<PAGE>
As filed with the Securities and Exchange Commission on April 16, 1999
Registration No. 333-61495
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 2
To
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
KBW, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 6211 (Pending)
<S> <C> <C>
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
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)
---------------
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)
---------------
Copies to:
<TABLE>
<S> <C>
EDWARD D. HERLIHY JOSEPH McLAUGHLIN
ANDREW J. NUSSBAUM 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
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
---------------
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. [_]
---------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
Proposed Maximum
Title of Each Class of Proposed Maximum Aggregate Amount of
Securities to Be Amount to Be Offering Price Offering Price Registration
Registered Registered (1) per Unit (2) (2) Fee
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$0.01 per share........ 5,430,300 shares $19.00 $103,175,700 $28,683(3)
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
</TABLE>
(1) Includes an aggregate of 708,300 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.
(3) This amount has been previously paid.
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+Information contained herein is subject to completion or amendment. A +
+registration statement relating to these securities has been filed with the +
+Securities and Exchange Commission. These securities may not be sold nor may +
+offers to buy be accepted prior to the time the Registration Statement +
+becomes effective. This Prospectus shall not constitute an offer to sell or +
+the solicitation of an offer to buy nor shall there be any sale of these +
+securities in any State in which such offer, solicitation or sale would be +
+unlawful prior to registration or qualification under the securities laws of +
+any such State. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED APRIL 16, 1999
PROSPECTUS
, 1999
4,722,000 Shares
KBW, Inc.
[KBW Logo] Common Stock
----
----
Of the 4,722,000 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"), 2,361,000 shares are being sold by the Company
and 2,361,000 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. The Selling Stockholders
include two directors of the Company. See "Principal and Selling Stockholders--
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 $17.00 and $19.00 per share. See "Underwriting"
for information relating to the factors to be considered in determining the
initial offering price. The Company has been approved for the listing of the
Common Stock on the New York Stock Exchange (the "NYSE") under the symbol
"KBW."
-----------
See "Risk Factors" beginning on page 8 for a discussion of risk factors that
should be considered in connection with an investment in the Common Stock
offered hereby.
-----------
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 COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
Price to Underwriting Proceeds Proceeds to
the Discounts and to the Selling
Public(1) Commissions(2) Company(3) Stockholders
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share...................... $ $ $ $
Total(4)....................... $ $ $ $
- --------------------------------------------------------------------------------
</TABLE>
(1) In connection with the Offering, the Underwriters (as defined herein) have
reserved for sale approximately 236,100 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 $1,250,000, 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) Certain of the Selling Stockholders have granted to the Underwriters a 30-
day option to purchase up to 708,300 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
, 1999.
Donaldson, Lufkin & Jenrette
Goldman, Sachs & Co.
Keefe, Bruyette & Woods, Inc.
<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."
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 Securities and Exchange Commission. 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.
[KBW LOGO]
<PAGE>
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 consummation of the
Offering, 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 consummation of the Offering and refer to Keefe, Bruyette
& Woods, Inc. and its subsidiary, KBW Asset Management, prior to such date.
Share information in this Prospectus reflects the conversion of each
outstanding share of common stock of Keefe, Bruyette & Woods, Inc. into 16.259
shares of Common Stock to be effected in the merger discussed under "Certain
Transactions Occurring Prior to the Offering--Creation of Holding Company
Structure." Information in this Prospectus assumes no exercise of the
Underwriters' option to purchase up to 708,300 additional shares from certain
of the Selling Stockholders to cover over-allotments, if any.
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") advisory services, corporate finance,
securities sales and trading, principal investments, fixed income portfolio
management and asset management. In 1998, KBW earned net income of $30.8
million, or 19.8% of total revenues of $155.4 million and a 19.8% return on
average equity. Although results have varied from year to year, for the five
years ended December 31, 1998, the Company's average ratio of net income to
total revenues and average return on equity were 21.7% and 22.3%, 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-size 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 1998, KBW ranked first and second, respectively,
in the number of announced M&A financial advisory assignments for the banking
industry. In 1998, KBW served as financial adviser in 36 announced M&A
assignments for banks and specialty finance companies, with an aggregate
transaction value in excess of $9.1 billion.
KBW is also active in underwritings and other placements of securities for
financial services companies. In 1998, the Company managed 43 equity and debt
offerings, aggregating approximately $3.1 billion in gross
3
<PAGE>
offering proceeds. KBW makes a market in over 250 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 market makers in
approximately 65 of these securities. The Company believes it 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 60% 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 enhance its ability 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. An investment in the Common Stock involves a number of risks, some
of which, including market volatility, dependence on the financial services
industry, dependence on non-recurring transactions, lack of a prior public
market for the Common Stock, dependence on key personnel, and legal and
regulatory risks, could be substantial and are inherent in the business of the
Company. Prospective investors should carefully consider the factors discussed
in detail elsewhere in this Prospectus under "Risk Factors."
4
<PAGE>
The Offering
<TABLE>
<C> <S>
Common Stock offered by the
Company......................... 2,361,000 shares
Common Stock offered by the
Selling Stockholders............ 2,361,000 shares(1)
Common Stock to be outstanding
after the Offering.............. 16,932,345 shares(2)
Dividend policy.................. Following the initial public offering, the
Company intends to pay quarterly dividends
of $0.04 per share of Common Stock
beginning with the dividend payable in the
third quarter of 1999. 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."
NYSE symbol...................... "KBW"
</TABLE>
- --------
(1) The Company will not receive any of the proceeds from the sale of shares by
the Selling Stockholders. The Selling Stockholders include two directors of
the Company. See "Principal and Selling Stockholders--Selling
Stockholders."
(2) Excludes an additional 3,400,000 shares of Common Stock reserved for
issuance under the Company's stock option plans. On the date of the pricing
of the Offering, the Company expects to grant options to purchase 2,040,000
of such shares at an exercise price equal to the initial public offering
price. See "Management--The Non-Employee Director Stock and Option
Compensation Plan" and "Management--The 1999 Stock and Annual Incentive
Plan."Also excludes 193,220 shares of Common Stock underlying restricted
stock units to be granted by the Company prior to the consummation of the
Offering. These restricted stock units will generally vest ratably on each
of the first three anniversaries of the date of grant and are payable in
shares of Common Stock. See "Management--Restricted Stock Units Granted in
Connection with Recruitment of Employees."
5
<PAGE>
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>
Years Ended December 31,
---------------------------------------------
1994 1995 1996 1997 1998
(dollars in thousands, except per share
data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Income Data:
Total revenues................. $46,472 $64,357 $86,604 $143,019 $155,445
Total expenses................. 32,112 40,499 55,112 82,758 100,198
Income before income tax
expense....................... 14,360 23,858 31,492 60,261 55,247
Net income..................... 8,331 15,326 17,945 37,312 30,780
Basic earnings per share(2).... $ .60 $ 1.10 $ 1.33 $ 2.69 $ 2.12
Diluted earnings per share(2).. $ .60 $ 1.10 $ 1.33 $ 2.69 $ 2.12
Pro forma basic earnings per
share(3)...................... -- -- -- -- $ 1.82
Pro forma diluted earnings per
share(3)...................... -- -- -- -- $ 1.82
Other Financial and Operating
Data (unaudited):
Return on average equity....... 13.7% 22.6% 21.1% 34.3% 19.8%
Compensation and benefits
expense as a percentage of
revenues...................... 47.9% 44.8% 47.1% 43.7% 49.2%
Non-compensation and benefits
expense as a percentage of
revenues...................... 21.2% 18.1% 16.5% 14.2% 15.2%
Income before income tax
expense as a percentage of
revenues...................... 30.9% 37.1% 36.3% 42.1% 35.5%
Net income as a percentage of
revenues...................... 17.9% 23.8% 20.7% 26.1% 19.8%
Number of employees at end of
period........................ 89 91 116 130 161
</TABLE>
<TABLE>
<CAPTION>
As of December
As of December 31, 31, 1998
------------------------------------------- --------------
1994 1995 1996 1997 1998 As Adjusted(3)
(Unaudited)
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Financial Condition
Data (at end of
period):
Total assets............ $95,044 $141,044 $132,870 $199,627 $221,542 $259,815
Stockholders' equity.... 65,457 78,610 95,975 135,116 172,046 210,319
Book value per common
share outstanding...... $ 4.51 $ 5.70 $ 6.92 $ 9.59 $ 11.81 $ 12.42
</TABLE>
- --------
(1) Basic earnings per share is calculated by dividing net income by the
weighted average number of outstanding shares. Diluted earnings per share
also includes the effects of the issuance of options and other exercisable
shares, of which there were none during the periods presented.
(2) Pro forma basic and diluted earnings per share for the year ended December
31, 1998 are calculated in the same manner as basic earnings per share and
diluted earnings per share for the year ended December 31, 1998, except
that the number of outstanding shares used for pro forma basic and diluted
earnings per share give effect to the issuance of 2.361 million shares by
the Company in the Offering as if outstanding for the entire year.
(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."
6
<PAGE>
RECENT RESULTS
The following table presents summary unaudited financial information of the
Company for the three months ended March 31, 1998 and March 31, 1999.
<TABLE>
<CAPTION>
Three Months Ended
-------------------
March 31, March 31,
1998 1999
(in thousands)
<S> <C> <C>
Total revenues......................................... $39,960 $30,591
Total expenses......................................... 26,258 21,714
Income before income tax expense....................... 13,702 8,877
Net income............................................. 7,797 4,972
</TABLE>
The Company's total revenues and net income for the three months ended March
31, 1999 were $30.6 million and $5.0 million, respectively, which represented a
decrease of $9.4 million or 23.5% in total revenues and a decrease of $2.8
million or 36.2% in net income compared to the three months ended March 31,
1998. The decreases were primarily attributable to lower revenue from principal
transactions and investment banking, partially offset by an increase in
commissions revenues. Net revenues from principal transactions decreased mainly
as a result of lower net revenues from market making activities, reflecting
less favorable market conditions for small to mid-cap banking industry stocks.
Investment banking revenue decreased primarily as a result of lower M&A
advisory fees, mainly reflecting a significant reduction in new M&A
transactions in the third and fourth quarters of 1998.
Total expenses decreased primarily as a result of a reduction in compensation
and benefits expense, reflecting lower accruals for performance-based
compensation. The Company has experienced, and expects to continue to
experience, significant fluctuations in its quarterly results.
7
<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, expand the range of services offered to its clients and
institutional customers, increase the number of its customers and clients,
expand its activities in the financial services industry, retain key personnel
and attract new personnel to accommodate its growth, or 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.
