions in which the Introducing Firm has not been or is no
longer authorized to do business.
K. It shall be the sole and exclusive responsibility of the Introducing
Firm to comply with any and all prospectus delivery requirements in connection
with Introduced Accounts which are option accounts.
6
<PAGE>
L. For purposes of the Securities Investors Protection Act and the
financial responsibility rules promulgated by the Securities and Exchange
Commission, the Introduced Accounts shall be deemed customers of the Clearing
Firm. For all other purposes, the responsibilities of the Clearing Firm and the
Introducing Firm with respect to the Introduced Accounts shall be as specified
herein, including with respect to the Introducing Firm's supervisory
responsibility specified herein.
VI. Transactions and Margin
-----------------------
A. It is understood that with respect to Introduced Accounts which are
margin accounts the Clearing Firm 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 interpretive
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 Introducing Firm is responsible to the Clearing Firm for the
collection of the margin required to support each transaction for, and to
maintain margin in, each Introduced Account, 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
the Clearing Firm and made by the Clearing Firm or by the Introducing Firm at
the instructions of the Clearing Firm. The Clearing Firm shall have the right to
modify, in its sole discretion, the margin requirements of any Introduced
Account from time to time so that the Clearing Firm may call for additional
margin. Therefore, the Clearing Firm shall be the sole judge as to the amount of
margin to be required of and maintained by Introduced Accounts, which may be
imposed by security or specific Introduced Account and need not be of general
application.
B. On all transactions, the Introducing Firm shall be solely and
exclusively responsible to the Clearing Firm for any loss, liability, damage,
cost or expense (including but not otherwise limited to fees and expenses of
legal counsel), as incurred, incurred or sustained by the Introducing Firm or
the Clearing Firm as a 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 the Clearing Firm has timely issued such call
and given notice thereof to the Introducing Firm), whether or not any margin
extensions have been granted by the Clearing Firm pursuant to the request of the
Introducing Firm, except that no interest will be charged by the Clearing Firm
for cash shorts in Introduced Accounts. The Introducing Firm agrees to be solely
and exclusively responsible to the Clearing Firm for any loss or liability
whatsoever should any check or draft given to the Clearing Firm by any of the
Introduced Accounts be returned to the Clearing Firm unpaid. The Introducing
Firm furthermore agrees to be solely and exclusively responsible for the payment
and delivery of all "when issued" or "when distributed" transactions which the
Clearing Firm may accept, forward or execute for Introduced Accounts.
C. On all over-the-counter transactions for Introduced Accounts, the
Introducing Firm shall furnish the Clearing Firm with the names of the
respective purchasing and selling broker-dealers (except as otherwise provided
in Section D of this Article VI, as set forth below),
7
<PAGE>
the names of the purchasing and selling customers, and the wholesale and retail
purchase and sale prices.
D. Should the Introducing Firm give an order in an over-the-counter
security to the Clearing Firm and the counterparty is left to the Clearing
Firm's discretion, the Clearing Firm will assume the responsibility of paying
the Introducing Firm that which the counterparty has failed to pay pursuant to
the over-the-counter transaction ("del credere risk"). In case the Introducing
Firm executes its own over-the-counter order or designates the counterparty, it
shall be understood that in the event the over-the-counter dealer with whom the
Introducing Firm dealt or whom it designated fails to live up to its part of the
transaction, the Introducing Firm will assume the del credere risk and reimburse
the Clearing Firm for any loss sustained thereby.
E. The Introducing Firm shall be solely and exclusively responsible for
approving all orders for the Introduced Accounts and for establishing procedures
to insure that such approved orders are transmitted properly to the Clearing
Firm for execution. The Clearing Firm, in its reasonable business judgment,
reserves the right to reject any order which the Introducing Firm may transmit
to the Clearing Firm for execution.
F. The Introducing Firm 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 the
Clearing Firm pursuant to the terms of this Agreement shall have been properly
authorized in advance.
G. The Introducing Firm shall be solely and exclusively responsible for
sales and purchases for the Introduced Accounts that may create or result in a
violation of any of the Laws and Regulations.
H. All transactions pursuant to the terms of this Agreement shall be
subject to the constitution, rules, by-laws, regulations, stated policies,
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
Introducing Firm assumes sole and exclusive responsibility for compliance with
the Laws and Regulations in the same manner and to the same degree as if the
Introducing Firm were performing the services for the Introduced Accounts that
have been assumed by the Clearing Firm pursuant to this Agreement, except
insofar as the Clearing Firm may, pursuant to Section D of this Article VI, as
set forth above, select the counterparty to a particular transaction.
I. All transactions heretofore between the Introducing Firm and the
Clearing Firm with respect to orders given by or for the Introduced Accounts and
cleared through the Clearing Firm shall be subject to the provisions of this
Agreement.
