As Filed With The Securities and Exchange Commission On August 14, 1998
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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KBW, INC.
(Exact name of Registrant as specified in its charter)
Delaware 6211 (Pending)
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction Classification Code Number) Identification Number)
of incorporation
or organization)
Two World Trade Center, 85th Floor
New York, NY 10048
(212) 323-8300
(Address, including zip code, and
telephone number, including area
code, of Registrant's principal
executive offices)
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Mitchell B. Kleinman
General Counsel
KBW, Inc.
Two World Trade Center, 85th Floor
New York, NY 10048
(212) 323-8300
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
Edward D. Herlihy Joseph McLaughlin and Michael T. Kohler
Wachtell, Lipton, Rosen & Katz Brown & Wood LLP
51 West 52nd Street One World Trade Center, 58th Floor
New York, NY 10019 New York, NY 10048
(212) 403-1000 (212) 839-5300
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
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If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.[ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ______________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ______________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ______________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ------------------------------------------------------------- ------------------- ---------------- ------------------ --------------
Proposed
Proposed Maximum
Maximum Aggregate Amount of
Title of Each Class of Amount to Be Offering Price Offering Registration
Securities to Be Registered Registered (1) per Unit (2) Price (2) Fee
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<S> <C> <C> <C> <C>
Common Stock, par value $0.01 per share................... shares $ $115,000,000 $33,925
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</TABLE>
(1) Includes an aggregate of shares which the Underwriters have the
option to purchase from the Selling Stockholders solely to cover
over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act of 1933,
as amended.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 14, 1998
PROSPECTUS
, 1998
[KBW, INC. LOGO]
Shares
KBW, INC.
Common Stock
Of the shares of Common Stock, par value $0.01 per share ("Common
Stock"), of KBW, Inc., a Delaware corporation ("KBW" or the "Company"), being
offered hereby (the "Offering"), shares are being sold by the Company and
shares are being sold by certain stockholders (the "Selling Stockholders")
of the Company. The Company will not receive any of the proceeds from the sale
of shares by the Selling Stockholders.
Prior to the Offering, there has been no public market for the Common
Stock. It is currently anticipated that the initial public offering price of the
Common Stock will be between $ and $ per share. See "Underwriting" for
information relating to the factors to be considered in determining the initial
offering price. Application will be made for listing of the Common Stock on the
New York Stock Exchange (the "NYSE") under the symbol "KBW."
-------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF RISK FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMIS-
SION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO THE DISCOUNTS AND TO THE SELLING
PUBLIC(1) COMMISSIONS(2) COMPANY(3) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share...................... $ $ $ $
Total(4)....................... $ $ $ $
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</TABLE>
(1) In connection with the Offering, the Underwriters (as defined herein) have
reserved for sale approximately shares of Common Stock for directors
and current employees of the Company who have an interest in purchasing
such shares of Common Stock in the Offering. The Underwriters have advised
the Company that the price per share for such shares will be the Price to
the Public less Underwriting Discounts and Commissions, or $ per share.
(2) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(3) Before deducting expenses estimated at $ , including $5,000 payable to
Donaldson, Lufkin & Jenrette Securities Corporation for services as a
qualified independent underwriter, all of which are payable by the Company.
(4) The Selling Stockholders have granted to the Underwriters a 30-day option
to purchase up to additional shares at the Price to the Public less
Underwriting Discounts and Commissions, solely to cover over-allotments, if
any. If such option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions, Proceeds to Company and Proceeds to
Selling Stockholders will be $ , $ , $ and $ , respectively.
See "Underwriting."
The shares offered hereby are being offered by the several Underwriters
(including Keefe, Bruyette & Woods, Inc., which is a direct, wholly-owned
subsidiary of the Company), subject to prior sale, when, as and if delivered to
and accepted by them and subject to various prior conditions, including their
right to reject orders in whole or in part. It is expected that delivery of the
shares will be made against payment in New York, New York on or about , 1998.
DONALDSON, LUFKIN & JENRETTE
GOLDMAN, SACHS & CO.
KEEFE, BRUYETTE & WOODS, INC.
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualifcation under the securities laws of any such State.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND
MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information and the Company's Consolidated Financial Statements,
including the Notes thereto, appearing elsewhere in this Prospectus. Each
prospective investor is urged to read this Prospectus in its entirety.
KBW is a recently formed holding company that, prior to the Offering
becoming effective, will be the holding company for Keefe, Bruyette & Woods,
Inc. and KBW Asset Management Inc. ("KBW Asset Management"). In this Prospectus
the terms "Company" and "KBW" refer to KBW, Inc. and its consolidated
subsidiaries from and after the date of this Prospectus and refer to Keefe,
Bruyette & Woods, Inc. and its subsidiary, KBW Asset Management, prior to such
date. Information in this Prospectus assumes no exercise of the Underwriters'
option to purchase up to additional shares from the Selling Stockholders to
cover over-allotments, if any, and that employees of the Company purchase
shares reserved for sale to them in the Offering.
Certain statements contained herein regarding the Company's competitive
position are based on publicly available information from independent,
third-party sources. The Company has not independently verified such information
but believes it to be accurate.
THE COMPANY
KBW is an institutionally oriented investment banking firm that is a
nationally recognized authority on the commercial banking and thrift industries
(collectively referred to herein as the "banking industry"), which has been the
Company's primary focus since its inception in 1962. In 1996, KBW expanded its
focus to include specialty finance companies, in which KBW has established a
significant presence. More recently, KBW has expanded its coverage to include
insurance companies and securities firms. KBW's activities include research,
mergers and acquisitions ("M&A") advice, corporate finance, securities sales and
trading, principal investments, fixed income portfolio management and asset
management. In 1997, KBW earned net income of $37.3 million, representing a
25.9% margin on total revenues of $143.9 million and a 34.3% return on average
equity. During the first half of 1998, KBW earned net income of $22.7 million,
representing a 22.6% margin on total revenues of $100.1 million and a 30.0%
annualized return on average equity. Although results have varied from year to
year, for the five years ended December 31, 1997, the Company's average ratio of
income before income tax expense to total revenues and return on equity were
36.7% and 25.0%, respectively.
Research is the core of KBW's business. The Company believes its
success in building its corporate finance, financial advisory, sales and trading
and principal investing activities is directly related to its position as a
leading provider of research on the banking industry. The Company's
comprehensive research coverage has allowed KBW to develop strong relationships
with a large number of small and mid-sized banks (generally banks with less than
$20 billion in assets). As these banks have grown in size and complexity, KBW
has been able to provide them a broad range of investment banking services.
These relationships have also enabled KBW to identify profitable investment
opportunities for its institutional clients and for the Company's own principal
investing activities.
KBW is a leading financial adviser in banking M&A. As reported by the
American Banker, in 1997 and the first half of 1998, KBW ranked first and
second, respectively, in the number of announced M&A financial advisory
assignments for the banking industry. In addition, since expanding its coverage
to include specialty finance companies, KBW has acted as financial adviser in 17
M&A transactions involving such companies. In 1997, KBW served as financial
adviser in 40 announced M&A assignments for banks and specialty finance
companies, with an aggregate transaction value in excess of $13.4 billion.
KBW is also active in underwritings and other placements of securities
for financial services companies. In 1997, the Company managed 48 equity and
debt offerings, aggregating approximately $4.0 billion in gross offering
proceeds. KBW makes a market in over 240 securities of banks, thrifts and
financial services companies which are traded in the over-the-counter ("OTC")
market and serves as one of the top three
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<PAGE>
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market makers in approximately 80 of these securities. The Company has developed
strong relationships with substantially all of the largest and most active
institutional investors who invest in the financial services industry. KBW also
maintains proprietary trading positions and makes principal investments in
financial services companies for its own account. The Company's broker-dealer
subsidiary, Keefe, Bruyette & Woods, Inc., is a member of the NYSE.
KBW believes that the experience, knowledge and tenure of its
executives and professional staff have enabled it to maintain long-term
relationships with its clients and customers. In addition, KBW's broad employee
stock ownership (more than 70% of current employees own KBW stock) and
compensation structure, which is based on a combination of individual,
departmental and overall Company performance, has encouraged employees to work
together to increase the value of KBW's business.
KBW's business strategy is to continue capitalizing on its competitive
strengths, to expand client and customer relationships and principal investments
in the banking and specialty finance industries and to leverage its experience
and reputation by expanding its business focus to include other sectors of the
financial services industry, including insurance and securities. As many
securities companies have been acquired by commercial banks, KBW believes its
independent status will enable it to develop new client relationships and to
hire experienced personnel who wish to remain affiliated with an independent
investment banking firm. KBW will also seek to expand its asset management
business and to develop additional sources of income.
KBW's principal executive offices are located at Two World Trade
Center, 85th Floor, New York, New York 10048; its telephone number is (212)
323-8300.
RISK FACTORS
No assurances can be given that the Company's objectives or strategies
will be achieved. Prospective investors should carefully consider the factors
discussed in detail elsewhere in this Prospectus under "Risk Factors."
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<PAGE>
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THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered by the Company................... shares
Common Stock offered by the Selling Stockholders...... shares
Common Stock to be outstanding after the Offering..... shares (1)
Dividend policy....................................... Following the initial public offering,
the Company intends to pay quarterly
dividends of $ per share of Common
Stock beginning with the dividend payable
in the quarter of 1998. See
"Dividend Policy."
Use of Proceeds....................................... The Company will use the proceeds from
the Offering for general corporate
purposes. The Offering will create a
public market for the Common Stock, which
will facilitate the Company's future
access to the public equity markets and
enhance the ability of the Company to use
the Common Stock as consideration for
acquisitions. See "Use of Proceeds."
Proposed NYSE symbol.................................. "KBW"
</TABLE>
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(1) Excludes an additional shares of Common Stock reserved for issuance
under the Company's stock option plans. The Company expects to grant
options to purchase shares at an exercise price equal to the
initial public offering price at a time substantially contemporaneous
with the closing of the Offering. See "Management--The Non-Employee
Director Stock Compensation Plan" and "Management--The 1998 Stock and
Annual Incentive Plan."
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<PAGE>
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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The information set forth below should be read in conjunction with
"Selected Historical Consolidated Financial and Other Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------- ------------------
1993 1994 1995 1996 1997 1997 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
INCOME DATA:
Total revenues.................. $68,804 $46,534 $66,260 $88,754 $143,886 $58,963 $100,584
Total expenses.................. 41,784 32,174 42,402 57,262 83,624 34,336 63,273
Income before income tax 27,020 14,360 23,858 31,492 60,262 24,627 37,311
expense.........................
Net income...................... 16,140 8,331 15,326 17,945 37,313 14,037 22,720
Pro forma basic earnings per $ 19.01 $ 9.73 $ 17.95 $ 21.65 $ 43.69 $ 16.52 $ 25.51
share(1)........................
Pro forma diluted earnings per
share(1)..................... $ 19.01 $ 9.73 $ 17.95 $ 21.65 $ 43.69 $ 16.52 $ 25.51
OTHER FINANCIAL AND OPERATING
DATA (UNAUDITED):
Return on average equity........ 33.3% 13.7% 22.6% 21.1% 34.3% 27.9%(2) 31.1%(2)
Compensation and benefits
expense as a percentage
of revenues.................. 45.1% 47.8% 43.6% 46.0% 43.4% 42.3% 51.0%
Non-compensation and benefits
expense as a percentage
of revenues.................. 15.6% 21.3% 20.4% 18.5% 14.7% 16.0% 11.9%
Income before income tax
expense 39.3% 30.9% 36.0% 35.5% 41.9% 41.8% 37.1%
as a percentage of revenues..
Number of employees at end of
period....................... 86 89 91 116 132 126 143
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30, 1998
----------------------------------------------------- ---------------------------
1993 1994 1995 1996 1997 ACTUAL AS ADJUSTED(3)
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
FINANCIAL CONDITION DATA
(AT END OF PERIOD):
Total assets.................... $78,865 $95,044 $141,044 $132,870 $199,627 $262,812 $
Stockholders' equity............ 56,714 65,457 78,610 95,975 135,116 163,547
Book value per common share
outstanding.................. $ 67.19 $ 73.37 $ 92.65 $ 112.52 $ 155.86 $ 182.38 $
</TABLE>
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(1) Pro forma earnings per share data reflects the holding company structure
described in "Certain Transactions Occurring Prior to the
Offering--Creation of Holding Company Structure" as if such holding company
structure had been in place for the periods presented.
(2) Six-month figures reported on an annualized basis.
(3) As adjusted to reflect the sale of Common Stock offered by the Company
hereby and the application of the estimated net proceeds therefrom. See
"Use of Proceeds" and "Capitalization."
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<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements, which may be
deemed to include the Company's plans to identify emerging trends in the
financial services industry, to expand the range of services offered to its
clients and institutional customers, to increase the number of its customers and
clients, to expand its activities in the financial services industry, to retain
key personnel and attract new personnel to accommodate its growth, or to
otherwise implement its strategy. Such statements include statements regarding
the belief or current expectation of the Company's management and are
necessarily based on management's current understanding of the markets and
industries in which the Company operates. That understanding could change or
could prove to be inconsistent with actual developments. Actual results could
differ materially from those anticipated in or implied by any forward-looking
statements for the reasons detailed in this "Risk Factors" portion of the
Prospectus or elsewhere in the Prospectus. Prospective purchasers of the Common
Stock are cautioned that any forward-looking statements are not guarantees of
future performance and involve risks and uncertainties, many of which are beyond
the Company's control. In addition to the other information contained in this
Prospectus, the following risk factors should be considered in evaluating the
Company and its business before purchasing the shares of Common Stock offered
hereby.
GENERAL SECURITIES BUSINESS RISKS; VOLATILE NATURE OF THE SECURITIES BUSINESS
The securities business is, by its nature, subject to numerous and
substantial risks, particularly in volatile or illiquid markets and in markets
influenced by sustained periods of low or negative economic growth, including
the risk of losses resulting from the underwriting or ownership of securities,
trading, principal activities, counterparty failure to meet commitments,
customer fraud, employee errors, misconduct and fraud (including unauthorized
transactions by traders), failures in connection with the processing of
securities transactions, litigation, the risks of reduced revenues in periods of
reduced demand for public offerings, reduced activity in the secondary markets
or reduced M&A activity and the risk of reduced spreads on the trading of
securities. Reductions in public offering, M&A and securities trading activities
due to any one or more changes in economic, political or market conditions could
cause the Company's revenues from corporate finance, investment banking,
principal investing and sales and trading activities to decline materially. The
amount and profitability of these activities are affected by many national and
international factors, including economic, political and market conditions; the
level and volatility of interest rates; legislative and regulatory changes;
currency values; inflation; flows of funds into and out of mutual and pension
funds; and availability of short-term and long-term funding and capital. The
stock market has recently experienced significant volatility, including some of
the largest single-day point declines in history. The Company's principal
business activities, including its broker-dealer operations, market making
activity, institutional sales and trading, principal investing, and its
corporate finance and investment banking advisory services, are subject to the
enhanced risks present during volatile trading markets and fluctuations in the
volume of market activity. Any resulting losses could have a material adverse
effect on the Company's business, financial condition and operating results. In
addition, because mutual funds purchase a significant portion of the securities
offered in public offerings and traded in the secondary markets, a slowdown or
reversal of cash inflows to mutual funds and other pooled investment vehicles
could lead to lower underwriting and brokerage revenues for the Company.
DEPENDENCE ON NON-RECURRING TRANSACTIONS AND ON THE FINANCIAL SERVICES INDUSTRY
The Company's revenues have historically been derived from principal
investments, proprietary trading, commissions for customer trades, M&A advisory
fees and capital markets underwritings and private placements. The Company's
revenues are likely to be lower during periods of declining prices or inactivity
in the market for securities of companies in the financial services industry and
periods of reduced M&A activity, and there are likely to be fluctuations in the
Company's revenues and operating results from quarter to quarter and year to
year due to the significant amount of the Company's revenues which are generated
from non-recurring transactions. See "--Risk of Significant Fluctuations in
Quarterly Operating Results."
The Company's business is particularly dependent on the new-issue and
secondary markets for equity securities of companies in the financial services
industry (which broadly includes banks, bank holding companies,
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<PAGE>
specialty finance companies, savings and loan associations, savings banks,
insurance companies and securities companies). The Company has significant
principal investments in companies in the financial services industry and
depends on transactions in the financial services industry for its investment
banking revenues. Revenues from trading and investments for the Company's own
account (excluding market making transactions) represented 28.8%, 16.6%, 42.7%,
36.7% and 37.3% of revenues in 1993, 1994, 1995, 1996 and 1997, respectively,
and 15.2% of revenues for the six months ended June 30, 1998. The markets for
securities of companies in the financial services industry have historically
experienced significant volatility not only in the number and size of equity
offerings, but also in the after-market trading volume and prices of such
securities. For example, during the five-month period from June through October
1990, the Keefe Bank Index of 24 bank stocks decreased 46%. During the past five
years, the Keefe Bank Index has declined by as much as 8% and increased by as
much as 15% in a single month. A decline in price levels of equity securities of
companies in the financial services industry could adversely effect the
Company's revenues.
A substantial portion of the Company's revenues is also attributable to
underwriting and M&A activities. Underwriting and M&A activities in the
Company's targeted industry can decline for a number of reasons. For example,
market conditions for securities of companies in the financial services industry
can be negatively affected by changes in interest rates and by economic events
in other parts of the world, such as the recent financial crisis in Asia.
Underwriting and M&A activity may also decrease during periods of market
uncertainty occasioned by concerns over inflation, rising interest rates and
related issues. Underwriting and sales and trading activity can also be
materially adversely affected for a company or industry segment by
disappointments in quarterly performance relative to analysts' expectations or
by changes in the long-term prospects of such company or industry segment.
DEPENDENCE ON KEY PERSONNEL
The Company's business is dependent on the highly skilled, and often
highly specialized, individuals it employs. Retention of research, investment
banking, sales and trading, and management and administrative professionals is
particularly important to the Company's prospects. The Company's strategy is to
establish relationships with the Company's prospective corporate clients in
advance of any transaction and to maintain such relationships over the long term
by providing advisory services to corporate clients in equity, debt and M&A
transactions as well as financial strategies services. Such relationships in
many cases depend to a large extent on the individual employees who represent
the Company in its dealings with such clients.
The level of competition for key personnel in the investment banking
industry is intense and has increased recently, particularly due to the efforts
of certain non-brokerage financial services companies, commercial banks and
other investment banks to target or increase their efforts in some of the same
industry sectors that the Company serves. Competition for employees with the
qualifications desired by the Company is likely to continue, especially with
respect to research and investment banking professionals with expertise in
industries in which underwriting or advisory activity is robust. While the
Company has historically experienced little turnover among its professional
employees, there can be no assurance that loss of key personnel due to such
competition or retirement or otherwise will not occur in the future. The loss of
a significant number of investment banking, research or sales and trading
professionals, particularly senior professionals with a broad range of contacts
in the financial services industry, could materially and adversely affect the
Company's business and operating results.
In connection with the Offering, the Company will enter into three-year
employment agreements with each of its Chief Executive Officer, President and
the co-heads of its corporate finance group. Among other provisions, these
agreements contain certain confidentiality and non-competition provisions. See
"Management--Employment Agreements." The Company does not have employment
agreements with any other members of senior management. The Company historically
sought to retain its employees with incentives, such as bonus plans and the
ability to buy common stock of the Company. After the Offering, the Company will
use stock option grants and other equity-based incentives tied to market
performance to promote employee retention and loyalty. These incentives,
however, may be insufficient in light of the increasing competition for
experienced professionals in the securities industry, particularly if the value
of the Common Stock declines or fails to appreciate sufficiently to be a
competitive source of a portion of professional compensation. See
"Business--Employees" and "Management."
-8-
<PAGE>
In the past, the Company sold common stock to many of its employees,
subject to an agreement among the Company's stockholders, as amended (the
"Former Stockholders' Agreement"), that required stockholders leaving the
Company's employ to sell their stock to the Company at book value. Effective
upon pricing of the Offering, employee stockholders will no longer be subject to
these restrictions in the Former Stockholders' Agreement when leaving the
Company and will be able to sell their Common Stock in the public market,
subject, in the case of employees at or above the position of Senior Vice
President, to certain restrictions to be included in a new stockholders
agreement (the "Stockholders' Agreement") that will become effective upon the
pricing of the Offering. Under the Stockholders' Agreement, employees with a
position at or above Senior Vice President (holding in the aggregate
approximately % of the Common Stock upon consummation of the Offering) will be
subject to certain restrictions on the disposition of their Common Stock during
the three-year period following the Offering. Subject to the limitations of the
Stockholders' Agreement, employees may be able to realize substantial value
following the Offering. This change could result in a higher level of attrition,
including due to retirement, of senior employees than the Company has
historically experienced. See "Certain Transactions Occurring Prior to the
Offering--New and Former Stockholders' Agreements."
The Company expects further growth in the number of its personnel,
particularly if current markets remain favorable to investment banking
transactions. Competition for recruiting and retaining employees may increase
the Company's compensation costs. There can be no assurance that the Company
will be able to recruit a sufficient number of new employees with the desired
qualifications in a timely manner. The failure to recruit and retain employees
could materially and adversely affect the Company's future operating results.
EXPANSION OF INDUSTRY FOCUS
The Company intends to continue to expand its focus in the financial
services industry beyond its historic focus on the commercial banking and thrift
sectors of that industry to include related sectors such as insurance and
securities. The Company plans to expand through the hiring of individuals with
expertise in such industries or the acquisition of an industry team in
combination with internal development at KBW. There can be no assurance that the
Company will be able to identify appropriate individuals or appropriate
acquisition candidates, negotiate acceptable terms of employment or acquisition,
obtain financing which may be needed to effect such acquisitions or integrate
such individuals or acquisitions successfully into the Company's operations.
Additionally, there can be no assurance that any such acquisitions will
contribute to the profitability of the Company or that expansion of the
Company's industry focus will be successful or profitable.
INDUSTRY COMPETITION
The Company is engaged in the highly competitive securities brokerage
and financial services businesses. It competes directly with large Wall Street
securities firms, regional securities firms and securities subsidiaries of major
commercial bank holding companies as well as companies, such as Instinet(R),
that provide electronic communications networks ("ECNs") that permit subscribers
to bypass brokers and trade directly among themselves. The Company's industry
focus also subjects it to direct competition from a number of specialty
securities firms and smaller investment banking boutiques that specialize in
providing services to the financial services industry.
Competition from commercial banks has increased because of recent
acquisitions of securities firms by commercial banks, as well as because of
internal expansion by commercial banks into the securities business. In
addition, the Company expects competition from domestic and international banks
to increase as a result of recent and anticipated legislative and regulatory
initiatives in the United States to reduce or eliminate certain restrictions on
commercial banks.
Many of the Company's competitors have greater capital, personnel and
financial resources than the Company. Larger competitors, for example, are able
to offer their customers access to international markets and other products and
services not offered by the Company, which may provide such firms with
competitive advantages over the Company. Industry developments, such as the
emergence of ECNs, may materially reduce the Company's revenues from sales and
trading.
-9-
<PAGE>
In recent years, competitive pressures have reduced market making
spreads and underwriting and agency spreads for corporate finance transactions.
This trend is expected to continue. Such reductions could adversely affect the
Company's operating results. See "Business--Competition."
MARKET, CREDIT AND LIQUIDITY RISKS ASSOCIATED WITH CERTAIN COMPANY ACTIVITIES
The Company's market making, principal trading, principal investing and
underwriting activities often involve the purchase, sale or short sale of
securities as principal. Such activities subject the Company's capital to
significant risks from markets that may be characterized by relative illiquidity
or that may be particularly susceptible to rapid fluctuations in liquidity. Such
market conditions could limit the ability of the Company to resell securities
purchased or to purchase securities sold short. These activities subject the
Company's capital to significant risks, including market, credit, counterparty
and liquidity risks. Market risk relates to the risk of fluctuating values based
on market prices without any action on the part of the Company. The Company's
primary credit risk (aside from the credit risk associated with holding
corporate debt securities) is settlement or counterparty risk, which relates to
whether a counterparty on a derivative or other transaction will fulfill its
contractual obligations, such as delivery of securities or payment of funds. The
Company has not extended margin loans to customers other than employees,
although it has a limited number of customer accounts authorized for such
activity. Liquidity risk relates to the Company's inability to liquidate assets
or redirect the deployment of assets contained in illiquid investments. In
addition, the Company's market and liquidity risks and risks associated with
asset revaluation are increased because these risks for the Company are
concentrated on a single industry and thus subject the Company to increased
risks if market conditions in the financial services industry deteriorate.
The Company's market making, principal trading, principal investing and
underwriting activities from time to time result in the Company holding large
positions in securities of a single issuer or issuers engaged in a specific
sector of the financial services industry. Such concentrations increase the
Company's exposure to specific credit and market risks than would be the case if
the Company's business involved a broader range of industries or larger number
of companies. In addition, participation in underwritings involves both legal
and economic risks. The trend, due to competitive and other reasons, toward
larger commitments on the part of lead underwriters means that, from time to
time, an underwriter (including a co-manager) may retain significant position
concentrations in individual securities. An underwriter may incur losses if it
is unable to resell securities it is committed to purchase or if it is forced to
sell such securities at less than their purchase price. See "Business--Risk
Management and Compliance."
RISK OF SIGNIFICANT FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's revenues and operating results may fluctuate from quarter
to quarter and from year to year because of a combination of factors, including
the significant amount of the Company's revenues generated from non-recurring
transactions, the number of capital markets and M&A transactions completed by
the Company's clients, access to public markets for, and trading prices for
securities of, companies in which the Company has invested as a principal, the
level of institutional brokerage transactions, variations in expenditures for
personnel, litigation expenses, and expenses of establishing new business units.
The timing of the Company's recognition of revenues from a significant
transaction can also materially affect the Company's quarterly operating
results.
The Company's cost structure currently is oriented to meet the level of
demand for investment banking and corporate finance transactions experienced
during the second half of 1997 and the first half of 1998, which has been at an
historic high. As a result, despite the variability of professional incentive
compensation, the Company could experience reduced profitability if demand for
the Company's services declines more quickly than the Company's ability to
change its cost structure. Due to the foregoing and other factors, there can be
no assurance that the Company will be able to sustain profitability on a
quarterly or annual basis. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
-10-
<PAGE>
POTENTIAL CONFLICTS OF INTEREST
The Company's executive officers, directors and employees and its
employee profit sharing retirement plan may from time to time invest in or
receive a profit interest in private or public companies in which the Company,
or one of its affiliates, is an investor or for which the Company provides
investment banking services, publishes research or acts as a market maker. In
addition, the Company may organize hedge funds or similar investment vehicles in
which employees of the Company may become investors. There is a risk that, as a
result of such investment or profit interest, a director, officer or employee
may take actions that conflict with the best interests of the Company.
The Company has a tax-qualified employee profit sharing retirement plan
which has been managed by certain employees and which has invested in securities
in which the Company and its customers and employees may also invest.
Substantially all Company employees who have been employed by the Company for at
least three months are participants in the plan. Historically, the plan has
invested in publicly traded equity and fixed income securities of financial
services companies, and the Company expects that this policy will continue.
After the Offering, the plan will continue to be managed by Company employees.
Some or all of these employees are expected to be participants in the plan, and
may also be holders of shares of Common Stock. It is the Company's intention,
after satisfaction of customer interest in investments, to continue to provide
suitable investment opportunities to the plan consistent with the management
policies of the plan trustees. Accordingly, from time to time, there may be
cases in which an investment opportunity is made available to the employee
profit sharing retirement plan which is not also available to the Company (or in
which availability is limited) as principal.
The Company has in place compliance procedures and practices designed
to ensure that inside information is not used for making investment decisions on
behalf of the Company. These procedures and practices may limit the freedom of
such officials to make potentially profitable investments for the Company. In
addition, certain rules, such as best execution rules, and fiduciary obligations
to customers and managed accounts, may cause the Company to forgo certain
investment opportunities in favor of customer accounts.
The Company's broker-dealer subsidiary is one of the Underwriters for
the Offering. Accordingly, underwriting discounts and commissions received by
this subsidiary will benefit the Company. Pursuant to Rule 2720 ("Rule 2720") of
the Conduct Rules of the National Association of Securities Dealers, Inc. (the
"NASD"), the initial public offering price can be no higher than that
recommended by a "qualified independent underwriter" meeting certain standards.
In accordance with this requirement, Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ") has assumed the responsibility of acting as qualified
independent underwriter and will recommend a price in compliance with the
requirements of Rule 2720. See "Underwriting."
DEPENDENCE ON SYSTEMS AND THIRD PARTIES; POSSIBLE YEAR 2000 COSTS
The Company's business is highly dependent on communications and
information systems, including certain systems provided by its clearing brokers.
Any failure or interruption of the Company's systems, systems of the Company's
clearing brokers or third-party trading systems could cause delays or other
problems in the Company's securities trading activities, which could have a
material adverse effect on the Company's operating results. Such failures and
interruptions may result from the inability of certain computing systems
(including those of the Company's clearing brokers and other third-party
vendors) to recognize the year 2000. Although the Company believes it will not
incur substantial expenses in connection with its own systems in addressing year
2000 issues, it may incur substantial costs, particularly costs resulting from
charges by its third-party service providers, in correcting year 2000 issues,
which costs are not sufficiently certain to estimate at this time. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000." There can be no assurance that the Company or its
clearing brokers will not suffer any systems failure or interruption, including
those caused by an earthquake, fire, other natural disaster, power or
telecommunications failure, act of God, act of war or otherwise, or that the
Company's or its clearing brokers' back-up procedures and capabilities in the
event of any such failure or interruption will be adequate.
-11-
<PAGE>
The rapidly evolving technological developments in the securities
industry may also require further capital investment by the Company in new
systems and technology.
LITIGATION AND POTENTIAL SECURITIES LAWS LIABILITY
Many aspects of the Company's business involve substantial risks of
liability. An underwriter is exposed to substantial liability under federal and
state securities laws, other federal and state laws and court decisions,
including decisions with respect to underwriters' liability and limitations on
indemnification of underwriters by issuers. For example, a firm that acts as an
underwriter may be held liable for material misstatements or omissions of fact
in a prospectus used in connection with the securities being offered. In recent
years there has been an increasing incidence of litigation involving the
securities industry, including class actions that seek substantial damages. The
Company is also subject to the risk of litigation from its other business
activities, including litigation that may be without merit. Significant legal
expenses could be incurred in connection with the defense of such litigation,
which could divert management's efforts and attention away from the Company's
business operations. An adverse resolution of any future lawsuits against the
Company could materially adversely affect the Company's business, operating
results and financial condition. In addition, both the regulatory and litigation
environments in which the Company operates are uncertain and subject to
extensive change, and the Company cannot predict the impact such changes could
have on its business, operating results and financial condition. As of the date
of this Prospectus, the Company is not a named defendant in any class action or
other litigation that the Company believes is reasonably likely to have a
material adverse effect on the Company's results of operations or financial
condition, and it has not previously experienced any material losses arising out
of litigation or other dispute resolution proceedings. See "Business--Legal
Proceedings" and "Business--Regulation."
DEPENDENCE UPON AVAILABILITY OF CAPITAL AND FUNDING
The Company's business is dependent upon the availability of adequate
funding and regulatory capital. Historically, the Company has satisfied these
needs from internally generated funds and, occasionally, loans from third
parties. While the net proceeds to the Company from the Offering will be
available for general corporate purposes, there can be no assurance that any, or
sufficient, funding or regulatory capital will continue to be available to the
Company in the future on terms that are acceptable to it. See
"Business--Regulation" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
REGULATION; NET CAPITAL REQUIREMENTS; COMPLIANCE
The securities business is subject to extensive regulation under
federal and state laws. The Company's broker-dealer subsidiary is subject to
regulations covering all aspects of the securities business, including sales
methods, trade practices among broker-dealers, use and safekeeping of customers'
funds and securities, capital structure, recordkeeping, and conduct of
directors, officers and employees. The subsidiaries of the Company are
registered investment advisers under the Investment Advisers Act of 1940, as
amended (the "Investment Advisers Act"), and are subject to regulation as
investment advisers, including with respect to compensation arrangements. The
Securities and Exchange Commission (the "SEC"), the NYSE and various other
securities exchanges and other regulatory bodies have rules with respect to net
capital (as defined herein) requirements relating to the Company's broker-dealer
subsidiary ("net capital rules"). The net capital rules are designed to ensure
that broker-dealers maintain adequate regulatory capital in relation to their
liabilities and the size of their customer business. Failure to maintain the
required net capital may subject a firm to suspension or revocation of its
registration by the SEC and suspension or expulsion by the NYSE, the NASD and
other regulatory bodies, and ultimately may require the firm's liquidation.