KBW is Subject to Significant Risks of Loss Inherent in 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.
The Company May Experience Losses as a Result of Volatility in the Trading
Markets in which It Participates
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 significantly increased risks of loss present during
volatile trading markets and fluctuations in the volume of market activity. The
stock market has recently experienced significant volatility, including some of
the largest single-day point declines in history. Measured by the percentage of
trading days in which the Dow Jones Industrial Average changed by 1% or more
from the previous day's close, 1998 was the second most volatile year in the
past 20 years. The third quarter of 1998 was marked by a particularly sharp
decrease in prices for stocks in the banking industry. From July 17, 1998
through October 9, 1998, the Keefe Bank Stock Index (an index of publicly
traded bank stocks developed by the Company) fell by 42.8%. This was the third
sharpest decrease since the establishment of this Index over 30 years ago and
occurred in 84 days, whereas the average time period for the four other largest
declines was 369 days. During this 84-day period, KBW experienced significant
unrealized losses in its investment accounts and substantial decreases in year-
to-date trading profits. By year end, the Keefe Bank Stock Index had recovered
and annual trading profits exceeded the pre-decline year-to-date level. Any
losses attributable to future periods of significant volatility or sustained
market declines could, however, have a material adverse effect on the Company's
business, financial condition and operating results.
8
<PAGE>
Revenues from Public Offerings, M&A and Securities Trading Activities May
Decline Due to Changes in Economic, Political or Market Conditions
Reductions in public offerings, 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; flow of funds into and out of mutual and pension
funds; and availability of short-term and long-term funding and capital.
A Slowdown or Reversal of Cash Inflow to Mutual Funds Could Adversely Affect
Revenues
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.
The Company's Revenues Are Dependent on Securities Market Activity in 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 for companies in
the financial services industry (which broadly includes banks, bank holding
companies, specialty finance companies, savings and loan associations, savings
banks, insurance companies and securities companies). 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.
The Company's business is particularly dependent on the new-issue and
secondary markets for equity securities of companies in the financial services
industry. 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 13.8%, 39.7%, 31.4%, 36.2% and 11.9% of revenues in
1994, 1995, 1996, 1997 and 1998, respectively. 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 period from July 17, 1998 through October 9, 1998, the
Keefe Bank Stock Index of 24 bank stocks decreased 42.8%. During the past five
years, the Keefe Bank Stock Index has declined by as much as 21% 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
affect 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. 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.
9
<PAGE>
Significant Fluctuations in Quarterly and Annual Operating Results Could Cause
Declines in the Market Price of the Common Stock
The market price of the Company's Common Stock may be adversely affected by
significant fluctuations in the Company's quarterly and annual operating
results. These fluctuations may cause operating results for any quarterly or
annual period to be below those of prevailing market expectations. The
Company's revenues and operating results are expected to fluctuate
significantly from quarter to quarter and from year to year because of a
combination of factors, the timing or occurrence of which cannot be predicted.
These factors include 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 and
private 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, and expenses of
establishing new business units. The timing of the Company's recognition of
revenues from a significant M&A or underwriting transaction, which typically
occurs upon completion of the deal, can also materially affect the Company's
quarterly or annual operating results.
It is and will continue to be difficult to project the Company's operating
results for any quarterly or annual period. The Company believes it has
benefited in recent years from significant mergers and acquisitions activity
in, and strong markets for stocks of, financial service companies and from
increased trading activity of institutional investors in the Company's customer
base. For internal planning purposes, the Company has attempted to take a
conservative approach in formulating its current budget for 1999 and has not
assumed that the level of these activities will remain at 1998 levels or that
its operating results will equal or exceed prior periods. It is possible that
the Company's actual results in any future quarter or annual period will be
lower than in prior periods.
The Company's cost structure currently is oriented to meet the level of
demand for investment banking and corporate finance transactions experienced
during 1997 and 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."
Loss of Key Personnel Could Adversely Affect the Company's Prospects and
Revenues
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 and revenues. There can be no
assurance that the Company will be able to retain and recruit key personnel.
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.
Competition Could Result in Loss of Key Personnel
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
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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. In addition, the
Company has recently increased the compensation payable to employees as a
percentage of revenues to a level more in line with industry averages. 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."
There May Be an Increase in Attrition as a Result of the Offering
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
consummation 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
consummation of the Offering. Under the Stockholders' Agreement, employees with
a position at or above Senior Vice President (holding in the aggregate
approximately 68% 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. In addition, certain
employees of the Company who are stockholders of the Company at the time of the
Offering will be subject to certain lock-up agreements entered into at the
request of the Underwriters. Subject to the limitations of the Stockholders'
Agreement and the lock-up agreements, 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."
Potential Increased Need for New Employees Could Result in Increased
Compensation Costs and Adverse Effects on Future Operating Results
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.
Growth of the Business Could Result in Increased Costs and a Decline in
Operating Margins
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
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continues to grow, the need for additional compliance, documentation and risk
management procedures and internal controls has increased throughout the
Company. 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."
Expansion of Industry Focus May Not be Successful or Profitable
The Company is expanding 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. There can
be no assurance that expansion of the Company's industry focus will be
successful or profitable. The Company plans to continue such expansion 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.
No Prior Operating History as a Public Company
The Company expects to incur additional costs operating as a public company.
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.
Strong Industry Competition Could Adversely Affect the Company's Revenues and
Operating Results
The Company has Many Competitors for Its Clients and Customers
The Company is engaged in the highly competitive securities brokerage and
financial services businesses. The Company's revenues and operating results may
decrease if the Company loses business to its competitors or if the Company
must expend more resources to remain competitive. The Company 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.
Some Competitors Have Advantages over the Company
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. The Company's revenues may decrease if
the Company loses business to its competitors. Industry developments, such as
the emergence of ECNs, may materially reduce the Company's revenues from sales
and trading.
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Trend of Reduced Spreads Could Adversely Affect Operating Results
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 Could Result in Losses to the Company
The Company May Experience Losses Resulting from the Purchase, Sale or Short
Sale of Securities as Principal
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 of loss from markets that may be characterized by relative
illiquidity or 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 of loss,
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 May Experience an Increased Risk of Loss Due to the Concentration
of the Company's Investments
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. The Company 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."
Potential Conflicts of Interest
Investments by the Company's Directors, Officers, Employees and its Employee
Profit Sharing Retirement Plan May Conflict with the Interests of Company
Stockholders
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, through KBW Asset Management, has organized hedge funds or similar
investment vehicles in which employees of the Company are or may become
investors and the Company expects to continue to do so in the future. 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.
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The Investment Opportunities for the Company as Principal May be Limited
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.
Conflict of Interest Arising from Participation of the Company's Subsidiary in
the Underwriting
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."
Failure of the Systems of the Company or of Third Parties Could Adversely
Affect Company Operations
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. 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. The rapidly evolving technological developments in the securities
industry may also require further capital investment by the Company in new
systems and technology.
Possible Year 2000 Costs Relating to Systems of the Company and of Third
Parties
Failures and interruptions of the Company's systems, systems of the Company's
clearing brokers or third-party trading systems 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 (the "Year 2000"
issue). The Company believes it will not incur substantial expenses in
connection with its own systems in addressing Year 2000 issues. The Company has
made inquiries of its significant third-party service providers relating to
their Year 2000 preparedness and based upon responses to such inquiries, the
Company is not
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<PAGE>
currently aware of any significant costs which would be incurred as a result of
charges by third-party service providers relating to Year 2000 costs. However,
any costs which the Company may bear related to Year 2000 issues of third-party
service providers are not sufficiently certain to estimate at this time and
there can be no assurance that such costs will not be substantial. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000."
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."
Shortage of Funding Could Limit Operations and Decrease Revenues
The Company's business is dependent upon the availability of adequate
funding. Lack of adequate funding could limit day-to-day operations,
particularly operations such as underwriting and trading activities, which, in
turn, could significantly reduce revenues. Lack of adequate funding would also
limit the Company's ability to pay dividends, repay debt and redeem or
repurchase shares of its outstanding capital stock. Historically, the Company
has satisfied its needs for funding from internally generated funds and,
occasionally, loans from third parties. While the Company currently has
adequate capital and liquidity which will be increased by the net proceeds to
the Company from the Offering, there can be no assurance that any, or
sufficient, funding will continue to be available to the Company in the future
on terms that are acceptable to it. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Regulatory Changes and Failure to Comply with Regulations Could Adversely
Affect the Company or Result in Significant Increased Costs
The securities business is subject to extensive regulation under federal and
state laws. The failure of the Company to comply with these federal and state
regulations could result in regulatory actions against the Company, fines, the
imposition of limitations on the Company's activities, and ultimately could
require liquidation of the Company. 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. KBW Asset
Management is a registered investment adviser under the Investment Advisers Act
of 1940, as amended (the "Investment Advisers Act"), and is subject to
regulation as an investment adviser, including with respect to compensation
arrangements.
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Failure to Maintain Adequate Net Capital Could Result in Suspension by
Regulatory Bodies and Could Ultimately Result in Liquidation of the Company
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
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."
Failure to Comply with Applicable Regulations Could Impair the Company's
Business, Operating Results and Financial Condition
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 Chief Financial Officer also acts as its senior compliance
officer. As a result of its recent compliance review, KBW expects to separate
these roles and is seeking to hire a senior full-time compliance officer who
would initially report directly to the Chief Executive Officer and the Board of
Directors of KBW (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.
Changes in the Regulatory Environment Could Increase Costs and Limit Revenues
The regulatory environment in which the Company operates is subject to
change. New or revised requirements imposed by the SEC, other United States or
foreign governmental regulatory authorities, the NYSE or the NASD could have
adverse effects on the Company, including increased costs of compliance and
limitations on the Company's activities, which in turn could significantly
reduce revenues. 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.
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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."
KBW Officers and Employees Will Initially Control the Company and Stockholder
Votes
After the Offering, employee members of the KBW Board will own approximately
27% of the outstanding voting stock of KBW and KBW officers and employees will
own approximately 74% of such voting stock. 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 and KBW officers and employees 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 ownership and voting power may also have the
effect of accelerating, delaying or preventing a change in control of the
Company. See "Management."
There May be an Adverse Effect on the Market Price of the Common Stock if an
Active Public Market Does Not Develop or is Not Sustained
Lack of an active public market could cause an adverse effect on the market
price of shares of Common Stock. 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 and may not be indicative of the
market price after the Offering. 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."
Market Price for Common Stock Could Decrease as a Result of External Factors
The market price of the Common Stock may decline even if the Company's
operating results or prospects have not changed. 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.