8
<PAGE>
VII. Supervisory Responsibility
--------------------------
A. The Introducing Firm shall have the sole and exclusive responsibility
for the review of all Introduced Accounts and for compliance with any
supervisory responsibility under Rule 405(2) of the Rules, including but not
otherwise limited to matters involving the investment objectives of the
Introduced Accounts, the suitability of the investments made by the Introduced
Accounts, the reasonable bases for recommendations made to Introduced Accounts,
and the frequency of trading in the Introduced Accounts, whether or not such
transactions are instituted by the Introducing Firm, its partners, officers,
employees or any registered investment advisor.
B. The Introducing Firm and the Clearing Firm 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.
VIII.Information to be Provided by the Introducing Firm
--------------------------------------------------
A. The Introducing Firm shall provide the Clearing Firm with copies of all
financial information and reports filed by the Introducing Firm 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.
B. The Introducing Firm shall submit to the Clearing Firm on a monthly
basis or, if so requested by the Clearing Firm, at more frequent intervals,
information and reports relating to the Introducing Firm's financial integrity,
including but not otherwise limited to information regarding the Introducing
Firm's aggregate indebtedness ratio and net capital.
C. The Introducing Firm shall provide the Clearing Firm with all
appropriate data in its possession pertinent to the proper performance and
supervision of any function or responsibility specifically allocated to the
Clearing Firm pursuant to the terms of this Agreement.
D. The Introducing Firm shall provide the Clearing Firm with any amendment
or supplement to the Form BD of the Introducing Firm.
IX. Information to be Provided by the Clearing Firm
-----------------------------------------------
The Clearing Firm shall provide the Introducing Firm with all appropriate
data in its possession pertinent to the proper performance and supervision of
any function specifically allocated to the Introducing Firm pursuant to the
terms of this Agreement. The Introducing Firm shall be responsible for and shall
promptly reimburse the Clearing Firm for all costs incurred by the Clearing Firm
in connection with the preparation and mailing of such information.
9
<PAGE>
X. Customer Notification and Correspondence
----------------------------------------
A. The Introducing Firm 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 the
Clearing Firm pursuant to this Agreement and the right of such customers to
reject the services provided herein. Any new customers of the Introducing Firm
shall also be informed as provided herein, prior to such customers becoming
Introduced Accounts. The Introducing Firm shall be solely and exclusively
responsible for the payment of all costs incurred in connection with the
preparation and mailing of such customer correspondence.
B. The Introducing Firm shall inform its customers pursuant to such
written correspondence that all inquiries and correspondence should be directed
to the Introducing Firm. All customer correspondence shall be reviewed and
responded to by the party responsible for the specific area to which the inquiry
or complaint relates pursuant to the terms of this Agreement. In the event such
correspondence is not directed to such party originally, the Introducing Firm or
Clearing Firm shall expeditiously forward such correspondence to the appropriate
party.
XI. Errors, Controversies and Indemnities
-------------------------------------
A. Errors, misunderstandings or controversies, except those specifically
otherwise covered in this Agreement, between the Introduced Accounts and the
Introducing Firm or any of its employees, which shall arise out of acts or
omissions of the Introducing Firm or any of its employees (including, without
limiting the foregoing, the failure of the Introducing Firm to deliver promptly
to the Clearing Firm any instructions received by the Introducing Firm 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 Introducing Firm. In the event, however, that by reason of
such error, misunderstanding or controversy, the Introducing Firm in its
discretion deems it advisable to commence an action or proceeding against an
Introduced Account, the Introducing Firm shall indemnify and hold the Clearing
Firm harmless from any loss, liability, damage, cost or expense (including but
not otherwise limited to fees and expenses of legal counsel), as incurred, which
the Clearing Firm 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 Clearing Firm, the
Introducing Firm shall indemnify and hold the Clearing Firm harmless from any
loss, liability, damage, cost or expense (including but not otherwise limited to
fees and expenses of legal counsel), as incurred, which the Clearing Firm may
incur or sustain in connection therewith or under any settlement thereof.
B. Errors, misunderstandings or controversies, except those specifically
otherwise covered in this Agreement, between the Introduced Accounts and the
Introducing Firm or any of its employees, which shall arise out of acts or
omissions of the Clearing Firm or any of its employees, shall be the sole and
exclusive responsibility and liability of the Clearing Firm. In the event,
however, that by reason of such error, misunderstanding or controversy, the
Clearing Firm in its discretion deems it advisable to commence an action or
proceeding against an Introduced Account, the Clearing Firm shall indemnify and
hold the Introducing Firm harmless from any loss, liability, damage, cost or
expense (including but not otherwise limited to fees and
10
<PAGE>
expenses of legal counsel), as incurred, which the Introducing Firm 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 Introducing Firm, the Clearing Firm shall indemnify and
hold the Introducing Firm harmless from any loss, liability, damage, cost or
expense (including but not otherwise limited to fees and expenses of legal
counsel), as incurred, which the Introducing Firm may incur or sustain in
connection therewith or under any settlement thereof.