Compliance with the net capital rules may limit certain operations of the
Company, even in circumstances where its broker-dealer subsidiary has more than
the minimum amount of required capital, which, in turn, could limit the ability
of the Company to pay dividends, implement its strategies, pay interest on and
repay principal of any outstanding debt and redeem or repurchase shares of
outstanding capital stock. A change in the net capital rules, the imposition of
new rules affecting net capital requirements, or a significant operating loss or
charge against net capital could have similar adverse effects. Underwriting
commitments require a charge against net
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<PAGE>
capital and, accordingly, Keefe, Bruyette & Woods, Inc.'s ability to make
underwriting commitments may be limited by the requirement that it must at all
times be in compliance with the applicable net capital rules. See "Business--Net
Capital Requirements."
Compliance with many of the regulations applicable to the Company
involves a number of risks, particularly in areas where applicable regulations
may be subject to interpretation. In the event of non-compliance with an
applicable regulation, governmental regulators, the NYSE and the NASD may
institute administrative or judicial proceedings that may result in censure,
fine, civil penalties (including treble damages in the case of insider trading
violations), issuance of cease-and-desist orders, deregistration or suspension
of the non-compliant broker-dealer or investment adviser, suspension or
disqualification of the broker-dealer's officers or employees or other adverse
consequences. The imposition of any such penalties or orders on the Company
could have a material adverse effect on the Company's business, operating
results and financial condition. In light of the Company's expanded business
activities and the continued changes and expansion in the scope of regulatory
requirements, KBW has undertaken an extensive review of its compliance policies
and procedures. Currently, KBW's senior compliance officer also acts as its
Chief Financial Officer. As part of its ongoing compliance review, KBW expects
to separate these roles and is seeking to hire a senior full-time compliance
officer who would report directly to the Chief Executive Officer and the KBW
Board.
The regulatory environment in which the Company operates is subject to
change. The Company may be adversely affected as a result of new or revised
requirements imposed by the SEC, other United States or foreign governmental
regulatory authorities, the NYSE or the NASD. The Company also may be adversely
affected by changes in the interpretation or enforcement of existing laws and
rules by these governmental authorities, the NYSE and the NASD. The Company
cannot predict the impact, if any, that such new requirements or enforcement
practices could have on the Company's business, operating results and financial
condition.
The Company is also subject to the effects of legislative and
regulatory developments in the banking industry and other sectors of the
financial services industry, which are also highly regulated by various federal
and state regulatory agencies. Adverse developments in these regulatory
environments could negatively impact the Company's business because of, for
example, decreased underwriting activity or decreased demand for the Company's
sales and trading, corporate finance and M&A advisory services.
Additional regulation, changes in existing laws and rules, or changes
in interpretations or enforcement of existing laws and rules often affect
directly the method of operation and profitability of securities firms. The
Company cannot predict what effect any such changes might have. Furthermore, the
Company's businesses may be materially affected not only by regulations
applicable to it as a financial market intermediary, but also by regulations of
general application. For example, the volume of the Company's underwriting, M&A
advisory and principal investment businesses during a particular time period
could be affected by, among other things, existing and proposed tax legislation,
antitrust policy and other governmental regulations and policies (including the
interest rate policies of the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board")) and changes in interpretation or enforcement of
existing laws and rules that affect the business and financial communities. The
level of business and financing activity in each of the industries on which the
Company focuses can be affected not only by such legislation or regulations of
general applicability, but also by industry-specific legislation or regulations.
See "Business--Regulation."
CORPORATE GOVERNANCE CONTROLLED BY INSIDERS
After the Offering, employee members of the Board of Directors of KBW
(the "KBW Board") will own approximately % of the outstanding voting stock of
KBW and KBW employees will own at least % of such voting tock. Although the
Stockholders' Agreement does not contain any provisions regarding the voting of
Common Stock owned by any KBW employee, such concentration of stock ownership
will effectively allow members of the KBW Board to control all matters submitted
for the vote or consent of Company stockholders, including election of
directors, as well as to control day-to-day management of the Company. This
concentration of
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<PAGE>
ownership and voting power may also have the effect of accelerating, delaying or
preventing a change in control of the Company. See "Management."
MANAGEMENT OF GROWTH; NO PRIOR OPERATING HISTORY AS A PUBLIC COMPANY
Over the past several years, the Company has experienced significant
growth in its business activities. This growth has required and will continue to
require increased investment in management personnel, financial and management
systems and controls and facilities, which, in the absence of continued revenue
growth, would cause the Company's operating margins to decline from current
levels. As the Company has grown and continues to grow, the need for additional
compliance, documentation and risk management procedures and internal controls
has increased throughout the Company. To help address these needs, KBW is
conducting a review of its compliance policies and procedures. KBW's current
senior compliance officer also serves as its Chief Financial Officer. As part of
its review of compliance policies and procedures, KBW expects to separate these
roles and is seeking to hire a full time senior compliance officer who would
report directly to the Chief Executive Officer and the KBW Board as well as to
implement further changes in its compliance and risk management policies and
procedures. However, there can be no assurance that the Company's risk
management procedures and internal controls will prevent losses or regulatory
violations from occurring. Implementation of these changes will require the
incurrence of additional expenses, including the hiring of additional personnel
and the adoption of new compliance procedures and controls. There can be no
assurance that the implementation of such additional policies and procedures
will prevent the Company from experiencing a material loss or other liability,
including regulatory sanction. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Risk Management
and Compliance."
For its entire history, KBW has operated as a closely-held,
employee-owned company. The Company has no history as a company with public
reporting obligations, and operating the Company with such obligations will
place substantial demands on management and the Company's operating systems.
These increased demands may require further expenditures to hire management
personnel and to expand the Company's operating systems.
ABSENCE OF PRIOR MARKET FOR COMMON STOCK AND FLUCTUATIONS OF MARKET PRICE
Prior to the Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market will develop
or, if developed, will be sustained following the Offering. The initial public
offering price of the Common Stock will be determined through negotiations among
the Company, the Selling Stockholders and the Underwriters, based upon several
factors. See "--Potential Conflicts of Interest." For a discussion of the
factors to be taken into account in determining the initial public offering
price, see "Underwriting."
Certain factors, such as sales of the Common Stock into the market by
existing stockholders, fluctuations in operating results of the Company or its
competitors, market conditions for similar stocks, and market conditions
generally for other companies in the investment banking industry or in the
financial services industry could cause the market price of the Common Stock to
fluctuate substantially. In addition, the stock market has experienced
significant price and volume fluctuations that have particularly affected the
market prices of equity securities and that have often been unrelated to the
operating performance of the issuers of such securities. Accordingly, the market
price of the Common Stock may decline even if the Company's operating results or
prospects have not changed.
POTENTIAL DECREASES IN THE MARKET PRICE OF COMMON STOCK RESULTING FROM SHARES
ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public
market, whether by purchasers in the Offering or other stockholders of the
Company, could adversely affect the prevailing market price of the Common Stock.
There will be shares of Common Stock outstanding immediately after completion
of the Offering, of which will be freely tradeable in the public markets,
subject, in certain cases, to the volume and other limitations set forth in Rule
144 promulgated under the Securities Act. shares of Common Stock
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outstanding immediately following the Offering will be subject to lock-up
agreements being entered into at the request of the Underwriters, unless
released by DLJ. The lock-up agreements generally prohibit the disposition of
any such shares until 180 days after the date of this Prospectus. Any shares
subject to the lock-up agreements may be released by DLJ at any time with or
without notice to the public. In addition, the shares held by certain officers
and employees of the Company are subject to sale restrictions set forth in the
Stockholders' Agreement, which limit the amount of Common Stock that the officer
or employee may sell during each of the first three years after the date of this
Prospectus. See "Certain Transactions Occurring Prior to the Offering--New and
Former Stockholders' Agreements," "Shares Eligible for Future Sale" and
"Underwriting."
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of Common Stock in the Offering will experience immediate
dilution in net tangible book value of $ per share, based on an assumed initial
public offering price of $ per share (the mid-point of the range indicated on
the cover page of this Prospectus). See "Dilution."
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER AND BYLAW PROVISIONS
The Certificate of Incorporation of KBW (the "KBW Certificate") and the
Bylaws of KBW (the "KBW Bylaws"), as well as Delaware corporate law, contain
certain provisions that could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from attempting to
acquire, control of the Company. These provisions could limit the price that
certain investors might be willing to pay in the future for shares of Common
Stock. Upon completion of the Offering, the KBW Board will have the authority to
issue up to 10,000,000 shares of Preferred Stock, par value $0.01 per share, of
KBW ("Preferred Stock"), and to determine the price, preferences and privileges
of those shares without any further vote or action by the stockholders of the
Company. The rights of the holders of Common Stock will be subject to, and may
be adversely affected by, the rights of the holders of any class or series of
Preferred Stock that may be issued in the future. The issuance of shares of
Preferred Stock, while potentially providing desirable flexibility in connection
with possible acquisitions and other corporate purposes, could have the effect
of making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. After giving effect to the Offering,
voting control of the Company will continue to be closely held by KBW employees.
See "--Corporate Governance Controlled by Insiders."
Other provisions of the Company's organizational documents and Delaware
corporate law impose various procedural and other requirements that could make
it more difficult for stockholders to effect certain corporate actions. In
addition, the Company is subject to the provisions of Section 203 of the
Delaware General Corporation Law (the "DGCL"), which prohibits the Company from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. These provisions could make more difficult or discourage a
takeover of KBW or the acquisition of control of KBW by a significant
stockholder and, thus, the removal of incumbent management. See "Description of
Capital Stock" and "Certain Anti-takeover Provisions."
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<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock offered by the Company hereby are estimated to be $ , assuming an initial
public offering price of $ per share (the mid-point of the range indicated on
the cover page of this Prospectus) and after deducting underwriting discounts
and commissions and estimated offering expenses. The Company will use the net
proceeds from the Offering for general corporate purposes. The Offering will
create a public market for the Common Stock, which will facilitate the Company's
future access to the public equity markets and enhance the ability of the
Company to use its Common Stock as consideration for acquisitions. The Company
will not receive any proceeds from the sale of shares of Common Stock by the
Selling Stockholders.
DIVIDEND POLICY
Following consummation of the Offering, the KBW Board intends to pay a
quarterly dividend of $ per share of Common Stock beginning in the quarter
of 1998. The timing and amount of future dividends will be determined by the KBW
Board and will depend, among other factors, upon the Company's earnings,
financial condition and cash requirements at the time such payment is
considered. Furthermore, the net capital rules impose limitations on the payment
of dividends by Keefe, Bruyette & Woods, Inc. that may limit the amount
available to be paid as dividends by the Company. See Note 4 to the Consolidated
Financial Statements included elsewhere in this Prospectus.
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<PAGE>
CAPITALIZATION
The following table sets forth the Company's capitalization as of June
30, 1998, on an actual basis and as adjusted to give effect to the Merger (see
"Certain Transactions Occurring Prior to the Offering") and the sale of the
shares of Common Stock offered by the Company hereby at an assumed
initial public offering price of $ per share (the mid-point of the range
indicated on the cover page of this Prospectus), after deducting underwriting
discounts and commissions and estimated offering expenses. This table should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements,
including the Notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
---------------------------------
(IN THOUSANDS)
ACTUAL AS ADJUSTED
<S> <C> <C>
Subordinated notes...................................................... $2,197 $2,197
Stockholders' equity:
Preferred Stock, $12.50 par value; 5,000(1) shares of voting
preferred stock and 5,000(1) shares of non-voting preferred stock -- --
authorized; $0.01 par value, 10,000,000 shares authorized, as adjusted;
no shares issued and outstanding......................
Common Stock, $0.01 par value; 5,000,000(1) shares authorized;
896,748(1) actual shares issued and outstanding; $0.01 par value,
140,000,000 shares authorized, as adjusted;
shares issued and outstanding, as adjusted ....................... 38
Additional paid-in capital(2)....................................... 13,167
Retained earnings(2)................................................ 181,385
Common stock in treasury(1) (26,311)
Notes receivable from stockholders.................................. (4,732) (4,732)
Total stockholders' equity..................................... 163,547
------- -------
Total capitalization.................................. $165,744 $
======== ==========
</TABLE>
- -----------------------------
(1) Reflects the number of shares authorized, issued and outstanding of Keefe,
Bruyette & Woods, Inc. before giving effect to the Merger. Upon consummation of
the Merger, all shares of treasury stock will be retired, which will be
reflected as a reduction in retained earnings.
(2) The as adjusted amount also gives effect to the recognition of $6.7 million
in compensation expense associated with the issuance of book value stock within
12 months prior to the Offering (see Note 15 to the Consolidated Financial
Statements).
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DILUTION
The net tangible book value of the Common Stock of the Company at June
30, 1998 was $162.0 million or $180.62 per share. After giving effect to the
sale of the shares of Common Stock by the Company pursuant to the Offering at an
assumed initial public offering price of $ per share and after deducting
underwriting discounts and commissions and estimated expenses of the Offering,
the Company's adjusted pro forma net tangible book value at June 30, 1998 would
have been $ million or $ per share.
Net tangible book value per share at June 30, 1998 has been determined
by dividing the net tangible book value of the Company (total tangible assets
less total liabilities) by the number of shares of Common Stock outstanding at
June 30, 1998. The Offering will result in an increase in pro forma net tangible
book value per share of $ to existing stockholders and a dilution of $ per
share to new investors who purchase shares of Common Stock in the Offering. Di-
lution is determined by subtracting pro forma net tangible book value per share
of Common Stock from the assumed initial public offering price of $ per share.
The following table illustrates the dilution per share of Common Stock.
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share................ $
------------
Net tangible book value per share at June 30, 1998............. $180.62
Increase attributable to sale of shares of Common Stock in the ------------
Offering.....................................................
Pro forma net tangible book value per share of Common Stock
after the Offering........................................... ------------
Dilution to persons who purchase shares of Common Stock in the
Offering..................................................... $
============
</TABLE>
The following table summarizes: (i) the number of shares of Common
Stock to be sold by the Company pursuant to the Offering; (ii) the number of
shares of Common Stock held by existing stockholders before the Offering; and
(iii) the cash consideration paid therefor:
<TABLE>
<CAPTION>
TOTAL CASH CONSIDERATION
------------------------------------
SHARES AVERAGE
------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
<S> <C> <C> <C> <C> <C>
Common Stock to be sold by the
Company in the Offering....... % $ % $
Common Stock owned by existing
stockholders (1)..............
----------------- ----- ----------- ------ -----------
Total........................... 100.0% $ 100.0% $
================= ====== ============ ====== ============
</TABLE>
- ----------------
(1) Does not reflect the issuance prior to the Offering of nonvested employee
options to acquire shares of Common Stock at prices below the Offering price.
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial information should be
read in conjunction with the Company's Consolidated Financial Statements and the
Notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contained elsewhere in this Prospectus. The selected
consolidated statement of income data for 1995, 1996 and 1997 and the selected
consolidated statement of financial condition data as of December 31, 1996 and
1997 are derived from the Company's Consolidated Financial Statements audited by
KPMG Peat Marwick LLP which are included elsewhere herein. The selected
consolidated statement of income data for the six months ended June 30, 1997 and
1998 and the selected consolidated statement of financial condition data as of
June 30, 1998 are derived from the Company's unaudited Consolidated Financial
Statements also included elsewhere herein, which include all adjustments,
consisting of normal recurring adjustments, which the Company considers
necessary for a fair presentation of its financial position and results of
operations for these periods. The historical results are not necessarily
indicative of the results of operations to be expected in the future. The
selected consolidated statement of financial condition data as of December 31,
1993, 1994 and 1995 and the selected consolidated statement of income data for
1993 and 1994 are derived from the Company's Consolidated Financial Statements
audited by KPMG Peat Marwick LLP, which are not included herein. The selected
consolidated statement of financial condition data as of June 30, 1997 are
derived from the Company's unaudited Consolidated Financial Statements which are
not included herein and which include all adjustments, consisting of normal
recurring adjustments, which the Company considers necessary for a fair
presentation of its financial position as of such date.
-19-
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA(1)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF
INCOME DATA:
REVENUES(2)
<S> <C> <C> <C> <C> <C> <C> <C>
Principal transactions, net.. $20,349 $15,251 $37,820 $ 36,272 $47,076 $15,542 $ 23,205
Commissions.................. 6,484 7,484 9,381 11,339 15,097 6,943 9,117
Investment banking........... 30,525 20,770 12,772 28,706 55,225 22,953 62,040
Net gain (loss) on
investments................ 8,359 (145) 1,196 5,987 18,419 9,992 2,238
Interest and dividend income. 2,225 2,409 4,349 5,083 6,729 2,913 3,168
Other........................ 862 765 742 1,367 1,340 620 816
------- ------ ------- ------- ------- ------- --------
Total revenues........... 68,804 46,534 66,260 88,754 143,886 58,963 100,584
EXPENSES
Compensation and benefits.... 31,021 22,263 28,862 40,813 62,508 24,921 51,295
Occupancy and equipment...... 2,640 2,105 2,210 2,364 2,608 1,263 1,546
Communications............... 1,269 1,452 1,653 2,058 2,310 1,149 1,171
Brokerage and clearance...... 2,400 2,179 3,141 3,876 4,683 2,263 2,314
Interest expense............. 101 107 2,215 2,296 966 693 32
Other........................ 4,353 4,068 4,321 5,855 10,549 4,047 6,915
------- ------ ------- ------- ------- ------- --------
Total expenses........... 41,784 32,174 42,402 57,262 83,624 34,336 63,273
------- ------ ------- ------- ------- ------- --------
Income before income tax
expense......................... 27,020 14,360 23,858 31,492 60,262 24,627 37,311
Income tax expense.............. 10,880 6,029 8,532 13,547 22,949 10,590 14,591
------- ------ ------- ------- ------- ------- --------
Net income...................... $16,140 $8,331 $15,326 $17,945 $37,313 $14,037 $ 22,720
======= ====== ======= ======= ======= ======= =========
Basic earnings per share........ $19.01 $9.73 $17.95 $21.65 $43.69 $16.52 $25.51
Diluted earnings per share...... $19.01 $9.73 $17.95 $21.65 $43.69 $16.52 $25.51
OTHER FINANCIAL AND
OPERATING DATA (UNAUDITED):
Annualized return on average
equity....................... 33.3% 13.7% 22.6% 21.1% 34.3% 27.9% 31.1%
Compensation and benefits
expense as a percentage
of revenues.................. 45.1% 47.8% 43.6% 46.0% 43.4% 42.3% 51.0%
Non-compensation and benefits
expense as a percentage
of revenues.................. 15.6% 21.3% 20.4% 18.5% 14.7% 16.0% 11.9%
Income before income tax
expense
as a percentage of revenues.. 39.3% 30.9% 36.0% 35.5% 41.9% 41.8% 37.1%
Number of employees at end of
period....................... 86 89 91 116 132 126 143
CONSOLIDATED STATEMENT OF
FINANCIAL CONDITION DATA:
(AT END OF PERIOD):
Total assets.................... $78,865 $95,044 $141,044 $132,870 $199,627 $287,096 $262,812
Stockholders' equity............ 56,714 65,457 78,610 95,975 135,116 109,712 163,547
Book value per common share
outstanding (unaudited)...... $67.19 $73.37 $92.65 $112.52 $155.86 $129.43 $182.38
- -------------------
</TABLE>
(1) See Note 1 to the Consolidated Financial Statements for an explanation of
the basis of presentation.
(2) For a description of the items comprising each line item under Revenues,
see "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
-20-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Historical Consolidated Financial Data" and the Company's Consolidated Financial
Statements and Notes thereto contained elsewhere in this Prospectus. In addition
to historical financial information, the following discussion contains
forward-looking statements that involve risks and uncertainties. The Company's
actual future results could differ significantly from those anticipated in or
implied by these forward looking statements for the reasons detailed in "Risk
Factors" and elsewhere in this Prospectus.
BUSINESS ENVIRONMENT
The Company's historical results of operations have been dependent on a
number of market factors, including general securities market conditions and
specific conditions affecting the market for equity and debt securities of
financial services companies. General securities market conditions are affected
by economic trends, changes in prevailing interest rates, trends in commercial
and consumer credit, the flow of investor funds into and out of the markets and
numerous other conditions. Declining interest rates and an improving economic
environment contributed to a significant increase in activity in the capital
markets beginning in 1995, which continued throughout 1996, 1997 and the first
quarter of 1998. The financial services industry has generally benefited from
these conditions, which, together with improved operating performance and
changes in the regulatory environment, have contributed to increases in the
trading volume and valuation of the securities of financial services companies,
increased financing activity by such companies, and significant M&A activity.
The Company's financial results have been and will continue to be subject to
fluctuations due to changes in these conditions and other factors beyond the
Company's control. As a result, past operating results are not necessarily
indicative of results for future periods.
COMPONENTS OF REVENUES AND EXPENSES
Revenues
Net revenues from principal transactions include realized and
unrealized gains and losses from market making activities in OTC equity
securities, proprietary trading (including arbitrage) in listed and OTC equity
securities, and trading in fixed income securities. Net revenues from principal
transactions also include revenues from the Company's Financial Strategies Team
that provides financial strategic planning services (including riskless
principal transactions with customers in fixed-income securities and arranging
repurchase agreements for customers). Commissions consist primarily of
commissions paid to KBW by customers for brokerage transactions in listed
securities. Investment banking revenues consist of: (i) fees earned as adviser
in mergers and acquisitions and for rendering related fairness opinions and for
other corporate strategic advice; (ii) management fees, underwriting fees,
selling concessions and agency placement fees earned through the Company's
participation in public offerings and private placements of debt and equity
securities; (iii) fees earned by the Webb Division (see "Business--Investment
Banking") as adviser to thrifts converting from a mutual to a stock form of
ownership; and (iv) fees earned from other advisory services, such as valuations
and arrangements for bulk sales or purchases of assets. Net gains or losses on
investments arise from the Company's investments in privately placed and
publicly traded securities of financial services companies. Such investments are
generally held for longer than six months and in some instances have been held
for several years. Changes in the market or fair values of investments are
recognized as unrealized gains or losses. Realized gains or losses are
recognized upon the sale of investments as the difference between sale proceeds
and the cost basis of the investments sold. Realized gains or losses are offset
by the reversal of any previously recognized unrealized gains or losses
associated with the investments sold. Interest and dividend income primarily
consists of interest and dividends on trading and investment securities and
interest on credit balances associated with securities sold short. Other
revenues include asset management fees, increases in the cash value of life
insurance policies held on certain current and former officers of the Company
and miscellaneous other income.
-21-
<PAGE>
The Company's sources of income have been subject to fluctuation based
on market changes and changes in the industry sectors on which KBW focuses,
particularly the banking industry. In 1996, the Company expanded its coverage to
include specialty finance companies. More recently, the Company has expanded its
coverage to include insurance companies and securities firms. With the objective
of increasing sources of recurring income, KBW added asset management services
to its activities in 1996, and established its Financial Strategies Team in 1997
to provide financial strategic planning services for small and mid-sized banks
and recently converted thrifts. See "Business--Business Strategy."
Expenses
Compensation and benefits expense has historically been the largest
component of KBW's expenses. Compensation and benefits expense includes
salaries, bonuses, profit sharing contributions and other employee costs. Over
the past five years, compensation and benefits expense has averaged 71.5% of
total expenses and 45.2% of revenues. 62.2% of compensation and benefits expense
over such period has been performance related. Occupancy and equipment expense
consists primarily of lease payments, depreciation of leasehold improvements and
office equipment and utilities expense. Communications expense consists of
charges for voice and data communications, and charges by third-party providers
for market data and electronic execution of transactions. Brokerage and
clearance expense consists primarily of fees paid to clearing brokers for
providing clearing, record keeping and other services; fees paid to exchanges;
and fees paid to brokers and specialists on the floors of various exchanges for
execution services. Interest expense includes interest paid on margin debit
balances used to finance a portion of the Company's trading and investment
positions, and interest paid on subordinated notes issued to certain former
employees in exchange for their KBW stock. Other expenses consist in large part
of travel and entertainment expenses; advertising and publication costs;
expenses for legal, consulting, and accounting services; amortization of
intangibles arising from the acquisition of the Webb Division; and miscellaneous
other operating expenses.
As a result of the Company's growth, expanding range of activities,
ongoing review of compliance and risk management policies and procedures and
changes expected to result from public ownership of the Common Stock following
the Offering, management anticipates that compensation and certain
non-compensation expenses will likely represent a higher percentage of total
revenues in the future than they have in the past. In connection with the
relocation of its New York headquarters, the Company expects to incur additional
rental expenses as well as significantly increased expenditures for furniture,
fixtures and leasehold improvements in the second half of 1998 and in 1999. In
1999, rental expense for the Company's headquarters will increase by
approximately 170%, in part due to payments under the lease for the Company's
new headquarters as well as continuing lease payments for the Company's existing
offices (which will continue until the Company vacates its existing offices
which management expects to occur prior to the end of 1999). In addition, in
1999, the Company will begin to amortize leasehold improvements and additional
furniture, fixtures and equipment with respect to its new offices. See
"--Liquidity and Capital Resources" and Note 5 to the Company's Consolidated
Financial Statements.
The Company historically allowed employees to purchase shares of its
common stock at book value, calculated in accordance with, and subject to the
terms of, the Former Stockholders' Agreement that provided for resale to the
Company at the then-current book value upon termination of employment. See
"Certain Transactions Occurring Prior to the Offering--New and Former
Stockholders' Agreements." Upon completion of the Offering and in the Company's
financial statements for the period in which the Offering is completed, the
Company will record a one-time compensation charge, and a one-time credit to
paid-in capital, of $6.7 million, representing the difference between the
estimated fair value and sale price of Common Stock sold to employees during the
12 months preceding completion of the Offering.
-22-
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage
of total revenues:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Principal transactions, net.......... 29.6% 32.8% 57.1% 40.9% 32.7% 26.4% 23.1%
Commissions.......................... 9.4 16.1 14.2 12.8 10.5 11.8 9.0
Investment banking................... 44.4 44.6 19.3 32.3 38.4 38.9 61.7
Net gain (loss) on investments....... 12.1 (0.3) 1.8 6.7 12.8 17.0 2.2
Interest and dividend income......... 3.2 5.2 6.6 5.7 4.7 4.9 3.2
Other................................ 1.3 1.6 1.0 1.6 0.9 1.0 0.8
------- ------- ------- ------- ------- ----- -----
Total revenues..................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
EXPENSES
Compensation and benefits............ 45.1 47.8 43.6 46.0 43.4 42.3 51.0
Occupancy and equipment.............. 3.8 4.5 3.3 2.7 1.8 2.1 1.5
Communications....................... 1.8 3.1 2.5 2.3 1.6 2.0 1.2
Brokerage and clearance.............. 3.5 4.7 4.7 4.4 3.3 3.8 2.3
Interest expense..................... 0.1 0.2 3.3 2.6 0.7 1.2 *
Other................................ 6.4 8.8 6.6 6.5 7.3 6.8 6.9
------- ------- ------- ------- ------- ----- -----
Total expenses..................... 60.7 69.1 64.0 64.5 58.1 58.2 62.9
------ ------ ------ ------ ------ ----- -----
Income before income tax expense ....... 39.3 30.9 36.0 35.5 41.9 41.8 37.1
Income tax expense...................... 15.8 13.0 12.9 15.3 16.0 18.0 14.5
------ ------ ------ ------ ------ ----- -----
Net income ............................. 23.5% 17.9% 23.1% 20.2% 25.9% 23.8% 22.6%
====== ====== ====== ====== ====== ====== ======
</TABLE>
- --------------------
* Less than 0.1%.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30,
1997
The Company experienced strong operating results in the six months
ended June 30, 1998. Total revenues increased by $41.6 million, or 70.6%, to
$100.6 million for the first half of 1998 from $59.0 million for the first half
of 1997, primarily due to increased revenues from investment banking and
principal transactions. Total expenses as a percentage of total revenues
increased to 62.9% for the first half of 1998 from 58.2% for the first half of
1997. Net income rose by $8.7 million, or 61.9%, to $22.7 million for the first
half of 1998 from $14.0 million for the first half of 1997. The Company's
pre-tax margin decreased to 37.1% for the first half of 1998 as compared to
41.8% for the first half of 1997. Return on average stockholders' equity
increased to 30.0% in the first half of 1998 from 27.4% in the first half of
1997.
Net revenues from principal transactions increased by $7.7 million, or
49.3%, to $23.2 million for the first half of 1998 from $15.5 million for the
comparable period of 1997. Net revenues from market making activities in OTC
equity securities increased by $3.4 million, or 48.1%, to $10.3 million from
$7.0 million, primarily reflecting higher trading volume and appreciation in the
market value of securities held in inventory. Net revenues from proprietary
trading in equity securities increased by $1.9 million, or 24.2%, to $9.7
million from $7.8 million, primarily due to favorable market conditions for the
equity securities of financial services companies and, to a lesser extent,
increased trading activity. Net revenues from trading in fixed income securities
increased by $2.4 million, or 308.3% to $3.2 million from $785,000. The
Financial Strategies Team, which did not begin to generate revenues until the
end of the first quarter of 1997, contributed $1.8 million of the $2.4 million
increase.
Commissions increased by $2.2 million, or 31.3%, to $9.1 million for
the first six months of 1998 from $6.9 million for the first six months of 1997.
The change reflected increased volume in agency customer transactions, with
average per-share commissions relatively constant.
-23-
<PAGE>
Investment banking revenues increased by $39.1 million, or 170.3%, to
$62.0 million for the first half of 1998 from $23.0 million for the first half
of 1997. Advisory fees increased by $40.3 million, or 471.7%, to $48.9 million
from $8.6 million, primarily reflecting increased M&A activity and increased
revenues from the Webb Division. Fees collected upon completion of four M&A
transactions during the first half of 1998 represented over 40% of total
advisory fees for the first six months of 1998. Revenues from public and private
offerings of securities decreased by $1.2 million, or 8.1%, to $13.1 million
from $14.2 million, primarily due to lower issuances of trust preferred
securities by investment banking clients in the first half of 1998. Issuance of
such securities during the first half of 1997 had been unusually high in
anticipation of proposed tax legislation which would have reduced the
attractiveness of such securities to issuers.
Net gains on investments decreased by $7.8 million, or 77.6%, to $2.2
million for the six months ended June 30, 1998 from $10.0 million for the
comparable period of 1997. The Company realized an $8.2 million gain on the
liquidation of a private investment in a banking company during the first half
of 1998, which gain was offset by the reversal of $8.1 million of previously
recognized unrealized gains associated with the investment. The Company had no
material realized gains on investments during the first half of 1997. The net
change in unrealized gains on retained investments was $2.1 million for the
first half of 1998, consisting primarily of an increase in the unrealized gain
on one investment, and $10.0 million for the first half of 1997, consisting
primarily of gains of $6.7 million and $6.5 million on two investments,
partially offset by unrealized losses ($3.0 million of which was attributable to
one investment).
Interest and dividend income increased by $255,000, or 8.8%, to $3.2
million for the six months ended June 30, 1998 from $2.9 million for the
comparable period of 1997.
Compensation and benefits expense increased by $26.4 million, or
105.8%, to $51.3 million for the six months ended June 30, 1998 from $24.9
million for the comparable period of 1997. The increase was primarily due to
higher accruals for performance-based bonuses reflecting the Company's increased
revenues and an increase in the number of employees to 150 at June 30, 1998 from
131 at June 30, 1997. Compensation and benefits expense as a percentage of total
revenues increased to 51.0% from 42.3%, owing primarily to lower gains on
investments recognized during the first six months of 1998 as compared to the
first six months of 1997. The Company typically accrues bonuses at a lower rate
on net investment gains than on other sources of revenues.
Non-compensation expenses increased by $2.6 million, or 27.2%, to $12.0
million for the first half of 1998 from $9.4 million for the first half of 1997.
Occupancy and equipment expense increased by $283,000, primarily because of the
accelerated write-down of leasehold improvements in preparation for the
relocation of the Company's headquarters to new facilities, which is expected to
occur in early to mid-1999. Communications and brokerage and clearance expenses
were both relatively unchanged. Interest expense decreased by $661,000,
primarily due to lower debit balances with the Company's clearing brokers. Other
expenses increased by $2.8 million due to higher travel and entertainment
expenses; legal, accounting and consulting fees incurred in connection with
investment banking activities and in preparation for the Offering; and
miscellaneous other expenses.