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 16,932,345 shares of Common Stock outstanding immediately after
completion of
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the Offering, of which 4,722,000 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. 12,210,345 shares of
Common Stock 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 11,512,145
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 $5.66 per share, based on an assumed initial
public offering price of $18.00 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 and Delaware Law
Could Limit the Market Price of Common Stock
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 "--KBW Officers and Employees Will
Initially Control the Company and Stockholder Votes."
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."
18
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,361,000 shares of
Common Stock offered by the Company hereby are estimated to be $38,273,000,
assuming an initial public offering price of $18.00 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 is not currently in negotiations regarding any
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 $0.04 per share of Common Stock beginning in the third
quarter of 1999. 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.
19
<PAGE>
CAPITALIZATION
The following table sets forth the Company's capitalization as of December
31, 1998, on an actual basis and as adjusted to give effect to the retirement
of common stock held in treasury and the sale of the 2,361,000 shares of Common
Stock offered by the Company hereby at an assumed initial public offering price
of $18.00 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 December 31,
1998
---------------------
(in thousands)
Actual As Adjusted
<S> <C> <C>
Subordinated notes....................................... $ 1,679 $ 1,679
Stockholders' equity:
Preferred Stock, $0.01 par value, 10,000,000 shares
authorized; no shares issued and outstanding.......... -- --
Common Stock, $0.01 par value; 140,000,000 shares
authorized; 61,041,681 actual shares issued;
14,571,345 actual shares outstanding; 16,932,345
shares issued and outstanding, as adjusted............ 610 169
Additional paid-in capital............................. 12,595 50,845
Retained earnings...................................... 189,444 163,497
-------- --------
Common stock in treasury; 46,470,336 actual shares held
in treasury; 0 shares held in treasury, as adjusted... (26,411) --
Notes receivable from stockholders..................... (4,192) (4,192)
-------- --------
Total stockholders' equity........................... 172,046 210,319
-------- --------
Total capitalization................................. $173,725 $211,998
======== ========
</TABLE>
20
<PAGE>
DILUTION
The net tangible book value of the Common Stock of the Company at December
31, 1998 was $170.7 million or $11.72 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 $18.00 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 December
31, 1998 would have been $209.0 million or $12.34 per share.
Net tangible book value per share at December 31, 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
December 31, 1998. The Offering will result in an increase in pro forma net
tangible book value per share of $0.62 to existing stockholders and a dilution
of $5.66 per share to new investors who purchase shares of Common Stock in the
Offering. Dilution is determined by subtracting pro forma net tangible book
value per share of Common Stock from the assumed initial public offering price
of $18.00 per share. The following table illustrates the dilution per share of
Common Stock.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $18.00
Net tangible book value per share at December 31, 1998....... $11.72
Increase attributable to sale of shares of Common Stock in
the Offering................................................ 0.62
------
Pro forma net tangible book value per share of Common Stock
after the Offering.......................................... 12.34
------
Dilution to persons who purchase shares of Common Stock in
the Offering................................................ $ 5.66
======
</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 (in thousands, except share and per share
amounts):
<TABLE>
<CAPTION>
Shares Total Cash Consideration
------------------ -----------------------------
Average Price
Number Percent Amount Percent per Share
<S> <C> <C> <C> <C> <C>
Common Stock to be sold by
the Company in the
Offering.................... 2,361,000 13.9% $42,498 76.9% $18.00
Common Stock owned by
existing stockholders....... 14,571,345 86.1 12,741 23.1 0.87
---------- ----- ------- -----
Total........................ 16,932,345 100.0% $55,239 100.0% 3.26
========== ===== ======= =====
</TABLE>
21
<PAGE>
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 1996, 1997 and 1998 and the selected
consolidated statement of financial condition data as of December 31, 1997 and
1998 are derived from the Company's Consolidated Financial Statements audited
by KPMG LLP which are included elsewhere herein. 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, 1994, 1995 and 1996 and the selected consolidated statement of
income data for 1994 and 1995 are derived from the Company's Consolidated
Financial Statements audited by KPMG LLP, which are not included herein.
Selected Historical Consolidated Financial and Other Data(1)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1994 1995 1996 1997 1998
(dollars in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Income Data:
Revenues(2)
Principal transactions,
net........................ $15,251 $ 37,820 $ 36,272 $ 47,076 $ 30,198
Commissions................. 7,484 9,381 11,339 15,097 21,505
Investment banking.......... 20,770 12,772 28,706 55,176 91,851
Net gain (loss) on
investments................ (145) 1,196 5,987 18,419 2,694
Interest and dividend
income..................... 2,347 2,446 2,933 5,911 7,574
Other....................... 765 742 1,367 1,340 1,623
------- -------- -------- -------- --------
Total revenues............. 46,472 64,357 86,604 143,019 155,445
Expenses
Compensation and benefits... 22,263 28,862 40,813 62,508 76,512
Occupancy and equipment..... 2,368 2,629 2,608 2,952 4,499
Communications.............. 1,452 1,653 2,058 2,310 2,438
Brokerage and clearance..... 2,179 3,141 3,876 4,683 5,292
Other....................... 3,850 4,214 5,757 10,305 11,457
------- -------- -------- -------- --------
Total expenses............. 32,112 40,499 55,112 82,758 100,198
------- -------- -------- -------- --------
Income before income tax
expense...................... 14,360 23,858 31,492 60,261 55,247
Income tax expense............ 6,029 8,532 13,547 22,949 24,467
------- -------- -------- -------- --------
Net income.................... $ 8,331 $ 15,326 $ 17,945 $ 37,312 $ 30,780
======= ======== ======== ======== ========
Basic earnings per share(3)... $ 0.60 $ 1.10 $ 1.33 $ 2.69 $ 2.12
Diluted earnings per
share(3)..................... $ 0.60 $ 1.10 $ 1.33 $ 2.69 $ 2.12
Pro forma basic earnings per
share(4)..................... -- -- -- -- $ 1.82
Pro forma diluted earnings per
share(4)..................... -- -- -- -- $ 1.82
Other Financial and Operating
Data (Unaudited):
Return on average equity...... 13.7% 22.6% 21.1% 34.3% 19.8%
Compensation and benefits
expense as a percentage of
revenues..................... 47.9% 44.8% 47.1% 43.7% 49.2%
Non-compensation and benefits
expense as a percentage of
revenues..................... 21.2% 18.1% 16.5% 14.2% 15.2%
Income before income tax
expense as a percentage of
revenues..................... 30.9% 37.1% 36.3% 42.1% 35.5%
Net income as a percentage of
revenues..................... 17.9% 23.8% 20.7% 26.1% 19.8%
Number of employees at end of
period....................... 89 91 116 130 161
Consolidated Statement of
Financial Condition Data
(at end of period):..........
Total assets.................. $95,044 $141,044 $132,870 $199,627 $221,542
Stockholders' equity.......... 65,457 78,610 95,975 135,116 172,046
Book value per common share
outstanding.................. $ 4.51 $ 5.70 $ 6.92 $ 9.59 $ 11.81
</TABLE>
(footnotes on following page)
22
<PAGE>
- --------
(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."
(3) Basic earnings per share is calculated by dividing net income by the
weighted average number of outstanding shares. Diluted earnings per share
also includes the effects of the issuance of options and other exercisable
shares, of which there were none during the periods presented.
(4) Pro forma basic and diluted earnings per share for the year ended December
31, 1998 are calculated in the same manner as basic earnings per share and
diluted earnings per share for the year ended December 31, 1998, except
that the number of outstanding shares used for pro forma basic and diluted
earnings per share give effect to the issuance of 2.361 million shares by
the Company in the Offering as if outstanding for the entire year.
23
<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 half of 1998. During this period, the financial
services industry 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 third quarter of 1998 was
marked by a particularly sharp decrease in prices for stocks in the banking
industry. From July 17, 1998 through October 9, 1998, the Keefe Bank Stock
Index fell by 42.8%. This was the third sharpest decrease since the
establishment of this Index over 30 years ago and occurred in 84 days, whereas
the average time period for the four other largest declines was 369 days.
During this 84-day period, KBW experienced significant unrealized losses in its
investment accounts and substantial decreases in year-to-date trading profits.
These were offset to some degree by improved commissions attributable to
increases in the volume of trading for customers. By year end, the Keefe Bank
Stock Index and the market in general had rebounded to record high levels and
KBW's annual trading profits exceeded the pre-decline year-to-date level. The
Company's annual and quarterly financial results have been and may 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
24
<PAGE>
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 net interest on balances
maintained in proprietary accounts at clearing firms. 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.
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. In 1998, the Company 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-size 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 73.3% of total
expenses and 46.5% of revenues. 62.6% of compensation and benefits expense over
such period has been performance related. Occupancy and equipment expense
consists primarily of lease payments and depreciation charges for leasehold
improvements, furniture, and data processing and general office equipment and,
in 1998, architects' and consultants' fees associated with the design of a new
headquarters facility. 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 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 increased compensation and certain non-compensation
expenses, representing a higher percentage of total revenues in 1998 than prior
years. Management may choose to further increase such expenses in 1999. In
connection with the pending relocation of its New York headquarters, the
Company began to incur additional rental expenses in 1998 for office space
under construction but not yet occupied, as well as significant charges for
construction and temporary furniture in its existing premises to alleviate
short-term capacity needs. In 1999, rental expense for the Company's
headquarters is expected to 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 Keefe,
Bruyette & Woods, Inc.'s 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
25
<PAGE>
termination of employment. As a result of the Merger (see "Certain Transactions
Occurring Prior to the Offering--Creation of Holding Company Structure"), KBW
will be the sole stockholder of Keefe, Bruyette & Woods, Inc. and shares of
Keefe, Bruyette & Woods, Inc. will no longer be offered to employees. Shares of
Common Stock will be offered to employees pursuant to the Purchase Plan (see
"Management--The Employee Stock Purchase Plan"). Upon consummation of the
Offering, the Former Stockholders' Agreement will be terminated. See "Certain
Transactions Occurring Prior to the Offering--New and Former Stockholders'
Agreements."