C. The Clearing Firm and the Introducing Firm 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 fees and expenses of
legal counsel), as incurred, 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 (including, without
limitation, the indemnification obligations contained in this Agreement) or any
breach of any representation or warranty herein by the indemnifying party under
this Agreement. The Introducing Firm hereby agrees to indemnify and hold the
Clearing Firm harmless from and against any loss, liability, damage, cost or
expense (including but not otherwise limited to fees and expenses of legal
counsel), as incurred, sustained or incurred in connection herewith in the event
any Introduced Account fails to meet any initial margin call or maintenance
call, in conformity with Article VI hereof.
D. 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.
E. The Introducing Firm agrees to maintain, and to provide evidence
thereof to the Clearing Firm, at least $500,000 blanket brokers indemnity bond
insurance covering any and all acts of its employees, agents and partners, with
an insurance company reasonably acceptable to the Clearing Firm, listing the
Clearing Firm as an insured party and permitting the Clearing Firm to assume the
policy in the event of the Introducing Firm ceasing operations.
XII. Representations, Warranties and Covenants
-----------------------------------------
A. The Introducing Firm represents, warrants and covenants as follows:
1. The Introducing Firm will (a) maintain at all times a net
capital computed in accordance with Rule 15c3-1 of at least
(i) $100,000 in excess of the minimum net capital required by
such rule if the Introducing Firm is a market maker (as that
term is defined under Rule 15c3-1) and (ii) $50,000 in excess
of the minimum net capital required by such rule if the
Introducing Firm is not a market maker, and (b) immediately
notify the Clearing Firm when (i) its net capital is less than
the applicable amount set forth in (a) above, (ii) its
Aggregate Indebtedness Ratio reaches or exceeds 10 to 1 or
(iii) if the Introducing Firm has elected to operate under
Rule l5c3-1(a)(1)(ii) 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 l5c3-3.
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<PAGE>
2. The Introducing Firm is a member in good standing of the
National Association of Securities Dealers, Inc. The
Introducing Firm will promptly notify the Clearing Firm of any
additional exchange memberships or affiliations. The
Introducing Firm 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.
3. The Introducing Firm 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.
4. The Introducing Firm has all the requisite authority in
conformity with all applicable Laws and Regulations to enter
into this Agreement and to retain the services of the Clearing
Firm in accordance with the terms hereof.
5. The Introducing Firm 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 or other securities exchange and/or
securities association of which the Introducing Firm is a
member, (ii) the capital requirements of the Securities and
Exchange Commission, and (iii) the capital requirements of
every state in which the Introducing Firm is licensed as a
broker/dealer.
6. The Introducing Firm shall not generate and/or prepare any
statements, billings or confirmations respecting any
Introduced Account unless expressly so instructed in writing
by the Clearing Firm.
7. The Introducing Firm shall keep confidential any information
it may acquire as a result of this Agreement regarding the
business and affairs of the Clearing Firm, which requirement
shall survive the life of this Agreement.
B. The Clearing Firm represents, warrants and covenants as follows:
1. The Clearing Firm is a member in good standing of the National
Association of Securities Dealers, Inc. and the New York Stock
Exchange, Inc.
2. The Clearing Firm 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.
3. The Clearing Firm has all the requisite authority, in
conformity with all applicable Laws and Regulations, to enter
into and perform this Agreement.
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4. The Clearing Firm 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.
5. The Clearing Firm represents and warrants that the names and
addresses of the Introducing Firm'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 the
Clearing Firm except in connection with the functions
performed by the Clearing Firm pursuant to this Agreement.
Notwithstanding the foregoing, should an Introduced Account
request, on an unsolicited basis, that the Clearing Firm or an
organization affiliated with the Clearing Firm become its
broker, acceptance of such Introduced Account by the Clearing
Firm or such affiliated organization shall in no way violate
this representation and warranty, nor result in a breach of
this Agreement.
6. The Clearing Firm shall keep confidential any information it
may acquire as a result of this Agreement regarding the
business and affairs of the Introducing Firm, which
requirement shall survive the life of this Agreement.