The Company's accrual for tax liabilities for the six months ended June
30, 1998 was 39.1% of income before taxes as compared to 43.0% of income before
taxes for the comparable period of 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
The Company's operating results for 1997 reflected strong growth in all
of the Company's core businesses and the recognition of significant gains on
investments. Total revenues increased by $55.1 million, or 62.1%, to $143.9
million for 1997 from $88.8 million for 1996. Total expenses as a percentage of
total revenues declined to 58.1% for 1997 from 64.5% for 1996. Net income rose
by $19.4 million, or 107.9%, to $37.3 million for 1997 from $17.9 million for
1996. The Company's pre-tax margin improved to 41.9% for 1997 from 35.5% for
1996, and return on average stockholders' equity increased to 34.3% for 1997
from 21.1% for 1996.
-24-
<PAGE>
Net revenues from principal transactions increased by $10.8 million, or
29.8%, to $47.1 million for 1997 from $36.3 million for 1996. Net revenues from
market making activities in OTC equity securities decreased by $1.4 million, or
8.9%, to $13.7 million from $15.1 million despite an increase in the number of
shares traded, reflecting the full-year effect in 1997 of the movement to
pricing OTC equity securities in sixteenths, the introduction of the NASD's new
order handling rules, and increased competition from electronic communications
networks that permit subscribers to bypass brokers and trade directly among
themselves. Net revenues from proprietary trading in equity securities increased
by $8.1 million, or 37.1%, to $30.1 million from $22.0 million, reflecting
favorable market conditions for the equity securities of financial services
companies and, to a lesser extent, increased trading activity. Net revenues from
trading in fixed income securities increased by $4.0 million to a net gain of
$3.2 million for 1997 from a net loss of $796,000 for 1996. The Company's
Financial Strategies Team, established during 1997, contributed $1.9 million of
the $4.0 million increase.
Commissions increased by $3.8 million, or 33.1%, to $15.1 million for
1997 from $11.3 million for 1996. The increase primarily resulted from a
significant increase in customer orders in listed securities partially offset by
a slight decline in the Company's average per-share commission revenue.
Investment banking revenues increased by $26.5 million, or 92.4%, to
$55.2 million for 1997 from $28.7 million for 1996. Advisory fees increased by
$15.1 million, or 79.4%, to $34.1 million from $19.0 million, primarily
reflecting increased M&A activity and increased revenues from the Webb Division.
Revenues from public and private offerings of securities increased by $11.4
million, or 118.0%, to $21.1 million from $9.7 million, reflecting increased
public and private offerings of common stock and trust preferred securities for
investment banking clients.
Net gains on investments increased by $12.4 million, or 207.6%, to
$18.4 million for 1997 from $6.0 million for 1996. During 1997, the Company
realized gains of $11.3 million on the sale of two investments, which gains were
partially offset by the reversal of $9.7 million of previously recognized
unrealized gains associated with the two investments. During 1996, the Company
realized gains of $232,000 on the sale of two investments, with no associated
reversal of previously recognized unrealized gains. The net change in unrealized
gains on retained investments was $16.8 million for 1997 and $5.8 million for
1996.
Interest and dividend income increased by $1.6 million, or 32.4%, to
$6.7 million for 1997 from $5.1 million for 1996. The change primarily reflected
increased interest on credit balances with the Company's clearing brokers,
partially offset by lower dividend and interest income on market making
inventories of equity securities and fixed income securities.
Compensation and benefits expense increased by $21.7 million, or 53.2%,
to $62.5 million for 1997 from $40.8 million for 1996. The increase was
primarily due to higher accruals for performance-based bonuses reflecting the
Company's increased revenues and an increase in the number of employees to 130
at December 31, 1997 from 116 at December 31, 1996. Compensation and benefits
expense as a percentage of total revenues decreased to 43.4% from 46.0%, owing
primarily to higher gains on investments recognized during 1997 as compared to
1996. The Company typically accrues bonuses at a lower rate on net investment
gains than on other sources of revenues.
Non-compensation expenses increased by $4.7 million, or 28.4%, to $21.1
million for 1997 from $16.4 million for 1996. Occupancy and equipment expense
increased by $244,000, primarily reflecting minor increases in the cost of
office space and the full-year effect of the Company's acquisition of the Webb
Division in July 1996. Communications expense increased by $252,000, primarily
due to increased voice and data communications charges. Brokerage and clearance
expenses increased by $807,000, primarily due to increased sales and trading
activity. Interest expense decreased by $1.3 million, primarily due to lower
debit balances with the Company's clearing brokers. Other expenses increased by
$4.7 million, primarily reflecting higher legal and consulting fees associated
with increased investment banking activity, increased travel and entertainment
expenses, technology upgrade costs, and the full-year effect of the acquisition
of the Webb Division.
The Company's accrual for tax liabilities for 1997 was 38.1% of income
before taxes as compared to 43.0% of income before taxes for 1996. See Note 3 to
the Consolidated Financial Statements.
-25-
<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The Company's operating results for 1996 reflected favorable market
conditions and a significant increase in investment banking revenues. Total
revenues increased by $22.5 million, or 33.9%, to $88.8 million for 1996 from
$66.3 million for 1995. Total expenses as a percentage of total revenues were
relatively stable at 64.5% for 1996 and 64.0% for 1995. Net income rose by $2.6
million, or 17.1%, to $17.9 million for 1996 from $15.3 million for 1995. The
Company's pre-tax margin remained relatively constant at 35.5% for 1996 as
compared to 36.0% for 1995. Return on average stockholders' equity was also
relatively unchanged, at 21.1% and 22.6% for 1996 and 1995, respectively.
Net revenues from principal transactions decreased by $1.5 million, or
4.1%, to $36.3 million for 1996 from $37.8 million for 1995. Net revenues from
market making activities in OTC equity securities increased by $1.6 million, or
12.1%, to $15.1 million from $13.5 million, primarily reflecting higher trading
volume. Net revenues from proprietary trading decreased by $1.5 million, or
6.4%, to $22.0 million from $23.5 million. The decline was primarily
attributable to a decrease in the value of securities owned. Net revenues from
trading in fixed income securities decreased by $1.7 million to a net loss of
$796,000 for 1996 from a net gain of $890,000 for 1995.
Commissions increased by $1.9 million, or 20.9%, to $11.3 million for
1996 from $9.4 million for 1995. The change resulted primarily from increased
customer orders in listed securities and a slight increase in the Company's
average per-share commission revenue.
Investment banking revenues increased by $15.9 million, or 124.8%, to
$28.7 million for 1996 from $12.8 million for 1995. Advisory fees increased by
$9.9 million, or 109.6%, to $19.0 million from $9.1 million, primarily
reflecting increased M&A activity and the acquisition of the Webb Division in
July 1996. Revenues from public and private offerings of securities increased by
$6.0 million, or 162.0%, to $9.7 million from $3.7 million, reflecting an
increased volume of offerings of common stock and preferred securities.
Net gains on investments increased by $4.8 million, or 400.6%, to $6.0
million for 1996 from $1.2 million for 1995. During 1996, the Company realized
gains of $232,000 on the sale of two investments, with no associated reversal of
previously recognized unrealized gains. During 1995, the Company realized a net
loss of $640,000, primarily from the sale of one investment at a loss, partially
offset by the gain realized on the sale of another investment, which net loss
was more than offset by the reversal of $700,000 of previously recognized
unrealized net losses associated with the investments sold. The net change in
unrealized gains on retained investments was $5.8 million for 1996 and $1.1
million for 1995.
Interest and dividend income increased by $734,000, or 16.9%, to $5.1
million for 1996 from $4.3 million for 1995. The change primarily reflected
higher dividend and interest income on market making inventories of equity
securities and fixed income securities.
Compensation and benefits expense increased by $11.9 million, or 41.4%,
to $40.8 million for 1996 from $28.9 million for 1995. The increase was
primarily due to higher accruals for performance-based bonuses reflecting the
Company's increased revenues and an increase in the number of employees to 116
at December 31, 1996 from 91 at December 31, 1995. Compensation and benefits
expense as a percentage of total revenues increased to 46.0% from 43.6%, owing
primarily to the increased number of employees during the period, including
employees of the Webb Division acquired during 1996.
Non-compensation expenses increased by $2.9 million, or 21.5%, to $16.4
million for 1996 from $13.5 million for 1995. Occupancy and equipment expense
increased by $154,000, primarily reflecting the Company's acquisition of the
Webb Division in July 1996. Communications expense increased by $405,000,
primarily due to the installation of a new real-time trading system. Brokerage
and clearance expenses increased by $735,000, primarily due to increased sales
and trading activity. Interest expense increased by $81,000 due to higher
interest expense on debit balances maintained with the Company's clearing
brokers partially offset by lower interest
-26-
<PAGE>
expense on subordinated notes payable to former employees. Other expenses
increased by $1.5 million, primarily reflecting costs associated with the
acquisition of the Webb Division and increases in various other expenses.
The Company's accrual for income tax liabilities for 1996 was 43.0% of
income before taxes as compared to 35.8% of income before taxes for 1995. See
Note 3 to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company is the parent of Keefe, Bruyette & Woods, Inc. and KBW
Asset Management. Dividends and other transfers from its subsidiaries are the
Company's primary source of funds to pay expenses and dividends. Applicable laws
and regulations, primarily the net capital rules discussed below, restrict
dividends and transfers from Keefe, Bruyette & Woods, Inc. to the Company. The
Company's rights to participate in the assets of any subsidiary are also subject
to prior claims of the subsidiary's creditors, including customers and trade
creditors of Keefe, Bruyette & Woods, Inc.
The majority of the Company's assets consist of marketable securities
and accounts receivable from clearing brokers, both of which are highly liquid.
A relatively small percentage of total assets are fixed or held for a period
longer than one year. The Company's liabilities primarily consist of securities
sold but not yet purchased, trade accounts payable, taxes payable and accrued
expenses. KBW has no bank debt and has historically been unleveraged. The
Company's total assets and short-term liabilities and the individual components
thereof vary significantly from period to period because of changes relating to
customer needs, economic and market conditions, and trading and investing
activities.
The Company's operating activities generate cash resulting from net
income earned during the period and fluctuations in the Company's current assets
and liabilities. The most significant fluctuations in current assets and
liabilities have resulted from changes in the level of customer activity and
changes in realized and unrealized gains on proprietary and investment positions
in response to changing trading strategies and market conditions.
The Company's capital expenditures have historically been modest and
funded with cash generated from operating activities. The Company expects to
incur significantly greater expenditures for furniture, fixtures and leasehold
improvements in the second half of 1998 and in 1999 in connection with the
relocation of its headquarters, and expects to finance these expenditures with
internally generated funds.
The Company has from time to time in the past loaned funds to employees
on a full recourse basis to purchase common stock of the Company. Outstanding
balances under such notes receivable from employees are recorded as a reduction
in stockholders' equity. Additionally, the Company has from time to time issued
subordinated notes, payable in installments, to departing employees in
connection with the Company's repurchase of their Common Stock.
Keefe, Bruyette & Woods, Inc., as a registered broker-dealer in
securities, is subject to the net capital requirements of the NYSE and the SEC's
uniform net capital rule. See "Business--Net Capital Requirements." The NYSE and
the SEC also provide that equity capital may not be withdrawn or cash dividends
paid if certain minimum net capital requirements are not met. At December 31,
1997, Keefe, Bruyette & Woods, Inc.'s net capital and excess net capital were
$102.9 million and $101.9 million, respectively. At June 30, 1998, Keefe,
Bruyette & Woods, Inc.'s net capital and excess net capital were $124.2 million
and $123.5 million, respectively. Regulatory net capital requirements change
based on certain investment and underwriting activities.
The Company believes that its current level of equity capital, combined
with the net proceeds it receives from the Offering and funds anticipated to be
generated from operations, will be adequate to meet its liquidity and regulatory
capital requirements for the foreseeable future.
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YEAR 2000
The Company's business activities are highly dependent on
communications and information systems, including internal information systems,
third-party trading systems (e.g. the NYSE, The Nasdaq Stock Market(SM)
("Nasdaq"), and the Brass Utility), various third-party research and market
information reference systems and certain systems provided by its clearing
brokers. Any failure or interruption of internal or third-party systems,
including due to the ability of such systems to recognize the year 2000 ("Year
2000"), could cause delays and other problems, which could have a material
adverse effect on the Company.
The Company does not believe that it has significant internal
information system problems associated with Year 2000. Much of the Company's
owned software has been recently developed or represents recent releases from
third-party vendors which management of the Company believes is not subject to
Year 2000 problems. Most of the hardware in the Company's personal
computer-based network is relatively new and has been designed to address Year
2000 issues. In addition, as part of its anticipated move to new headquarters,
the Company has scheduled replacement of any older computer equipment with new
equipment that is Year 2000 ready.
The Company has made general inquiries of significant third-party
system providers and has been informed that such third parties are either
currently conducting reviews of their Year 2000 issues or already implementing
remediation strategies. The Company also depends to a material degree on third
parties such as banks and other payment processors, delivery services,
depositories such as The Depository Trust Company and other service providers.
The Company is unable to determine whether all of its service providers will be
able to adequately address their Year 2000 issues. To the extent that a
third-party vendor or service provider is unable to adequately address Year 2000
issues, the Company may seek to change to another provider. However, in the case
of certain providers, such as the NYSE and Nasdaq, the Company may not be able
to obtain comparable essential services from other sources. There can be no
assurance that the Company will be able to change to another provider or that
such provider's services will be comparable in quality, service or cost to that
now used by the Company.
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BUSINESS
FINANCIAL SERVICES INDUSTRY BACKGROUND
KBW specializes in the financial services industry. The financial
services industry, which consists primarily of banks, thrifts, specialty finance
companies, insurance companies, securities firms and investment management
companies, has undergone major changes since the early 1980s. Legislative and
regulatory developments have eliminated virtually all restrictions on interstate
banking and now permit banks to engage in businesses that were previously
prohibited to them, such as securities underwriting and other securities-related
activities. Through the combination of deregulation and consolidation, the
financial services industry has been marked by increased competition among
banks, investment banks, insurance companies and other industry participants.
Deregulation has contributed to substantial M&A activity in the banking
industry, as participants seek to increase scale, broaden product offerings and
improve operating efficiency to remain competitive. In 1988, the aggregate
completed transaction value of mergers and acquisitions of U.S. banks and
thrifts (with over $250 million in assets) was approximately $4.0 billion. In
1997, the aggregate value of bank and thrift M&A transactions expanded
dramatically to approximately $91.2 billion. The number of completed
transactions in the banking industry has also increased significantly over the
same period, from 37 in 1988 to 127 in 1997.
Despite continuous M&A activity, consolidation in the banking industry
remains far from complete, with 10,927 banking institutions operating in the
United States at December 31, 1997. In a recently published research report, KBW
noted that the banking industry is more fragmented than other consumer-oriented
financial services industries, such as mutual funds, credit cards and personal
insurance. Assuming the completion of announced mergers as of the date of the
report, the 20 largest banking organizations held 38.6% of domestic deposits, as
compared to 64.8% of assets held by the top 20 mutual fund companies, 84.9% of
receivables held by the top 20 credit card companies and 68.4% of net premiums
written by the top 20 personal insurers.
The evolution of the U.S. banking industry has been accompanied in
recent years by substantial increases in the market value of publicly traded
bank securities. The Keefe Bank Index of 24 publicly traded bank stocks,
developed by the Company over 30 years ago, is a widely recognized measure of
bank stock price performance. From January 1993 through December 1997, this
index increased by 194%, while the S&P 500 index increased by 123%. This
performance has been accompanied by substantial investor interest in publicly
traded bank stocks. From 1993 to 1997, total U.S. equity underwritings
(including common and preferred stock) for banks and thrifts grew at a compound
annual rate of 48%, from approximately $20.1 billion to $96.4 billion. Over the
same period, total U.S. debt underwritings for banks and thrifts grew at a
compound annual rate of 25%, from approximately $139 billion to $344 billion.
Other sectors of the financial services industry have also experienced
significant change in recent years. The evolution of the market for securitized
financial assets, such as mortgage loans, credit card receivables, automobile
loans and equipment leases, has contributed to the growth in the number of
finance companies specializing in such financing activities. At December 31,
1996 (the latest date available), there were approximately 1,250 finance
companies in the United States with an aggregate of over $800 billion of managed
receivables, representing a 53% increase in managed receivables since 1990. In
1990, there were fewer than 15 publicly traded specialty finance companies
compared to over 80 of such companies in 1998. M&A and corporate finance
activity among the nation's many insurance companies, brokerage companies and
asset management companies has also increased in recent years.
THE COMPANY
KBW is an institutionally oriented investment banking firm that is a
nationally recognized authority on the banking industry, which has been the
Company's primary focus since its inception in 1962. In 1996, KBW expanded its
focus to include specialty finance companies, in which KBW has established a
significant presence. More recently, KBW has expanded its coverage to include
insurance companies and securities firms. KBW's
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activities include research, M&A advice, corporate finance, securities sales and
trading, principal investments, fixed income portfolio management and asset
management.
Research is the core of KBW's business. Institutional Investor ranked
KBW as "Best of the Boutiques" for both money center and regional bank research
in both 1997 and 1996. In an independent survey of institutional investors in
the banking industry, KBW has consistently led all other securities firms as the
first choice for regional bank research. The Company believes its success in
building its corporate finance, financial advisory, sales and trading and
principal investing activities is directly related to its position as a leading
provider of research on the banking industry. The Company's comprehensive
reseach coverage has allowed KBW to develop strong relationships with a large
number of small and mid-sized banks (generally banks with less than $20 billion
in assets) that management of the Company believes are underserved by other
larger securities firms. As these banks have grown in size and complexity, KBW
has been able to provide them a broad range of investment banking services over
time. These relationships have also enabled KBW to identify profitable
investment opportunities for its institutional clients and for the Company's
own principal investing activities.
KBW is a leading financial adviser in banking M&A. As reported by the
American Banker, in 1997 and the first half of 1998, KBW ranked first and
second, respectively, in the number of announced M&A financial advisory
assignments for the banking industry. In addition, since expanding its coverage
to include specialty finance companies, KBW has acted as financial adviser in 17
M&A transactions involving such companies. In 1997, KBW served as financial
adviser on 40 announced M&A assignments for banks and specialty finance
companies, with an aggregate transaction value in excess of $13.4 billion.
KBW is also active in underwriting and other placements of securities
for financial services companies. In 1997, the Company managed 48 equity and
debt offerings, aggregating approximately $4.0 billion in gross offering
proceeds. KBW makes a market in over 240 securities of banks, thrifts and
financial services companies which are traded in the OTC market and serves as
one of the top three market makers in approximately 80 of these securities. The
Company has developed strong relationships with substantially all of the largest
and most active institutional investors who invest in the financial services
industry. KBW also maintains proprietary trading positions and makes principal
investments in financial services companies for its own account. The Company's
broker-dealer subsidiary, Keefe, Bruyette & Woods, Inc., is a member of the
NYSE.
KBW believes that the experience, knowledge and tenure of its
executives and professional staff have enabled it to maintain long-term
relationships with its clients and customers. In addition, KBW's broad employee
stock ownership (more than 70% of current employees own KBW stock) and
compensation structure, which is based on a combination of individual,
departmental and overall Company performance, has encouraged employees to work
together to increase the value of KBW's business.
BUSINESS STRATEGY
KBW's business strategy is to continue capitalizing on its competitive
strengths to expand client and customer relationships and principal investments
in the banking and specialty finance sectors of the financial services industry
and to leverage its experience and reputation by expanding its business focus to
include other sectors of the financial services industry, including insurance
and securities. As many securities companies have been acquired by commercial
banks, KBW believes its independent status will enable it to develop new client
relationships and hire experienced personnel who wish to remain affiliated with
an independent investment banking firm. KBW will also seek to expand its asset
management business and develop additional sources of income.
The Company's business strategy is comprised of the following key
elements:
- - Lead in Identifying and Capitalizing on Key Industry Trends. KBW will seek
to use its superior research capability to identify developments in the
banking and non-bank financial services industry. KBW's industry knowledge
permits its research, sales and trading and investment banking
professionals to interact with companies and investors to take early
advantage of industry developments.
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- - Establish Early and Long-term Relationships with Clients. KBW will
continue to focus on providing research coverage and market making support
to smaller and mid-size financial services companies before KBW's
competitors. Many client relationships initiated with relatively small
community or regional banking institutions have expanded into assisting
these institutions through all phases of their development, including
financings, strategic acquisitions, investment strategy and, in an
increasing number of cases, acquisition by a larger institution.
- - Maintain Flexibility in Providing the Services and Products Needed by
Clients and Customers. KBW believes that it is important to tailor products
and services to meet the needs of its clients and customers, rather than
simply providing the same products as other investment banking firms.
Because of its ability to bring together institutional investors and
clients with the same industry focus, KBW can structure securities and
transactions which satisfy multiple needs. For example, as the banking
industry stabilized in 1993 and 1994 following a period of severe financial
distress, KBW identified investors who were willing to act in a stand-by
capacity for capital raising efforts for undercapitalized banks. Once these
banks became well capitalized and were relieved of regulatory orders, they
were able to participate in industry-wide growth. KBW believes its success
in these transactions led to further opportunities, such as assisting the
Federal Deposit Insurance Corporation in obtaining value for institutions
upon which it had foreclosed through a combination of bulk sales of
troubled assets and offering the securities of such institutions to many of
the same institutional investors who had participated in rights offerings.
In 1997, KBW determined that its institutional customers would buy trust
preferred securities issued by small and mid-sized bank and thrift holding
companies. KBW was able to offer this financing vehicle to these companies
and participated in 16 trust preferred offerings. Also in the past year,
KBW has offered the services of its Financial Strategies Team to thrift
institutions that had recently been converted from mutual to stock
ownership and which became clients of KBW through its recently-acquired
Webb Division.
- - Leverage the KBW Model in Related Industries. KBW is expanding its focus,
which has historically been on the banking industry, to other sectors of
the financial services industry such as insurance and securities.
Management will seek to develop strong research coverage of these industry
sectors in an attempt to identify investment opportunities and new clients
for KBW. The Company has already begun this effort and is actively seeking
further expansion into such other sectors through the hiring of individuals
or the acquisition of an industry team in combination with internal
development at KBW. In particular, KBW believes its broad experience in the
conversion of mutual savings banks could be applied to conversions of
mutual insurance companies.
- - Diversify Sources of Income. Management is committed to diversifying KBW's
sources of income by expanding KBW's role in asset management and by
expanding the activities of its Financial Strategies Team. KBW's asset
management activity has initially included the management of funds raised
by others and acting as adviser for managed accounts. Future growth in
asset management may result from a combination of managing funds raised by
others, acquiring existing asset management companies and actively
marketing directly to investors KBW's own management services and
investment vehicles that it is currently developing. The Financial Services
Team, which commenced operations at the end of the first quarter of 1997,
provides strategic advice to KBW clients restructuring their investments.
- - Capitalize on Opportunities Arising from Consolidation in the Securities
Industry. KBW will continue to attempt to capitalize on opportunities
created by consolidation in the securities industry. As an independent
investment banking firm focused on financial services companies, KBW has
entered into relationships with a number of banking clients that no longer
wish to do business with their former investment bankers who are now
affiliated with their bank competitors. This recent consolidation trend
also provides opportunities to hire proven investment banking professionals
who prefer the culture and opportunities of a smaller, entrepreneurial firm
with KBW's industry focus. During 1998, the Company hired an experienced
investment banker in the insurance segment of the financial services
industry and a group of four experienced investment bankers with numerous
relationships with banks in the Midwest to open a KBW office in Chicago.
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- - Identify Proprietary Investment Opportunities. KBW will continue to make
proprietary investments in opportunities it identifies in the marketplace.
KBW anticipates that its expansion of industry coverage to include the
insurance and securities sectors of the financial services industry will
enable it to identify additional investment opportunities in these sectors.
- - Retain a Corporate Culture that Promotes Employee Loyalty. KBW prides
itself on offering an excellent workplace to its employees. Employees are
encouraged to share their thoughts, ideas and opinions and are given credit
and support for their ideas regardless of seniority. KBW recently created
an Operating Committee, consisting of department heads, to help coordinate
the exchange of ideas throughout the Company and to assist the KBW Board in
developing and monitoring budgets and business strategies and determining
appropriate employee compensation and benefits. In addition, more than 70%
of KBW's employees own Common Stock, and after giving effect to the
Offering (including the sale of shares of Common Stock to KBW directors
and employees pursuant to the Offering), KBW's employees will own
approximately % of the outstanding Common Stock. KBW's historical
employee ownership has fostered an atmosphere of teamwork which KBW
believes promotes business growth and helps retain employees, clients and
customers. KBW believes its employee turnover rate is low compared to many
of its competitors. KBW'semployees have an average tenure of approximately
six years and 29% of all employees have at least 10 years' experience at
KBW. KBW's six directors who are also executive officers have an average
24-year tenure at KBW. Although KBW intends to pursue growth opportunities
through additional hirings, it will seek to retain its cooperative culture
and long-term commitment to its employees.
RESEARCH
KBW's research covers both bank and non-bank financial institutions
such as specialty finance, insurance and securities firms. KBW believes that
industry specialization, developed through careful analysis and original
investigation, is crucial to meeting the demands of its clients for
sophisticated and informed investment and strategic advice. The Company's
approach is to serve its clients through an in-depth understanding of the
financial services industry and its various segments.
KBW's research department is the catalyst for much of KBW's growth and
expansion into new industries. For example, in 1996 the research department
initiated coverage of specialty finance companies. The research department
published its first industry overview report for these companies in February
1996 and has published 11 such industry reports and 21 company-specific reports
since that time. Since the expansion of the research department's coverage to
include specialty finance companies, KBW's investment banking division has
worked on 10 financings and 14 M&A assignments in this area. KBW also makes a
market in the equity securities of a limited number of specialty finance
companies and has invested in the equity securities of a number of such
companies.
KBW is widely recognized as the leading provider of research on the
banking industry. Institutional Investor ranked KBW as the "Best of the
Boutiques" for regional and money center bank research in both 1997 and 1996. In
an independent survey of institutional investors in the banking industry, KBW
has consistently led all other securities firms as the first choice for regional
bank research. KBW has developed and maintained the Keefe Bank Index of 24 bank
stocks since the Company's inception. The Keefe Bank Index, which facilitates
the analysis of long-term trends, is frequently cited in the media. Another
index, the "KBW50," is frequently cited by sector companies in their annual
proxy statements as a measure of industry stock price performance. KBW's
analysts also often comment on industry and company developments for major
television, radio, print and proprietary news systems.
The Company's research team of 16 analysts operates out of its New York
and other offices, maintaining close contact with approximately 240 publicly
traded banks, thrifts and specialty finance and other non-bank financial
services companies. Because the Company's research team continually considers
adding institutions to its research list, the number of covered companies has
remained relatively constant despite the consolidation of the banking industry.
Research coverage may also be initiated in connection with KBW's underwriting,
market making and other corporate finance and advisory services. In late 1997,
KBW entered into an affiliation agreement with
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Oliver Securities, a small Boston-based firm specializing in insurance industry
research. In February 1998, Oliver Securities was acquired by KBW, resulting in
a new operating division of the Company, KBW Oliver Securities. Oliver
Securities has published research reports on 35 insurance companies since
becoming affiliated with KBW.
KBW's research effort is an intensive, "bottom-up" approach that
requires a detailed familiarity with the covered institution's senior
management, operations and strategy rather than primary reliance on statistical
data obtained from third parties. The research department also participates in
frequent face-to-face meetings with senior management of KBW's clients and
others in the banking industry and in management presentations at numerous
KBW-sponsored conferences and other events. The research team, through its
familiarity with current developments at companies, identifies opportunities for
the Company's corporate finance group and introduces covered companies to other
parts of KBW's business.
The team's research products include several staple publications that
are widely consulted in the financial services industry, as well as individual
company reports and daily and bimonthly communications for KBW's customers. The
Company's numerous publications include: the BankScan, the BriefBook, the Thrift
Review, the BankBook, Bank Bulletins, the NorthEastern BankScan, the
NorthEastern Quarterly Bank Review, WebbScan and BrokerScan. During 1997, the
research department generated approximately 1,500 individual company notes in
its daily Bank Bulletins.
INVESTMENT BANKING
KBW's corporate finance group provides a broad range of investment
banking services to the financial services industry. The group's 26
professionals are knowledgeable about the regulatory, competitive and market
environments surrounding financial institutions, permitting the Company to offer
clients a significant depth of experience in advising on corporate finance and
M&A opportunities.
The Company's capital raising activities for small and mid-sized
financial institutions, as well as its mutual thrift conversion services, foster
relationships with financial institutions at an early stage and often result in
long-term relationships covering a wide range of corporate finance services,
including additional capital raising assignments as well as M&A and strategic
advice. KBW believes that the continuity of its corporate finance staff
contributes to lasting relationships with many of its investment banking
clients. KBW's corporate finance team has generally grown internally,
supplemented by occasional lateral recruiting. Management also believes that its
practice of establishing teams of investment bankers responsible for maintaining
regular client contact and executing both financing and M&A assignments for
their clients contributes to closer and more enduring client relationships than
would be the case if the Company's investment bankers were organized in product
specialty groups. The Company intends to continue to expand its corporate
finance and M&A business in the banking industry as well as other sectors of the
financial services industry.
The Company's in-depth knowledge of the banking and specialty finance
industries has permitted it to capitalize for the benefit of its clients on
emerging developments, such as the recapitalization of many banks and thrifts
through the use of rights offerings in 1993 and 1994, and the use of trust
preferred securities in 1997 and 1998 for small and mid-sized banks.
KBW's investment banking expertise, coupled with its salesforce's
relationships with institutional investors who focus on the banking industry and
its willingness to make investments for its own account, often leads to
opportunities to provide multiple services to clients. For example, in a recent
transaction, KBW not only acted as financial adviser to the seller of a bank,
but also formed a group of equity and debt investors willing to purchase control
of the institution, and committed the Company's own capital to assure completion
of the acquisition. As a result, KBW earned fees for the debt and equity
placements as well as for its advisory services.
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M&A and Other Strategic Advisory Services
KBW's advisory services include strategic advice, M&A advice, takeover
defense, valuations and fairness opinions, divestitures and corporate
restructurings, and investor relations strategies. KBW has maintained its role
as a leading adviser in bank M&A transactions as the banking industry has
continued to consolidate at a rapid pace.
From January 1993 through December 1997, the Company acted as financial
adviser in 97 announced mergers and acquisitions of banks and thrifts,
representing $25.5 billion in aggregate transaction value, and 17 mergers and
acquisitions of non-bank financial institutions, with an aggregate transaction
value of $2.4 billion. As shown in the following table, the American Banker
ranked the Company first among the leading financial advisers based on number of
transactions in each of 1995, 1996 and 1997, and seventh among financial
advisers in terms of aggregate value of mergers and acquisitions of banks and
thrifts announced in each of those years:
1995 1996 1997
Number of Transactions............. 20 19 30
Ranking by Number.................. 1 1 1
Transaction Value (in millions).... $ 7,294 $ 2,441 $ 11,093
Ranking by Value................... 7 7 7
In 1997, KBW acted as financial adviser on approximately 40 announced
M&A assignments with transaction values ranging from $4 million to over $3
billion, involving both banks and non-bank finance companies. During the first
half of 1998, KBW acted as financial adviser in 18 additional announced M&A
transactions, with an aggregate announced transaction value of approximately
$7.3 billion, and was ranked second by the American Banker based on number of
M&A transactions in the banking industry.
KBW has also provided financial advisory and valuation services in
connection with bank branch sales and acquisitions. Since the beginning of 1993,
KBW has provided such services in 12 announced branch sales and acquisitions.
Capital Raising and Other Corporate Finance Services
The corporate finance group oversees KBW's participation in both
underwritten public offerings and private placements of common stock, preferred
stock and fixed income securities. The Company believes that its strong
reputation for research and market making is an important factor in obtaining
capital raising assignments.