Results of Operations
The following table sets forth certain financial data as a percentage of
total revenues:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
Revenues
Principal transactions, net................ 32.8% 58.8% 41.9% 32.9% 19.4%
Commissions................................ 16.1 14.6 13.1 10.6 13.8
Investment banking......................... 44.7 19.8 33.1 38.6 59.2
Net gain (loss) on investments............. (0.3) 1.9 6.9 12.9 1.7
Interest and dividend income............... 5.1 3.8 3.4 4.1 4.9
Other...................................... 1.6 1.1 1.6 0.9 1.0
----- ----- ----- ----- -----
Total revenues........................... 100.0 100.0 100.0 100.0 100.0
Expenses
Compensation and benefits.................. 47.9 44.8 47.1 43.7 49.2
Occupancy and equipment.................... 5.1 4.1 3.0 2.1 2.9
Communications............................. 3.1 2.6 2.4 1.6 1.6
Brokerage and clearance.................... 4.7 4.9 4.5 3.3 3.4
Other...................................... 8.3 6.5 6.7 7.2 7.4
----- ----- ----- ----- -----
Total expenses........................... 69.1 62.9 63.7 57.9 64.5
----- ----- ----- ----- -----
Income before income tax expense............. 30.9 37.1 36.3 42.1 35.5
Income tax expense........................... 13.0 13.3 15.6 16.0 15.7
----- ----- ----- ----- -----
Net income................................... 17.9% 23.8% 20.7% 26.1% 19.8%
===== ===== ===== ===== =====
</TABLE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
The Company's operating results for 1998 reflected strong growth in
investment banking and commissions offset by significant decreases in gains on
investments and revenue from principal transactions activity. Total revenues
increased by $12.4 million, or 8.7%, to $155.4 million for 1998 from $143.0
million for 1997. Total expenses as a percentage of total revenues increased to
64.5% for 1998 from 57.9% for 1997. Net income declined by $6.5 million, or
17.4%, to $30.8 million for 1998 from $37.3 million for 1997. The Company's
pre-tax margin decreased to 35.5% for 1998 from 42.1% for 1997, and return on
average stockholders' equity decreased to 19.8% for 1998 from 34.3% for 1997.
Net revenues from principal transactions decreased by $16.9 million, or
35.9%, to $30.2 million for 1998 from $47.1 million for 1997. Net revenues from
market making activities in OTC equity securities increased slightly by $0.6
million, or 4.4%, to $14.3 million from $13.7 million as a result of a moderate
increase in the number of shares traded in the OTC market. Net revenues from
proprietary trading in equity securities decreased by $22.4 million, or 74.2%,
to $7.8 million from $30.2 million, reflecting highly volatile market
conditions for the equity securities of financial services companies in the
third and fourth quarters of 1998. Net revenues from trading in fixed income
securities increased by $4.9 million to $8.1 million for 1998 from $3.2 million
for 1997. The Company's Financial Strategies Team, established during 1997,
contributed
26
<PAGE>
$4.7 million in 1998 to fixed income revenues reflecting its first full year of
operations, compared to $1.9 million in 1997.
Commissions increased by $6.4 million, or 42.4%, to $21.5 million for 1998
from $15.1 million for 1997. The change reflected increased volume in agency
customer transactions, with average per share commissions remaining relatively
constant.
Investment banking revenues increased by $36.7 million, or 66.5%, to $91.9
million for 1998 from $55.2 million for 1997. Advisory fees increased by $40.4
million, or 118.5%, to $74.5 million from $34.1 million, primarily reflecting
increased M&A fees, particularly in the first half of 1998, and increased
revenues from the Webb Division. Revenues from public and private offerings of
securities decreased by $3.7 million, or 17.5%, to $17.4 million from $21.1
million in 1997, reflecting decreased public and private offerings of common
stock and trust preferred securities for investment banking clients largely as
a result of turbulent market conditions in the second half of 1998.
Net gains on investments decreased by $15.7 million, or 85.3%, to $2.7
million for 1998 from $18.4 million for 1997. During 1998, the Company realized
gains of $7.1 million on the sale of four investments. These gains were offset
by a reversal of $7.8 million of unrealized gains associated with those
investments. During 1997, the Company realized gains of $11.3 million on the
sale of two investments, which were partially offset by the reversal of $9.9
million of previously recognized unrealized gains associated with these
investments. The net increase in unrealized gains on retained investments was
$3.4 million in 1998 (primarily due to an increase in market value of one
investment), and $17.0 million in 1997.
Interest and dividend income increased by $1.7 million, or 28.8%, to $7.6
million for 1998 from $5.9 million for 1997. The change primarily reflected
increased interest on credit balances with the Company's clearing brokers, as
well as slightly higher dividend and interest income on market making
inventories of equity securities and fixed income securities.
Compensation and benefits expense increased by $14.0 million, or 22.4%, to
$76.5 million for 1998 from $62.5 million for 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 161 at
December 31, 1998 from 130 at December 31, 1997. Compensation and benefits
expense as a percentage of total revenues increased to 49.2% in 1998 from 43.7%
in 1997, owing primarily to a decision by the Company to increase compensation
as a percentage of revenue in order to make compensation paid by the Company
more consistent with the industry average for compensation.
Non-compensation expenses increased by $3.4 million, or 16.7%, to $23.7
million for 1998 from $20.3 million for 1997. Occupancy and equipment expense
increased by $1.5 million, primarily as a result of rental and design expenses
incurred in establishing the Company's new headquarters as well as the
accelerated depreciation of leaseholds and furniture that are expected to be
abandoned when the new headquarters are occupied. Communications expense
increased by $128,000, primarily due to increased voice and data communications
charges. Brokerage and clearance expenses increased by $609,000, primarily due
to increased sales and trading activity. Other expenses increased by $1.2
million, primarily reflecting higher travel and entertainment expenses
associated with increased investment banking activity.
The Company's accrual for tax liabilities for 1998 was 44.3% of income before
taxes as compared to 38.1% of income before taxes for 1997. See Note 3 to the
Consolidated Financial Statements.
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 $56.4 million, or 65.1%, to $143.0
million for 1997 from $86.6 million for 1996. Total expenses as a percentage of
total revenues declined
27
<PAGE>
to 57.9% for 1997 from 63.7% for 1996. Net income rose by $19.4 million, or
108.4%, to $37.3 million for 1997 from $17.9 million for 1996. The Company's
pre-tax margin improved to 42.1% for 1997 from 36.3% for 1996, and return on
average stockholders' equity increased to 34.3% for 1997 from 21.1% for 1996.
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
9.3%, 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 $8.2 million, or 37.3%, to $30.2 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 33.6%, 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 92.3%, to $55.2
million for 1997 from $28.7 million for 1996. Advisory fees increased by $15.1
million, or 79.5%, to $34.1 million from $19.0 million, primarily reflecting
increased M&A fees and increased revenues from the Webb Division. Revenues from
public and private offerings of securities increased by $11.4 million, or
117.5%, 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 206.7%, 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 $9.9 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 $17.0 million for 1997 and $5.8
million for 1996.
Interest and dividend income increased by $3.0 million, or 103.4%, to $5.9
million for 1997 from $2.9 million for 1996. The change primarily reflected
increased interest on credit balances with the Company's clearing brokers,
partially offset by slightly 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 43.7% from 47.1%, 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 $6.0 million, or 42.0%, to $20.3
million for 1997 from $14.3 million for 1996. Occupancy and equipment expense
increased by $344,000, 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
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sales and trading activity. Other expenses increased by $4.5 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.
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 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,
1998, Keefe, Bruyette & Woods, Inc.'s net capital and excess net capital were
$125.6 million and $124.9 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
Many of the world's computer systems (including those in non-information
technology equipment and systems) currently record years in a two-digit format.
If not addressed, such computer systems will be unable to properly interpret
dates beyond the year 1999, which could lead to business disruptions in the
United States and internationally. The potential costs and uncertainties
associated with the Year 2000 issue will depend on a number of factors,
including a company's software, a company's hardware and the nature of the
industry in which a company operates. Additionally, companies must coordinate
with other entities with which they electronically interact.
The Company's business activities are highly dependent on communications and
information technology ("IT") systems, including third-party trading systems
(e.g., the NYSE, The Nasdaq Stock Market(SM) ("Nasdaq"), and the Brass Equity
Trading System), various third-party research and market information reference
systems, certain systems provided by its clearing brokers and internal IT
systems. Any failure or interruption of third-party or internal systems,
including due to the ability of such systems to recognize the 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 IT 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 less
than two years old 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 not yet incurred any significant additional
costs for remediation. The Company estimates that it will incur total costs of
less than $500,000 to ensure that its IT systems are Year 2000 compliant. The
Company has completed the inventory of hardware and software phase of its Year
2000 review and has made inquiries of third-party market data, trading and
other significant IT providers as to their Year 2000 readiness. The Company is
nearing completion of the assessment phase to determine which of its hardware
and software will require remediation or replacement. New hardware and software
has been and will continue to be tested to ensure that it is Year 2000
compliant. The Company does not currently foresee any difficulty in completing
the final implementation phase of its Year 2000 review on a timely basis, which
will consist of replacement or remediation of any non-compliant hardware or
software systems.
The Company has also assessed its internal Year 2000 issues with respect to
non-IT systems and has determined that consequences of its Year 2000 issues
with respect to internal non-IT systems would not have a material effect on the
Company's business, results of operations, or financial condition.
The Company depends to a significant degree upon the proper functioning of
third-party IT and non-IT systems. The Company has sent inquiry letters to
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.
If such third parties have Year 2000 problems that are not remedied, the
following problems could result: (i) in the case of vendors, in disruption of
important services upon which the Company depends, such as telecommunications
and electrical power; (ii) in the case of third-party data providers, in the
receipt of inaccurate or out-of-date information that could impair the
Company's ability to perform critical data functions, such as pricing
securities or other assets; (iii) in the case of financial intermediaries such
as exchanges and clearing agents, in failed trade settlements, and inability to
trade in certain markets and disruption of capital flows potentially resulting
in liquidity stress; and (iv) in the case of counterparties and customers, in
financial
30
<PAGE>
and accounting difficulties for those parties that expose the Company to
increased credit risk and lost business. In addition, uncertainty about the
success of remediation efforts in the financial services industry may cause
many market participants to reduce the level of their market activities in the
financial services industry temporarily as they assess the effectiveness of
these efforts during a "phase-in" period beginning in late 1999. This, in turn,
could result in a general reduction in trading and other market activities (and
lost revenues) in the financial services industry. The Company cannot predict
the adverse impact that such reduction would have on its business.
To the extent that a third-party vendor or service provider is unable to
adequately address Year 2000 issues, the Company will use alternate manual
procedures, where possible, or seek to change to another provider. The Company
has multiple quotation and news services which it can use in the event that one
or more of them is unable to provide service. The Company has also identified
alternate means of delivery for most batch feeds and reports and is currently
developing a list of alternate vendors for software. 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. In such event, the
Company will seek to trade on alternate markets, but such alternate markets
could be inadequate substitutes for the NYSE or Nasdaq. With respect to all
services provided to the Company by third parties, 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. If the NYSE and/or Nasdaq are unable to provide service to
the Company, the Company's trading activities could be materially disrupted
until such time that those services resume. In the case of Pershing, the
Company's primary clearing broker, the Company would seek to use an alternate
clearing broker if such services are available from an alternate source.