XIII. 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 the Clearing Firm or the Introducing Firm 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 60 days (30 days in
the case of a failure of the Introducing Firm to maintain the
net capital ratios set forth in Section A(i)(a) of Article
XII) 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 the Clearing
Firm or the Introducing Firm herein shall prove to be
incorrect at any time in any material respect; or
(iii) a receiver, liquidator or trustee of either the Clearing Firm
or the Introducing Firm, or of its property, held by either
party, is appointed by court order and such order remains in
effect for more than 30 days; or either the Clearing Firm or
the Introducing Firm is adjudicated bankrupt or
13
<PAGE>
insolvent; or any of its property is sequestered by court
order and such order remains in effect for more than 30 days;
or a petition is filed against either the Clearing Firm or the
Introducing Firm 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 the Clearing Firm or the Introducing Firm 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 any jurisdiction, whether now or hereafter in effect,
or consents to the filing of any petition against it under any
such law; or
(v) either the Clearing Firm or the Introducing Firm 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 the Clearing Firm or the
Introducing Firm, or of any property held by either party.
Upon the occurrence of any such 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.
XIV. 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, 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.
XV. Year 2000
---------
The Introducing Firm agrees that, in the event the Introducing Firm
desires to establish an electronic link with the Clearing Firm or any of its
affiliates, the Introducing Firm shall be required to make a representation with
respect to the Year 2000 compliance of any of its systems that may interface
with the Clearing Firm's systems (or those of any affiliate), and the Clearing
Firm shall, in its sole discretion, determine whether to permit the electronic
interface to exist (or to discontinue any link after being established). The
Clearing Firm may require that evidence of compliance be provided.
14
<PAGE>
XVI. PAIB Requirements
-----------------
The Clearing Firm and Introducing Firm agree to comply with the SEC No-
Action Letter, dated November 3, 1998 ("No-Action Letter") relating to the
capital treatment of assets in the proprietary account of an introducing broker
("PAIB") and to permit Introducing Firm to use PAIB assets in its net capital
computations.
A. Introducing Firm shall identify to Clearing Firm in writing all
accounts that are, or from time to time may be, its proprietary accounts. The
Clearing Firm shall perform a computation for Introducing Firm's PAIB assets
("PAIB Reserve Computation") in accordance with the customer reserve computation
set forth in Rule 15c3-3 ("customer reserve formula") with the following
modifications:
1. Any credit (including a credit applied to reduce a debit) that
is included in the customer reserve formula may not be included
as a credit in the PAIB reserve computation;
2. Note E(3) to Rule 15c3-3a which reduces debit balances by 1%
under the basic method and subparagraph (a)(1)(ii)(A) of the
net capital rule which reduces debit balances by 3% under the
alternative method shall not apply; and
3. Neither Note E(1) to Rule 15c3-3a nor NYSE Interpretation /04
to Item 10 of Rule 15c3-3a regarding securities concentration
charges shall be applicable to the PAIB reserve computation.
B. The PAIB reserve computation shall include all proprietary accounts
belonging to Introducing Firm. All PAIB assets shall be kept separate and
distinct from customer assets under the customer reserve formula in Rule 15c3-3.
C. The PAIB reserve computation shall be prepared within the same time
frames as those prescribed by Rule 15c3-3 for the customer reserve formula.
D. The Clearing Firm shall establish and maintain a separate "Special
Reserve Account for the Exclusive Benefit of Customers" with a bank in
conformity with the standards of paragraph (f) of Rule 15c3-3 ("PAIB Reserve
Account"). Cash and/or qualified securities as defined in the customer reserve
formula shall be maintained in the PAIB Reserve Account in an amount equal to
the PAIB reserve requirement.
E. If the PAIB reserve computation results in a deposit requirement, the
requirement may be satisfied to the extent of any excess debit in the customer
reserve formula of the same date. However, a deposit requirement resulting from
the customer reserve formula shall not be satisfied with excess debits from the
PAIB reserve computation.
F. Introducing Firm's commissions receivable and other receivables from
the Clearing Firm (excluding clearing deposits) that are otherwise allowable
assets under the net capital rule
15
<PAGE>
shall be excluded from the PAIB reserve computation if the amounts have been
clearly identified as receivables on Introducing Firm's books and records of and
as payables on the books of the Clearing Firm.
G. Introducing Firm represents that it is not a guaranteed subsidiary of a
clearing broker and that it is not a guarantor of a clearing broker.
Introducing Firm also represents that it will immediately notify the Clearing
Firm in the event that either of the foregoing representations becomes
inaccurate.