The following table sets forth, for the past five years, the number and
dollar amount of capital markets transactions in which KBW acted as lead or
co-manager or as placement agent:
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---------------- ---------------- ---------------- ---------------- ----------------
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT
(DOLLARS IN MILLIONS) (1)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common Stock....... 14 $ 751 4 $ 82 3 $ 78 8 $ 188 11 $1,192
Preferred Stock and
Debt Securities. 15 1,749 8 893 7 825 11 1,139 26 2,105
-- ------ --- ------ --- ------ ----- ------ ---- ------
Total......... 29 $2,500 12 $ 975 10 $ 903 19 $1,327 37 $3,297
</TABLE>
(1) Gross offering proceeds (excluding over-allotments) raised by entire
syndicate.
In the first half of 1998, KBW acted as sole or lead manager in 17
public offerings and as co-manager in five public offerings of securities, with
combined gross proceeds of approximately $1.3 billion.
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The Company participates in public offerings of securities either by
acting as manager or co-manager of an underwriting syndicate, or by acting as a
member of an underwriting syndicate managed by other investment banks. In both
cases, the Company risks its capital through its participation in a commitment
to purchase securities from an issuer and to resell them to the public. The
Company's syndicate activities include managing the marketing and book-building
process of underwritten transactions the Company is managing, participating in
discussions leading to the determination of the offering price of securities and
conducting market stabilization activities.
The Investment Banking Department has recently grown through the hiring
of experienced investment bankers. In May 1998, the Investment Banking
Department hired a Managing Director with substantial experience in the
property/casualty insurance area. In August 1998, the Investment Banking
Department hired four investment bankers to open a new Chicago office. These
bankers have specialized in regional and community banks concentrated in 10
Midwestern states.
KBW acquired Charles Webb & Company of Columbus, Ohio in July 1996 to
expand the Company's investment banking business with mutual thrift
institutions. Now operating as a division of Keefe, Bruyette & Woods, Inc. (the
"Webb Division") and consisting of 15 professionals, the Webb Division has
completed 98 conversions of thrifts from a mutual to a stock form of ownership
since its establishment in 1990, including 29 since becoming a division of KBW.
In such transactions, the converting thrift typically sells stock to its
depositors in a subscription offering. KBW assists in the development of an
orderly secondary market for such stock by acting as a market maker and
soliciting institutional purchase orders and retail depositor sell orders in the
new security. In addition to advising thrifts during their conversion, KBW,
through its Financial Strategies Team, can provide recently converted thrifts
with financial advice and transaction execution to assist in the management of
their newly raised capital.
SALES AND TRADING
KBW provides a broad range of sales and trading services to issuers and
institutional investors and makes a market in over 240 stocks traded in the OTC
market. The Company engages in sales and trading activity for both equity and
fixed income securities. The Company's customer base consists of institutional
investors, including substantially all major institutional investors who
regularly invest in the U.S. banking industry. Since the beginning of 1998, KBW
has engaged in trading and brokerage transactions for approximately 600
different institutional customers.
Because of the Company's industry focus, KBW's sales force is highly
knowledgeable about the banking industry and can therefore provide customers
with in-depth information about specific companies and about trends affecting
the industry as a whole. Management believes that the knowledge and experience
of its sales force, together with the Company's long-established presence in the
market, are distinct competitive advantages in establishing and maintaining
relationships with institutional investors. The Company's senior sales
professionals have an average of 13 years of experience in institutional sales.
Equity Sales and Trading
The equity sales and trading group consists of 14 sales people, seven
traders and nine sales/traders. The Company seeks to become a leading market
maker in the OTC stocks of companies identified by KBW's research department as
likely to become important competitors in their sector of the financial services
industry. In executing this strategy, the Company often takes large positions in
such stocks to satisfy the needs of institutional investors for a liquid market.
KBW's decision to make a market in a company's security is based on the volume
of trading in the security, whether the company is covered by KBW's research
group, and the strength of KBW's investment banking relationship with the
company. During the first half of 1998, the Company made a market in over 240
securities which are either listed with Nasdaq or are other OTC securities of
banks, thrifts and specialty finance companies, and it ranked among the top
three market makers in approximately 80 of such securities.
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The Company's sales professionals work closely with KBW's research
analysts to provide up-to-date information to the Company's institutional
customers. The Company's other activities as a broker-dealer in equity
securities include execution of trades for institutional customers in OTC quoted
securities as well as exchange-listed stocks. When KBW is engaged as a manager
of an underwriting or private placement, the sales force works with the
corporate finance group in the marketing and book-building process and provides
information regarding the pricing and timing of the offering.
In recent years, the volume of stock transactions executed by KBW has
increased dramatically. In 1997, the equity trading volume through KBW's New
York sales desk exceeded 560 million shares, representing an average of 2.2
million shares per business day, as compared to approximately 460 million shares
or 1.8 million shares per business day in 1996.
The Company's sales group, together with its research and corporate
finance groups, sponsors a series of periodic investor conferences throughout
the United States and the United Kingdom, presenting summaries of industry
trends and providing related commentary and discussions. These conferences
provide an opportunity for senior management of selected companies to make
presentations directly to institutional investors and the media. KBW also hosts
frequent "investor roundtable dinners" throughout the United States at which
institutional investors meet with KBW's sales, research and investment banking
professionals to discuss industry and investment trends.
Each of the Company's four most senior equity traders has been with KBW
for at least 10 years. The Company's sales people and traders are compensated
through salaries and performance-based bonuses rather than through commissions.
Management believes that the long tenure of many of KBW's senior sales and
trading professionals and the method by which they are compensated contributes
to lasting and trusting relationships with the Company's institutional
investors.
Fixed Income Sales and Trading
The Company's fixed income group includes nine sales professionals,
five traders and trade support persons and three fixed income analysts. The
Company's fixed income group makes a market in both fixed income and
deposit-based products and also trades U.S. government and agency securities.
The Company's fixed income group also oversees KBW's participation in the
medium-term note facilities of many banking institutions and manages the
Company's underwriting of fixed income securities. The Company's fixed income
group has a particular expertise in arranging agency private placements of
non-rated or non-investment grade unsecured debt and preferred stock of
financial institutions. Excluding members of KBW's new Financial Strategies
Team, KBW's fixed income sales professionals have been employed by KBW for an
average of 11 years and generally have maintained relationships with the same
accounts for most of their careers.
The fixed income group's research professionals provide fixed income
research coverage on banks, thrifts and specialty finance companies, including
through the publication of the Bank Debt Review, a widely read source of credit
information relating to the debt securities of U.S. financial institutions.
In January 1997, the Company established its Financial Strategies Team
to provide advice to KBW clients regarding balance sheet management, including
investment portfolio management, interest rate risk management, capital leverage
and stock repurchases. KBW earns revenue from certain resulting transactions by
acting as a riskless principal in transactions with customers implementing
investment strategies. The Financial Strategies Team also arranges, as
introducing agent, repurchase agreement financings between its clients and other
investment banks.
KBW maintains a portfolio of fixed income securities issued by
companies in the financial services industry, principally as an accommodation to
customers. In 1997, KBW's fixed income portfolio had long positions with
aggregate closing daily market values ranging from $14.6 million to $44.8
million and short positions (primarily holdings of U.S. government and agency
securities) with aggregate market values ranging from $5.4 million to $33.7
million. The long and short positions are not perfectly matched and therefore
KBW retains some interest rate exposure on such positions. In addition, the
Company bears credit risk with respect to long positions.
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PRINCIPAL INVESTING
In addition to principal transactions arising from the Company's market
making activities, KBW has, since its inception, traded and invested in
securities for its own account. Such transactions almost exclusively involve
securities of financial services companies. KBW does not generally invest as
principal in derivative securities, other than options used in connection with
market making and arbitrage positions. Revenues from trading and investments for
the Company's own account (excluding market making transactions) represented
28.8%, 16.6%, 42.7%, 36.7% and 37.3% of total revenues in 1993, 1994, 1995, 1996
and 1997, respectively, and 15.2% of revenues for the six months ended June 30,
1998.
The level of the Company's trading positions carried in the Company's
trading and investment accounts can vary significantly from day to day depending
upon economic and market conditions, the allocation of capital among types of
inventories, underwriting commitments, customer demand and trading volume. The
aggregate value of inventories that the Company may carry is limited by certain
requirements of the net capital rules. See "--Net Capital Requirements."
The Company engages, to a limited extent, in arbitrage transactions for
its own account. Such transactions relate to announced mergers and acquisitions
primarily in the banking industry. The number of arbitrage positions is
dependent on announced M&A activity in the financial services industry. The
Company does not (other than in connection with unsolicited customer orders)
currently take arbitrage positions in securities of companies involved in an M&A
transaction in which the Company has an advisory role, engage in speculative
arbitrage with respect to rumored mergers, or generally engage in arbitrage
based on discrepancies between the market value of convertible or derivative
securities and the underlying securities.
The following table presents the Company's highest, lowest and average
month-end combined balances of equity market making inventories and short-term
proprietary trading positions (including arbitrage transactions) for 1997.
HIGHEST LOWEST AVERAGE
MONTH MONTH MONTH
END END END
-----------------------------------------------------
(in thousands)
Gross long positions $51,710 $36,459 $46,414
Gross short positions 27,800 7,166 14,620
Net long positions 41,712 14,772 31,795
The Company also invests in privately placed and publicly traded
securities of financial services companies. Such investments are generally held
for longer than six months and, in some instances, have been held for several
years. Opportunities for such investments arise from the Company's investment
banking activities as well as from its presence in the markets for securities of
financial services companies. Additionally, the Company occasionally accepts
payment for services in the form of equity securities or rights or warrants to
purchase equity securities. As of June 30, 1998, the carrying value of the
Company's investments was $26.9 million, including $7.9 million of securities
not readily marketable.
Regulatory requirements and the Company's internal policies and
procedures require that customer orders be satisfied prior to any of the
Company's principal trading and investing activities. Marketable securities are
generally valued at the last sale price or at the bid price for long positions
and ask price for short positions. Securities without established market values
are carried at fair value as determined by the KBW Board. Investment decisions
regarding the Company's proprietary positions are generally made by the
Company's senior traders in consultation with one of KBW's Vice Chairmen,
Charles H. Lott, and its President and Chief Operating Officer. In connection
with the expansion of KBW's asset management business, the Company anticipates
that Mr. Lott will devote substantially all of his time to the management of
that business and will play a lesser role in principal investment decisions. See
"--Asset Management."
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ASSET MANAGEMENT
KBW's subsidiary, KBW Asset Management, is a registered investment
adviser focused on investments in the securities of banks and other financial
services companies. KBW is seeking to expand the activities of KBW Asset
Management in order to increase the Company's fee income. KBW Asset Management
is the adviser for several large managed accounts. As of June 30, 1998, KBW
Asset Management had approximately $220 million in assets under management. KBW
is a 40% owner of the general partner in America First Financial Institutions
Investment Fund L.P. ("America First"), a private institutional investment fund
established in 1997 focusing on the banking industry. As of June 30, 1998,
America First had approximately $23.3 million under management. KBW provides
advice and trading execution services to America First.
KBW Asset Management is managed by its Chairman, Charles Lott, the
former Chairman and Chief Executive Officer of KBW who currently serves as a
Vice Chairman of KBW, and by its President, Michael O'Brien, who was previously
an institutional salesman with KBW for 13 years. KBW Asset Management also
currently has a trader/analyst and anticipates hiring additional personnel as
its business growth requires. KBW Asset Management expects to establish several
investment vehicles, including private hedge funds to be marketed to
institutions and high net worth individuals, and in which KBW and certain of its
employees may also invest.
As of the date of this Prospectus, KBW is in negotiations with an
unaffiliated investment banking firm to effect a series of transactions pursuant
to which KBW Asset Management would be a member in a limited liability company
which would act as investment adviser for an investment fund registered under
the Investment Company Act of 1940 and focused on the financial services
industry. No assurance can be made that such negotiations will be successfully
concluded. In the future, KBW expects to grow its asset management business
through internal growth of managed accounts and the establishment of additional
investment vehicles, through management of funds established by others and,
possibly, through the acquisition of existing asset management businesses.
RISK MANAGEMENT AND COMPLIANCE
The Company has established various policies and procedures for the
management of its exposure to operating, principal and credit risks. Operating
risk arises out of the daily conduct of the Company's business and relates to
the possibility that one or more of the Company's personnel could involve the
Company in imprudent or unlawful business activities. Principal risk relates to
the fact that KBW owns a variety of investments which are subject to changes in
value that could result in material losses. The Company's primary credit risk is
settlement or counterparty risk, which relates to whether a counterparty on a
derivative or other transaction will fulfill its contractual obligations, which
may include delivery of securities or payment of funds. With the exception of
margin loans to employees, the Company has not extended credit to customers,
although it has a limited number of customer accounts authorized for such
activity.
Operating risk is monitored by the managers and senior professionals of
KBW's various business groups. These managers and professionals review the
overall business activities of the Company and make recommendations for
addressing issues which, in their judgment, could result in a material loss to
the Company. In addition, KBW has in place policies and procedures designed to
limit operating risk, including with respect to avoiding potential liability for
violation of laws or regulations. Various department heads and other supervisory
personnel are responsible for the implementation and monitoring of such policies
and the maintenance of transaction records in accordance with applicable
regulatory provisions. Employees are required to review regularly such policies.
Employee trading activities are closely monitored and subject to certain rules,
such as minimum holding periods and prior clearance procedures to avoid trading
in securities on the Company's watch or restricted lists. In light of the
Company's expanded business activities and the continued changes and expansion
in the scope of regulatory requirements, KBW has undertaken an extensive review
of its compliance policies and procedures. Currently, KBW's senior compliance
officer also acts as its Chief Financial Officer. As part of its ongoing
compliance review, KBW expects to separate these roles and to hire a senior
full-time compliance officer. Although the Company believes its policies and
procedures are adequate, there can be no assurance that situations will not
arise from inadvertent regulatory violations or other operational errors that
may have a material impact on the
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<PAGE>
Company. See "Risk Factors--Regulation; Net Capital Requirements; Compliance"
and "Risk Factors--Management of Growth; No Prior Operating History as Public
Company."
Principal risk is managed primarily through the daily monitoring of
securities owned by the Company and by limiting the Company's exposure to any
one investment or type of investment. The two most common categories of
securities owned by the Company are those related to the daily trading
activities of KBW's brokerage and underwriting operations and those related to
the Company's principal trading and investing activities. The Company generally
seeks to limit principal risk with respect to its fixed-income business to a
greater extent than its equity trading activities, both through hedging
transactions and through more limited underwriting activities. Security
inventory positions are balanced daily, with pricing information provided by the
Company's clearing brokers and by the Company's operations employees independent
of the sales and trading area. The Company's President and Chief Operating
Officer is aware of all material principal positions taken by the Company.
Because of the relatively small number of sales and trading personnel, the
active involvement of senior management in daily principal trading and investing
decisions, and the specialized knowledge and experience of these professionals,
the Company does not employ specific principal risk limit policies typically
used in larger investment banks. The Company is conducting a review of its risk
management and compliance policies and procedures and expects to implement
changes in, and additions to, procedures and controls based on the results of
this review.
CUSTOMERS AND CLIENTS
The Company's investment banking clients include U.S. bank holding
companies, commercial banks, thrift institutions and non-bank financial services
companies. The Company plans to expand its investment banking client base to
include insurance companies and securities firms. KBW's sales and trading
customers include banks, insurance companies, registered investment advisers,
mutual funds, pension funds, unregistered investment companies and similar
entities that invest in the securities of financial services companies. KBW
occasionally executes transactions in securities for high net worth individuals
who are otherwise known to the Company. As an accommodation to a corporate
client, the Company may also assist in executing transactions in restricted or
"control" stock in accordance with Rules 144 and 145 under the Securities Act.
In addition, in connection with its mutual thrift conversion business, KBW opens
accounts for individuals for the limited purpose of handling order flow in
connection with the conversion of these institutions. The Company generally
limits its activity in these accounts to effecting transactions in related
shares. No investment banking client or sales and trading customer accounts for
more than 10% of the Company's revenues.
CLEARING ACTIVITIES
Pershing, a division of DLJ, clears securities transactions for KBW,
maintains KBW customers' accounts on a fully-disclosed basis and prepares
various records and reports relating to the Company's sales and trading activity
on behalf of clients and for KBW's own accounts.
Pershing furnishes KBW with certain information needed to operate KBW's
business, including commission runs, transaction summaries, data feeds for
various reports including compliance, risk management and execution reports,
trade confirmations and monthly account statements. Pershing also performs
cashiering functions and processes margin accounts. The agreement between the
Company and Pershing, which has been in effect since February 1993, may be
canceled on 90 days' notice by either party. See "Risk Factors--Dependence on
Systems and Third Parties; Possible Year 2000 Costs."
The Company currently has an uncommitted financing arrangement with
Pershing pursuant to which the Company finances its customer accounts,
broker-dealer balances and trading positions through Pershing. The Company has
agreed to indemnify Pershing for losses it may sustain in connection with
accounts of the Company's customers.
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<PAGE>
NationsBanc Montgomery Securities LLC also clears a small portion of
KBW's trades (those involving collateralized mortgage obligations, government
securities and similar securities in connection with the activities of the
Financial Strategies Team).
COMPETITION
The Company is engaged in the highly competitive securities brokerage
and investment banking businesses. It competes directly with large Wall Street
securities firms, regional securities firms and securities subsidiaries of major
commercial bank holding companies as well as companies, such as Instinet(R),
that provide ECNs that permit subscribers to bypass brokers and trade directly
among themselves. The Company's industry focus also subjects it to direct
competition from a number of specialty securities firms and smaller investment
banking boutiques that specialize in providing services to the financial
services industry. The Company expects competition from domestic and
international banks to increase as a result of recent and anticipated
legislative and regulatory initiatives in the United States to reduce or
eliminate certain restrictions on the activities of commercial banks.
In addition to competing for both investment banking clients and sales
and trading customers, companies in the securities industry compete to attract
and retain experienced and productive professionals. The Company has generally
been successful in retaining its key executives and other professionals, but
there can be no assurance that it will be able to continue to do so. See "Risk
Factors--Dependence on Key Personnel."
The principal competitive factors influencing the Company's business
include its professional staff, industry expertise, client relationships,
business reputation and its mix of market and product capabilities. The Company
believes that its strategy of offering focused research, investment advice and
investment banking services in particular areas of expertise relating to the
banking and financial services industries differentiates it from its
competitors. See "Risk Factors--Industry Competition."
EMPLOYEES
As of June 30, 1998, the Company had a total of 143 employees, of whom
18 were engaged in research, 49 in sales and trading, 26 in corporate finance,
17 in the Webb Division, three in asset management services, and 30 in
accounting, administration and operations. None of the Company's employees is a
member of a union or subject to a collective bargaining agreement. The Company
believes that its relations with its employees are excellent. More than 70% of
all employees are stockholders of the Company.
PROPERTIES
The Company's principal executive offices are located at Two World
Trade Center, New York City, New York and occupy approximately 45,000 square
feet under a lease that terminates on July 30, 1999. The Company recently signed
a fifteen-year lease which provides for moving its principal executive offices
in the same building to two contiguous floors encompassing approximately 98,000
square feet. The lease has a five-year renewal option. The Company also occupies
the following office space: approximately 3,000 square feet in Hartford,
Connecticut under a lease that expires on December 31, 2001; approximately 4,815
square feet in Columbus, Ohio for its Webb Division under a lease that expires
on December 31, 2001; and approximately 600 square feet in Boston, Massachusetts
for Oliver Securities under a lease that expires on December 31, 1999. KBW is
currently seeking to lease office space for a new Chicago office. The Company
believes that its present or anticipated facilities, together with its current
options to extend lease terms and occupy additional space, are adequate for its
current and projected needs.
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<PAGE>
LEGAL PROCEEDINGS
Many aspects of the Company's business involve substantial risks of
legal liability. An underwriter, placement agent or financial adviser is exposed
to substantial liability under federal and state laws and court decisions. For
example, an underwriter or placement agent may be held liable for material
misstatements or omissions of fact in a prospectus or other offering document. A
financial adviser in an M&A transaction may incur liability for its advice.
In recent years, there has been an increasing incidence of litigation
involving the securities industry, including class actions that seek substantial
damages. The Company's clients include many small and mid-sized banks and
non-bank financial services companies, whose securities often involve a higher
degree of risk than the securities of more established companies. In comparison
with more established companies, such small and mid-size companies are more
likely to be the subject of securities class actions, to carry directors and
officers liability insurance policies with lower limits than more established
companies, and to become insolvent. Each of these factors increases the
likelihood that an underwriter, placement agent or financial adviser for a small
or mid-sized company will be required to contribute to any judgment or
settlement of a securities lawsuit.
As of the date of this Prospectus, the Company has not experienced any
material losses relating to litigation or other proceedings, although there can
be no assurance that the Company will not become involved in securities-related
litigation or other proceedings at some time in the future. In addition to the
financial costs and risks of such litigation, the defense of litigation may
divert the efforts and attention of the Company's management and staff, which
could materially adversely impact its business. In the normal course of
business, the Company has on occasion been a defendant in a civil action or
arbitration arising out of its activities as a broker-dealer in securities, as
an employer and as a result of other related business activities. KBW has not
been required to make any material payments, or to in any way restrict its
business activities, in connection with such matters.
REGULATION
KBW's business and the securities industry in general are subject to
extensive regulation at both the federal and state level, as well as by self
regulatory organizations ("SROs"). A number of federal regulatory agencies are
charged with safeguarding the integrity of the securities and other financial
markets and with protecting the interests of customers participating in those
markets. The SEC is the federal agency that is primarily responsible for the
regulation of broker-dealers and investment advisers, and the Federal Reserve
Board promulgates regulations applicable to securities credit transactions
involving broker-dealers and certain other U.S. institutions. Broker-dealers and
investment advisers are subject to registration and regulation by state
securities regulators in those states in which they conduct business. Regulation
by SROs is generally subject to oversight by the SEC. The NYSE has been
designated the primary regulator of Keefe, Bruyette & Woods, Inc. SROs also
conduct periodic examinations of the Company's operations.
Keefe, Bruyette & Woods, Inc. is registered as a broker-dealer with the
SEC and in all 50 states, Puerto Rico and the District of Columbia, and is a
member of, and subject to regulation by, a number of SROs, including the NASD,
the NYSE, other securities exchanges and the Municipal Securities Rulemaking
Board.
As a result of federal and state registration and SRO memberships,
Keefe, Bruyette & Woods, Inc. is subject to overlapping schemes of regulation
which cover all aspects of its securities business. Such regulations cover
capital requirements, the use and safekeeping of customers' funds and
securities, record keeping and reporting requirements, supervisory and
organizational procedures intended to assure compliance with securities laws and
to prevent improper trading on material non-public information, employee-related
matters, including qualification and licensing of supervisory and sales
personnel, limitations on extensions of credit in securities transactions,
clearance and settlement procedures, requirements for the registration,
underwriting, sale and distribution of securities and rules of SROs designed to
promote high standards of commercial honor and just and equitable principles of
trade. A particular focus of the applicable regulations concerns the
relationship between broker-dealers and their customers. As a result, all
aspects of the broker-dealer customer relationship are subject to regulation,
including in
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some instances "suitability" determinations as to certain customer transactions,
limitations on the amounts that may be charged to customers, timing of
proprietary trades in relation to customers' trades and disclosures to
customers.
Much of the Company's underwriting and market-making business involves
securities traded on Nasdaq. Nasdaq's operations, including allegations of
collusion among Nasdaq market makers, have been the subject of extensive
scrutiny in the media and by government regulators, including by the Antitrust
Division of the United States Department of Justice. Nasdaq has made a number of
changes in its operations, and the NASD continually reviews its required
practices and procedures for broker-dealers, including the proposed introduction
of additional regulatory requirements for registered broker-dealers. The Company
has not been named in any actions relating to these investigations. A settlement
is pending based on certain antitrust allegations relating to the activities of
certain Nasdaq market makers other than the Company, but the Company is unable
to predict the final resolution of such settlement. Certain requirements
proposed by the NASD, such as the proposed Order Audit Trail System (OATS)
rules, if effected, could adversely affect the Company's operating results.
Keefe, Bruyette & Woods, Inc. and KBW Asset Management are registered
as investment advisers with the SEC. As investment advisers registered with the
SEC, each is subject to the requirements of the Investment Advisers Act and the
SEC's regulations thereunder, as well as state securities laws and regulations.
Such requirements relate to, among other things, limitations on the ability of
investment advisers to charge performance-based fees to clients, record keeping
and reporting requirements, disclosure requirements, limitations on principal
transactions between an adviser or its affiliates and advisory clients, and
general anti-fraud prohibitions. The state securities law requirements
applicable to registered investment advisers are in certain cases more
comprehensive than those imposed under the federal securities laws.
Violations of federal or state laws or regulations or SRO rules could
subject the Company, its subsidiaries and/or its employees to disciplinary,
administrative or judicial proceedings that could result in civil or criminal
liability, including revocation of licenses, censures, fines (including treble
damages in the case of insider trading violations), the issuance of
cease-and-desist orders, the de-registration or suspension of the non-compliant
broker-dealer or investment adviser, the temporary suspension or permanent
disqualification of the broker-dealer's officers or employees or other adverse
consequences. Any such proceeding could have a material adverse effect on the
Company's business. The Company has not, as of the date of this Prospectus,
incurred any significant liability, fine or sanction from a federal or state
securities regulatory organization or an SRO and, to its knowledge, is not the
subject of any such material investigation, inquiry or proceeding.
Additional legislation and regulations, including those relating to the
activities of broker-dealers and investment advisers, changes in rules
promulgated by the SEC or other governmental regulatory authorities and SROs or
changes in the interpretation or enforcement of existing laws and rules may
adversely affect the manner of operation and profitability of the Company. KBW's
businesses may be materially affected not only by regulations applicable to it
as a financial market intermediary, but also by regulations of general
application. For example, the volume of KBW's underwriting, M&A, sales, trading
and principal investing activities could be affected by, among other things,
existing and proposed tax legislation, antitrust policy and other governmental
regulations and policies (including the interest rate policies of the Federal
Reserve Board) and changes in interpretation or enforcement of existing laws and
rules that affect the business and financial communities.
NET CAPITAL REQUIREMENTS
As a broker-dealer registered with the SEC and a member firm of the
NYSE, Keefe, Bruyette & Woods, Inc. is subject to the net capital requirements
of the SEC and the NYSE. These net capital rules specify minimum levels of
capital, computed in accordance with regulatory requirements, that each firm is
required to maintain and also limit the amount of leverage that each firm is
able to obtain in its respective business.
The Company believes that Keefe, Bruyette & Woods, Inc. has at all
times been in compliance in all material respects with the applicable minimum
net capital rules. At June 30, 1998, Keefe, Bruyette & Woods, Inc.
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was required to maintain minimum net capital, in accordance with SEC rules, of
approximately $667,500 and had total net capital of approximately $124.2
million, or approximately $123.5 million in excess of the amount required.
Keefe, Bruyette & Woods, Inc. computes its net capital requirements
under the alternative method permitted by the SEC's rules. Under this method,
Keefe, Bruyette & Woods, Inc. is required by the SEC to maintain regulatory net
capital, computed in accordance with the SEC's regulations as supplemented by
NYSE Rule 325, equal to the highest minimum net capital requirement established
under the alternative standard or as required pursuant to any of KBW's
activities.
"Net capital" is defined as net worth (assets minus liabilities, as
determined under generally accepted accounting principles), plus qualifying
subordinated borrowings, less the value of all of a broker-dealer's assets that
are not readily convertible into cash (such as goodwill, furniture, prepaid
expenses, exchange seats and unsecured receivables), and further reduced by
certain percentages (commonly called "haircuts") of the market value of a
broker-dealer's positions in securities and other financial instruments.
The failure of a broker-dealer to maintain its minimum required net
capital would require it to cease executing customer transactions until its
compliance is restored, and could cause it to lose its membership on an exchange
or in an SRO, its registration with the SEC, or require its liquidation.
Further, the decline in a broker-dealer's net capital below certain "early
warning levels," even though above minimum capital requirements, could cause
material adverse consequences to the broker-dealer. For example, the SEC's
regulations prohibit payment of dividends, redemption of stock and the repayment
of subordinated indebtedness if a broker-dealer's net capital thereafter would
be less than 5% of aggregate debit items. Under NYSE Rule 326, a member firm is
required to reduce its business if its net capital (after giving effect to
scheduled maturities of subordinated indebtedness or other planned withdrawals
of regulatory capital during the following six months) is less than $312,500 or
4% of aggregate debit items for 15 consecutive days. NYSE Rule 326 also
prohibits the expansion of a member's business if its net capital (after giving
effect to scheduled maturities of subordinated indebtedness or other planned
withdrawals of regulatory capital during the following six months) is less than
$375,000 or 5% of aggregate debit items for 15 consecutive days.
The SEC's net capital rules also (i) require that broker-dealers notify
it and the NYSE in writing two business days prior to making withdrawals or
other distributions of equity capital or making unsecured loans to certain
related persons, if those withdrawals, distributions or loans would exceed, in
any 30-day period, 30% of the broker-dealer's excess net capital and that they
provide such notice within two business days after any such withdrawal,
distribution or loan that would exceed, in any 30-day period, 20% of the
broker-dealer's excess net capital; (ii) prohibit a broker-dealer from
withdrawing or otherwise distributing equity capital or making unsecured related
party loans if, after such withdrawal, distribution or loan, the broker-dealer
has net capital of less than 120% of its required minimum net capital or its net
capital would be less than 5% of aggregate debit items (as computed under a
related rule) and in certain other circumstances; and (iii) provide that the SEC
may, by order, prohibit withdrawals of capital or unsecured related party loans
for a period of up to 20 business days if the withdrawals or loans would exceed,
in any 30-day period, 30% of the broker-dealer's excess net capital and the SEC
believes such withdrawals or loans would be detrimental to the financial
integrity of the firm or would unduly jeopardize the broker-dealer's ability to
pay its customer claims or other liabilities.
Compliance with net capital rules could limit those operations of the
Company that require the intensive use of capital, such as underwriting and
trading activities, and also could restrict the Company's ability to withdraw
capital from its broker-dealer subsidiary, which, in turn, could limit its
ability to pay dividends, repay debt and redeem or repurchase shares of its
outstanding capital stock.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their
respective ages and positions are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
<S> <C> <C>
James J. McDermott, Jr........ 47 Chairman of the Board of Directors, Chief Executive Officer and
Class I Director(1)
Joseph J. Berry............... 52 President, Chief Operating Officer and Class III Director(1)
Charles H. Lott............... 68 Vice Chairman of the Board of Directors and Class II Director(1)
Stanley T. Wells.............. 56 Vice Chairman of the Board of Directors and Class I Director(1)
John G. Duffy................. 49 Executive Vice President, Co-Head of Corporate Finance and Class
II Director(1)
Andrew M. Senchak............. 51 Executive Vice President, Co-Head of Corporate Finance and Class
III Director(1)
Guy G. Woelk.................. 54 Executive Vice President, Chief Financial Officer and Treasurer
Mitchell B. Kleinman.......... 44 General Counsel
</TABLE>
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(1) The terms of Class I Directors will expire at the annual meeting held
in 1999. The terms of Class II Directors will expire at the annual
meeting held in 2000. The terms of Class III Directors will expire at
the annual meeting held in 2001.
Prior to consummation of the Offering, the Company intends to appoint
as directors two additional persons who are not officers or employees of the
Company. The Company will be required to have at least two independent directors
(as defined by the NYSE) to maintain the listing of the Common Stock on the
NYSE. In addition, following the Offering, the KBW Board may from time to time
determine that it is in the best interests of the Company to increase the number
of directors in order to appoint one or more additional independent directors
who could provide additional outside experience to the KBW Board in its
management of the Company. Messrs. Lott and Wells have announced that they will
retire from the KBW Board effective as of the first annual meeting in 1999. At
that time, the KBW Board may elect to fill one or more such vacancies or may
elect to correspondingly reduce the size of the KBW Board.
James J. McDermott, Jr. Mr. McDermott has served as Chairman and Chief
Executive Officer since KBW's inception and as Chairman and Chief Executive
Officer of Keefe, Bruyette & Woods, Inc. since January 1, 1998. He joined the
Company in 1977 as a research analyst and has also served as Director of
Research, Executive Vice President and President of Keefe, Bruyette & Woods,
Inc. Mr. McDermott was elected to the Board of Directors of Keefe, Bruyette &
Woods, Inc. in 1988.