However, until such transition were completed, the Company's activities
conducted through its clearing broker could be materially disrupted.
Disruptions in the trading activities of the Company, which may be the result
of industry-wide or Company-specific problems with third party providers, could
have a material and adverse effect on the Company.
The costs to remedy Year 2000 programs and the date on which the Company
plans to complete the Year 2000 modifications are based on current estimates,
which reflect numerous assumptions about future events, including the continued
availability of certain resources, the timing and effectiveness of third-party
remediation plans and other factors. The Company can give no assurance that
these estimates will be achieved, and actual results could differ materially
from the Company's plans. Specific factors that might cause such material
differences include, but are not limited to, the availability to locate and
correct relevant computer source codes and embedded technology, the results of
internal and external testing and the timeliness and effectiveness of
remediation efforts of third parties.
31
<PAGE>
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
1998, the aggregate value of bank and thrift M&A transactions expanded
dramatically to approximately $249 billion. The number of completed
transactions in the banking industry has also increased significantly over the
same period, from 37 in 1988 to 150 in 1998.
Despite continuous M&A activity, consolidation in the banking industry
remains far from complete, with more than 10,000 banking institutions operating
in the United States at September 30, 1998. 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 Stock 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 December 1992 through December 1998, this
index increased by 209%, while the S&P 500 index increased by 182%. This
performance has been accompanied by substantial investor interest in publicly
traded bank stocks. From 1993 to 1998, total U.S. equity underwritings
(including common and preferred stock) for financial institutions (other than
federal agencies and insurance companies) grew at a compound annual rate of
23%, from approximately $19 billion to $53 billion. Over the same period, total
U.S. debt underwritings for such financial institutions grew at a compound
annual rate of 22%, from approximately $271 billion to $726 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. As of December 31,
1998, there were 90 publicly traded specialty finance companies in the United
States, compared to fewer than 15 such companies in 1990. Non-public and public
finance companies controlled in the aggregate over $870 billion in managed
receivables as of November 1998, representing a 68% increase in managed
receivables since November 1990. 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
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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, 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
1998, 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
research coverage has allowed KBW to develop strong relationships with a large
number of small and mid-size 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 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 19 M&A transactions
involving such companies. In 1998, KBW served as financial adviser on 36
announced M&A assignments for banks and specialty finance companies, with an
aggregate transaction value in excess of $9.1 billion.
KBW is also active in underwriting and other placements of securities for
financial services companies. In 1998, the Company managed 43 equity and debt
offerings, aggregating approximately $3.1 billion in gross offering proceeds.
KBW makes a market in over 250 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 65 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 60% 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.
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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.
. 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.
Beginning in late 1996, KBW determined that its institutional customers
would buy trust preferred securities issued by small and mid-size bank
and thrift holding companies. KBW was able to offer this financing
vehicle to these companies and participated in 16 trust preferred
offerings before the end of 1997. Also, since the end of the first
quarter of 1997, 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 is developing strong research coverage of these industry
sectors in an attempt to identify investment opportunities and new
clients for KBW. The Company 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 KBW and 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. 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
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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 the KBW office in Chicago.
. 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,
including 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. In 1998, KBW
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 60% of KBW's employees own Common Stock, and after
giving effect to the Offering (including the sale of 236,100 shares of
Common Stock to KBW directors and employees pursuant to the Offering),
KBW's officers and employees will own approximately 74% 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's employees have an average tenure of approximately six years and 26%
of all employees have at least 10 years' experience at KBW. KBW's six
directors 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, the research department recently
initiated coverage of insurance companies. The research department published
its first reports on 11 of these companies in January 1999 and anticipates
covering 50 companies during the third quarter of 1999. In conjunction with
the expansion of the research department's coverage to include insurance
companies, KBW's investment banking division has obtained several financing
assignments in this area. KBW also has begun making a market in the equity
securities of the insurance companies covered by such research which are
traded over the counter and has invested in the equity securities of a number
of such listed 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 1998, 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 Stock Index of
24 bank stocks since the Company's inception. The Keefe Bank Stock 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
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<PAGE>
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 20 analysts operates out of its New York and
other offices, maintaining close contact with approximately 250 publicly traded
banks, thrifts, specialty finance, insurance 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 Oliver Securities, a small
Boston-based firm specializing in insurance industry research, which has since
become an operating division of the Company. Since that time, KBW has hired
three additional analysts dedicated to the insurance area. These analysts
currently cover life, property, casualty and financial guarantee insurers.
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 1998, the
research department generated approximately 1,900 individual company notes in
its daily Bulletins. In conjunction with the opening of the Chicago office, KBW
introduced its Midwest BankScan and Midwest Bank Review and KBW has also
introduced an InsuranceScan as part of the expansion of coverage into the
insurance area.
Investment Banking
KBW's corporate finance group provides a broad range of investment banking
services to the financial services industry. The group's 28 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-size 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
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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-size 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.
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 1994 through December 1998, the Company acted as financial
adviser in 116 announced mergers and acquisitions of banks and thrifts,
representing $31.1 billion in aggregate transaction value, and 19 mergers and
acquisitions of non-bank financial institutions, with an aggregate transaction
value of $2.8 billion. The American Banker ranked the Company first among the
leading financial advisers based on number of transactions in each of 1996 and
1997 and second in 1998, and seventh among financial advisers in terms of
aggregate value of mergers and acquisitions of banks and thrifts announced in
each of 1996 and 1997 and eighth in 1998.
<TABLE>
<CAPTION>
1996 1997 1998
------ ------- ------
<S> <C> <C> <C>
Number of Transactions(1)........................... 19 33 33
Ranking by Number(2)................................ 1 1 2
Transaction Value (in millions)(1).................. $2,441 $11,410 $8,666
Ranking by Value(2)................................. 7 7 8
</TABLE>
--------
(1) Source: Company data.
(2) Source: American Banker rankings.
In 1998, KBW acted as financial adviser on approximately 36 announced M&A
assignments with transaction values ranging from $5.5 million to $2.7 billion,
involving both banks and non-bank finance companies.
KBW has also provided financial advisory and valuation services in connection
with bank branch sales and acquisitions. Since the beginning of 1994, KBW has
provided such services in 14 announced branch sales and acquisitions.
Capital Raising and Other Corporate Finance Services
The corporate finance group also 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.
37
<PAGE>
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>
1994 1995 1996 1997 1998
------------- ------------- ------------- ------------- -------------
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............ 4 $ 82 3 $ 78 14 $ 275 22 $1,912 29 $1,700
Preferred Securities and
Debt Securities........ 8 893 7 825 11 1,139 26 2,105 14 1,365
--- ---- --- ---- --- ------ --- ------ --- ------
Total.................. 12 $975 10 $903 25 $1,414 48 $4,017 43 $3,065
</TABLE>
- --------
(1) Gross offering proceeds (excluding over-allotments) raised by entire
syndicate.
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 overseeing 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 1998, the investment banking department
hired a Managing Director with substantial experience in the property/casualty
insurance area. Also in 1998, the 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 16 professionals, as of December 31, 1998 the Webb Division
had completed 104 conversions of thrifts from a mutual to a stock form of
ownership since its establishment in 1990, including 38 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 250 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 675
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 16 years of experience in institutional sales.
38
<PAGE>
Equity Sales and Trading
The equity sales and trading group consists of 14 sales people, eight traders
and ten 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. The Company makes a market in over 250 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 65 of such securities.
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 1998, the equity trading volume through KBW's New
York sales desk exceeded 721 million shares, representing an average of 2.9
million shares per business day, as compared to approximately 560 million
shares or 2.2 million shares per business day in 1997.
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 14 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 10 sales professionals, six traders
and trade support persons, one capital markets coordinator 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 capital markets coverage and 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 12 years and generally have maintained
relationships with the same accounts for most of their careers. The four most
senior salesmen have been with KBW an average of 17 years.
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.
39
<PAGE>
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. 1998 was the Financial Strategies Team's
first full year of operation.
KBW maintains a position in fixed income securities issued by companies in
the financial services industry, principally as an accommodation to customers.
In 1998, KBW's fixed income portfolio had long positions with aggregate month-
end market values ranging from $20.8 million to $53.0 million and short
positions (primarily holdings of U.S. government and agency securities) with
aggregate month-end market values ranging from $18.8 million to $36.3 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.
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 13.8%, 39.7%, 31.4%, 36.2% and 11.9% of total revenues in 1994,
1995, 1996, 1997 and 1998, respectively.
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 also engages 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) take arbitrage positions
in securities of companies involved in an M&A transaction in which the Company
has an advisory role and does not engage in speculative arbitrage with respect
to rumored mergers. The Company also engages in arbitrage based on
discrepancies between the market value of convertible 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 1998.
<TABLE>
<CAPTION>
Highest Lowest Average
Month Month Month
End End End
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Gross long positions............................... $67,975 $21,417 $51,217
Gross short positions.............................. 38,304 7,252 19,028
Net long positions................................. 50,007 14,165 32,189
</TABLE>
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.
40
<PAGE>
Additionally, the Company occasionally accepts payment for services in the form
of equity securities or rights or warrants to purchase equity securities. As of
December 31, 1998, the net carrying value of the Company's investments was
$32.5 million, including $11.6 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 KBW's President and Chief
Operating Officer.
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 December 31, 1998, KBW Asset
Management had approximately $176 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 December 31, 1998,
America First had approximately $23.2 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 KBW Asset Management's President, who was previously an
institutional salesman with KBW for 13 years. The Vice Chairman of KBW Asset
Management joined KBW Asset Management in October 1998 with 38 years of
experience in the investment management area. KBW Asset Management also
currently has a trader/analyst and an administrative secretary 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.
In late 1998, KBW Asset Management began acting as adviser to Wynstone
Partners, L.P., a registered investment company. As of December 31, 1998,
Wynstone Partners, L.P. had approximately $11 million in assets under
management. Investments in this partnership are being continuously marketed by
an unaffiliated investment banking firm, which has a fee sharing arrangement
with KBW Asset Management. It is anticipated that KBW Asset Management will
seek to market additional investment vehicles through this firm, including an
offshore partnership. In January 1999, KBW Asset Management had its first
closing on a private hedge fund created and marketed by KBW Asset Management.