H. Upon discovery that any deposit made to the PAIB Reserve Account did
not satisfy its deposit requirement, the Clearing Firm shall by facsimile or
telegram immediately notify its designated examining authority and the
Securities and Exchange Commission ("Commission"). Unless a corrective plan is
found acceptable by the Commission and the designated examining authority, the
Clearing Firm shall provide written notification to Introducing Firm within 5
business days of the date of discovery that PAIB assets held by the Clearing
Firm shall not be deemed allowable assets for net capital purposes. The
notification shall also state that if Introducing Firm wishes to continue to
count its PAIB assets as allowable, it has until the last business day of the
month following the month in which the notification was made to transfer all
PAIB assets to another clearing broker. However, if the deposit deficiency is
remedied before the time at which Introducing Firm must transfer its PAIB assets
to another clearing broker, Introducing Firm may choose to keep its assets at
the Clearing Firm.
I. The parties shall adhere to the terms of the No-Action Letter,
including the Interpretations set forth therein, in all respects.
XVII. Customer Complaints, Exception Reports and Check Writing Authority
------------------------------------------------------------------
A. Customer Complaints. Introducing Firm authorizes the Clearing Firm, and
-------------------
the Clearing Firm agrees to (i) furnish promptly any written customer complaint
received by the Clearing Firm regarding any of its customers or its associated
persons relating to functions and responsibilities allocated to Introducing Firm
pursuant to this Agreement, directly to Introducing Firm and its designated
examining authority; and (ii) notify its customer in writing that the Clearing
Firm has received the complaint, and that the complaint has been furnished to
Introducing Firm and to its designated examining authority.
B. Exception Reports. The Clearing Firm agrees to furnish a list of all
-----------------
reports that it offers to Introducing Firm to assist Introducing Firm to
supervise and monitor its accounts in order for Introducing Firm to carry out
its functions and responsibilities pursuant to this Agreement. The Clearing
Firm agrees to notify Introducing Firm promptly, in writing, of those specific
reports offered by the Clearing Firm that Introducing Firm requires to supervise
and monitor its customer accounts. The Clearing Firm may provide data or data
software to Introducing Firm that enables it to prepare its own reports provided
the Clearing Firm can recreate the report or furnish the data and the data
software used to prepare the report upon the request of the designated examining
authority. The Clearing Firm must comply with the notification requirement by
informing Introducing Firm of the data and data software that is available. The
Clearing Firm agrees to retain and preserve as part of its records copies of the
16
<PAGE>
specific reports requested by and/or supplied to Introducing Firm or
alternatively, where reports are supplied through data and data software, retain
and preserve such items from which the reports are prepared. The Clearing Firm
agrees to provide a written notice to Introducing Firm's chief executive and
compliance officers within 30 days of July 1 of each year indicating the list of
reports offered to Introducing Firm and specify the reports that were actually
requested by and/or supplied to Introducing Firm. A copy of the notice will be
sent to Introducing Firm's designated examining authority.
C. Check Writing Authority. In connection with the services that are to be
-----------------------
performed by the Clearing Firm under this Agreement, the Clearing Firm will not
establish a checking account on Introducing Firm's behalf or on behalf of
Introducing Firm's customers.
XVIII.Order Audit Trail System (OATS)
------------------------------
A. In compliance with NASDR requirements, the Clearing Firm implemented an
Order Audit Trail System ("OATS"). For all NASDAQ transactions executed by the
Clearing Firm, the Clearing Firm agrees to perform OATS reporting for all data
commencing at the time an order is received by the Clearing Firm.
B. The Clearing Firm will not report any data (i) covering time periods
before an order is received, (ii) on transactions that were settled and/or
cleared but not executed by the Clearing Firm, (iii) for transactions that were
cleared through another clearing broker.
C. Introducing Firm is required to file a "new order report" detailing the
time the order was entered by Introducing Firm and a "route report" indicating
the time the order was sent to Clearing Firm in order to satisfy Introducing
Firm's OATS requirements.
XIX. Miscellaneous
-------------
A. As of the effective date of this Agreement the Clearing Firm will not
convert to its records as Introduced Accounts customer accounts of the
Introducing Firm that are partially or totally unsecured, securities in the name
of the Introducing Firm's customers, or legal transfer securities (securities in
the name of estates, trust, joint ownership, foreign ownership and such).
B. The Clearing Firm shall have the power to place open orders as
instructed by the Introducing Firm as of the effective date of this Agreement,
and appropriate adjustments shall be made by the Clearing Firm to reflect that
the Clearing Firm has acted as broker on the open orders with specialists on any
National Securities Exchange or other securities exchange.
C. The Clearing Firm 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.
D. The Introducing Firm shall be responsible for providing annual dividend
and distribution information as contained in IRS Form 1087 and any other
information required to be reported by Federal, state, or local tax laws, rules
or regulations, to its customers until the
17
<PAGE>
effective date of this Agreement, whereupon the Clearing Firm shall assume this
function as to Introduced Accounts.