Joseph J. Berry. Mr. Berry has served as President and Chief Operating
Officer since KBW's inception and as President and Chief Operating Officer of
Keefe, Bruyette & Woods, Inc. since January 1, 1998. He joined the Company in
1972 as an institutional salesperson and has also served as Vice President,
Senior Vice President, Executive Vice President and Vice Chairman of Keefe,
Bruyette & Woods, Inc. Mr. Berry was elected to the Board of Directors of Keefe,
Bruyette & Woods, Inc. in 1987.
Charles H. Lott. Mr. Lott has served as Vice Chairman since KBW's
inception and as Vice Chairman of Keefe, Bruyette & Woods, Inc. since January 1,
1998. He joined the Company at its inception in 1962 as Vice President and
Director of Research and has also served as its President from 1982 through
1989, its Chief Executive
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Officer from 1989 through 1997 and its Chairman from 1990 through 1997. Mr. Lott
was elected to the Board of Directors of Keefe, Bruyette & Woods, Inc. in 1967.
Stanley T. Wells. Mr. Wells has served as Vice Chairman since KBW's
inception and as Vice Chairman of Keefe, Bruyette & Woods, Inc. since January 1,
1998. He joined the Company in 1970 and has also served as Vice President,
Senior Vice President, and Executive Vice President of Keefe, Bruyette & Woods,
Inc. Mr. Wells was elected to the Board of Directors of Keefe, Bruyette & Woods,
Inc. in 1990. Mr. Wells has served nearly all of his time at KBW based in the
Hartford office. His primary areas of responsibility have included institutional
sales, research and managing an investment account for the Company focused on
financial services companies in the Northeastern United States.
John G. Duffy. Mr. Duffy has served as Executive Vice President since
KBW's inception and as Executive Vice President of Keefe, Bruyette & Woods, Inc.
since 1990 and Co-Head of Corporate Finance since 1997. He joined the Company in
1978 and has also served as a Senior Vice President, Co-Head of M&A and Director
of Corporate Finance of Keefe, Bruyette & Woods, Inc. Mr. Duffy was elected to
the Board of Directors of Keefe, Bruyette & Woods, Inc. in 1990.
Andrew M. Senchak. Mr. Senchak has served as Executive Vice President
since KBW's inception and as Executive Vice President of Keefe, Bruyette &
Woods, Inc. since 1995 and Co-Head of Corporate Finance since 1997. He joined
the Company in 1985 and has also served as Assistant Vice President, Vice
President, and Senior Vice President of Keefe, Bruyette & Woods, Inc. Mr.
Senchak was elected to the Board of Directors of Keefe, Bruyette & Woods, Inc.
in 1997.
Guy G. Woelk. Mr. Woelk has served as Executive Vice President, Chief
Financial Officer and Treasurer since KBW's inception and as Executive Vice
President, Chief Financial Officer and Treasurer of Keefe, Bruyette & Woods,
Inc. since 1995. He joined the Company in 1983 and has also served as Vice
President and Senior Vice President of Keefe, Bruyette & Woods, Inc.
Mitchell B. Kleinman. Mr. Kleinman has served as General Counsel since
KBW's inception and as General Counsel of Keefe, Bruyette & Woods, Inc. since
March 1998. Prior to that time, Mr. Kleinman was a partner in the law firm of
Brown & Wood LLP where he specialized in corporate and securities law and
frequently represented the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
A Compensation Committee of the KBW Board will be formed on or prior to
completion of the Offering. It is anticipated that new independent directors to
be appointed to the KBW Board will be members of the Compensation Committee. The
Compensation Committee will determine compensation for the executive officers of
the Company.
ADDITIONAL COMMITTEES OF THE BOARD OF DIRECTORS
Upon completion of the Offering, the KBW Board will also establish an
Audit Committee and an Executive Committee.
Audit Committee
The Audit Committee will meet with management to consider the adequacy
of the internal controls and the objectivity of financial reporting. The Audit
Committee also will meet with the independent auditors of the Company and with
appropriate financial personnel of the Company regarding these matters. The
Audit Committee will recommend to the KBW Board the appointment of independent
auditors, subject to ratification by the stockholders of the Company at the
annual meeting. The independent auditors will periodically meet alone with the
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Audit Committee and have unrestricted access to the Audit Committee. The Audit
Committee is anticipated to consist solely of the independent directors of the
Company.
Executive Committee
The Executive Committee will be comprised of Messrs. McDermott, Berry,
Duffy and Senchak. The Executive Committee will exercise the authority of the
KBW Board between meetings of the full KBW Board (other than such authority as
is reserved to the Audit Committee, the Compensation Committee or the full KBW
Board).
THE OPERATING COMMITTEE
The KBW Board recently established an Operating Committee comprised of
the department heads of the following departments: Research, Equity Sales,
Equity Trading, Fixed Income Sales and Trading, Investment Banking and
Compliance/Administration as well as the President of KBW Asset Management. From
time to time in the future, the KBW Board may designate additional departments
or subsidiaries of the Company to be represented on the Operating Committee. The
purposes of the Operating Committee include assisting the KBW Board and the
Chief Executive Officer in strategic planning and identifying issues of
importance to multiple departments or areas of the Company.
EXECUTIVE COMPENSATION
The information set forth below describes the components of the total
compensation of the Chief Executive Officer and the four other most highly
compensated executive officers of the Company, based on 1997 salary and annual
bonuses (the "Named Executive Officers"). The principal components of such
individuals' current cash compensation are the annual base salary and annual
bonus included in the Summary Compensation Table. The following table sets forth
the compensation earned by the Named Executive Officers for the year ended
December 31, 1997.
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<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
1997 ALL OTHER
ANNUAL COMPENSATION COMPENSATION
----------------------------------------- ------------
OTHER ANNUAL
NAME AND SALARY BONUS COMPENSATION
PRINCIPAL POSITION(1) ($) ($) ($) ($)
<S> <C> <C> <C> <C>
James J. McDermott, Jr.................. 340,000 4,152,871 (2) 28,157(3)
Chairman and
Chief Executive Officer
Joseph J. Berry......................... 320,000 4,151,613 (2) 29,399(4)
President, Chief Operating Officer
and Director
Charles H. Lott......................... 360,000 4,040,330 (2) 40,927(5)
Vice Chairman
Stanley T. Wells........................ 260,000 2,526,493 (2) 30,714(6)
Vice Chairman
John G. Duffy........................... 300,000 1,432,739 (2) 27,464(7)
Executive Vice President,
Co- Head of Corporate Finance
and Director
</TABLE>
- -------------
(1) During 1997, Mr. McDermott served as President and Director; Mr. Berry
served as Vice Chairman; and Mr. Lott served as Chairman and Chief
Executive Officer.
(2) Amount does not exceed $50,000.
(3) Amount represents: (i) a contribution of $24,000 by the Company on
behalf of Mr. McDermott into the Company's profit sharing retirement
plan; and (ii) a net annual premium of $4,157 paid by the Company with
respect to split-dollar life insurance arrangements relating to Mr.
McDermott which does not include a reduction for amounts which will be
refunded to the Company in the future.
(4) Amount represents: (i) a contribution of $24,000 by the Company on
behalf of Mr. Berry into the Company's profit sharing retirement plan;
and (ii) a net annual premium of $5,399 paid by the Company with
respect to split-dollar life insurance arrangements relating to Mr.
Berry which does not include a reduction for amounts which will be
refunded to the Company in the future.
(5) Amount represents: (i) a contribution of $24,000 by the Company on
behalf of Mr. Lott into the Company's profit sharing retirement plan;
and (ii) a net annual premium of $16,927 paid by the Company with
respect to split-dollar life insurance arrangements relating to Mr.
Lott which does not include a reduction for amounts which will be
refunded to the Company in the future.
(6) Amount represents: (i) a contribution of $24,000 by the Company on
behalf of Mr. Wells into the Company's profit sharing retirement plan;
and (ii) a net annual premium of $6,714 paid by the Company with
respect to split-dollar life insurance arrangements relating to Mr.
Wells which does not include a reduction for amounts which will be
refunded to the Company in the future.
(7) Amount represents: (i) a contribution of $24,000 by the Company on
behalf of Mr. Duffy into the Company's profit sharing retirement plan;
and (ii) a net annual premium of $3,464 paid by the Company with
respect to split-dollar life insurance arrangements relating to Mr.
Duffy which does not include a reduction for amounts which will be
refunded to the Company in the future.
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COMPENSATION OF DIRECTORS
Each non-employee director will receive a single annual retainer of
$20,000 for service on the KBW Board. Each non-employee director will also
receive a fee of $1,000 for each in-person meeting of the KBW Board that they
attend and a fee of $500 for each telephonic meeting of the KBW Board and each
meeting of any committee of the KBW Board that they attend. The chair of each
committee will receive an additional annual retainer of $5,000. Directors who
are employees of the Company or any subsidiary of the Company will not receive
additional compensation for service as directors. With respect to the annual
retainer fee and meeting fees paid to non-employee directors, 25% of all such
director fees will be paid on a mandatory basis in shares of Common Stock.
THE NON-EMPLOYEE DIRECTOR STOCK AND OPTION COMPENSATION PLAN
KBW will adopt the KBW Non-Employee Director Stock and Option
Compensation Plan (the "Director Stock and Option Plan") effective at the
consummation of the Offering. The purposes of the Director Stock and Option Plan
are to: (i) promote a greater identity of interests between KBW's non-employee
directors and its stockholders; and (ii) attract and retain individuals to serve
as directors.
General
The Director Stock and Option Plan will be administered by the KBW
Board or a committee of the KBW Board designated for such purpose.
Pursuant to the terms of the Director Stock and Option Plan,
non-employee directors of KBW will be eligible to participate in the Director
Stock and Option Plan following the Offering (each, an "Eligible Director"). A
total of shares of Common Stock will be reserved for issuance and available
for grants under the Director Stock and Option Plan.
In the event of any change in corporate capitalization (such as a stock
split) or a corporate transaction (such as a merger, consolidation, separation,
including a spin-off, or other distribution of stock or property of KBW, any
reorganization or any partial or complete liquidation of KBW), the KBW Board or
the designated committee thereof may make such substitutions or adjustments in
the aggregate number and class of shares reserved for issuance under the
Director Stock and Option Plan, in the number, kind and option price of shares
subject to outstanding options, in the number and kind of shares subject to
other outstanding awards granted under the Director Stock and Option Plan,
and/or such other equitable substitutions or adjustments as it may determine to
be appropriate in its sole discretion; provided, however, that the number of
shares subject to any award must always be a whole number.
Common Stock
With respect to the annual retainer and fees paid to directors (the
"Director Fees"), each Eligible Director will receive 25% of such director's
Director Fees in shares of Common Stock on a mandatory basis and may make an
annual irrevocable election to receive shares of Common Stock in lieu of all or
a portion (in 25% increments) of the remaining Director Fees to which such
director is entitled; provided that the election of cash and Common Stock under
the Director Stock and Option Plan when taken together with the mandatory
receipt of Common Stock in lieu of Director Fees, may not exceed 100% of such
Director Fees. The number of shares of Common Stock granted to an Eligible
Director will be equal to the appropriate percentage of the Director Fees
payable to such director in each fiscal quarter, divided by the "fair market
value" (as defined in the Director Stock and Option Plan) of a share of Common
Stock on the last business day of such fiscal quarter rounded to the nearest
whole share of Common Stock. Fractional shares of Common Stock will not be
granted and any remainder in the Director Fees which otherwise would have
purchased fractional shares will be paid in cash. Each Eligible Director may
defer the receipt of his or her elected or mandatory shares of Common Stock by
electing to receive share units, payable upon such Eligible Director's
termination from the KBW Board.
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Options
On the day the Offering becomes effective, each Eligible Director will
be granted options ("Director Options") for shares of Common Stock. After each
annual meeting of stockholders during such director's term, each Eligible
Director will be granted Director Options for shares of Common Stock. Each new
Eligible Director will be granted Director Options for share of Common Stock
upon being elected or appointed to the KBW Board. The exercise price for the
Director Options will be 100% of the fair market value of Common Stock on the
date of the grant of such Director Option; provided that Director Options
granted prior to or upon consummation of the Offering will be granted at the
initial public offering price. Each Director Option will become vested and
exercisable on the first anniversary of the date of grant of such Director
Option. Each vested Director Option shall terminate one year after the
optionee's service as a director ceases for any reason, but no later than the
tenth anniversary of the date of grant. Any unvested Director Options will
terminate and be canceled as of the date the optionee's service as a director
ceases for any reason. All Director Options become fully vested and exercisable
upon a Change of Control (as defined in the 1998 Plan described below).
Transferability
Grants and awards under the Director Stock and Option Plan are
nontransferable other than by will or the laws of descent and distribution, or
at the discretion of the KBW Board or the designated committee thereof pursuant
to a written beneficiary designation or pursuant to qualified domestic relations
order and, during the Eligible Director's lifetime, may be exercised only by the
Eligible Director or his or her guardian, legal representative or beneficiary.
Amendments
The KBW Board may at any time terminate, amend or modify the Director
Stock and Option Plan; provided that no termination, amendment, or modification
will be made which will impair the rights of Eligible Directors with outstanding
Director Options or awards and, to the extent required by law, agreement or
stock exchange rule, no such amendment will be made without the approval of
KBW's stockholders.
EMPLOYEE INCENTIVE COMPENSATION PLANS
The Company's philosophy is to compensate employees based on their
individual, departmental and overall Company performance. Two main principles
guiding this philosophy are to pay competitive compensation and to provide
long-term employee stock ownership. KBW considers equity ownership by employees
to be critical to its long-term success. Following completion of the Offering,
when calculating total compensation, KBW will consider both cash compensation
and awards of restricted stock or options that vest over time.
It is anticipated that, following the consummation of the Offering, the
Compensation Committee of the KBW Board will review all plans, policies and
arrangements affecting employees of KBW and will consider what changes are
appropriate, if any, for recommendation to the full KBW Board.
THE 1998 STOCK AND ANNUAL INCENTIVE PLAN
KBW has adopted the KBW, Inc. 1998 Stock and Annual Incentive Plan (the
"1998 Plan") which will become effective at the consummation of the Offering.
The 1998 Plan is designed to promote the success and enhance the value of KBW by
linking the interests of certain of the Company's employees ("Participants") to
those of KBW's stockholders and by providing Participants with an incentive for
outstanding performance. The 1998 Plan is further intended to provide
flexibility to KBW in its ability to motivate, attract and retain Participants
upon whose judgment, interest and special efforts KBW's business is largely
dependent. As determined by the Compensation Committee, or any other designated
committee of the KBW Board (the "Committee"), employees and consultants of KBW,
including employees who are members of the KBW Board, are eligible to
participate in
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the 1998 Plan. Non-employee directors are not eligible to participate in the
1998 Plan. The 1998 Plan is intended to remain in effect until 2008. The
description below summarizes the material terms of the 1998 Plan.
General
The 1998 Plan will be administered by the Committee or the KBW Board
and provides for the grant of stock options (both non-qualified and incentive
stock options) ("Options" or "Awards").
The 1998 Plan provides that the total number of shares of Common Stock
available for grant under the 1998 Plan may not exceed shares.
The 1998 Plan is not subject to the provisions of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and is not
qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended
(the "Code").
The term of Options granted under the 1998 Plan may not exceed 10
years. Unless otherwise determined by the Committee or the KBW Board, Options
will generally vest ratably on each of the first three anniversaries after the
grant date. Unless otherwise determined by the Committee or the KBW Board,
Options will have an exercise price equal to the fair market value of the Common
Stock on the date of grant.
A Participant exercising an Option may pay the exercise price in full
in cash or, if approved by the Committee or the KBW Board, with previously
acquired shares of Common Stock or in a combination thereof. The Committee or
the KBW Board, in its discretion, may allow cashless exercise of Options.
Options are nontransferable other than by will or the laws of descent
and distribution or, at the discretion of the KBW Board or the Committee,
pursuant to a written beneficiary designation (and, in the case of a
nonqualified Option, pursuant to a domestic relations order or in the discretion
of the KBW Board or the Committee, pursuant to a gift to members of the holder's
immediate family, whether directly or indirectly, or by means of a trust or
partnership or limited liability company) and, during the Participant's
lifetime, may be exercised only by the Participant, any such transferee or a
guardian, legal representative or beneficiary thereof.
During the 60-day period following a Change of Control, unless the
Committee determines otherwise, any Participant will have the right to surrender
all or part of any Option held by such Participant in lieu of payment of the
exercise price, and to receive cash (or stock, if necessary to preserve
pooling-of-interests accounting for the Change of Control) in an amount equal to
the excess of (i) the higher of the price received for Common Stock in
connection with the Change of Control and the highest reported sales price of a
share of Common Stock on a national exchange or on Nasdaq during the 60-day
period prior to and including the date of the Change of Control (the "Change of
Control Price"), over (ii) the exercise price multiplied by the number of shares
of Common Stock granted under the Option as to which the right is being
exercised; provided that, if the Option is an incentive stock option, the Change
of Control Price will equal the fair market value of a share of the Common Stock
on the date, if any, that such Option is exercised.
Other Awards
A stock appreciation right ("SAR") permits the Participant to receive
in cash an amount equal to the excess of the fair market value of a share of
Common Stock on the date of exercise over the SAR exercise price, times the
number of shares with respect to which the SAR is exercised. Restricted stock
may be granted subject to performance or service-based goals upon which
restrictions will lapse. Performance units may be granted subject to performance
goals and restrictions, and will be payable in cash or shares of Common Stock
(or a combination) as determined by the KBW Board or the Committee. The KBW
Board or the Committee may grant dividend and interest equivalents with respect
to Awards.
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Annual Incentive Awards
An annual cash bonus payment may be made to Named Executive Officers,
Managing Directors, Executive Vice Presidents, Senior Vice Presidents, Vice
Presidents and certain other employees as specified in the 1998 Plan. The annual
cash bonus component of the 1998 Plan is intended to reward these employees for
the overall performance of the Company, the performance of their respective
business areas and individual performance. During each fiscal year commencing
with 1998, the Committee will establish an aggregate bonus pool to be awarded to
participants under the annual cash bonus component of the 1998 Plan, provided
that the pool may be reduced to the extent that aggregate compensation and
benefits expense for the year (including annual cash bonus payments under the
1998 Plan) would otherwise exceed a specified percentage of revenues or a
measure of corporate profitability, as determined by the Committee with respect
to each fiscal year. The KBW Board or the Committee, with the input of various
department heads and other members of the Operating Committee, will determine
the allocation of such bonus pool. Upon a Change of Control, a pro rata bonus
award will be paid to each eligible employee, unless the KBW Board determines to
continue the annual bonus cycle for the full year. The KBW Board or the
Committee may make advance payments to participants during a fiscal year.
Change of Control
In the event of a Change of Control, any Option that is not then
exercisable and vested will become fully exercisable and vested, restricted
stock will vest and performance units will be deemed earned. The 1998 Plan
defines "Change of Control" as generally: (i) the acquisition of 50% or more of
the Common Stock or voting securities of KBW by a person or group; (ii) a change
in a majority of the KBW Board, unless approved by the incumbent directors;
(iii) the approval by KBW's stockholders of certain mergers involving KBW; or
(iv) approval by KBW's stockholders of a liquidation, dissolution or sale of
substantially all of the assets of KBW.
Amendments
The KBW Board may at any time amend or terminate the 1998 Plan and may
amend the terms of any outstanding Option or other Award; provided that no such
amendment to the 1998 Plan shall be made without the approval of the Company's
stockholders to the extent such approval is required by law or stock exchange
rule.
Federal Income Tax Considerations of Options
The following brief summary of the U.S. federal income tax rules
currently applicable to nonqualified stock options and incentive stock options
is not intended to be specific tax advice to Participants under the 1998 Plan.
Two types of stock options may be granted under the 1998 Plan:
nonqualified stock options ("NQOs") and incentive stock options ("ISOs"). The
grant of an Option generally has no immediate tax consequences to the
Participant or the Company. Generally, Participants will recognize ordinary
income upon the exercise of NQOs. In the case of NQOs, the amount of income
recognized is measured by the difference between the exercise price and the fair
market value of Common Stock on the date of exercise. The exercise of an ISO for
cash generally has no immediate tax consequences to a Participant or to the
Company. Participants may, in certain circumstances, recognize ordinary income
upon the disposition of shares acquired by exercise of an ISO, depending upon
how long such shares were held prior to disposition. Special rules apply to
shares acquired by exercise of ISOs for previously held shares. In addition,
special tax rules may result in the imposition of a 20% excise tax on any
"excess parachute payments" (as defined in the Code) that result from the
acceleration of the vesting or exercisability of Awards upon a Change of
Control.
The Company is generally required to withhold applicable income and
payroll taxes ("employment taxes") from ordinary income which a Participant
recognizes on the exercise or receipt of an Award. The Company thus may either
require Participants to pay to the Company an amount equal to the employment
taxes the Company is required to withhold or retain or sell without notice a
sufficient number of the shares to cover the amount required to be withheld.
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The Company generally will be entitled to a deduction for the amount
includible in a Participant's gross income for federal income tax purposes upon
the exercise of an NQO or upon a disqualifying disposition of shares acquired
upon exercise of an ISO.
THE EMPLOYEE STOCK PURCHASE PLAN
The KBW Board and KBW's stockholders have adopted and approved the KBW,
Inc. 1998 Employee Stock Purchase Plan (the "Purchase Plan"). Subject to meeting
federal and state securities law requirements, the Purchase Plan will become
effective at the consummation of the Offering, or as soon as practicable
thereafter.
The purpose of the Purchase Plan is to further the long-term stability
and financial success of KBW by providing a method for employees to increase
their ownership of Common Stock. Under the Purchase Plan, shares of Common Stock
will be available for issuance and sale under the Purchase Plan. Unless sooner
terminated at the discretion of the KBW Board, the Purchase Plan will terminate
on December 31, 2008.
Eligibility
All employees of KBW and its designated subsidiaries are generally
eligible to participate in the Purchase Plan, other than employees whose
customary employment is 20 hours or less per week, or is for not more than five
months in a calendar year or are ineligible to participate due to Code
restrictions.
General Description
A Participant in the Purchase Plan may authorize monthly salary
deductions of a maximum of 15% and a minimum of 1% of base compensation. The
fair market value of shares which may be purchased by any employee during any
calendar year may not exceed $25,000. The amounts so deducted and contributed
will be applied to the purchase of full shares of Common Stock at 85% of the
fair market value of such shares on the date of purchase. The offering dates
will be January 1 and July 1 of each Purchase Plan year, and each offering
period shall consist of one six-month purchase period. Shares will be purchased
for participating employees on the last business days of June and December for
each Purchase Plan year. Shares purchased under the Purchase Plan will be held
in separate accounts for each Participant.
Participants may decrease their payroll deductions at any time but not
more than once during any offering period. Participants may increase or decrease
their payroll deductions for any subsequent offering period by notifying the
Purchase Plan administrator no later than 15 days prior to such offering period.
Participants may also withdraw from participation in the Purchase Plan at any
time. If a Participant withdraws from the Purchase Plan, any contributions which
have not been used to purchase shares will be refunded. A Participant who has
withdrawn may not participate in the Purchase Plan again until the next offering
period.
In the event of retirement or other termination of employment, any
contributions which have not yet been used to purchase shares will be refunded
and a certificate issued for the full shares in the Participant's account.
Alternatively, a Participant may elect to have his or her shares sold and the
proceeds, less selling expenses, remitted to him or her. In the event of a
Participant's death, any contributions which have not yet been used to purchase
shares and all shares in such Participant's account will be delivered to the
Participant's beneficiary designated in writing and filed with KBW, or, if no
beneficiary has been designated or survives the Participant, to the
Participant's estate.
Amendments to the Purchase Plan
The KBW Board may at any time, or from time to time, amend the Purchase
Plan in any respect; provided that the stockholders of KBW must approve any
amendment that would increase the number of securities that may be issued under
the Purchase Plan or would require stockholder approval under Section 423 of the
Code.
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EMPLOYMENT AGREEMENTS
KBW has entered into employment agreements (the "Employment
Agreements") with each of James J. McDermott, Jr., Joseph J. Berry, John G.
Duffy and Andrew M. Senchak (the "Executives"). Each Employment Agreement is for
a term of three years, commencing upon the consummation of the Offering and
ending on the third anniversary thereof (the "Employment Period"). During the
Employment Period, Mr. McDermott will serve as the Chief Executive Officer of
the Company, Mr. Berry will serve as the President of the Company and Messrs.
Duffy and Senchak will each serve as a Co-Head of Corporate Finance of the
Company. During the Employment Period, each of Messrs. McDermott, Berry, Duffy
and Senchak will receive an annual base salary of $ , $ , $ and $ ,
respectively. The Employment Agreements provide that each Executive will be
eligible to receive an annual bonus, pursuant to the 1998 Plan, and other
benefits on a basis no less favorable than peer executives of the Company. If
during the Employment Period the Executive's employment terminates other than
for "cause" (as defined in the Employment Agreements), death or "disability" (as
defined in the Employment Agreements), or the Executive terminates employment
for "good reason" (as defined in the Employment Agreements), the Executive will
be entitled to a lump-sum cash payment equal to the sum of: (i) any unpaid base
salary; (ii) a pro rata annual bonus, based on the average annual bonus earned
in the three years prior to the date of termination (the "Annual Bonus"); and
(iii) the product of (a) the greater of (1) the number of months from the date
of termination until the expiration of the Employment Period and (2) 12 (the
"Continuation Period"), divided by 12 and (b) the sum of (1) the Executive's
base salary, (2) the Annual Bonus and (3) the Company's contribution to the
profit sharing retirement plan with respect to the Executive for the year prior
to the date of termination. Upon any such termination, the Executive and his
family will be entitled to receive welfare benefit coverage for the Continuation
Period and reasonable outplacement services at the Company's expense. Each
Employment Agreement contains restrictive covenants, which prohibit the
Executive from disclosing confidential information obtained while employed by
the Company, from competing with the Company and from soliciting the employees
and customers of the Company, during the Employment Period and for specified
periods thereafter.
DISCOUNT STOCK OPTIONS ISSUED IN CONNECTION WITH RECRUITMENT OF EMPLOYEES
Since the end of the second quarter of 1998, the Company has granted
discounted stock options to induce certain individuals to become employees. The
Company generally has used these options to replace equity investment
opportunities which the new employees forfeited upon termination of their
previous employment and for other compensation purposes. The Company has issued
discounted options to purchase an aggregate of shares of Common Stock at
an exercise price of $ per share. These options have a 10-year term and
generally vest ratably on each of the first three anniversaries of the date of
grant. These options are non-qualified stock options under the Code and will
generate compensation expense for tax purposes at the time of exercise equal to
the difference between the exercise price and the fair market value at such
date. The Company may grant discounted options for similar purposes from time to
time in the future.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Indebtedness of Management.
From time to time the Company has made loans to its directors and
executive officers to enable them to purchase common stock of the Company. The
following table summarizes such loans outstanding for those individuals whose
indebtedness to the Company exceeded $60,000 since January 1, 1995.
<TABLE>
<CAPTION>
LARGEST OUTSTANDING
NAME AND BALANCE SINCE OUTSTANDING BALANCE,
PRINCIPAL POSITION JANUARY 1, 1995 JUNE 30, 1998 INTEREST RATE
($) ($)
<S> <C> <C> <C>
John G. Duffy.................................. 95,120 0 7.0%
Executive Vice President and
Co-Head of Corporate Finance
Andrew M. Senchak.............................. 460,918 307,278 6.5%
Executive Vice President and
Co-Head of Corporate Finance
Guy G. Woelk................................... 69,668 46,445 6.5%
Executive Vice President and
Chief Financial Officer
</TABLE>
Securities Trading and Investments by Employees.
From time to time, directors, officers and other employees of the
Company may buy or sell securities to or from Keefe, Bruyette & Woods, Inc. as
principal or through Keefe, Bruyette & Woods, Inc. as agent in its capacity as a
registered securities broker-dealer. Such transactions are generally executed on
terms (i.e., commissions, mark-ups, and mark-downs) more favorable to the
employee-customer than those available to similarly situated non-employee
customers. In addition, the Company provides margin credit for employees, while
it has not provided such credit to customers.
From time to time, and subject to satisfaction of customer orders,
certain employees are permitted to make investments for their own account in
securities which the Company is also placing with customers or in which the
Company is also making an investment as principal. With the exception of
allowing employees to make such investments net of any sales commissions or
similar fees due the Company, such investments are made on terms no more
favorable to the employee than those relating to the investments of customers of
the Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the DGCL, the Company has included in the KBW
Certificate a provision to eliminate the personal liability of its directors for
monetary damages for breach or alleged breach of their fiduciary duties as
directors, subject to certain exceptions. In addition, the KBW Bylaws provide
that the Company is required to indemnify its officers and directors under
certain circumstances, including those circumstances in which indemnification
would otherwise be discretionary, and the Company is required to advance
expenses to its officers and directors as incurred in connection with
proceedings against them for which they may be indemnified. The Company has also
agreed to indemnify its directors and certain officers to the maximum extent
permitted by the DGCL pursuant to agreements with such directors and officers.
At present, the Company is not aware of any pending or threatened litigation or
proceeding involving a director, officer, employee or agent of the Company in
which indemnification would be required or permitted. The Company believes that
its charter provisions and indemnification agreements are necessary to attract
and retain qualified persons as directors and officers.
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Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling KBW pursuant
to the foregoing provisions, KBW has been informed that, in the opinion of the
SEC, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of Common Stock as of , 1998, and as adjusted to reflect
completion of the Offering, by: (i) each Named Executive Officer; (ii) each
director; (iii) each holder of more than 5% the of Common Stock; and (iv) all
current directors and executive officers as a group. Except as indicated in the
footnotes, the individuals named in the table have sole voting and investment
power with respect to all shares of Common Stock shown as beneficially owned by
them, subject to community property laws where applicable.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK NUMBER OF SHARES OF COMMON
BENEFICIALLY OWNED PRIOR SHARES STOCK TO BE BENEFICIALLY
TO OFFERING(1) OFFERED OWNED AFTER OFFERING(2)
------------------------ --------- ------------------------
NAME OF BENEFICIAL OWNER NUMBER(4) PERCENT NUMBER(4) PERCENT
<S> <C> <C> <C> <C>
James J. McDermott, Jr. 62,864 7.01% - 62,864
Charles H. Lott 100,146 11.17
Stanley T. Wells 96,933 10.81
Joseph J. Berry (3) 79,528 8.87 - 79,528
John G. Duffy 42,300 4.72 - 42,300
Andrew Senchak 26,769 2.99 - 26,769
All Directors and Executive Officers
as a Group (eight persons) 430,365 47.99%
</TABLE>
- -------------
(1) Beneficial ownership is determined in accordance with rules of the SEC and
includes general voting power or investment power with respect to
securities. Unless otherwise indicated, the address of each of the
beneficial owners identified above is Two World Trade Center, 85th Floor,
New York, NY 10048.
(2) Without giving effect to the exercise of the over-allotment option granted
to the Underwriters with respect to the Offering.
(3) Includes 1,700 shares held by a charitable gifting trust of which Mr. Berry
is a trustee.
(4) Reflects the number of shares of common stock of Keefe, Bruyette & Woods,
Inc. before giving effect to the Merger (see"Certain Transactions Occurring
Prior to the Offering").
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<PAGE>
CERTAIN TRANSACTIONS OCCURRING PRIOR TO THE OFFERING
CREATION OF HOLDING COMPANY STRUCTURE
On August , 1998, the stockholders of Keefe, Bruyette & Woods, Inc., a
New York corporation, voted to effect certain corporate transactions affecting
Keefe, Bruyette & Woods, Inc., its stockholders and its subsidiary, KBW Asset
Management. The purpose of the transactions is to place ownership of Keefe,
Bruyette & Woods, Inc. and KBW Asset Management under a holding company
structure by means of a merger of a transitory subsidiary of KBW with and into
Keefe, Bruyette & Woods, Inc. (the "Merger") and a distribution by Keefe,
Bruyette & Woods, Inc. to KBW of all of the outstanding capital stock of KBW
Asset Management (the "Distribution"). In the Merger, each share of common stock
of Keefe, Bruyette and Woods, Inc. will be converted into the right to receive
shares of Common Stock. The Merger and Distribution will become effective
immediately prior to consummation of the Offering. KBW Asset Management was
formerly named Keefe Management Services, Inc.
Unless the context otherwise requires, all information set forth in
this Prospectus reflects the formation of the holding company structure and
consummation of the Merger and Distribution described above.