Keefe, Bruyette & Woods, Inc. has invested approximately $10 million in this
hedge fund with approximately $10 million being obtained from outside
investors. KBW Asset Management will continue to actively market this private
fund and will seek to develop and market other private investment vehicles,
including an offshore private hedge fund. 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
41
<PAGE>
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 recently conducted a
comprehensive review of its compliance policies and procedures. Currently,
KBW's Chief Financial Officer also acts as its senior compliance officer. As a
result of its 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 Company. See "Risk Factors--
Regulatory Changes and Failure to Comply with Regulations Could Adversely
Affect the Company or Result in Significant Increased Costs" and "Risk
Factors--No Prior Operating History as a 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 recently
conducted a comprehensive review of its risk management and compliance policies
and procedures and is implementing changes in, and additions to, procedures and
controls based on the results of this review.
Quantitative Disclosures About Market Risk
In addition to the information above, the Company's exposure to market risk
at December 31, 1998 is described in the following tables. Market risk relating
to the Company's positions in equity securities relates primarily to the
Company's trading activity in the equity securities of financial institutions.
The Company's market risk exposure in the case of debt instruments includes the
impact of short-term changes in interest rates, which may result in losses on
long and short positions of debt securities held for trading purposes. See
"Risk Factors--Market, Credit and Liquidity Risks Could Result in Losses to the
Company."
42
<PAGE>
Equity Securities
at December 31, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
Assets Fair Value
------ ----------
<S> <C>
Equity securities owned......................................... $108,483
Other investments............................................... 3,238
<CAPTION>
Liabilities
-----------
<S> <C>
Equity securities sold not yet purchased........................ 17,038
Options sold.................................................... 582
</TABLE>
Debt Securities
at December 31, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
Maturity Date
--------------------------------------------------------------------
2000 2001 2002 2003 2004 Thereafter Total Fair Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
- ------
U.S. Treasury securities
owned.................. $ -- $ -- $ -- $ -- $ -- $3,000 $ 3,000 $ 3,198
Corporate debt
securities owned....... 1,540 4,123 250 1,580 1,871 1,767 11,131 11,333
Certificates of deposit,
floating rate notes and
other securities
owned.................. -- -- -- -- -- 4,610 4,610 4,498
Weighted Average
Interest Rate.......... 8.8% 6.3% 8.4% 7.4% 7.6% 3.7%
Liabilities
- -----------
U.S. Treasury securities
sold not yet
purchased.............. $ 200 $ -- $ -- $1,000 $ -- $3,000 $ 4,200 $ 4,265
Corporate debt
securities sold not yet
purchased.............. -- 500 -- 4 5,000 805 6,309 6,450
Certificates of deposit,
floating rate notes and
other securities sold
not yet purchased...... -- -- -- -- -- 2,250 2,250 2,116
Weighted Average
Interest Rate.......... 5.9% 6.6% 5.5% 6.1% 5.5%
Other debt securities:
KBWI subordinated
notes issued to
former stockholders.. $1,679 $ -- $ -- $ -- $ -- $ -- $ 1,679
Weighted Average
Interest Rate........ 2.0%
</TABLE>
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 is expanding 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.
43
<PAGE>
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--Failure of the
Systems of the Company or of Third Parties Could Adversely Affect Company
Operations" and "Risk Factors--Possible Year 2000 Costs Relating to Systems of
the Company and of Third Parties."
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.
Morgan Stanley & Co. Incorporated 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--Loss of Key Personnel Could Adversely Affect the Company's Prospects
and Revenues."
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--Strong Industry Competition Could Adversely
Affect the Company's Revenues and Operating Results."
Employees
As of December 31, 1998, the Company had a total of 161 employees, of whom 22
were engaged in research, 52 in sales and trading, 32 in corporate finance, 19
in the Webb Division, five in asset management services, and 31 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 60% 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 is scheduled to terminate on July 30, 1999. The Company
signed a 15-year lease in 1998 which provides for moving its principal
executive
44
<PAGE>
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; approximately 600 square feet in
Boston, Massachusetts for Oliver Securities under a lease that expires on
December 31, 1999; and approximately 4,360 square feet in Burr Ridge, Illinois
under a lease that expires on the fifth anniversary of the date of initial
occupancy which is currently expected to be in April of 1999. 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.
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-size
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 generally 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-size 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
45
<PAGE>
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 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. 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.
KBW Asset Management is registered as an investment adviser with the SEC. As
an investment adviser registered with the SEC, it 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 advisory,
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
46
<PAGE>
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 December 31, 1998, Keefe, Bruyette & Woods, Inc. was required to
maintain minimum net capital, in accordance with SEC rules, of approximately
$687,500 and had total net capital of approximately $125.6 million, or
approximately $124.9 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)(1)
<C> <C> <S>
James J. McDermott, Jr. .. 47 Chairman of the Board of Directors, Chief
Executive Officer and Class I Director
Joseph J. Berry........... 53 President, Chief Operating Officer and Class
III Director
Charles H. Lott........... 69 Vice Chairman of the Board of Directors and
Class II Director
Stanley T. Wells.......... 57 Vice Chairman of the Board of Directors and
Class I Director
John G. Duffy............. 49 Executive Vice President, Co-Head of
Corporate Finance and Class II Director
Andrew M. Senchak......... 52 Executive Vice President, Co-Head of
Corporate Finance and Class III Director
Michael P. Esposito, Jr... 59 Class I Director Nominee
R. Ralph Parks............ 55 Class II Director Nominee
Guy G. Woelk.............. 55 Executive Vice President, Chief Financial
Officer and Treasurer
Mitchell B. Kleinman...... 45 General Counsel
</TABLE>
- --------
(1) The terms of Class I Directors will expire at the annual meeting held in
2002. 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.
The Company has appointed Michael P. Esposito, Jr. and R. Ralph Parks as
directors effective upon pricing of the Offering. Neither Mr. Esposito nor Mr.
Parks is an officer or employee 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 regularly scheduled meeting of the KBW
Board in the third quarter of 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,
as Vice Chairman of Keefe, Bruyette & Woods, Inc. since January 1, 1998 and as
Chairman of KBW Asset Management since December 1998. He joined the Company at
its inception in 1962 as Vice President and Director of Research
48
<PAGE>
and has also served as its President from 1982 through 1989, its Chief
Executive 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.
Michael P. Esposito, Jr. Mr. Esposito has been named to become a director of
the Company upon pricing of the Offering. Mr. Esposito serves as the Chairman
of the Board of XL Capital Ltd., a provider of insurance and reinsurance, and
as the Co-Chairman of Inter-Atlantic Capital Partners, an investment banking
firm, each of which he joined in 1995. From 1961 to 1995, Mr. Esposito worked
in commercial banking at The Chase Manhattan Corporation and The Chase
Manhattan Bank and ultimately served as Executive Vice President, Chief
Financial Officer and Chief Administrative, Control and Compliance Officer. Mr.
Esposito also serves on the Boards of Directors of Risk Capital Holdings, Inc.,
Forest City Enterprises, Inc. and Annuity and Life Re (Holdings), Ltd.
R. Ralph Parks. Mr. Parks has been named to become a director of the Company
upon the pricing of the Offering. Mr. Parks is a Limited Partner of the Beacon
Group LLC, an investment banking firm. From 1981 to 1997, Mr. Parks was
employed by Goldman, Sachs & Co, where he was a General Partner from 1986 to
1994 and a Limited Partner from 1994 until he retired in 1997. Mr. Parks serves
on the Board of Directors of Generac Portable Products, Inc.
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, Chief Compliance 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 Mr. Esposito and Mr. Parks
will be members of the Compensation Committee. The Compensation Committee will
determine compensation for the executive officers of the Company.
49
<PAGE>
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
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).
Operating Committee
The KBW Board established an Operating Committee in 1998 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. The
Operating Committee also is active in supervising the Company's compliance
procedures.
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 1998 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, 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
1998 All Other
Annual Compensation Compensation
------------------------------ ------------
Other Annual
Name and Salary Bonus Compensation
Principal Position ($) ($) ($) ($)
<S> <C> <C> <C> <C>
James J. McDermott, Jr. ........... 340,000 3,514,586 (1) 28,089(2)
Chairman and Chief Executive
Officer
Joseph J. Berry..................... 320,000 2,505,030 (1) 29,295(3)
President, Chief Operating Officer
and Director
Charles H. Lott..................... 360,000 1,441,120 (1) 40,117(4)
Vice Chairman
John G. Duffy....................... 300,000 2,379,452 (1) 27,401(5)
Executive Vice President, Co-Head
of Corporate Finance and Director
Andrew M. Senchak................... 274,231 1,148,815 (1) 24,000(6)
Executive Vice President, Co-Head
of Corporate Finance and Director
</TABLE>
(footnotes on following page)
50
<PAGE>
- --------
(1) Amount does not exceed $50,000.
(2) 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 $4,089 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.
(3) 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 $5,295 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.
(4) 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 $16,117 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.
(5) 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 $3,401 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.
(6) Amount represents a contribution of $24,000 by the Company on behalf of
Mr. Senchak into the Company's profit sharing retirement plan.
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 in which they
participate 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 pursuant to the Director Stock and Option Plan
(described below).
The Non-Employee Director Stock and Option Compensation Plan
KBW has adopted and approved the KBW, Inc. Non-Employee Director Stock and
Option Compensation Plan (the "Director Stock and Option Plan") which will be
effective immediately prior to the pricing 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 as of the date of the pricing of the Offering (each, an "Eligible
Director"). A total of 250,000 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 and kind of shares to be granted
as options to Eligible Directors annually and upon initial election to the
Board, in the number, kind and option
51
<PAGE>
price of shares subject to outstanding options, in the number and kind of
shares subject to other outstanding awards (including deferred 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 a director (the
"Director Fees"), each Eligible Director will receive 25% of such 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 calendar 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 calendar 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, which are credited to a share account and are
distributable in Common Stock upon such Eligible Director's termination from
the KBW Board or upon a Change in Control (as defined in the 1999 Plan
described below).
Options
On the day of the pricing of the Offering, each Eligible Director will be
granted options ("Director Options") for 10,000 shares of Common Stock with an
exercise price per share equal to the initial public offering price. After each
annual meeting of stockholders during such director's term, each Eligible
Director will be granted Director Options for 5,000 shares of Common Stock.
Each new Eligible Director will be granted Director Options for 10,000 shares
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 a share
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
Eligible Director's service on the KBW Board ceases for any reason (other than
for cause), 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
Eligible Director's service on the KBW Board ceases for any reason. All
Director Options become fully vested and exercisable upon a Change in Control.