E. The Clearing Firm shall have the power to allocate and make appropriate
adjustments for fails, reorganization accounts, other work in process accounts,
and coverages relating to accounts of the customers of the Introducing Firm that
have become Introduced Accounts pursuant to the terms of this Agreement.
F. The Introducing Firm shall assume all liabilities in connection with
uncompared principal trades. The Introducing Firm shall also assume all
liabilities in connection with the bad debts of all Introduced Accounts. The
Introducing Firm has the responsibility to collect from its customers unsecured
and partially secured debits in the Introduced Accounts and to transmit such
collections to the Clearing Firm within the appropriate time periods as
established in procedural manuals of the Clearing Firm. If any debit balances
remain outstanding for a time period longer than the established period, the
Clearing Firm is authorized to apply, as payment of such debit balances,
commission fees owed to the Introducing Firm in connection with transactions
pursuant to this Agreement.
G. Transfers of securities relating to Introduced Accounts shall be frozen
ten business days prior to the effective date of this Agreement.
H. The Clearing Firm shall limit its services pursuant to the terms of
this Agreement to that of clearing functions and the related services expressly
set forth herein and the Introducing Firm shall not hold itself out as an agent
of the Clearing Firm or any of the subsidiaries or companies controlled directly
or indirectly by or affiliated with the Clearing Firm. Should the Introducing
Firm in any way attempt to hold itself out as, advertise or in any way represent
that it is the agent of the Clearing Firm, the Clearing Firm shall have the
power, at its option, to terminate this Agreement and the Introducing Firm shall
be liable for any loss, liability, damage, cost or expense (including but not
otherwise limited to fees and expenses of legal counsel) sustained or incurred
by the Clearing Firm as a result of such a representation of agency or apparent
authority to act as an agent of the Clearing Firm or agency by estoppel.
I. This Agreement supersedes any previous agreement and may be modified
only by a writing signed by both parties to this Agreement. Such modification
shall not be deemed as a cancellation of this Agreement.
J. 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 approval.
K. This Agreement may be cancelled by either of the parties hereto upon
sixty (60) days' written notice; provided, however, that this Agreement may be
cancelled by either party upon thirty (30) days' written notice if (i) the net
capital ratio of the other party exceeds 10 to 1 or (ii) if the other party has
elected to operate under Rule l5c3-1(a)(1)(ii) of the Securities Exchange Act of
1934, as amended, when its net capital is less than 3% of aggregate debit items
computed
18
<PAGE>
in accordance with Rule l5c3-3, and provided, further, that this Agreement may
be cancelled by the Clearing Firm 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 Introducing Firm.
L. ANY DISPUTE OR CONTROVERSY BETWEEN THE INTRODUCING FIRM AND THE
CLEARING FIRM RELATING TO OR ARISING OUT OF THIS AGREEMENT SHALL BE SETTLED BY
ARBITRATION BEFORE AND UNDER THE RULES OF THE ARBITRATION COMMITTEE OF THE
NATIONAL ASSOCIATION OF SECURITIES DEALERS, 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. THE DECISION OF THE ARBITERS MAY BE
ENTERED AS A FINAL JUDGMENT IN ANY COURT OF COMPETENT JURISDICTION.
M. The Clearing Firm will not be bound to make any investigation into the
facts surrounding any transaction that it may have with the Introducing Firm on
a principal or agency basis or that the Introducing Firm may have with its
customers or other persons, nor will the Clearing Firm be under any
responsibility for compliance by the Introducing Firm with any Laws or
Regulations which may be applicable to the Introducing Firm.
N. To facilitate the keeping of records by the Clearing Firm, the
Introducing Firm will turn over promptly to the Clearing Firm any and all
payments and securities which the Introducing Firm receives from its customers.
Concurrently with the delivery of such payments or securities to the Introducing
Firm, it shall furnish the Clearing Firm with such information as may be
relevant or necessary to enable the Clearing Firm to record promptly and
properly such payments and securities in the respective Introduced Accounts.
O. 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 Introducing Firm or the Clearing Firm. Any
assignment 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. No assignment of this Agreement by the Introducing Firm shall be
valid unless the Clearing Firm consents to such an assignment in writing. Any
assignment by the Clearing Firm to any subsidiary that it may create or to a
company affiliated with or controlled directly or indirectly by it will be
deemed valid and enforceable in the absence of any consent from the Introducing
Firm. 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
Introducing Firm and the Clearing Firm.