NEW AND FORMER STOCKHOLDERS' AGREEMENTS
Prior to the pricing of the Offering, all stockholders of the Company
have been party to the Former Stockholders' Agreement, relating to the ownership
and disposition of any shares of common stock of Keefe, Bruyette & Woods, Inc.
owned by them. In connection with the Offering, and effective upon the pricing
of the Offering, the Former Stockholders' Agreement will be terminated.
At the time of the Merger, each outstanding share of common stock of
Keefe Bruyette & Woods, Inc. will be converted into the right to receive shares
of Common Stock. All of the newly issued shares of Common Stock which have been
issued in exchange for shares beneficially owned by employees of the Company who
are Covered Stockholders will be governed by the terms of the new Stockholders'
Agreement, except for the shares of Common Stock sold by the Selling
Stockholders as contemplated by the Underwriting Agreement. See "Underwriting."
The new Stockholders' Agreement contains provisions limiting the disposition
after the pricing of the Offering (the "Effective Date") of shares of Common
Stock held by Covered Stockholders at the time of the Offering (such shares of
Common Stock, the "Common Shares"). Covered Stockholders are defined to be
employees of the Company, including any of its subsidiaries, who held a title at
or above the level of Senior Vice President on the Effective Date. The
Stockholders' Agreement provides that sales of Common Shares thereunder are also
subject to the 180-day lock-up agreement more fully described under "Shares
Eligible for Future Sale."
Pursuant to the Stockholders' Agreement, Common Shares held by Covered
Stockholders will be subject to limitations on disposition during the first
three years following the Effective Date. Under the terms of the Stockholders'
Agreement, prior to the first anniversary of the Effective Date, each Covered
Stockholder may dispose of up to 10% of such Covered Stockholder's Common Shares
(measured as of the Effective Date), subject to the lock-up agreement with the
Underwriters. See "Shares Eligible for Future Sale." On or after the first
anniversary of the Effective Date, the Stockholders' Agreement permits each
Covered Stockholder to dispose of up to an additional 10% of such Covered
Stockholder's Common Shares (measured as of the Effective Date). On or after the
second anniversary of the Effective Date, the Stockholders' Agreement permits
each Covered Stockholder to dispose of up to an additional 10% of such Covered
Stockholder's Common Shares (measured as of the Effective Date). On or after the
third anniversary of the Effective Date, the Covered Stockholders may make
dispositions of their Common Shares without restriction under the terms of the
Stockholders' Agreement. As of the Effective Date and after giving effect to the
Offering, approximately % of the outstanding Common Stock was held by Covered
Stockholders.
Under the Stockholders' Agreement, in the event that, prior to the
third anniversary of the Effective Date, a Covered Stockholder elects to
terminate employment with the Company and, within six months or, if earlier, the
third anniversary of the Effective Date, enters into a "competitive activity"
with the Company (as defined in the
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Stockholders' Agreement), the KBW Board will have the option to acquire all of
the Common Shares of such Covered Stockholder at a price equal to the book value
of such Common Shares as calculated pursuant to the Stockholders' Agreement. If,
in such a case, such Covered Stockholder has sold or otherwise transferred any
of such Common Shares after electing to terminate employment, the Covered
Stockholder will refund to the Company any profits in excess of the applicable
book value of such Common Shares. In the case of Common Shares that the Company
would have the right to acquire but which have been pledged by the employee as
permitted by the Stockholders' Agreement, such Covered Stockholder would either
be required to cause the release of such pledge (in which case the Company would
have the purchase right described above) or be liable to the Company for
liquidated damages in an amount equal to the number of Common Shares subject to
the pledge multiplied by the excess, if any, of the market value of a Common
Share on the date of exercise by the Company of its repurchase right over the
most recent book value price as described above.
In addition, pursuant to the terms of the Stockholders' Agreement, a
Covered Stockholder may dispose of Common Shares to: (i) a family member or a
trust or other entity for the benefit of or controlled by such Covered
Stockholder or such Covered Stockholder's family member; provided that such
family member or such trust or other entity agrees in writing to be bound by the
Stockholders' Agreement as though such individual or entity were a Covered
Stockholder; or (ii) a charitable organization.
Pursuant to the terms of the Stockholders' Agreement, a Covered
Stockholder may pledge such Covered Stockholder's Common Shares which are
otherwise not permitted to be disposed of under the Stockholders' Agreement to a
bank to secure a bona fide full recourse loan for value. Subject to the
provisions of the Stockholders' Agreement regarding the Company's right to
repurchase Common Shares described above, any Common Shares so pledged would be
free from the restrictions on disposition described above so long as such Common
Shares are so pledged, but would thereafter be once again subject to the
restrictions on disposition described above, unless the bank has sold such
Common Shares pursuant to a bona fide foreclosure proceeding.
Covered Stockholders may, with the consent of the KBW Board, dispose of
additional Common Shares at any time, in any amount, regardless of the foregoing
restrictions, subject to the 180-day lock-up agreement with the Underwriters.
See "Shares Eligible for Sale" and "Underwriting."
The Stockholders' Agreement does not restrict the disposition of Common
Shares held by a Covered Stockholder who ceases to be an employee of KBW or any
of its subsidiaries as a result of death or disability.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 140,000,000
shares of Common Stock and 10,000,000 shares of Preferred Stock. As of
, 1998, the Company had no shares of Preferred Stock outstanding and
shares of Common Stock were held by 105 stockholders. Upon the consummation
of the Offering, there will be shares of Common Stock outstanding.
The following summary description of the capital stock of the Company is
qualified in its entirety by reference to the KBW Certificate and the KBW
Bylaws, copies of which have been filed as exhibits to the Registration
Statement of which this Prospectus is a part.
COMMON STOCK
Subject to the rights of the holders of any Preferred Stock which may
be outstanding, each holder of Common Stock on the applicable record date is
entitled to receive such dividends as may be declared by the KBW Board out of
funds legally available therefor, and, in the event of liquidation, to share pro
rata in any distribution of the Company's assets after payment or providing for
the payment of liabilities and the liquidation preference of any outstanding
Preferred Stock. Each holder of Common Stock is entitled to one vote for each
share held of record on the applicable record date on all matters presented to a
vote of stockholders, including the election of directors. Holders of Common
Stock have no cumulative voting rights or preemptive rights to purchase or
subscribe for any stock or other securities and there are no conversion rights
or redemption or sinking fund provisions with respect to such stock. All
outstanding shares of Common Stock are, and the shares of Common Stock offered
hereby will be when issued, fully paid and nonassessable.
Application will be made for listing of the Common Stock on the NYSE
under the symbol "KBW."
The transfer agent for the Common Stock is .
PREFERRED STOCK
The KBW Certificate authorizes 10,000,000 shares of Preferred Stock.
The KBW Board has the authority to issue shares of such Preferred Stock in one
or more series and to fix, by resolution, full or limited or no voting powers,
and such designations, preferences and relative, participating, optional or
other rights, if any, and the qualifications, limitations or restrictions
thereof, if any, including the number of shares in such series (which the KBW
Board may increase or decrease as permitted by the DGCL), liquidation
preferences, dividend rates, conversion rights and redemption provisions of the
shares constituting any series, without any further vote or action by KBW's
stockholders. Any shares of Preferred Stock so issued would have priority over
the Common Stock with respect to dividend or liquidation rights or both.
CERTAIN ANTI-TAKEOVER PROVISIONS
The KBW Certificate and the KBW Bylaws contain certain provisions that
could delay or make more difficult the acquisition of KBW by means of a tender
offer, a proxy contest or otherwise. Such provisions have been implemented to
enable KBW to develop its business in a manner which will foster its long-term
growth without disruption caused by the threat of a takeover not deemed by the
KBW Board to be in the best interests of KBW and its stockholders. The
description of certain aspects of the KBW Certificate and the KBW Bylaws set
forth below does not purport to be complete and is qualified in its entirety by
reference to the KBW Certificate and the KBW Bylaws, copies of which have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part.
CLASSIFIED BOARD OF DIRECTORS
The KBW Certificate and the KBW Bylaws provide that the KBW Board will
be divided into three classes of directors, with the classes to be as equal in
number as possible. The KBW Board is expected to consist of the individuals
referred to under "Management--Directors and Executive Officers." The KBW
Certificate and the KBW Bylaws provide that, of the initial directors of KBW,
approximately one-third will continue to serve until the
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<PAGE>
1999 Annual Meeting of Stockholders, approximately one-third will continue to
serve until the 2000 Annual Meeting of Stockholders and approximately one-third
will continue to serve until the 2001 Annual Meeting of Stockholders. Of the
initial directors, Messrs. McDermott and Wells will serve until the 1999 Annual
Meeting of Stockholders, Messrs. Lott and Duffy will serve until the 2000 Annual
Meeting of Stockholders and Messrs. Berry and Senchak will serve until the 2001
Annual Meeting of Stockholders. Starting with the 1999 Annual Meeting of
Stockholders, one class of directors will be elected each year for a three-year
term.
The classification of directors will have the effect of making it more
difficult for stockholders to change the composition of the KBW Board. At least
two annual meetings of stockholders, instead of one, will generally be required
to effect a change in a majority of the KBW Board. Such a delay may help ensure
that KBW's directors, if confronted by a holder attempting to force a proxy
contest, a tender or exchange offer, or an extraordinary corporate transaction,
would have sufficient time to review the proposal as well as any available
alternatives to the proposal and to act in what they believe to be the best
interest of the stockholders. However, the classification provisions will apply
to every election of directors and will increase the likelihood that incumbent
directors will retain their positions, regardless of whether a change in the
composition of the KBW Board would be beneficial to KBW and its stockholders and
whether or not a majority of KBW's stockholders believe that such a change would
be desirable.
The classification provisions could also have the effect of
discouraging a third party from initiating a proxy contest, making a tender
offer or otherwise attempting to obtain control of KBW, even though such an
attempt might be beneficial to KBW and its stockholders. In addition, because
the classification provisions may discourage accumulations of large blocks of
Common Stock by purchasers whose objective is to take control of KBW and remove
a majority of the KBW Board, the classification of the KBW Board could tend to
reduce the likelihood of fluctuations in the market price of the Common Stock
that might result from accumulations of large blocks. Accordingly, stockholders
could be deprived of certain opportunities to sell their shares of Common Stock
at a higher market price than might otherwise be the case.
NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES
The KBW Bylaws provide that, subject to any rights of holders of
Preferred Stock to elect directors under specified circumstances, the number of
directors will be fixed from time to time exclusively pursuant to a resolution
adopted by directors constituting a majority of the total number of directors
that KBW would have if there were no vacancies on the KBW Board (the "Whole
Board"). In addition, the KBW Bylaws provide that, subject to applicable law and
any rights of holders of Preferred Stock, and unless the KBW Board otherwise
determines, any vacancies will be filled only by the affirmative vote of a
majority of the remaining directors, though less than a quorum. Accordingly,
absent an amendment to the KBW Bylaws, the KBW Board could prevent any
stockholder from enlarging the KBW Board and filling the new directorships with
such stockholder's own nominees.
Under the DGCL, unless otherwise provided in a corporation's
certificate of incorporation, directors serving on a classified board may only
be removed by the stockholders for cause. The KBW Certificate does not otherwise
provide.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS
The KBW Certificate and the KBW Bylaws provide that, subject to the
rights of any holders of Preferred Stock to elect additional directors under
specified circumstances, stockholder action can be taken only at an annual or
special meeting of stockholders and may not be taken by written consent in lieu
of a meeting. The KBW Bylaws provide that, subject to the rights of holders of
any series of Preferred Stock to elect additional directors under specified
circumstances, special meetings of stockholders can be called only by the
Chairman of the KBW Board or the President of KBW or by the KBW Board pursuant
to a resolution adopted by a majority of the Whole Board. Stockholders are not
permitted to call, or to require that the Chairman, the President or the KBW
Board call, a special meeting of stockholders. Moreover, the business permitted
to be conducted at any special meeting of stockholders is limited to the
business brought before the meeting pursuant to the notice of meeting given by
KBW.
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The provisions of the KBW Certificate and the KBW Bylaws prohibiting
stockholder action by written consent may have the effect of delaying
consideration of a stockholder proposal until the next annual meeting. These
provisions would also prevent the holders of a majority of the voting power of
the voting stock from unilaterally using the written consent procedure to take
stockholder action. Moreover, a stockholder could not force stockholder
consideration of a proposal over the opposition of the Chairman of the KBW Board
and the KBW Board by calling a special meeting of stockholders prior to the time
the Chairman of the KBW Board or a majority of the Whole Board believes such
consideration to be appropriate.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND STOCKHOLDER PROPOSALS
The KBW Bylaws establish an advance notice procedure for stockholders
to nominate candidates for election as directors or to bring other business
before meetings of stockholders of KBW (the "Stockholder Notice Procedure").
A stockholder nominee will be eligible for election as a director of
KBW only if nominated in accordance with the Stockholder Notice Procedure. Under
the Stockholder Notice Procedure, notice of stockholder nominations to be made
at an annual meeting (or of any other business to be brought before such
meeting) must be received by KBW not less than 60 days nor more than 90 days
prior to the first anniversary of the previous year's annual meeting (or, if the
date of the annual meeting is more than 30 days before or more than 60 days
after such anniversary date, not earlier than the 90th day prior to such meeting
and not later than the later of: (i) the 60th day prior to such meeting; or (ii)
the tenth day after public announcement of the date of such meeting is first
made). Notwithstanding the foregoing, in the event that the number of directors
to be elected is increased and there is no public announcement naming all of the
nominees for director or specifying the size of the increased KBW Board made by
KBW at least 70 days prior to the first anniversary of the preceding year's
annual meeting, a stockholder's notice will be deemed timely, but only with
respect to nominees for any new positions created by such increase, if it is
received by KBW not later than the tenth day after such public announcement is
first made by KBW.
The KBW Bylaws provide that only such business may be conducted at a
special meeting as is specified in the notice of meeting given by KBW.
Nominations for election to the KBW Board may be made at a special meeting at
which directors are to be elected only by or at the KBW Board's direction or by
a stockholder who has given timely notice of nomination. Under the Stockholder
Notice Procedure, such notice must be received by KBW not earlier than the 90th
day before such meeting and not later than the later of: (i) the 60th day prior
to such meeting; or (ii) the 10th day after public announcement of the date of
such meeting is first made. Stockholders will not be able to bring other
business before special meetings of stockholders.
The Stockholder Notice Procedure provides that, at an annual meeting,
only such business may be conducted as has been brought before the meeting by,
or at the direction of, the Chairman of the KBW Board, the President of KBW or
the KBW Board or by a stockholder who has given timely written notice (as set
forth above) to the Secretary of KBW of such stockholder's intention to bring
such business before such meeting.
Under the Stockholder Notice Procedure, a stockholder's notice to KBW
proposing to nominate an individual for election as a director must contain
certain information, including, without limitation, the identity and address of
the nominating stockholder, the class and number of shares of stock of KBW owned
by such stockholder, and all information regarding the proposed nominee that
would be required to be included in a proxy statement soliciting proxies for the
proposed nominee. Under the Stockholder Notice Procedure, a stockholder's notice
relating to the conduct of business other than the nomination of directors must
contain certain information about such business and about the proposing
stockholder, including, without limitation, a brief description of the business
the stockholder proposes to bring before the meeting, the reasons for conducting
such business at such meeting, the name and address of such stockholder, the
class and number of shares of stock of KBW beneficially owned by such
stockholder, and any material interest of such stockholder in the business so
proposed. If the Chairman of the KBW Board or other officer of KBW presiding at
a meeting determines that an individual was not nominated, or other business was
not brought before the meeting, in accordance with the Stockholder Notice
Procedure, such individual will not be eligible for election as a director, or
such business will not be conducted at such meeting, as the case may be.
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By requiring advance notice of nominations by stockholders, the
Stockholder Notice Procedure will afford the KBW Board an opportunity to
consider the qualifications of the proposed nominees and, to the extent deemed
necessary or desirable by the KBW Board, to inform stockholders about such
qualifications. By requiring advance notice of other proposed business, the
Stockholder Notice Procedure will provide a more orderly procedure for
conducting annual meetings of stockholders and, to the extent deemed necessary
or desirable by the KBW Board, will provide the KBW Board with an opportunity to
inform stockholders, prior to such meetings, of any business proposed to be
conducted at such meetings, together with the KBW Board's position regarding
action to be taken with respect to such business, so that stockholders can
better decide whether to attend such a meeting or to grant a proxy regarding the
disposition of any such business.
Although the KBW Bylaws do not give the KBW Board any power to approve
or disapprove stockholder nominations for the election of directors or proposals
for action, they may have the effect of precluding a contest for the election of
directors or the consideration of stockholder proposals if the proper procedures
are not followed, and of discouraging or deterring a third party from conducting
a solicitation of proxies to elect its own slate of directors or to approve its
own proposal, without regard to whether consideration of such nominees or
proposals might be harmful or beneficial to KBW and its stockholders.
KBW PREFERRED STOCK
The KBW Certificate authorizes the KBW Board to establish one or more
series of Preferred Stock, and to determine, with respect to any series of
Preferred Stock, the terms and rights of such series, including: (i) the
designation of the series; (ii) the number of shares of the series, which number
the KBW Board may thereafter (except where otherwise provided in the Preferred
Stock designation) increase or decrease (but not below the number of shares
thereof then outstanding); (iii) whether dividends, if any, will be cumulative
or noncumulative and the dividend rate of the series; (iv) the dates on which
dividends, if any, will be payable; (v) the redemption rights and price or
prices, if any, for shares of the series; (vi) the terms and amounts of any
sinking fund provided for the purchase or redemption of shares of the series;
(vii) the amounts payable on shares of the series in the event of any voluntary
or involuntary liquidation, dissolution or winding up of the affairs of KBW;
(viii) whether the shares of the series will be convertible into shares of any
other class or series, or any other security, of KBW or any other corporation,
and, if so, the specification of such other class or series or such other
security, the conversion price or prices or rate or rates, any adjustments
thereof, the date or dates as of which such shares shall be convertible and all
other terms and conditions upon which such conversion may be made; (ix)
restrictions on the issuance of shares of the same series or of any other class
or series; and (x) the voting rights, if any, of the holders of such series.
The authorized shares of Preferred Stock, as well as shares of Common
Stock, will be available for issuance without further action by KBW's
stockholders, unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which KBW's securities may
be listed or traded. If the approval of KBW's stockholders is not so required,
the KBW Board does not intend to seek stockholder approval.
Although the KBW Board has no intention at the present time of doing
so, it could issue a series of Preferred Stock that could, depending on the
terms of such series, impede the completion of a merger, tender offer or other
takeover attempt. The KBW Board will make any determination to issue such shares
based on its judgment as to the best interests of KBW and its stockholders. The
KBW Board, in so acting, could issue Preferred Stock having terms that could
discourage an acquisition attempt or other transaction that some, or a majority,
of KBW's stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over the then-current
market price of such stock.
AMENDMENT OF CERTAIN PROVISIONS OF THE KBW CERTIFICATE OF INCORPORATION AND
THE KBW BYLAWS
Under the DGCL, stockholders have the right to adopt, amend or repeal
the certificate of incorporation and bylaws of a corporation. In addition, if
the certificate of incorporation so provides, the bylaws may be amended by the
board of directors. The KBW Certificate provides that the affirmative vote of
the holders of at least 80% of the voting power of the outstanding shares of
capital stock of KBW eligible to vote generally in the election of directors
("Voting Stock"), voting together as a single class, is required to amend
provisions of the KBW Certificate relating
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to the prohibition of stockholder action without a meeting; the number, election
and term of KBW's directors; the removal of directors; and the amendment of the
KBW Bylaws. The KBW Certificate further provides that the KBW Bylaws may be
amended by the KBW Board or by the affirmative vote of the holders of at least
80% of the outstanding shares of Voting Stock, voting together as a single
class. These voting requirements will have the effect of making it more
difficult for stockholders to amend the provisions of the KBW Certificate stated
above or the KBW Bylaws, even if a majority of KBW stockholders believes that
such amendment would be in its best interests.
ANTI-TAKEOVER STATUTE
Section 203 of the DGCL provides that, subject to certain exceptions
specified therein, a corporation shall not engage in any business combination
with any interested stockholder for a three-year period following the date on
which such stockholder becomes an interested stockholder unless: (i) prior to
such date, the board of directors of the corporation approves either the
business combination or the transaction that resulted in the stockholder
becoming an interested stockholder; (ii) upon consummation of the transaction
which results in the stockholder becoming an interested stockholder, the
interested stockholder owns at least 85% of the voting stock (as defined in
Section 203 of the DGCL) of the corporation outstanding at the time the
transaction commenced (excluding certain shares); or (iii) on or subsequent to
such date, the business combination is approved by the board of directors of the
corporation and by the affirmative vote of at least 66 2/3% of the outstanding
voting stock not owned by the interested stockholder. Except as specified in
Section 203 of the DGCL, an "interested stockholder" is defined to include: (i)
any person that is the owner of 15% or more of the outstanding voting stock of
the corporation, or is an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation, at any
time within three years immediately prior to the relevant date; and (ii) the
affiliates and associates of any such person.
Under certain circumstances, Section 203 of the DGCL makes it more
difficult for an interested stockholder to effect various business combinations
with a corporation for a three-year period, although the stockholders may elect
to exclude a corporation from the restrictions imposed thereunder; the KBW
Certificate does not exclude KBW from such restrictions. It is anticipated that
the provisions of Section 203 of the DGCL may encourage companies interested in
acquiring KBW to negotiate in advance with the KBW Board, since the stockholder
approval requirement would be avoided if a majority of the directors then in
office approve either the business combination or the transaction that results
in the stockholder becoming an interested stockholder. Section 203 of the DGCL
should encourage persons interested in acquiring KBW to negotiate in advance
with the KBW Board, since the higher stockholder voting requirements would not
be invoked if such person, prior to acquiring 15% of KBW's Voting Stock, obtains
the approval of the KBW Board for such acquisition or for the proposed business
combination transaction (unless such person acquires 85% or more of KBW's voting
stock in such transaction, excluding certain shares as described above). In the
event of a proposed acquisition of KBW, it is believed that the interests of KBW
stockholders will best be served by a transaction that results from negotiations
based upon careful consideration of the proposed terms, such as the price to be
paid to minority stockholders, the form of consideration paid and the tax
effects of the transaction.
Section 203 of the DGCL will not prevent a hostile takeover of KBW. It
may, however, make more difficult or discourage a takeover of KBW or the
acquisition of control of KBW by a significant stockholder and thus the removal
of incumbent management. Some stockholders may find this disadvantageous in that
they may not be afforded the opportunity to participate in takeovers that are
not approved as required by Section 203 of the DGCL but in which stockholders
might receive, for at least some of their shares, a substantial premium above
the market price at the time of a tender offer or other acquisition transaction.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no market for the Common Stock of
the Company. Future sales of substantial amounts of Common Stock in the public
market could adversely affect prevailing market prices and impair the Company's
ability to raise capital through the sale of equity securities.
Upon the closing of the Offering, the Company will have shares
of Common Stock outstanding ( shares if the over-allotment option
granted to the Underwriters is exercised in full). shares offered
hereby ( shares if the over-allotment option is exercised in full) will be
freely tradeable, unless purchased by affiliates of the Company as that term is
defined in Rule 144 promulgated under the Securities Act described below. All
other shares will be "restricted shares" for purposes of the Securities Act and
subject to the volume and other limitations set forth in Rule 144 promulgated
under the Securities Act.
In general, under Rule 144, as currently in effect, a person (or
persons whose shares are aggregated) who has beneficially owned shares for at
least one year (including the holding period of any prior owner except an
affiliate from whom such shares were purchased) is entitled to sell in "brokers'
transactions" or to market makers, within any three-month period commencing 90
days after the date of this Prospectus, a number of shares that does not exceed
the greater of: (i) 1% of the then-outstanding shares of the Company's Common
Stock ( shares immediately after the Offering); or (ii) the average
weekly trading volume of the Company's Common Stock during the four calendar
weeks preceding the required filing of a Form 144 with respect to such sale.
Sales under Rule 144 are generally subject to the availability of current public
information about the Company. Under Rule 144(k), a person who is not deemed to
have been an affiliate of the Company at any time during the 90 days preceding a
sale, and who has beneficially owned the shares proposed to be sold for at least
two years (including the holding period of any prior owner other than an
affiliate from whom such shares were purchased), is entitled to sell such shares
without having to comply with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
Pursuant to the lock-up agreements, all of the Company's officers and
directors and all of the Company's employees as of the Offering who are
stockholders (who will own upon completion of the Offering, in the aggregate,
approximately shares of Common Stock) have agreed that they will not
(subject to certain exceptions) for a period of 180 days subsequent to the date
of this Prospectus, directly or indirectly, offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase or otherwise transfer or
dispose of any shares of Common Stock or any securities convertible into, or
exercisable or exchangeable for any shares of Common Stock or enter into any
swap or other arrangement that transfers all or a portion of the economic
consequences associated with the ownership of any Common Stock without the prior
written consent of DLJ. The Company has agreed that it will not, for a period of
180 days from the date of this Prospectus, directly or indirectly, offer, sell,
contract to sell, sell an option or contract to purchase, purchase any option or
contract to sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of any shares of Common Stock or any securities convertible
into, or exercisable or exchangeable for, any shares of Common Stock, or enter
into any swap or other arrangement that transfers all or a portion of the
economic consequences associated with the ownership of any Common Stock without
the prior written consent of DLJ, except that such agreement does not prevent
the Company from granting additional options under the Company's existing stock
option plans or from issuing shares of Common Stock upon exercise of a stock
option. DLJ may, in its sole discretion and at any time without notice, release
all or any portion of the securities subject to lock-up agreements.
Pursuant to the Stockholders' Agreement, certain stockholders have
agreed to additional limitations on dispositions of Common Stock. See "Certain
Transactions Occurring Prior to the Offering--New and Former Stockholders'
Agreements."
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UNDERWRITING
Subject to the terms and conditions of an Underwriting Agreement, dated
, 1998 (the "Underwriting Agreement"), the Underwriters named below,
who are represented by Donaldson, Lufkin & Jenrette Securities Corporation,
Goldman, Sachs & Co. and Keefe, Bruyette & Woods, Inc. (the "Representatives"),
have severally agreed to purchase from the Company and the Selling Stockholders
the respective number of shares of Common Stock set forth opposite their names
below:
NUMBER OF
UNDERWRITERS SHARES
Donaldson, Lufkin & Jenrette Securities Corporation..
Goldman, Sachs & Co..................................
Keefe, Bruyette & Woods, Inc.........................
Total............................................ =======
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to approval by their counsel of certain legal matters
and to certain other conditions. The Underwriters are obligated to purchase and
accept delivery of all the shares of Common Stock offered hereby (other than
those shares covered by the over-allotment option described below) if any are
purchased.
The Underwriters initially propose to offer the shares of Common Stock
in part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus and in part to certain dealers (including the
Underwriters) at such price less a concession not in excess of $ per share.
The Underwriters may allow, and such dealers may re-allow, to certain other
dealers a concession not in excess of $ per share. After the initial
offering of the Common Stock, the public offering price and other selling terms
may be changed by the Representatives at any time without notice. The
Underwriters will not confirm sales to any accounts over which they exercise
discretionary authority.
The Selling Stockholders have granted to the Underwriters an option,
exercisable within 30 days after the date of this Prospectus, to purchase, from
time to time, in whole or in part, up to an aggregate of additional
shares of Common Stock at the initial public offering price less underwriting
discounts and commissions. The Underwriters may exercise such option solely to
cover over-allotments, if any, made in connection with the Offering. To the
extent that the Underwriters exercise such option, each Underwriter will become
obligated, subject to certain conditions, to purchase its pro rata portion of
such additional shares based on such Underwriter's percentage underwriting
commitment as indicated in the preceding table.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
Each of the Company, its executive officers, directors and employees
who are stockholders as of the date of the Offering (including the Selling
Stockholders) have agreed, subject to certain exceptions, not to: (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of, directly or indirectly, any shares
of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock; or (ii) enter into any swap or other arrangement
that transfers all or a portion of the economic consequences associated with the
ownership of any Common Stock (regardless of whether any of the transactions
described in clause (i) or (ii) is to be settled by the delivery of Common
Stock, or such other securities, in cash or otherwise) for a period of 180 days
after the date of this Prospectus without the prior written consent of DLJ.
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In addition, during such period, the Company has also agreed not to
file any registration statement with respect to, and each of its executive
officers, directors and certain stockholders of the Company (including the
Selling Stockholders) has agreed not to make any demand for, or exercise any
right with respect to, the registration of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock
without DLJ's prior written consent.
Prior to the Offering, there has been no established trading market for
the Common Stock. The initial public offering price for the shares of Common
Stock offered hereby will be determined by negotiation among the Company,
representatives of the Selling Stockholders and the Representatives. The factors
to be considered in determining the initial public offering price include the
history of and the prospects for the industry in which the Company competes, the
past and present operations of the Company, the historical results of operations
of the Company, the prospects for future earnings of the Company, the recent
market prices of securities of generally comparable companies and the general
condition of the securities markets at the time of the Offering.
Application will be made to list the Common Stock on the NYSE. In order
to meet the requirements for listing the Common Stock on the NYSE, the
Underwriters have undertaken to sell lots of 100 or more shares to a minimum of
2,000 beneficial owners. In addition, NYSE Rule 312(g) prohibits a member
corporation, after the distribution of securities of its parent to the public,
from effecting any transactions (except on an unsolicited basis) for the account
of any customer in, or making any recommendation with respect to the purchase or
sale of, any such security. Thus, following the Offering, Keefe, Bruyette &
Woods, Inc. will not be permitted to make recommendations regarding the purchase
or sale of the Common Stock.
Other than in the United States, no action has been taken by the
Company, the Selling Stockholders or the Underwriters that would permit a public
offering of the shares of Common Stock offered hereby in any jurisdiction where
action for that purpose is required. The shares of Common Stock offered hereby
may not be offered or sold, directly or indirectly, nor may this Prospectus or
any other offering material or advertisements in connection with the offer and
sale of any such shares of Common Stock be distributed or published in any
jurisdiction, except under circumstances that will result in compliance with the
applicable rules and regulations of such jurisdiction. Persons into whose
possession this Prospectus comes are advised to inform themselves about and to
observe any restrictions relating to the Offering of the Common Stock and the
distribution of this Prospectus. This Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any shares of Common Stock offered
hereby in any jurisdiction in which such an offer or a solicitation is unlawful.
In connection with the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may overallot the Offering,
creating a syndicate short position. The Underwriters may bid for and purchase
shares of Common Stock in the open market to cover such syndicate short position
or to stabilize the price of the Common Stock. In addition, the underwriting
syndicate may reclaim selling concessions from syndicate members if the
syndicate repurchases previously distributed Common Stock in syndicate covering
transactions, in stabilizing transactions or otherwise. These activities may
stabilize or maintain the market price of the Common Stock above independent
market levels. The Underwriters are not required to engage in these activities,
and may end any of these activities at any time.
Keefe, Bruyette & Woods, Inc. is a direct wholly-owned subsidiary of
the Company. Keefe, Bruyette & Woods, Inc. has committed to purchase from the
Company an aggregate of % of the shares of Common Stock being underwritten by
the Underwriters in the Offering on the same basis as the other Underwriters.
Although the amount of proceeds derived from the Offering by the Company will
not be affected by Keefe, Bruyette & Woods, Inc.'s participation as an
Underwriter, to the extent that part or all of the shares of Common Stock
underwritten by Keefe, Bruyette & Woods, Inc. are not resold, the consolidated
equity of the Company will be reduced. Until resold, any such shares will be
eliminated in consolidation as if they were not outstanding for purposes of any
future computation of earnings per common share and book value per common share.
Keefe, Bruyette & Woods, Inc. intends to resell any shares which it is unable to
resell in the Offering from time to time, at prevailing market prices.
Under Rule 2720, the Company is considered an affiliate of Keefe,
Bruyette & Woods, Inc. This Offering is being conducted in accordance with Rule
2720, which provides that, among other things, when a NASD member
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participates in the underwriting of its parent's equity securities, the initial
public offering price can be no higher than that recommended by a "qualified
independent underwriter" meeting certain standards. In accordance with this
requirement, DLJ has assumed the responsibilities of acting as qualified
independent underwriter and will recommend a price in compliance with the
requirements of Rule 2720. In connection with the Offering, DLJ is performing
due diligence investigations and reviewing and participating in the preparation
of this Prospectus and the Registration Statement of which this Prospectus forms
a part. As compensation for the services of DLJ as qualified independent
underwriter, the Company has agreed to pay DLJ $5,000.