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 and, in the case of an Option,
pursuant to a gift to the Eligible Director's immediate family, whether
directly or indirectly, or by means of a trust or partnership or limited
liability company and, during the Eligible Director's lifetime, a Director's
Option may be exercised only by the Eligible Director, any such permitted
transferee or a guardian, legal representative or beneficiary thereof.
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.
52
<PAGE>
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 or based on the
achievement of specified performance goals.
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 1999 Stock and Annual Incentive Plan
KBW has adopted and approved the KBW, Inc. 1999 Stock and Annual Incentive
Plan (the "1999 Plan") which will be effective immediately prior to the pricing
of the Offering. The 1999 Plan is designed to promote the success and enhance
the value of KBW by linking the interests of certain of the Company's officers,
employees and consultants ("Participants") to those of KBW's stockholders and
by providing Participants with an incentive for outstanding performance. The
1999 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"), officers, employees and consultants of KBW, including employees
who are members of the KBW Board, are eligible to participate in the 1999 Plan.
Non-employee directors are not eligible to participate in the 1999 Plan. The
1999 Plan is intended to remain in effect until 2009. The description below
summarizes the material terms of the 1999 Plan.
General
The 1999 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") and other types of equity-based awards (together with
Options, "Awards").
The 1999 Plan provides that the total number of shares of Common Stock
available for grant under the 1999 Plan may not exceed 3,400,000 shares.
The 1999 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 1999 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 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, in its discretion, may
allow cashless exercise of Options. At the discretion of the Committee, an
Option may include a right to receive a replacement or "reload" option when a
Participant delivers shares of Common Stock to pay for the exercise price of an
Option. A reload option will be for the number of shares of Common Stock equal
to the number of shares that were delivered to satisfy the exercise price of
the Option that was exercised, will have an exercise price equal to the fair
market value of a share of Common Stock on the date of grant of the reload
option, will vest and become exercisable six months after such date of grant,
will expire on the same day as the Option that was exercised was otherwise due
to expire and will not have the Change in Control cash-out right described
below.
53
<PAGE>
Options are nontransferable other than by will or the laws of descent and
distribution or, at the discretion of the Committee, pursuant to a written
beneficiary designation and, in the case of a nonqualified Option, 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 permitted transferee or a guardian, legal representative
or beneficiary thereof.
During the 60-day period following a Change in Control, unless the Committee
determines otherwise, 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 in Control) in an amount equal to the
excess of (a) (i) the higher of the price received for Common Stock in
connection with the Change in 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 in Control (the "Change in
Control Price"), over (ii) the exercise price multiplied by (b) 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 in Control Price will equal the fair market value of a share of Common
Stock on the date, if any, that such Option is exercised.
The Company expects to grant Options to purchase 2,040,000 shares of Common
Stock under the 1999 Plan at an exercise price equal to the initial public
offering price on the date of the pricing of the Offering.
Other Awards
A stock appreciation right ("SAR") permits the Participant to receive cash or
shares of Common Stock (or a combination thereof), as determined by the KBW
Board or the Committee, in an amount (or with a value) 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 or
restricted units may be granted subject to performance goals and/or service-
based 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 and other Awards based on the value of Common Stock.
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 provided in the 1999 Plan. The
annual cash bonus component of the 1999 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 calendar year
commencing with 1999, the Committee will establish an aggregate bonus pool to
be awarded to participants under the annual cash bonus component of the 1999
Plan, provided that the pool may be reduced to the extent that aggregate
compensation and benefits expense for the calendar year (including annual cash
bonus payments under the 1999 Plan) would otherwise exceed a specified
percentage of revenues or a measure of corporate profitability, as determined
by the Committee with respect to each calendar 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. Bonus payments will be paid prior to the end of the
applicable calendar year, or in the Committee's discretion, as soon as
practicable following the end of a calendar year. In addition, the Committee
has the discretion to make bonus payments in Common Stock of the Company, in
lieu of cash.
Change in Control
In the event of a Change in Control, any Option or SAR that is not then
exercisable and vested will become fully exercisable and vested, restrictions
on restricted stock will lapse and performance units will be deemed earned. The
1999 Plan defines "Change in Control" as generally: (i) the acquisition of 50%
or more of
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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 consummation 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 1999 Plan and may amend
the terms of any outstanding Option or other Award; provided that no such
amendment to the 1999 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 1999 Plan.
Two types of stock options may be granted under the 1999 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.
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
KBW has adopted and approved the KBW, Inc. 1999 Employee Stock Purchase Plan
(the "Purchase Plan") which will be effective immediately prior to the pricing
of the Offering. 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, 1,000,000 shares of Common
Stock will be available for issuance and sale. Unless sooner terminated at the
discretion of the KBW Board, the Purchase Plan will terminate on December 31,
2009.
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.
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General Description
A Participant in the Purchase Plan may authorize regular 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 lesser of the fair
market value of such shares on the date of purchase or on the offering date for
such offering period. 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 on or prior to the 15th day of the last month of the offering
period. 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 or Termination of 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. The Board may suspend or terminate the Purchase Plan at any time;
provided that upon a termination while an offering period is in progress, such
offering period shall be shortened by setting a new date of purchase.
Employment Agreements
Prior to the Offering becoming effective, KBW will enter 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 $340,000, $320,000, $300,000 and $300,000, respectively. The Employment
Agreements provide that each Executive will be eligible to receive an annual
bonus, pursuant to the 1999 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
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"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 the Executive will be provided
with 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.
Restricted Stock Units Granted in Connection with Recruitment of Employees
Prior to the consummation of the Offering, the Company will grant restricted
stock units ("Units") pursuant to prior commitments made in connection with
recruiting certain employees. The Company is using these Units to replace
equity investment opportunities which the new employees forfeited upon
termination of their previous employment and for other compensation purposes.
The Company will grant an aggregate of 193,220 Units, each representing one
share of Common Stock. Units will generally vest ratably on each of the first
three anniversaries of the date of grant and are payable in shares of Common
Stock. Unvested Units will be forfeited upon termination of employment for
cause or voluntary termination other than for good reason.
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. Individuals
whose indebtedness to the Company exceeded $60,000 since January 1, 1996 as a
result of such loans are John G. Duffy, Executive Vice President and Co-Head of
Corporate Finance, Andrew M. Senchak, Executive Vice President and Co-Head of
Corporate Finance, and Guy Woelk, Executive Vice President and Chief Financial
Officer. There was no outstanding balance on Mr. Duffy's loan at December 31,
1998. The largest outstanding balance of Mr. Duffy's loan since January 1, 1996
was $75,095. The annual interest rate of Mr. Duffy's loan was 7.0%. The
outstanding balance of Mr. Senchak's loan at December 31, 1998 was $263,381.
The largest outstanding balance of Mr. Senchak's loan since January 1, 1996 was
$460,918. The annual interest rate on Mr. Senchak's loan is 6.5%. There was no
outstanding balance on Mr. Woelk's loan at December 31, 1998. The largest
outstanding balance of Mr. Woelk's loan since January 1, 1996 was $69,668. The
annual interest rate on Mr. Woelk's loan was 6.5%.
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
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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.
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 March 31, 1999, 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% of the Common Stock; (iv) each
Selling Stockholder; and (v) 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 Number of Shares of Common
Stock Beneficially Owned Shares Stock to be Beneficially
Prior to Offering(1) Offered Owned After Offering(2)
------------------------ --------- ------------------------
Name of Beneficial Owner Number Percent Number Percent
<S> <C> <C> <C> <C> <C>
James J. McDermott,
Jr..................... 1,022,105 7.01% -- 1,022,105 6.04%
Charles H. Lott......... 1,628,272(3) 11.17 -- 560,203(3) 3.31
Charles H. Lott 1999
Trust I................ 541,961 3.72 356,023 185,938 1.10
Charles H. Lott 1999
Trust II............... 541,961 3.72 356,023 185,938 1.10
Charles H. Lott 1999
Trust III.............. 541,977 3.72 356,023 185,954 1.10
Stanley T. Wells........ 1,576,033(4) 10.82 454,521 507,963(4) 3.00
1999 STANCE Investment
Trust.................. 613,549 4.21 613,549 -- --
Joseph J. Berry......... 1,293,045(5) 8.87 -- 1,293,045(5) 7.64
John G. Duffy........... 687,755 4.72 -- 687,755 4.06
Andrew Senchak.......... 435,237 2.99 -- 435,237 2.57
Michael P. Esposito, Jr.
(6).................... -- -- -- -- --
R. Ralph Parks (6)...... -- -- -- -- --
Teresa M. Dooner........ 224,861 1.54 224,861 -- --
All Directors and
Executive Officers as a
Group (ten persons).... 6,997,299 48.02% 2,136,139 4,861,160 28.71%
</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 shares of Common Stock held by the Charles H. Lott 1999 Trust I,
the Charles H. Lott 1999 Trust II and the Charles H. Lott 1999 Trust III
(collectively, the "Lott Trusts"). Mr. Lott is a trustee of, and will
receive an annuity from, each of the Lott Trusts. Mr. Lott's estate or
certain family members of Mr. Lott will receive the remainder of the trust
estate.
(4) Includes shares of Common Stock held by the 1999 STANCE Investment Trust
(the "Wells Trust"). Mr. Wells is the trustee of, and will receive an
annuity from, the Wells Trust. Mr. Wells' estate or certain family members
of Mr. Wells will receive the remainder of the trust estate.
(5) Includes 27,640 shares held by a charitable gifting trust of which Mr.
Berry is a trustee.
(6) Does not include options to be granted to Mr. Esposito and Mr. Parks on the
day of the pricing of the Offering under the Director Stock and Option
Plan. See "Management--The Non-Employee Director Stock and Option
Compensation Plan."
Selling Stockholders
Of the 4,722,000 shares of Common Stock being offered hereby, 2,361,000
shares are being sold by the Company and 2,361,000 shares are being sold by the
Selling Stockholders. The Company will not receive any of the proceeds from the
sale of shares by the Selling Stockholders. The Selling Stockholders are
Charles H.
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Lott and Stanley T. Wells, each of whom is a Vice Chairman of the KBW Board,
the Lott Trusts, the Wells Trust and Teresa M. Dooner, who is a Vice President
of the Company.