P. Notwithstanding the provisions of Section L of Article XIX that any
dispute or controversy between the parties relating to or arising out of this
Agreement shall be referred to and settled by arbitration, in connection with
any breach by the Introducing Firm of Section H, the Clearing Firm may, at any
time prior to the initial arbitration hearing pertaining to such dispute or
controversy, by application to the United States District Court for the Southern
District
19
<PAGE>
of New York or the Supreme Court of the State of New York for the County of New
York seek any such temporary or provisional relief or remedy ("provisional
remedy") provided for by the laws of the United States of America or the laws of
the State of New York as would be available in an action based upon such dispute
or controversy in the absence of an agreement to arbitrate. The parties
acknowledge and agree that it is their intention to have any such application
for a provisional remedy decided by the court to which it is made and that such
application shall not be referred to or settled by arbitration. No such
application to either said court for a provisional remedy, nor any act or
conduct by either party in furtherance of or in opposition to such application,
shall constitute a relinquishment or waiver of any right to have the underlying
dispute or controversy with respect to which such application is made settled by
arbitration in accordance with Section L above.
Q. The Introducing Firm shall not, without having obtained the prior
written approval of the Clearing Firm, agree to place or place any advertisement
in any newspaper, publication, periodical or any other media or communicate with
any customer or the public in any manner whatsoever if such advertisement or
communication in any manner makes reference to the Clearing Firm, 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 the Clearing Firm
and to the clearing arrangements and/or any of the services embodied in this
Agreement.
R. The Laws and Regulations require that the Clearing Firm 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 the Clearing Firm to comply with such account
documentation requirements of the Laws and Regulations have not been received by
the Clearing Firm, the Introducing Firm 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 orders. On receipt of
the necessary documents, this restriction will be lifted on future commissions,
but any commissions withheld will not be credited or paid. This Agreement is not
in any way intended to limit the responsibility of the Clearing Firm under the
Laws and Regulations with respect to Introduced Accounts.
S. THE CONSTRUCTION AND EFFECT OF EVERY PROVISION OF THIS AGREEMENT, THE
RIGHTS OF THE PARTIES HEREUNDER AND ANY QUESTIONS ARISING OUT OF THE AGREEMENT,
SHALL BE SUBJECT TO THE STATUTORY AND COMMON LAW OF THE STATE OF NEW YORK
(INCLUDING SECTION 5-1501 OF THE GENERAL OBLIGATION LAW) WITHOUT REGARD TO
CONFLICT OF LAW PRINCIPLES.
T. 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.
U. This Agreement shall cover only the types of services set forth herein
and is in no way intended nor shall it be construed to bestow upon the
Introducing Firm any special treatment regarding any other arrangements,
agreements or understandings which presently exist between the Introducing Firm
and the Clearing Firm or which may hereafter exist. The Introducing Firm
20
<PAGE>
shall be under no obligation whatsoever to deal with the Clearing Firm or any of
its subsidiaries or any companies controlled directly or indirectly by or
affiliated with the Clearing Firm, in any capacity other than as set forth in
this Agreement. Likewise, the Clearing Firm shall be under no obligation
whatsoever to deal with the Introducing Firm or any of its affiliates in any
capacity other than as set forth in this Agreement.
V. 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.
W. For the purposes of any and all notices, consents, directions,
approvals, restrictions, requests or other communications required or permitted
to be delivered hereunder, the Clearing Firm's address shall be 222 Broadway,
6th Floor, New York, New York 10038, with a copy to the General Counsel at the
same address, and the Introducing Firm's address shall be as specified on the
signature page hereof 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.
X. This Agreement shall become effective on or about the date specified on
the signature page hereof as the effective date or such other date mutually
agreed upon by the parties hereto.
Y. The Clearing Firm shall not be liable for any loss caused, directly or
indirectly, by government restrictions, exchange or market rulings, suspension
of trading, war, strikes or other conditions beyond the control of the Clearing
Firm. In the event that any communications network or computer system used by
the Clearing Firm, whether or not owned by the Clearing Firm, is rendered
inoperable, the Clearing Firm shall not be liable to the Introducing Firm for
any loss, liability, claim, damage or expense resulting, either directly or
indirectly, therefrom.
Z. The Clearing Firm shall have the right to investigate, or arrange for
an appropriate party to investigate, the Introducing Firm's credit; provided,
however, that the Introducing Firm may make a written request for disclosure of
the nature of such investigation within a reasonable time. Nothing in this
paragraph shall be construed to relieve the Introducing Firm of its obligation
to oversee its financial integrity.
21
<PAGE>
Made and executed at New York, New York on the date specified below.
KNIGHT SECURITIES, L.P.
By: /s/ William Karsh
------------------------------------
Title: SVP
---------------------------------
BROADCORT CAPITAL CORP.