Pershing, a division of DLJ, is the Company's principal clearing
broker. The Company pays Pershing customary charges for its services as clearing
broker. In addition, the Company has the ability to borrow from DLJ to enable
the Company to meet the net capital requirements resulting from specific
underwriting transactions.
The Underwriters have reserved for sale approximately shares of
Common Stock for directors and current employees of the Company who have an
interest in purchasing such shares of Common Stock in the Offering. The price
per share for such shares will be the initial public offering price less
underwriting discounts and commissions or $ per share. The number of
shares available for sale to the general public in the Offering will be reduced
to the extent such persons purchase such reserved shares. Any reserved shares
not so purchased will be offered by the Underwriters to the general public on
the same basis as the other shares offered hereby. Any such directors and
current employees of the Company who purchase any of the shares offered in the
Offering will be prohibited from selling, pledging, assigning, hypothecating or
transferring such shares for a period of five months following the effective
date of the Offering.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
The material federal income tax consequences to Non-U.S. Holders
expected to result from the purchase, ownership and sale or other taxable
disposition of the Common Stock, under currently applicable law, are summarized
below. A "Non-U.S. Holder" is a person or entity purchasing Common Stock in the
Offering that, for U.S. federal income tax purposes, is a non-resident alien
individual, a foreign corporation, a foreign estate or trust or a foreign
partnership as such terms are defined in the Code.
This summary is based upon the current provisions of the Code,
applicable Treasury regulations and judicial and administrative decisions and
rulings. There can be no assurance that the Internal Revenue Service (the "IRS")
will not take a contrary view, and no ruling from the IRS has been or will be
sought. Future legislative, judicial or administrative changes or
interpretations could alter or modify the statements set forth herein, and any
such changes or interpretations could be retroactive and could affect the tax
consequences to Non-U.S. Holders of Common Stock.
The following summary is for general information only and does not
purport to deal with all aspects of federal income taxation that may affect
particular Non-U.S. Holders in light of their individual circumstances and is
not intended for: (i) stockholders other than Non-U.S. Holders; (ii) Non-U.S.
Holders who would not hold the Common Stock as a capital asset; or (iii)
Non-U.S. Holders who are otherwise subject to special treatment under the Code
(including insurance companies, tax-exempt entities, financial institutions,
broker-dealers and persons who would hold the Common Stock as part of a
straddle, hedge or conversion transaction). In addition, the summary does not
consider the effect of any applicable state, local or foreign tax laws on
Non-U.S. Holders. EACH PROSPECTIVE NON-U.S. HOLDER OF COMMON STOCK SHOULD
CONSULT SUCH HOLDER'S OWN TAX ADVISER WITH RESPECT TO THE TAX CONSEQUENCES OF
THE ACQUISITION, OWNERSHIP AND DISPOSITION OF COMMON STOCK, INCLUDING THE
APPLICABILITY AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS, AND OF CHANGES IN
APPLICABLE TAX LAWS.
DIVIDENDS ON COMMON STOCK
Dividends paid to a Non-U.S. Holder of Common Stock that are not
effectively connected with the conduct by the Non-U.S. Holder of a trade or
business within the United States will generally be subject to withholding of
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U.S. federal income tax at the rate of 30% of the gross amount of the dividends
unless the rate is reduced by an applicable income tax treaty. A Non-U.S. Holder
may claim exemption from withholding under the effectively connected income
exception by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of Business in the United States) or a
successor form with the Company or its paying agent. Except to the extent that
an applicable tax treaty otherwise provides, a Non-U.S. Holder will be taxed in
the same manner as U.S. citizens, resident aliens and domestic corporations on
dividends paid (or deemed paid) that are effectively connected with the conduct
of a trade or business in the United States by the Non-U.S. Holder. If such
Non-U.S. Holder is a foreign corporation, it may also be subject to an
additional U.S. "branch profits" tax on such effectively connected income,
subject to certain adjustments, at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty.
Under the currently applicable Treasury regulations, dividends paid to
an address in a country other than the United States are presumed to be paid to
a resident of such country for purposes of the withholding discussed above
(unless the payor has knowledge to the contrary) and, under the current
interpretation of Treasury regulations, for purposes of determining the
applicability of a reduced rate of withholding under an income tax treaty.
However, under certain recently finalized Treasury regulations (the "New
Withholding Regulations") a Non-U.S. Holder of Common Stock who wishes to claim
the benefit of an applicable treaty rate would be required to satisfy certain
certification and other requirements. In addition, under the New Withholding
Regulations, in the case of Common Stock held by a foreign partnership, the
certification requirement would generally be applied to the partners of the
partnership and the partnership may be required to provide certain information,
including a U.S. taxpayer identification number. The New Withholding Regulations
also provide look-through rules for tiered partnerships. The New Withholding
Regulations are generally effective for payments made after December 31, 1999,
subject to certain transition rules. Non-U.S. Holders are encouraged to consult
with their own tax advisers with respect to the application of the New
Withholding Regulations.
Generally, the Company must report to the IRS the amount of dividends
paid, the name and address of the recipient and the amount, if any, of the tax
withheld. A similar report is sent to the holder. Pursuant to income tax
treaties or certain other agreements, the IRS may make its reports available to
tax authorities in the recipient's country of residence.
If paid to an address outside the United States, dividends on Common
Stock held by a Non-U.S. Holder will generally not be subject to backup
withholding, provided that the payor does not have actual knowledge that the
holder is a U.S. person. However, under the New Withholding Regulations (which
are effective for dividends paid after December 31, 1999), dividend payments may
be subject to backup withholding imposed at a rate of 31% unless applicable
certification requirements are satisfied. See the discussion above with respect
to rules applicable to foreign partnerships under the New Withholding
Regulations.
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to U.S. federal income
tax or withholding on gain recognized upon the sale or other disposition of
Common Stock unless: (i) the gain is effectively connected with the conduct of a
trade or business within the United States by the Non-U.S. Holder; or (ii) in
the case of a Non-U.S. Holder who is a non-resident alien individual and holds
the Common Stock as a capital asset, such holder is present in the United States
for 183 or more days in the taxable year and certain other conditions are met;
or (iii) the Non-U.S. Holder is subject to tax pursuant to the provisions of
U.S. federal income tax law applicable to certain U.S. expatriates. If a
Non-U.S. Holder falls under clause (i) above, the holder will be taxed on the
net gain derived from the sale at regular graduated U.S. federal income tax
rates (the branch profits tax also may apply if the Non-U.S. Holder is a
corporation). If an individual Non-U.S. Holder falls under clause (ii) above,
the holder generally will be subject to a 30% tax on the gain derived from the
sale, which gain may be offset by U.S. capital losses recognized within the same
taxable year of such sale. The foregoing discussion in this paragraph is based
on the Company's conclusion that it is not presently, and has not been for the
past five years, a U.S. real property holding corporation ("USRPHC") subject to
the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Different
consequences would apply to certain Non-U.S. Holders if the Company were to
become a USRPHC subject to
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FIRPTA. Prospective Non-U.S. Holders of Common Stock should consult their own
tax advisers with respect to the consequences of the application of the USRPHC
and FIRPTA provisions.
FEDERAL ESTATE TAXES
An individual Non-U.S. Holder who owns, or is treated as owning, Common
Stock at the time of his or her death or has made certain lifetime transfers of
an interest in Common Stock will be required to include the value of such Common
Stock in his gross estate for U.S. federal estate tax purposes unless an
applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Information reporting requirements and backup withholding tax will not
apply to any payment of the proceeds of the sale of Common Stock effected
outside the United States by a foreign office of a "broker" (as defined in
applicable Treasury regulations), unless such broker is: (i) a U.S. person; (ii)
a foreign person that derives 50% or more of its gross foreign income for
certain periods from activities that are effectively connected with the conduct
of a trade or business in the United States; (iii) a controlled foreign
corporation for U.S. federal income tax purposes; or (iv) effective December 31,
1999, certain brokers that are foreign partnerships with partners who are U.S.
persons or that are engaged in a U.S. trade or business. Payment of the proceeds
of any such sale effected outside the United States by a foreign office of any
broker that is described in clause (i), (ii), (iii) or (iv) of the preceding
sentence will not be subject to backup withholding tax but will be subject to
information reporting requirements unless such broker has documentary evidence
in its records that the beneficial owner is a Non-U.S. Holder and certain other
conditions are met, or the beneficial owner otherwise establishes an exemption.
Payment of the proceeds of any such sale to or through the United States office
of a broker is subject to information reporting and backup withholding
requirements, unless the beneficial owner of the Common Stock either: (i)
provides a Form W-8 (or a suitable substitute form) signed under penalties of
perjury that includes its name and address and certifies as to its Non-U.S.
Holder status in compliance with applicable law and regulations; or (ii)
otherwise establishes an exemption. Effective for payments after December 31,
1999 (and subject to certain transition rules), the New Withholding Regulations
unify certain certification procedures and forms and the reliance standards
relating to information reporting and backup withholding.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS
FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, EACH
PROSPECTIVE NON-U.S. HOLDER OF COMMON STOCK SHOULD CONSULT SUCH HOLDER'S OWN TAX
ADVISER WITH RESPECT TO THE TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND
DISPOSITION OF COMMON STOCK.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Wachtell,
Lipton, Rosen & Katz, New York, New York and for the Underwriters by Brown &
Wood LLP, New York, New York. Each of these firms has in the past represented
and continues to represent the Company and certain of the Underwriters on a
regular basis and in a variety of matters other than the Offering.
EXPERTS
The consolidated statements of financial condition of the Company as of
December 31, 1996 and 1997 and the related consolidated statements of income,
changes in stockholders' equity and cash flows for each of the years ended
December 31, 1995, 1996 and 1997 have been included herein and in the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
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ADDITIONAL INFORMATION
The Company has filed with the SEC, a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby
(the "Registration Statement"). This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Common Stock, reference is hereby made to such Registration Statement and the
exhibits and schedules thereto. Statements contained in this Prospectus as to
the contents of any contract or other document are not necessarily complete and,
in each instance, reference is made to the copy of such contract or document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. The Registration Statement,
including exhibits thereto, may be inspected and copied at the public reference
facilities maintained by the SEC at Judiciary Plaza, 450 Fifth Street, N.W, Room
1024, Washington, D.C. 20549 and at the SEC's Regional Offices located at Suite
1400, 500 West Madison Street, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048. Copies of such materials may be
obtained from the Public Reference Section of the SEC at 450 Fifth Street, N.W.
Washington, D.C. 20549 at prescribed rates. The SEC also maintains a worldwide
web site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants such as the Company which
file electronically with the SEC. The Registration Statement, including all
exhibits thereto and amendments thereof, are available on such world wide web
site.
Upon completion of the Offering, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and, in accordance therewith, will file reports, proxy statements and
information statements with the SEC. Such reports, proxy statements and
information statements and other information can be inspected and copied at the
addresses set forth above.
The Company intends to furnish to its stockholders annual reports
containing financial statements of the Company audited by its independent
auditors and quarterly reports containing unaudited condensed financial
statements for each of the first three quarters of each fiscal year.
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KBW, INC. & SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report.................................. F-2
Consolidated Statements of Financial Condition at
December 31, 1996 and 1997 and at June 30, 1998
(Unaudited).............................................. F-3
Consolidated Statements of Income for the years
ended December 31, 1995, 1996 and 1997 and the
six months ended June 30, 1997 and 1998
(Unaudited).............................................. F-4
Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 1995,
1996 and 1997 and the six months ended June 30, 1998
(Unaudited).............................................. F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1995, 1996 and 1997 and the
six months ended June 30, 1997 and 1998
(Unaudited).............................................. F-6
Notes to Consolidated Financial Statements.................... F-7
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
KBW, Inc.:
We have audited the accompanying consolidated statements of financial condition
of KBW, Inc. (previously Keefe, Bruyette & Woods, Inc. and subsidiary) (the
Company) as of December 31, 1996 and 1997, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of KBW, Inc. at
December 31, 1996 and 1997, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
February 20, 1998
F-2
<PAGE>
KBW, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30
------------------------- -------------
1996 1997 1998
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents......................................... $ 3,764 $ 6,410 $ 3,622
Securities owned, at market value:
Bank and financial institution stocks......................... 69,647 94,176 113,981
Corporate bonds............................................... 16,943 8,290 24,701
U.S. government and agency securities......................... 2,985 -- 1,823
Certificate of deposit, floating rate notes and other......... 244 302 302
-------- -------- --------
89,819 102,768 140,807
-------- -------- --------
Investments....................................................... 21,622 32,588 26,918
Receivable from clearing brokers.................................. 5,735 46,204 67,460
Accounts receivable............................................... 1,414 3,369 12,995
Furniture, fixtures and leasehold improvements, at cost, less
accumulated depreciation and amortization of $3,830 in
1996, $4,487 in 1997, and $4,859 in 1998....................... 1,214 888 741
Other Assets 9,302 7,400 10,269
--------- ------ --------
Total assets............................................. $ 132,870 $199,627 $262,812
========= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Securities sold but not yet purchased, at market value:
Bank and financial institution stocks......................... $ 13,362 $ 21,687 $ 14,241
Corporate bonds............................................... 1,159 8,029 4,261
U.S. government and agency securities......................... 6,010 8,290 23,487
-------- ------ -------
20,531 38,006 41,989
Accounts payable and accrued expenses......................... 5,535 8,019 49,440
Income taxes payable.......................................... 2,099 7,756 1,566
Deferred income taxes, net.................................... 3,829 7,961 4,073
-------- ------ -------
11,463 23,736 55,079
-------- ------ -------
Commitments and contingencies
Subordinated liabilities...................................... 4,901 2,769 2,197
-------- ------ -------
Total liabilities 36,895 64,511 99,265
-------- ------ -------
Stockholders' equity:
Common stock: par value $.01, shares authorized
5,000,000, issued 3,754,335, outstanding 852,954 in 1996,
866,895 in 1997 and 896,748 in 1998 (unaudited) 38 38 38
Paid-in capital................................................ 6,537 9,134 13,167
Retained earnings.............................................. 121,352 158,665 181,385
Common stock in treasury, at cost, shares:
2,901,381 in 1996, 2,887,440 in 1997 and 2,857,587 in
1998 (unaudited)............................................. (26,660) (27,167) (26,311)
Notes receivable from stockholders............................. (5,292) (5,554) (4,732)
-------- ------ -------
Total stockholders' equity.................................. 95,975 135,116 163,547
-------- ------- -------
Total liabilities and stockholders' equity $ 132,870 $199,627 $262,812
========= ======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-3
<PAGE>
KBW, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------- --------------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues
Principal transactions, net................ $ 37,820 $ 36,272 $ 47,076 $ 15,542 $ 23,205
Commissions................................ 9,381 11,339 15,097 6,943 9,117
Investment banking......................... 12,772 28,706 55,225 22,953 62,040
Net gain on investments.................... 1,196 5,987 18,419 9,992 2,238
Interest and dividend income............... 4,349 5,083 6,729 2,913 3,168
Other...................................... 742 1,367 1,340 620 816
------- -------- -------- ------- --------
Total revenues........................ 66,260 88,754 143,886 58,963 100,584
------- -------- -------- ------- --------
Expenses
Compensation and benefits.................. 28,862 40,813 62,508 24,921 51,295
Occupancy and equipment.................... 2,210 2,364 2,608 1,263 1,546
Communications............................. 1,653 2,058 2,310 1,149 1,171
Brokerage and clearance.................... 3,141 3,876 4,683 2,263 2,314
Interest expense........................... 2,215 2,296 966 693 32
Other...................................... 4,321 5,855 10,549 4,047 6,915
------- -------- -------- ------- --------
Total Expenses........................ 42,402 57,262 83,624 34,336 63,273
------- -------- -------- ------- --------
Income before income tax expense............... 23,858 31,492 60,262 24,627 37,311
Income tax expense............................. 8,532 13,547 22,949 10,590 14,591
------- -------- -------- ------- --------
Net income..................................... $ 15,326 $ 17,945 $ 37,313 $ 14,037 $ 22,720
======== ========= ======== ======== ========
Basic earnings per share....................... $ 17.95 $ 21.65 $ 43.69 $ 16.52 $ 25.51
======== ========= ======== ======== ========
Diluted earnings per share..................... $ 17.95 $ 21.65 $ 43.69 $ 16.52 $ 25.51
======== ========= ======== ======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-4
<PAGE>
KBW, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
AND THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON NOTES
STOCK RECEIVABLE
COMMON PAID-IN RETAINED IN FROM
STOCK CAPITAL EARNINGS TREASURY STOCKHOLDERS TOTAL
-------- ---------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994 $ 38 $ 1,080 $ 88,081 $ (18,735) $ (5,006) $ 65,458
Net income.................................. -- -- 15,326 -- -- 15,326
Purchase of 44,848 shares of common
stock from treasury...................... -- -- -- (3,545) -- (3,545)
Sale of 1,131 shares of common stock
from treasury............................ -- 32 -- 65 -- 97
Proceeds from principal repayment on
notes receivable from stockholders....... -- -- -- -- 1,274 1,274
---- ------ -------- ------- ------- ---------
Balances at December 31, 1995 $ 38 $ 1,112 $ 103,407 $(22,215) $ (3,732) $ 78,610
===== ======= ======== ======= ======== =========
Net income.................................. -- -- 17,945 -- -- 17,945
Purchase 60,275 shares of common
stock for treasury....................... -- -- -- (6,304) -- (6,304)
Sale of 64,797 shares of common stock
from treasury............................ -- 5,425 -- 1,859 -- 7,284
Issuance of notes receivable from
stockholders............................. -- -- -- -- (3,067) (3,067)
Proceeds from principal repayment on
notes receivable from stockholders....... -- -- -- -- 1,507 1,507
---- ------ -------- ------- ------- ---------
Balances at December 31, 1996 $ 38 $ 6,537 $ 121,352 $(26,660) $ (5,292) $ 95,975
===== ======= ======== ======= ======== =========
Net income.................................. -- -- 37,313 -- -- 37,313
Purchase of 9,388 shares of common
stock for treasury....................... -- -- -- (1,176) -- (1,176)
Sale of 23,329 shares of common stock
from treasury............................ -- 2,597 -- 669 -- 3,266
Issuance of notes receivable from
stockholders -- -- -- -- (1,255) (1,255)
Proceeds from principal repayment on
notes receivable from stockholders....... -- -- -- -- 993 993
---- ------ -------- ------- ------- ---------
Balances at December 31, 1997 $ 38 $ 9,134 $ 158,665 $(27,167) $ (5,554) $ 135,116
===== ======= ======== ======= ======== =========
Net income.................................. -- -- 22,720 -- -- 22,720
Sale of 29,853 shares of common stock
from treasury............................ -- 4,033 -- 856 -- 4,889
Repayment of notes receivable from
stockholders............................. -- -- -- -- 822 822
---- ------ -------- ------- ------- ---------
Balances at June 30, 1998 $ 38 $ 13,167 $ 181,385 $(26,311) $ (4,732) $ 163,547
===== ======= ======== ======= ======== =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-5
<PAGE>
KBW, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------- --------------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................ $ 15,326 $ 17,945 $ 37,313 $ 14,037 $ 22,720
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Deferred income taxes (benefit)........ 1,550 2,563 4,131 2,621 (3,888)
Unrealized (gain) loss from
principal transactions and (6,687) (8,495) (11,440) (7,280) 10,764
investments...........................
Realized (gain) loss from 640 (232) (11,292) -- (8,179)
investments...........................
Depreciation and amortization.......... 518 297 1,128 536 655
(Increase) decrease in operating
assets:
Securities owned..................... (62,445) 28,389 (7,040) (12,674) (43,631)
Receivable from clearing brokers..... 28,030 (2,535) (40,468) (108,458) (21,256)
Accounts receivable.................. (761) 8 (1,955) (1,386) (9,626)
Other assets......................... (75) (371) 1,481 604 (3,125)
Increase (decrease) in operating liabilities:
Securities sold but not yet
purchased............................ 24,966 (32,615) 15,886 100,384 5,318
Accounts payable and accrued
expenses............................. 5,514 (1,322) 2,484 15,666 41,421
Income taxes payable................. (35) 1,453 5,658 2,673 (6,190)
-------- -------- --------- -------- --------
Total adjustments.................. (8,785) (12,860) (41,427) (7,314) (37,737)
--------- -------- --------- -------- --------
Net cash provided by (used in)
operating activities................. $ 6,541 $ 5,085 $ (4,114) $ 6,723 $(15,017)
------- ------- -------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, fixtures and
leasehold improvements................ (264) (229) (290) (189) (252)
Purchases of investments.................. (5,186) (3,718) (7,029) (6,446) (5,800)
Proceeds from sale of investments......... 164 269 14,383 99 13,142
-------- -------- --------- -------- --------
Net cash provided by (used in)
investing activities................ $ (5,286) $ (3,678) $ 7,064 $ (6,536) $ 7,090
------- ------- -------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock from treasury........ $ 97 $ 1,125 $ 2,011 $ 430 $ 4,889
Purchase of common stock for treasury..... (3,545) (6,304) (1,176) (1,083) --
Repayment of notes receivable from
stockholders.......................... 1,274 1,467 993 352 822
Issuance of subordinated borrowings....... -- 5,673 -- -- --
Installment payments on subordinated
borrowings............................ (336) (1,290) (2,132) (1,471) (572)
-------- -------- --------- -------- --------
Net cash provided by (used in)
financing activities.............. (2,510) 671 (304) (1,772) 5,139
-------- -------- --------- -------- --------
Net increase (decrease) in cash
and cash equivalents.............. (1,255) 2,078 2,646 (1,585) (2,788)
Cash and cash equivalents at beginning 2,941 1,686 3,764 3,764 6,410
-------- -------- --------- -------- --------
of period.................................
Cash and cash equivalents at end of $ 1,686 $ 3,764 $ 6,410 $ 2,179 $ 3,622
======== ======== ========= ======== ========
period....................................
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Income taxes......................... $ 7,070 $ 9,620 $ 13,129 $ 5,297 $ 24,669
======== ======== ========= ======== ========
Interest............................. $ 2,183 $ 2,306 $ 980 $ 68 $ 36
======== ======== ========= ======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
F-6
<PAGE>
KBW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
KBW, Inc. (the "Company") is a newly formed holding company which, as
of the date of completion of its initial public offering, will own all of the
outstanding capital stock of Keefe, Bruyette & Woods, Inc. ("KBWI") and KBW
Asset Management, Inc. ("KBWAM"), previously Keefe Management Services, Inc.,
pursuant to the Reorganization (See Subsequent Events note 15).
Prior to the Reorganization, KBWI and its consolidated subsidiary KBWAM
reported as Keefe Bruyette & Woods, Inc. and subsidiary. As KBW, Inc., KBWI and
KBWAM are entities under common control, the accompanying financial statements
give effect to the Reorganization as if it were a pooling-of-interests.
Accordingly, the financial statements reflect the Reorganization as if it had
occurred as of the beginning of the earliest period presented, and the assets,
liabilities and stockholders' equity are recorded based upon their historical
carrying amounts. No intangible assets are to be created and recorded as a
result of the Reorganization.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries KBWI and KBWAM. All intercompany accounts and
transactions have been eliminated in consolidation. These consolidated financial
statements reflect, in the opinion of management, all adjustments necessary for
a fair presentation of the consolidated financial position and results of
operations of the Company.
Clearing Arrangements
The Company has agreements with Pershing, a division of Donaldson,
Lufkin & Jenrette Securities Corporation, and Morgan Stanley & Co. Incorporated
("Morgan Stanley"), whereby Pershing and Morgan Stanley clear securities
transactions for the Company, carry customers' accounts on a fully disclosed
basis and prepare various records and reports. (See Subsequent Events note 15).
Cash Equivalents
For purposes of the consolidated financial statements, the Company
considers all money market and time deposits with maturities of three months or
less to be cash equivalents. At December 31, 1995, 1996 and 1997 and June 30,
1998 (unaudited) cash equivalents totaled $1,237, $2,457, $3,074 and $2,294,
respectively.
Securities and Options
Securities and options transactions, including amounts receivable from
clearing brokers, are recorded on a trade date basis. Securities owned,
including options, are valued at quoted market prices. The resulting difference
between cost and market is included in the consolidated statements of income in
principal transactions, net.
F-7
<PAGE>
KBW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investments
Investments represent not readily marketable securities, and certain
publicly traded securities held for long-term proprietary investment purposes,
of financial services companies. Securities not readily marketable include
investment securities (a) for which there is no market on a securities exchange
or no independent publicly quoted market price, (b) that cannot be publicly
offered or sold unless registration has been effected under the Securities Act
of 1933 or (c) that cannot be offered or sold because of other arrangements,
restrictions or conditions applicable to the securities or to the Company.
Publicly traded investments are valued at market. Securities not readily
marketable are valued at fair value as determined by management. The resulting
difference between cost and market or estimated fair value is included in the
consolidated statements of income in net gain on investments. The fair value of
not readily marketable securities at December 31, 1996 and 1997 and the six
months ended June 30, 1998 (unaudited) was $6,926, $4,629 and $7,945,
respectively.
Investment Banking
Investment banking revenues are recorded as follows: management fees as
of the offering date, sales concessions on the trade date, merger and
acquisition fees when amounts are due under terms of the engagement and
underwriting fees at the time the underwriting is completed and the income is
reasonably determinable.
Fixed Assets
Furniture and fixtures are carried at cost and depreciated on a
straight-line basis using estimated useful lives of the related assets,
generally two to five years. Leasehold improvements are amortized on a straight
line basis over the lesser of the economic useful life of the improvement or the
term of the respective leases.
Business Acquisition
On July 31, 1996, Charles Webb & Company was acquired by KBWI. The
acquisition was accounted for as a purchase. KBWI issued 27,914 treasury shares
with an aggregate carrying value of $3,092 in exchange for all of the
outstanding common stock of Charles Webb & Company. Goodwill in the amount of
$2,562 was recorded and is being amortized over a five-year period on a straight
line basis.
Fair Value of Financial Instruments
Substantially all of the Company's financial assets and liabilities are
carried at fair market value or contracted amounts which approximate fair value.
Income Taxes
Deferred income taxes are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. Income taxes for interim period consolidated
financial statements have been accrued using the Company's estimated annual
effective rates.
F-8
<PAGE>
KBW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Interim Financial Statements
The accompanying consolidated financial statements as of June 30, 1998
and for the six months ended June 30, 1997 and 1998 have been prepared by the
Company, are unaudited and include, in the opinion of management, all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the interim period results. Operating results for any interim
period are not necessarily indicative of the results for any other period or for
an entire year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Other
Certain reclassifications have been made to prior years' financial
statements to conform to the current presentation.
2. SUBORDINATED LIABILITIES
The Company had various subordinated notes outstanding, payable to
former employees in installments, with interest rates and final maturities as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
NOTES DUE 1996 1997 1998
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
February 1997 $ 35 $ -- $ --
April 1997 397 -- --
May 1997 16 -- --
July 1997 15 -- --
March 1999 687 38 --
April 2000 1,688 1,205 964
June 2000 233 171 124
September 2000 1,830 1,355 1,109
-------- -------- --------
$ 4,901 $ 2,769 $ 2,197
======== ======== ========
</TABLE>
One note due April 1997 for $199 bore interest at 2% per annum above
the two-year Treasury note rate but not less than 10% per annum. At December 31,
1996 this note bore interest at 10% per annum. All other notes outstanding bore
interest at 1% above a reference bank rate not to exceed 7-1/2% in total.
Interest rates at December 31, 1996 and December 31, 1997 were 2.5% per annum
and at June 30, 1998 (unaudited) were 2.25% per annum.
F-9
<PAGE>
3. INCOME TAXES
Income taxes included in the consolidated statements of income
represent the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- ------
<S> <C> <C> <C>
Year ended December 31, 1995:
U.S. Federal $5,971 $1,550 $7,521
State and local 1,011 -- 1,011
------ ---- -----
$6,982 $1,550 $8,532
===== ===== =====
Year ended December 31, 1996:
U.S. Federal $9,298 $2,084 $11,382
State and local 1,686 479 2,165
------ ----- ------
$10,984 $2,563 $13,547
====== ===== ======
Year ended December 31, 1997:
U.S. Federal $15,070 $3,402 $18,472
State and local 3,748 729 4,477
------ ----- ------
$18,818 $4,131 $22,949
====== ===== ======
</TABLE>
The difference between the "expected" Federal tax rate and expense
computed by applying the statutory tax rate to income before provision for
income taxes and the effective tax rate and expense is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------------------- ---------------------- ----------------------
PERCENT OF PERCENT OF PERCENT OF
PRE-TAX PRE-TAX PRE-TAX
AMOUNT EARNINGS AMOUNT EARNINGS AMOUNT EARNINGS
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Computed "expected"
tax provision $ 8,350 35.0% $ 11,022 35.0% $ 21,091 35.0%
State and local
taxes, net of
related federal
income tax benefit 657 1.6 1,407 4.5 2,910 4.8
Dividend exclusion
and other (475) (.8) 1,118 3.5 (1,052) (1.7)
------ ----- ------- ----- ------- -----
$ 8,532 35.8% $ 13,547 43.0% $ 22,949 38.1%
====== ==== ======= ==== ======= ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Other liabilities and accrued expenses $ 976 $ 1,168
Fixed assets 542 657
Deferred tax liabilities:
Investments (5,347) (9,786)
------ ------
Net deferred tax liabilities $ (3,829) $ (7,961)
====== ======
</TABLE>
There are no valuation allowances recorded against deferred tax assets
at December 31, 1996 and 1997 since management has determined that it is more
likely than not that the benefits will be realized.
F-10
<PAGE>
KBW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. NET CAPITAL REQUIREMENTS
KBWI, as a registered broker-dealer in securities, is subject to the
net capital requirements of the New York Stock Exchange (the "NYSE") and the
Securities and Exchange Commission's (the "SEC") Uniform Net Capital Rule (Rule
15c3-1). The NYSE and the SEC also provide that equity capital may not be
withdrawn or cash dividends paid if certain minimum capital requirements are not
met.
At December 31, 1997, the Company's net capital and excess net capital
were $102,881 and $101,934, respectively. At June 30, 1998 (unaudited), the
Company's net capital and excess net capital were $124,180 and $123,513,
respectively.
5. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its headquarters and other office locations under
noncancellable lease agreements which expire in 1999 and 2001. Such agreements
contain escalation clauses and provide that certain operating costs be paid by
the Company in addition to the minimum rentals.
Future minimum lease payments are as follows:
DECEMBER 31, JUNE 30,
1997 1998
---- ----
(UNAUDITED)
1998 $1,790 $ 901
1999 1,135 3,092
2000 146 3,261
2001 148 3,263
2002 -- 3,115
Thereafter -- 35,423
------ -------
$3,219 $49,055
===== ======
Rent expense for the years ended December 31, 1995, 1996 and 1997, and
the six months ended June 30, 1997 (unaudited) and 1998 (unaudited) aggregated
$1,637, $1,668, $1,679, $885 and $897, respectively.
Litigation
In the ordinary course of business the Company may be a defendant or
co-defendant in legal actions. It is the opinion of management, after
consultation with counsel, that the resolution of all known actions will not
have a material adverse effect on the consolidated financial position and
results of operations of the Company.
F-11
<PAGE>
KBW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. NOTES RECEIVABLE FROM STOCKHOLDERS
Notes receivable from stockholders represent full recourse notes issued
to employees for their purchases of stock acquired pursuant to the KBWI book
value stock purchase plan. Loans are payable in quarterly installments and bear
interest at 6.5% per annum. (See Subsequent Events note 15.)
7. PRINCIPAL TRANSACTIONS, NET
The Company's principal transaction revenues (losses) by type of
financial instrument are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------- -------------------------
1995 1996 1997 1997 1998
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Fixed income $ 890 $ (797) $ 3,192 $ 785 $ 3,203
Equity (including options) 36,930 37,069 43,884 14,757 20,002
--------- --------- --------- ---------- ----------
$ 37,820 $ 36,272 $ 47,076 $ 15,542 $ 23,205
========= ========= ========= ========== ==========
</TABLE>
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
PROPRIETARY TRADING EXPOSURE
In the normal course of its proprietary trading activities, the Company
enters into transactions in financial instruments with off-balance-sheet. These
financial instruments, primarily listed options, contain off-balance-sheet risk
inasmuch as ultimate settlement of these transactions may have market and/or
credit risk in excess of amounts recorded in the financial statements.