By: /s/ James Smyth
----------------------------------
Title: Managing Director
-------------------------------
Date of Clearing Agreement: September 28, 1999
Effective Date of this Clearing Agreement: October 14, 1999
Introducing Firm's Address:
Newport Tower
525 Washington Boulevard
29th Floor
Jersey City, New Jersey 07310
22
<PAGE>
SCHEDULE A
CLEARING CHARGES
(A) CLEARING ONLY RATES
-------------------
O.T.C. Equities (CNS) $****** per transaction (post compression)
O.T.C. Equities (Excleared) $****** per transaction
O.T.C. (D.V.P.) $****** per transaction
(B) INTERNATIONAL
-------------
Foreign Equities - ORD's $****** per transaction
ADR to ORD Conversions $****** per transaction plus fees*
Euroclear, CEDEL & CREST $****** per transaction
*Fees
$****** per share for Sponsored issuance and cancellation
$****** per share for Unsponsored cancellations
Fees are defined as costs that are incurred from the ADR agent.
(C) OPTIONS
-------
[INTENTIONALLY LEFT BLANK]
(D) MISCELLANEOUS SECURITIES
------------------------
Clearance charges not set forth within the above schedule will be by mutual
agreement between the parties hereto.
GENERAL
- -------
(A) RETURNED DELIVERIES
-------------------
In the event that any Introduced account or its agent (including but not
otherwise limited to its custodian bank) rejects a valid "delivery against
payment" (as this phrase is customarily used in the securities industry)
made by the Clearing Firm, the Clearing Firm will charge the Introducing
Firm ****** from the date of such rejection until such time as such valid
delivery is accepted and payment is received.
23
<PAGE>
EXHIBIT 10.2
(B) EXTENSIONS
----------
The Introducing Firm will be charged ****** for each extension granted by
the Clearing Firm.
(C) REGISTER AND SHIP TRANSFERS
---------------------------
The Introducing Firm will be charged ****** for each transfer requested of
the Clearing Firm.
(D) FED FUND WIRE
-------------
The Introducing Firm will be charged ****** for each Fed Fund Money wire
requested of the Clearing Firm.
(E) CHARGES AND FEES
----------------
The foregoing charges and fees are based upon the type and level of
securities business represented as of the date of this agreement by the
Introducing Firm to the Clearing Firm. All such charges may be subject to
renegotiation and change upon the mutual consent of both parties.
(F) INTEREST RATES
--------------
The following percentage and rates will be used to calculate the money owed
to the Introducing Firm by the Clearing Firm or money owed to the Clearing
Firm by the Introducing Firm on the following balances:
Free Credit Balances ******
Debit Balances ******
Short ******
24
<PAGE>
EXHIBIT 10.2
Amendment to Clearing Agreement
The undersigned hereby amend the clearing agreement dated as of September
28, 1999, between Broadcort Capital Corp. (the "Clearing Firm") and Knight
Securities, L.P. (hereinafter referred to as the "Introducing Firm") in the
manner set forth herein.
WHEREAS, the Introducing Firm and the Clearing Firm desire to amend the
clearing agreement to provide for rights and responsibilities associated with
rehypothecation of securities and the receipt of control and restricted
securities,
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 folllows:
A. The Introducing Firm shall be responsible for all matters associated
with the receipt and transfer of controlled and restricted securities
by its clients. Any securities presented by the Introducing Firm's
clients shall be in fully negotiable form upon receipt by the Clearing
Firm.
B. The Clearing Firm (and not the Introducing Firm) shall have the right
to rehypothecate any securities owned by the Introducing Firm's
clients if such securities are not fully paid for.
This Agreement shall become effective as of October 18, 1999 or such other date
mutually agreed upon by the parties hereto.
Made and executed at New York, New York on this 18th day of October, 1999.
BROADCORT CAPITAL CORP.
By /s/ Gregory T. Russo
-----------------------------
Title: General Counsel
-------------------------
KNIGHT SECURITIES, L.P.
By /s/ Michael T. Dorsey
-----------------------------
Title: SVP & General Counsel
-------------------------
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF INCOME AND CONSOLIDATED BALANCE SHEET OF THE COMPANY'S
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 265,298
<RECEIVABLES> 107,738
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 100,823
<PP&E> 15,272
<TOTAL-ASSETS> 534,155
<SHORT-TERM> 0
<PAYABLES> 47,364
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 86,789
<LONG-TERM> 0
0
0
<COMMON> 1,113
<OTHER-SE> 398,889
<TOTAL-LIABILITY-AND-EQUITY> 534,155
<TRADING-REVENUE> 524,423
<INTEREST-DIVIDENDS> 8,180
<COMMISSIONS> 11,688
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 0
<COMPENSATION> 164,429
<INCOME-PRETAX> 185,162
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 109,444
<EPS-BASIC> 1.00
<EPS-DILUTED> .95
</TABLE>