Transactions in listed options are conducted through regulated exchanges, which
clear and guarantee performance of counterparties.
Also, in connection with its proprietary trading activities, the
Company has sold securities that it does not currently own and it will,
therefore, be obligated to purchase such securities at a future date. The
Company has recorded these obligations in the financial statements at market
values of the related securities and will incur a loss if the market value of
the securities increases subsequent to the financial statement date.
BROKER-DEALER EXPOSURE
The Company clears securities transactions on behalf of customers
through its clearing brokers. In connection with these activities, customers'
unsettled trades may expose the Company to off-balance-sheet credit risk in the
event customers are unable to fulfill their contracted obligations. The Company
seeks to control the risk associated with its customer activities by requiring
margin customers to maintain collateral in compliance with various regulatory
and internal guidelines and by monitoring the creditworthiness of all its
customers.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company's derivative activities consist of writing and purchasing
options for trading purposes. As a writer of options, the Company receives a
cash premium at the beginning of the contract period and bears the risk of
unfavorable changes in the value of the financial instruments underlying the
options. Options written do not expose the Company to credit risk since they
obligate the Company (not its counterparty) to perform.
F-12
<PAGE>
KBW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (CONTINUED)
In order to measure derivative activity, notional or contract amounts
are frequently utilized. Notional/contract amounts, which are not included on
the balance sheet, are used as a basis to calculate contractual cash flows to be
exchanged and generally are not actually paid or received. A summary of the
Company's listed options contracts is as follows:
<TABLE>
<CAPTION>
CONTRACT
NOTIONAL AVERAGE FAIR END OF PERIOD
AMOUNT VALUE FAIR VALUE
---------- ------------ -------------
<S> <C> <C> <C>
December 31, 1996
Purchased options $ 8,599 $ 605 $ 443
Written options 42,314 1,070 935
December 31, 1997
Purchased options $ 2,370 $ 248 $ 54
Written options 28,778 815 696
June 30, 1998 (unaudited)
Purchased options $ 14,500 $ 146 $ 238
Written options 31,770 797 898
</TABLE>
Open commitments at December 31, 1997, which were subsequently settled,
had no material effect on the consolidated financial position of the Company.
9. CONCENTRATIONS OF CREDIT RISK
As a securities broker and dealer, the Company is engaged in various
securities trading and brokerage activities servicing primarily domestic and
foreign institutional investors and, to a lesser extent, individual investors.
Nearly all of the Company's transactions are executed with and on behalf of
institutional investors including other brokers and dealers, commercial banks,
mutual funds and other financial institutions. The Company's exposure to credit
risk associated with the nonperformance of these customers in fulfilling their
contractual obligations pursuant to securities transactions can be directly
impacted by volatile securities markets.
A substantial portion of the Company's marketable securities are common
stock and debt of banks and similar financial institutions. The credit and/or
market risk associated with these holdings can be directly impacted by volatile
credit markets and actions of regulatory authorities.
10. BOOK VALUE STOCK PURCHASE PLAN
The Company maintains a book value stock purchase plan pursuant to a
stockholder agreement ("the Agreement") whereby employees may purchase shares of
the Company's stock at book value as calculated in accordance with the
Agreement. The Agreement requires stockholders leaving the Company's employ to
sell their stock back to the Company at the then book value as calculated under
the Agreement. (See Subsequent Events, note 15.)
F-13
<PAGE>
KBW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. EMPLOYEE PROFIT SHARING RETIREMENT PLAN
The Company has a defined contribution employee profit sharing
retirement plan in which all employees are entitled to participate based upon
certain eligibility requirements. Investment decisions for the plan are managed
by certain officers of the Company. The Company's contributions to the plan,
which are voluntary, were $1,138, $1,245 and $1,742 in 1995, 1996 and 1997,
respectively.
12. EARNINGS PER SHARE
The Company computes its earnings per share in accordance with SFAS
No. 128, "Earnings Per Share".
Pursuant to SFAS No. 128, basic earnings per share is computed by
dividing net income applicable to common shares by the weighted average number
of common shares outstanding for the period. Diluted earnings per share is
computed by dividing net income applicable to common shares plus earnings
addbacks attributable to potentially dilutive securities by the weighted average
number of fully-diluted shares outstanding for the period. The following table
sets forth the computation for Basic and Diluted earnings per share:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- --------------------------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net income $15,326 $17,945 $37,313 $14,038 $22,720
Denominator:
Weighted average shares
outstanding 854 829 854 850 891
Dilutive effect of stock options
and other exercisable shares -- -- -- -- --
----- ------ ------ ------ ------
Adjusted weighted average shares
outstanding 854 829 854 850 891
----- ------ ------ ------ ------
Basic earnings per share $ 17.95 $ 21.65 $ 43.69 $ 16.52 $ 25.51
===== ===== ===== ===== =====
Diluted earnings per share $ 17.95 $ 21.65 $ 43.69 $ 16.52 $ 25.51
===== ===== ===== ===== =====
</TABLE>
13. INDUSTRY SEGMENT DATA
The Company currently follows the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 14, "Financial Reporting for Segments of a
Business Enterprise," in disclosing its business segments. Pursuant to that
statement, the Company is primarily engaged in a single line of business as a
securities broker-dealer, which comprises several types of services, such as
principal and agency transactions, underwriting and investment banking. These
activities constitute a single business segment.
14. RECENT ACCOUNTING DEVELOPMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income," which is effective for fiscal
years beginning after December 15, 1997. This statement
F-14
<PAGE>
KBW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. RECENT ACCOUNTING DEVELOPMENTS (CONTINUED)
establishes standards for the reporting and display of comprehensive income and
its components. The Company believes that this statement will have no effect on
its current financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which is effective for financial
statements for fiscal years beginning after December 15, 1997. This statement
requires a company to report financial and descriptive information about its
reportable operating segments. The Company is currently evaluating the impact of
this standard on its financial statement presentation and disclosures.
In June of 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which is effective for financial
statements for fiscal years beginning after June 15, 1999. This statement
establishes comprehensive accounting and reporting standards for derivative and
hedging activities. As the Company values all of its securities positions at
market or fair value, it believes that this statement will have no impact on
current accounting methods. The effects of this statement on financial statement
disclosures, if any, are presently being considered.
15. SUBSEQUENT EVENTS (UNAUDITED)
On August ___, 1998, the Company filed a registration statement with
the Securities and Exchange Commission to register the primary and secondary
initial public offering of shares of the Company's common stock.
Reorganization
Prior to the initial public offering, the stockholders of KBWI will
vote to place ownership of KBWI and KBWAM under a holding company structure
which will be effected either by merger or share exchange (the
"Reorganization"). As part of the Reorganization, KBWI will distribute the
capital stock of KBWAM to the Company. Effective immediately prior to the
initial public offering, all of the outstanding common stock of KBWI will be
converted into or exchanged into shares of common stock of the Company at the
applicable exchange ratio.
Treasury Stock Retirement
In connection with the Reorganization and the initial public offering,
the former treasury stock of KBWI will be retired. The pro forma effect on the
Company's June 30, 1998 equity would be as follows:
<TABLE>
<CAPTION>
PRO FORMA
JUNE 30, JUNE 30,
1998 1998
---- ----
(UNAUDITED)
<S> <C> <C>
Common stock $ 38 $ 9
Paid-in capital 13,167 13,167
Retained earnings 181,385 155,103
Common stock in treasury (26,311) --
Notes receivable from stockholders (4,732) (4,732)
----------- --------------
$ 163,547 $ 163,547
========== =============
</TABLE>
F-15
<PAGE>
KBW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
Compensation Adjustment
Upon completion of the initial public offering and in the Company's
financial statements for the period in which the offering is completed, the
Company will record a one-time compensation charge and corresponding increase in
paid in capital of $6,662 representing the difference between the estimated fair
value and sale price of common stock sold to employees during the twelve months
preceding completion of the offering.
Leases
On June 24, 1998, the Company entered into a new lease agreement for
its headquarters. The new lease expires in 2014.
Issuance of Discount Stock Options
Subsequent to June 30, 1998 the Company began issuing discounted
stock options to induce certain persons to become employees. The options have a
ten-year term and generally vest ratably on each of the first three
anniversaries of the date of grant. Compensation expense for the difference
between the exorcise price and the fair market value at the date of grant will
be recorded ratably over the three-year vesting period.
Employee Stock Purchase Plan
Upon the exchange of outstanding shares of common stock of KBWI for
shares of common stock of the Company (see note 1) the book value stock purchase
plan of KBWI will become inoperative. The Company's Board of Directors and
stockholders intend to adopt a new employee stock purchase plan relating to the
common stock of the Company. The new plan allows employees of the Company or any
of its subsidiaries to purchase shares of the Company's common stock at 85% of
the fair market value of such shares on the date of purchase. The offering dates
are January 1 and July 1 of each year, and each offering period shall consist of
one six-month purchase period. The fair market value of shares that may be
purchased by any employee during a calendar year may not exceed $25,000 (amount
not in thousands).
Employee Stock and Annual Incentive Plan
The Company also intends to adopt an employee stock and annual
incentive plan (the "1998 Plan") which provides for the grant of stock options
to purchase the Company's common stock (both non-qualified and incentive stock
options), stock appreciation rights, incentive awards and restricted stock
(collectively, the "Awards") to employees as determined by the compensation
committee or other designated committee of the Board of Directors. The terms of
options granted under the 1998 Plan may not exceed 10 years. Unless otherwise
determined by the Company's Board of Directors or the designated committee,
options will have an exercise price equal to the fair market value of the common
stock on the date of grant. In the event of a change in control as defined in
the 1998 Plan, any option that is not then exercisable and vested will become
fully exercisable and vested, restricted stock will vest and performance units
will be deemed earned. The 1998 Plan also permits annual cash bonus payments to
be awarded to certain eligible employees of the Company, as determined by the
Board of Directors or the committee.
Director Stock and Option Plan
The Company intends to adopt a non-employee director compensation plan
(the "Director Compensation Plan") whereby non-employee directors of the Company
will be eligible to receive common stock or options (at fair market value) in
lieu of, or in combination with cash, for directors fees. Options granted under
the Director
F-16
<PAGE>
KBW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
Compensation Plan will vest upon the first anniversary of the grant and are
exercisable up to 10 years from the date of grant. All director options become
fully vested and exercisable upon a change of control. All options and stock
awarded under the Director Compensation Plan are nontransferable other than by
will or the laws of descent and distribution.
Other
In 1998 Morgan Stanley sold its clearing business to NationsBanc
Montgomery Securities LLC. NationsBanc Montgomery Securities LLC continues to
clear certain of the Company's securities transactions.
F-17
<PAGE>
<TABLE>
<CAPTION>
================================================================================ ===============================================
<S> <C>
No dealer, salesperson or other person has been authorized to Shares
give any information or to make any representations other than those contained
in this Prospectus in connection with the offer made by this Prospectus and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Company, the Selling Stockholders or any of the [Logo of KBW, INC.]
Underwriters. This Prospectus does not constitute an offer to sell or the
solicitation of any offer to buy any security other than the shares of Common KBW, INC.
Stock offered by this Prospectus, nor does it constitute an offer to sell or a
solicitation of any offer to buy the shares of Common Stock by anyone in any
jurisdiction in which such offer or solicitation is not authorized, or in
which the person making such offer or solicitation is not qualified to do so,
or to any person to whom it is unlawful to make such offer or solicitation.
Neither the delivery of this Prospectus nor any sale made hereunder shall,
under any circumstances, create any implication that the information contained
herein is correct as of any time subsequent to the date hereof.
-----------------------
TABLE OF CONTENTS
PAGE
Prospectus Summary.................................................. 3 Common Stock
Risk Factors........................................................ 7
Use of Proceeds..................................................... 16
Dividend Policy..................................................... 16
Capitalization...................................................... 17 ---------------
Dilution............................................................ 18 PROSPECTUS
Selected Historical Consolidated ---------------
Financial Data................................................ 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations................................................. 21
Business............................................................ 29
Management.......................................................... 44
Principal and Selling Stockholders.................................. 55
Certain Transactions Occurring Prior to
the Offering.................................................. 56
Description of Capital Stock........................................ 58 Donaldson, Lufkin & Jenrette
Certain Anti-takeover Provisions.................................... 58
Shares Eligible for Future Sale..................................... 63
Underwriting........................................................ 64
Tax Consequences to Non-U.S. Holders................................ 66 Goldman, Sachs & Co.
Legal Matters....................................................... 68
Experts............................................................. 68
Additional Information.............................................. 69
Index to Consolidated
Financial Statements.......................................... F-1 Keefe, Bruyette & Woods, Inc.
-----------------------
Until , 1998 (25 days after the date of this Prospectus), all dealers
effecting transactions in the Common Stock, whether or not participating in this
distribution, may be required to deliver a Prospectus. This requirement is in , 1998
addition to the obligation of dealers to deliver a Prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
================================================================================ ================================================
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the estimated costs and expenses, other
than underwriting discounts and commissions, payable in connection with the sale
of Common Stock offered hereby (including the Common Stock which may be sold
pursuant to the Underwriters' over-allotment option) all of which will be paid
by the Company:
Amount*
SEC registration fee.................................... $ 33,925
NASD filing fee......................................... 12,000
New York Stock Exchange listing fee.....................
Printing and engraving expenses.........................
Legal fees and expenses.................................
Accounting fees and expenses............................
Blue sky fees and expenses (including legal fees and
expenses)............................................... 2,500
Transfer agent and registrar fees and expenses..........
Miscellaneous...........................................
---------
Total................................................... $
=========
* All amounts are estimated except SEC registration fee, NASD filing fee, and
New York Stock Exchange listing fee.
Item 14. Indemnification of Directors and Officers
Section 145 of the General Corporation Law of the State of Delaware
("DGCL") provides as follows:
A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that the person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with such action, suit or proceeding if the
person acted in good faith and in a manner the person reasonably believed to be
in or not opposed to the best interest of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe the
person's conduct was unlawful. The termination of any action, suit or proceeding
by judgment, order, settlement, conviction or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which the person reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had reasonable cause to believe that the
person's conduct was unlawful.
A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that the person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against expenses (including attorneys'
fees) actually and reasonably incurred by the person in connection with the
defense or settlement of such action or suit if the person acted in good faith
and in a manner the person reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification shall be
made in respect to any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to the extent that
the Court of
II-1
<PAGE>
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
As permitted by the DGCL, the Company has included in the KBW
Certificate a provision to eliminate the personal liability of its directors for
monetary damages for breach or alleged breach of their fiduciary duties as
directors, subject to certain exceptions. In addition, the KBW Bylaws provide
that the Company is required to indemnify its directors and officers under
certain circumstances, including those circumstances in which indemnification
would otherwise be discretionary, and the Company is required to advance
expenses to its directors and officers as incurred in connection with
proceedings against them for which they may be indemnified. The Company has also
agreed to indemnify its directors and certain officers to the maximum extent
permitted by the DGCL pursuant to agreements with such directors and officers.
The Underwriting Agreement provides that the Underwriters are
obligated, under certain circumstances, to indemnify directors, officers and
controlling persons of the Company against certain liabilities, including
liabilities under the Securities Act. Reference is made to the form of
Underwriting Agreement filed as Exhibit 1.01 hereto.
The Company maintains directors and officers liability insurance for
the benefit of its directors and certain of its officers.
Item 15. Recent Sales of Unregistered Securities
Immediately prior to the offering contemplated hereby, the Registrant
issued an aggregate of shares of Common Stock to the stockholders of Keefe,
Bruyette & Woods, Inc. in exchange for all of their shares of common stock of
Keefe, Bruyette & Woods, Inc., a New York corporation, pursuant to a merger in
which a transitory subsidiary of the Registrant was merged with and into Keefe,
Bruyette & Woods, Inc. There were no underwriters, brokers or finders employed
in connection with these transactions. The sales of the above securities were
deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act, as transactions by an issuer not involving a
public offering. The recipients of securities in each such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were attached to the certificates issued in such
transactions. All recipients had adequate access to information about the
Registrant.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
Exhibit
Number Exhibit Title
1.01 --Form of Underwriting Agreement.*
2.01 --Agreement and Plan of Merger.*
3.01 --Registrant's Certificate of Incorporation.
3.02 --Registrant's Bylaws.*
4.01 --Form of Specimen Certificate for Registrant's Common Stock.*
5.01 --Form of Opinion of Wachtell, Lipton, Rosen & Katz.*
10.01 --Form of Stockholders' Agreement.*
10.02 --Form of 1998 Stock and Annual Incentive Plan.*
10.03 --Form of 1998 Employee Stock Purchase Plan.*
10.04 --Form of Non-Employee Director Stock and Option Compensation
Plan.*
10.05 --Form of Employment Agreement for certain executives.*
II-2
<PAGE>
11.01 --Computation of Earnings Per Share.*
21.01 --List of Subsidiaries of the Registrant.*
23.01 --Consent of Independent Public Accountants.
23.02 --Consent of Counsel (included in Exhibit 5.01). *
24.01 --Power of Attorney (see page II-4 of this Registration
Statement).
27.01 --Financial Data Schedule.
- ---------------
* To be filed by amendment.
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(1) That for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this Registration Statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act of 1933 shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) That for the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment that contains
a form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To provide to the underwriters at the closing specified in
the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriters to permit
prompt delivery to each purchaser.
(4) Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act of 1933 and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act of 1933
and will be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on the 14th day of August 1998.
KBW, INC.
By: /S/ JAMES J. MCDERMOTT, JR.
Chairman of the Board of Directors
and Chief Executive Officer
POWER OF ATTORNEY
Know all men by these presents, that each of the undersigned directors
and officers of KBW, Inc. does hereby constitute and appoint James J. McDermott,
Jr., John G. Duffy, Guy G. Woelk and Mitchell B. Kleinman, or any of them (with
full power to each of them to act alone), his true and lawful attorney-in-fact
and agent, with full power of substitution, for him and on his behalf to sign,
execute and file this Registration Statement and any or all amendments
(including, without limitation, post-effective amendments and any amendment or
amendments or abbreviated registration statement increasing the amount of
securities for which registration is being sought) to this Registration
Statement, with all exhibits and any and all documents required to be filed with
respect thereto, with the Securities and Exchange Commission or any regulatory
authority, granting unto such attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises in order to
effectuate the same as fully to all intents and purposes as he might or could do
if personally present, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities on the 14th day of August 1998.
Signature Title
/s/ JAMES J. MCDERMOTT, JR. Chairman of the Board of Directors
- -------------------------------------------- and Chief Executive Officer
(James J. McDermott, Jr.) (Principal Executive Officer)
/S/ CHARLES H. LOTT Vice Chairman of the Board of
- -------------------------------------------- Directors
(Charles H. Lott)
/S/ STANLEY T. WELLS Vice Chairman of the Board of
- -------------------------------------------- Directors and Executive Vice
(Stanley T. Wells) President
/S/ JOSEPH J. BERRY President, Chief Operating Officer
- -------------------------------------------- and Director
(Joseph J. Berry)
/S/ JOHN G. DUFFY Executive Vice President, Co-Head
- -------------------------------------------- of Corporate Finance and Director
(John G. Duffy)
II-4
<PAGE>
/s/ ANDREW M. SENCHAK Executive Vice President, Co-Head
- ------------------------------------------ of Corporate Finance and Director
(Andrew M. Senchak)
/S/ GUY G. WOELK Executive Vice President, Chief
- ------------------------------------------ Financial Officer and Treasurer
(Guy G. Woelk) (Principal Financial Officer and
Principal Accounting Officer)
II-5
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Title
1.01 --Form of Underwriting Agreement.*
2.01 --Agreement and Plan of Merger.*
3.01 --Registrant's Certificate of Incorporation.
3.02 --Registrant's Bylaws.*
4.01 --Form of Specimen Certificate for Registrant's Common Stock.*
5.01 --Form of Opinion of Wachtell, Lipton, Rosen & Katz.*
10.01 --Form of Stockholders' Agreement.*
10.02 --Form of 1998 Stock and Annual Incentive Plan.*
10.03 --Form of 1998 Employee Stock Purchase Plan.*
10.04 --Form of Non-Employee Director Stock and Option Compensation Plan.*
10.05 --Form of Employment Agreement for certain executives.*
11.01 --Computation of Earnings Per Share.*
21.01 --List of Subsidiaries of the Registrant.*
23.01 --Consent of Independent Public Accountants.
23.02 --Consent of Counsel (included in Exhibit 5.01).*
24.01 --Power of Attorney (see page II-4 of this Registration Statement).
27.01 --Financial Data Schedule.
- ---------------
* To be filed by amendment.
II-6
EXHIBIT 3.01
CERTIFICATE OF INCORPORATION
OF
KBW, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
================================================================================
ARTICLE I
The name of the corporation (the "Corporation") is:
KBW, Inc.
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street in the City of
Wilmington, County of New Castle. The name of the Corporation's registered agent
at such address is The Corporation Trust Company.
ARTICLE III
The purpose of the Corporation shall be to engage in any lawful act or
activity for which corporations may be organized and incorporated under the
General Corporation Law of the State of Delaware (the "GCL").
ARTICLE IV
(a) The total number of shares of stock which the Corporation shall
have authority to issue is One Hundred Fifty Million (150,000,000), consisting
of Ten Million (10,000,000) shares of preferred stock, par value $0.01 per share
("Preferred Stock"), and One Hundred Forty Million (140,000,000) shares of
common stock, par value $0.01 per share ("Common Stock").
(b) The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized to provide for the issuance
of shares of Preferred Stock in series and, by filing a certificate pursuant to
the applicable law of the State of Delaware ("Preferred Stock Designation"), to
establish from time to time the number of shares to be included in each such
series, and to fix the designation, powers, preferences and rights of the shares
of each such series and the qualifications, limitations and restrictions
thereof. The
<PAGE>
authority of the Board of Directors with respect to each series shall include,
but not be limited to, determination of the following:
(1) The designation of the series, which may be by
distinguishing number, letter or title.
(2) The number of shares of the series, which number the Board
of Directors may thereafter (except where otherwise provided in the
Preferred Stock Designation) increase or decrease (but not below the
number of shares thereof then outstanding).
(3) Whether dividends, if any, shall be cumulative or
noncumulative and the dividend rate of the series.
(4) The dates on which dividends, if any, shall be payable.
(5) The redemption rights and price or prices, if any, for
shares of the series.
(6) The terms and amount of any sinking fund provided for the
purchase or redemption of shares of the series.
(7) The amounts payable on, and the preferences, if any, of,
shares of the series in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the
Corporation.
(8) Whether the shares of the series shall be convertible into
shares of any other class or series, or any other security, of the
Corporation or any other corporation, and, if so, the specification of
such other class or series of such other security, the conversion price
or prices or rate or rates, any adjustments thereof, the date or dates
at which such shares shall be convertible and all other terms and
conditions upon which such conversion may be made.
(9) Restrictions on the issuance of shares of the same series
or of any other class or series.
(10) The voting rights, if any, of the holders of shares of
the series.
(c) The Common Stock shall be subject to the express terms of the
Preferred Stock and any series thereof. Each share of Common Stock shall be
equal to each other share of Common Stock. The holders of shares of Common Stock
shall be entitled to one vote for each such share upon all questions presented
to the stockholders.
Except as may be provided in this Certificate of Incorporation or in a
Preferred Stock Designation, or as may be required by law, the Common Stock
shall have the exclusive right to vote for the election of directors and for all
other purposes, and holders of Preferred Stock shall
-2-
<PAGE>
not be entitled to receive notice of any meeting of stockholders at which they
are not entitled to vote.
(d) The Corporation shall be entitled to treat the person in whose name
any share of its stock is registered as the owner thereof for all purposes and
shall not be bound to recognize any equitable or other claim to, or interest in,
such share on the part of any other person, whether or not the Corporation shall
have notice thereof, except as expressly provided by applicable law.
ARTICLE V
The Board of Directors is hereby authorized to create and issue, whether or not
in connection with the issuance and sale of any of its stock or other securities
or property, rights entitling the holders thereof to purchase from the
Corporation shares of stock or other securities of the Corporation or any other
corporation. The times at which and the terms upon which such rights are to be
issued will be determined by the Board of Directors and set forth in the
contracts or instruments that evidence such rights. The authority of the Board
of Directors with respect to such rights shall include, but not be limited to,
determination of the following:
(1) The initial purchase price per share or other unit of the
stock or other securities or property to be purchased upon exercise of
such rights.
(2) Provisions relating to the times at which and the
circumstances under which such rights may be exercised or sold or
otherwise transferred, either together with or separately from, any
other stock or other securities of the Corporation.
(3) Provisions which adjust the number or exercise price of
such rights or amount or nature of the stock or other securities or
property receivable upon exercise of such rights in the event of a
combination, split or recapitalization of any stock of the Corporation,
a change in ownership of the Corporation's stock or other securities or
a reorganization, merger, consolidation, sale of assets or other
occurrence relating to the Corporation or any stock of the Corporation,
and provisions restricting the ability of the Corporation to enter into
any such transaction absent an assumption by the other party or parties
thereto of the obligations of the Corporation under such rights.
(4) Provisions which deny the holder of a specified percentage
of the outstanding stock or other securities of the Corporation the
right to exercise such rights and/or cause the rights held by such
holder to become void.
(5) Provisions which permit the Corporation to redeem or
exchange such rights.
(6) The appointment of a rights agent with respect to such
rights.
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<PAGE>
ARTICLE VI
In furtherance of, and not in limitation of, the powers conferred by
law, the Board of Directors is expressly authorized and empowered:
(1) to adopt, amend or repeal the By-laws of the Corporation;
provided, however, that the By-laws adopted by the Board of Directors
under the powers hereby conferred may be amended or repealed by the
Board of Directors or by the stockholders having voting power with
respect thereto, provided further that in the case of amendments by
stockholders, the affirmative vote of the holders of at least 80
percent of the voting power of the then outstanding Voting Stock (as
defined below), voting together as a single class, shall be required to
alter, amend or repeal any provision of the By-laws; and
(2) from time to time to determine whether and to what extent,
and at what times and places, and under what conditions and
regulations, the accounts and books of the Corporation, or any of them,
shall be open to inspection of stockholders; and, except as so
determined or as expressly provided in this Certificate of
Incorporation or in any Preferred Stock Designation, no stockholder
shall have any right to inspect any account, book or document of the
Corporation other than such rights as may be conferred by applicable
law.
The Corporation may in its By-laws confer powers upon the Board of
Directors in addition to the foregoing and in addition to the powers and
authorities expressly conferred upon the Board of Directors by applicable law.
Notwithstanding anything contained in this Certificate of Incorporation to the
contrary, the affirmative vote of the holders of at least 80 percent of the
voting power of the then outstanding Voting Stock, voting together as a single
class, shall be required to amend, repeal or adopt any provision inconsistent
with paragraph (1) of this Article VI. For the purposes of this Certificate of
Incorporation, "Voting Stock" shall mean the outstanding shares of capital stock
of the Corporation entitled to vote generally in the election of directors.
ARTICLE VII
Subject to the rights of the holders of any series of Preferred Stock
or any other series or class of stock as set forth in this Certificate of
Incorporation to elect additional directors under specific circumstances, any
action required or permitted to be taken by the stockholders of the Corporation
must be effected at a duly called annual or special meeting of stockholders of
the Corporation and may not be effected by any consent in writing in lieu of a
meeting of such stockholders. Notwithstanding anything contained in this
Certificate of Incorporation to the contrary, the affirmative vote of at least
80 percent of the voting power of the then outstanding Voting Stock, voting
together as a single class, shall be required to amend, repeal or adopt any
provision inconsistent with this Article VII.
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<PAGE>
ARTICLE VIII
Subject to the rights of the holders of any series of Preferred Stock
or any other series or class of stock as set forth in this Certificate of
Incorporation to elect additional directors under specified circumstances, the
number of directors of the Corporation shall be fixed, and may be increased or
decreased from time to time, in such manner as may be prescribed by the By-laws
of the Corporation.
Unless and except to the extent that the By-laws of the Corporation
shall so require, the election of directors of the Corporation need not be by
written ballot.
The directors, other than those who may be elected by the holders of
any series of Preferred Stock or any other series or class of stock as set forth
in this Certificate of Incorporation, shall be divided into three classes, as
nearly equal in number as possible. One class of directors shall be initially
elected for a term expiring at the annual meeting of stockholders to be held in
1999, another class shall be initially elected for a term expiring at the annual
meeting of stockholders to be held in 2000, and another class shall be initially
elected for a term expiring at the annual meeting of stockholders to be held in
2001. Members of each class shall hold office until their successors are elected
and qualified. At each succeeding annual meeting of the stockholders of the
Corporation, the successors of the class of directors whose term expires at that
meeting shall be elected by a plurality vote of all votes cast at such meeting
to hold office for a term expiring at the annual meeting of stockholders held in
the third year following the year of their election.
Subject to the rights of the holders of any series of Preferred Stock
or any other series or class of stock as set forth in this Certificate of
Incorporation to elect additional directors under specified circumstances, any
director may be removed from office at any time by the stockholders, but only
for cause.
Notwithstanding anything contained in this Certificate of Incorporation
to the contrary, the affirmative vote of the holders of at least 80 percent of
the voting power of the then outstanding Voting Stock, voting together as a
single class, shall be required to amend, repeal or adopt any provision
inconsistent with this Article VIII.
ARTICLE IX
Each person who is or was or has agreed to become a director or officer
of the Corporation, or each such person who is or was serving or who has agreed
to serve at the request of the Board of Directors or an officer of the
Corporation as an employee or agent of the Corporation or as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, including service with respect to employee benefit
plans (including the heirs, executors, administrators or estate of such person),
shall be indemnified by the Corporation, in accordance with the By-laws of the
Corporation, to the fullest extent permitted from time to time by the GCL as the
same exists or may hereafter be amended (but, in
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<PAGE>
the case of any such amendment, only to the extent that such amendment permits
the Corporation to provide broader indemnification rights than said law
permitted prior to such amendment) or any other applicable laws as presently or
hereafter in effect. Without limiting the generality or the effect of the
foregoing, the Corporation may enter into one or more agreements with any person
which provide for indemnification greater than or different from that provided
in this Article IX. Any amendment or repeal of this Article IX shall not
adversely affect any right or protection existing hereunder in respect of any
act or omission occurring prior to such amendment or repeal.
ARTICLE X
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach or alleged
breach of fiduciary duty as a director, except for liability (1) for any breach
of the director's duty of loyalty to the Corporation or its stockholders, (2)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (3) under Section 174 of the GCL, or (4) for any
transaction from which the director derived an improper personal benefit. Any
amendment or repeal of this Article X shall not adversely affect any right or
protection of a director of the Corporation existing hereunder in respect of any
act or omission occurring prior to such amendment or repeal.
ARTICLE XI
Except as may be expressly provided in this Certificate of
Incorporation, the Corporation reserves the right at any time and from time to
time to amend, alter, change or repeal any provision contained in this
Certificate of Incorporation or a Preferred Stock Designation, and any other
provisions authorized by the laws of the State of Delaware at the time in force
may be added or inserted, in the manner now or hereafter prescribed herein or by
applicable law, and all rights, preferences and privileges of whatsoever nature
conferred upon stockholders, directors or any other persons whomsoever by and
pursuant to this Certificate of Incorporation in its present form or as
hereafter amended are granted subject to the right reserved in this Article XI;
provided, however, that any amendment or repeal of Article IX or Article X of
this Certificate of Incorporation shall not adversely affect any right or
protection existing hereunder in respect of any act or omission occurring prior
to such amendment or repeal; and provided further that no Preferred Stock
Designation shall be amended after the issuance of any shares of the series of
Preferred Stock created thereby, except in accordance with the terms of such
Preferred Stock Designation and the requirements of applicable law.
ARTICLE XII
The name and mailing address of the incorporator is Nicole E. Clark,
Esq., c/o Wachtell, Lipton, Rosen & Katz, 51 West 52nd Street, New York, New
York 10019.
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<PAGE>
IN WITNESS WHEREOF, I, the undersigned, being the incorporator hereinbefore
named, do hereby further certify that the facts hereinabove stated are truly set
forth and, accordingly, I have hereunto set my hand this 11th day of August,
1998.
/s/ Nicole E. Clark
-----------------------------
Nicole E. Clark
Incorporator
EXHIBIT 23.01
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
KBW, Inc.
We consent to the use of our report included herein and to the reference to our
firm under the headings "Selected Historical Consolidated Financial Data" and
"Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
New York, New York
August 14, 1998
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