In March 1999, Mr. Lott transferred 1,625,899 shares of Common Stock in the
aggregate to the Lott Trusts and Mr. Wells transferred 613,549 shares of Common
Stock to the Wells Trust. Messrs. Lott and Wells have announced that they will
retire from the KBW Board effective as of the first regularly scheduled meeting
of the KBW Board in the third quarter of 1999. See "Management--Directors and
Executive Officers." As described in the table above, the Lott Trusts will sell
1,068,069 shares of Common Stock in the Offering and receive gross proceeds of
$19,225,242, Mr. Wells and the Wells Trust will sell 1,068,070 shares of Common
Stock in the Offering and receive gross proceeds of $19,225,260 and Ms. Dooner
will sell 224,861 shares of Common Stock in the Offering and receive gross
proceeds of $4,047,498, assuming an initial public offering price of $18.00 per
share. In addition, the Underwriters have the option to purchase up to 354,150
additional shares of Common Stock from the Lott Trusts and up to 354,150
additional shares of Common Stock from Mr. Wells to cover over-allotments, if
any. See "Underwriting." If this option is exercised by the Underwriters for
the full amount, Mr. Lott and the Lott Trusts will receive total gross proceeds
of $25,599,942 and Mr. Wells and the Wells Trust will receive total gross
proceeds of $25,599,960. See "Underwriting."
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CERTAIN TRANSACTIONS OCCURRING PRIOR TO THE OFFERING
Creation of Holding Company Structure
On , 1999, 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 contribution by Keefe,
Bruyette & Woods, Inc. to KBW of all of the outstanding capital stock of KBW
Asset Management (the "Contribution"). In the Merger, each share of common
stock of Keefe, Bruyette and Woods, Inc. will be converted into the right to
receive 16.259 shares of Common Stock, with fractional shares being paid out in
cash, based on the initial public offering price, in lieu of such fractional
interests. The Merger and Contribution will become effective immediately upon
pricing 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 Contribution described above.
New and Former Stockholders' Agreements
Prior to the Merger, 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. Upon
completion of the Merger, KBW will be the sole stockholder of Keefe, Bruyette &
Woods, Inc. and 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 16.259
shares of Common Stock and cash in lieu of fractional shares. All of the newly
issued shares of Common Stock which will 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
upon consummation of the Offering, 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 consummation 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 68% of the outstanding Common Stock will be 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, engages in employment in competition with
the Company (as
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defined in the 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 deliver such Common Shares to
the Company (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 Future 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.
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 March 31, 1999,
the Company had no shares of Preferred Stock outstanding and 14,571,345 shares
of Common Stock were held by 109 stockholders of record. 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 to be in
effect upon consummation of the Offering, 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
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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.
The Company has been approved for the listing of the Common Stock on the NYSE
under the symbol "KBW."
The transfer agent for the Common Stock is The Bank of New York.
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.
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CERTAIN ANTI-TAKEOVER PROVISIONS
The KBW Certificate and the KBW Bylaws to be in effect upon consummation of
the Offering 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 2000 Annual Meeting of
Stockholders, approximately one-third will continue to serve until the
2001 Annual Meeting of Stockholders and approximately one-third will continue
to serve until the 2002 Annual Meeting of Stockholders. Of the initial
directors, Messrs. Lott, Duffy and Parks are scheduled to serve until the
2000 Annual Meeting of Stockholders, Messrs. Berry and Senchak are scheduled to
serve until the 2001 Annual Meeting of Stockholders and Messrs. McDermott,
Wells and Esposito are scheduled to serve until the 2002 Annual Meeting of
Stockholders. Starting with the 2000 Annual Meeting of Stockholders, one class
of directors will be elected each year for a three-year term. Messrs. Lott and
Wells have announced that they will retire from the KBW Board effective as of
the first regularly scheduled meeting of the KBW Board in the third quarter of
1999.
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
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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 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 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.
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 tenth 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.
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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 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.
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.
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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 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 (other than the corporation and its subsidiaries) 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
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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.
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 16,932,345 shares of
Common Stock outstanding. The 4,722,000 shares offered hereby (5,430,300 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
(approximately 169,000 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 12,210,000 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
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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 or from issuing shares of Common Stock or
options exercisable for Common Stock in connection with the hiring of new
employees. 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
, 1999 (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:
<TABLE>
<CAPTION>
Number of
Underwriters Shares
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation................
Goldman, Sachs & Co................................................
Keefe, Bruyette & Woods, Inc.......................................
---
Total............................................................
===
</TABLE>
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.
Certain of 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 708,300
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 (except that (i) the Company may grant stock options pursuant to the
Company's stock option plan described in this Prospectus, (ii) the Company may
issue shares of Common Stock upon the exercise of options or warrants or
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the conversion of currently outstanding securities and (iii) the Company may
issue, offer and sell shares of Common Stock or securities convertible,
exercisable or exchangeable therefor as an inducement for employees to join the
Company provided that in each case the recipient of such securities agrees in
writing to be bound by the restrictions set forth in this sentence for the
shares of Common Stock issued or issuable pursuant to this clause (iii)).
In addition, during such period, the Company has also agreed not to file any
registration statement (other than a registration statement on Form S-8
relating to the Company's benefit plans) 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.
The Common Stock has been approved for listing 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.
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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 an NASD member 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.
The Underwriters have reserved for sale approximately 236,100 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 three months following the effective
date of the Offering.
72
<PAGE>
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 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
73
<PAGE>
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 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
74
<PAGE>
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
The validity of the shares of Common Stock offered hereby will be passed upon
by Wachtell, Lipton, Rosen & Katz, New York, New York. Certain legal matters
will be passed upon 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, 1997 and 1998 and the related consolidated statements of income,
changes in stockholders' equity and cash flows for each of the years ended
December 31, 1996, 1997 and 1998 have been included herein and in the
Registration Statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
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
75
<PAGE>
worldwide website (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
worldwide website.
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.
76
<PAGE>
KBW, INC. & SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................. F-2
Consolidated Statements of Financial Condition at December 31, 1997 and
1998.................................................................... F-3
Consolidated Statements of Income for the years ended December 31, 1996,
1997 and 1998........................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1996, 1997 and 1998.................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998..................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
The financial statements included herein have been adjusted to give effect to
the anticipated reorganization discussed in Note 1 of the Notes to Consolidated
Financial Statements. We expect to be in a position to render the following
audit report upon the effectiveness of such events, assuming from April 16,
1999, to the effective date of such events, no other events will have occurred
that would affect the accompanying financial statements or notes thereto.
KPMG LLP
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, 1997 and 1998, 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, 1998.
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, 1997 and 1998, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1998,
in conformity with generally accepted accounting principles.
New York, New York
April 16, 1999
F-2
<PAGE>
KBW, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents.................................. $ 6,410 $ 4,754
Securities owned, at market value:
Bank and financial institution stocks.................... 94,176 79,240
Corporate bonds.......................................... 8,290 11,333
U.S. government and agency securities.................... -- 3,198
Certificates of deposit, floating rate notes and other... 302 4,498
-------- --------
102,768 98,269
-------- --------
Investments................................................ 32,488 32,483
Receivable from clearing brokers........................... 46,204 69,686
Accounts receivable........................................ 3,369 6,404
Furniture, fixtures and leasehold improvements, at cost,
less accumulated depreciation and amortization of $4,487
in 1997 and $5,306 in 1998................................ 888 1,001
Other assets............................................... 7,500 8,945
-------- --------
Total assets........................................... $199,627 $221,542
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Securities sold but not yet purchased, at market value:
Bank and financial institution stocks.................... $ 21,687 $ 17,038
Corporate bonds.......................................... 8,029 6,450
U.S. government and agency securities.................... 8,290 4,265
Certificates of deposit, floating rate notes and other... -- 2,698
-------- --------
38,006 30,451
Accounts payable and accrued expenses.................... 8,019 13,680
Income taxes payable..................................... 7,756 1,122
Deferred income taxes, net............................... 7,961 2,564
-------- --------
23,736 17,366
-------- --------
Commitments and contingencies
Subordinated liabilities................................. 2,769 1,679
-------- --------
Total liabilities...................................... 64,511 49,496
-------- --------
Stockholders' equity:
Preferred Stock: par value $.01, shares authorized
10,000,000, no shares issued and outstanding............ -- --
Common stock: par value $.01, shares authorized
140,000,000, issued 61,041,681, outstanding 14,094,794
in 1997, 14,571,345 in 1998............................. 610 610
Paid-in capital.......................................... 8,562 12,595
Retained earnings........................................ 158,664 189,444
Common stock in treasury, at cost, shares: 46,946,887 in
1997 and 46,470,336 in 1998............................. (27,167) (26,411)
Notes receivable from stockholders....................... (5,553) (4,192)
-------- --------
Total stockholders' equity.............................. 135,116 172,046
-------- --------
Total liabilities and stockholders' equity............. $199,627 $221,542
======== ========
</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>
Years ended December 31,
-------------------------
1996 1997 1998
<S> <C> <C> <C>
Revenues
Principal transactions, net........................ $36,272 $ 47,076 $ 30,198
Commissions........................................ 11,339 15,097 21,505
Investment banking................................. 28,706 55,176 91,851
Net gain on investments............................ 5,987 18,419 2,694
Interest and dividend income....................... 2,933 5,911 7,574
Other.............................................. 1,367 1,340 1,623
------- -------- --------
Total revenues................................... 86,604 143,019 155,445
------- -------- --------
Expenses
Compensation and benefits.......................... 40,813 62,508 76,512
Occupancy and equipment............................ 2,608 2,952 4,499
Communications..................................... 2,058 2,310 2,438
Brokerage and clearance............................ 3,876 4,683 5,292
Other.............................................. 5,757 10,305 11,457
------- -------- --------
Total expenses................................... 55,112 82,758 100,198
------- -------- --------
Income before income tax expense..................... 31,492 60,261 55,247
Income tax expense................................... 13,547 22,949 24,467
------- -------- --------
Net income........................................... $17,945 $ 37,312 $ 30,780
======= ======== ========
Basic earnings per share............................. $ 1.33 $ 2.69 $ 2.12
======= ======== ========
Diluted earnings per share........................... $ 1.33 $ 2.69 $ 2.12
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
KBW, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Notes
Common Receivable
Common Paid-in Retained Stock in from
Stock Capital Earnings Treasury Stockholders Total
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1995................... $610 $ 540 $103,407 $(22,215) $(3,732) $ 78,610
Net income............ -- -- 17,945 -- -- 17,945
Purchase 980,011
shares of common
stock for treasury... -- -- -- (6,304) -- (6,304)
Sale of 1,053,534
shares of common
stock from treasury.. -- 5,425 -- 1,859 -- 7,284
Issuance of notes
receivable from
stockholders......... -- -- -- -- (3,027) (3,027)
Proceeds from
principal repayment
on notes receivable
from stockholders ... -- -- -- -- 1,467 1,467
---- ------- -------- -------- ------- --------
Balances at December 31,
1996................... $610 $ 5,965 $121,352 $(26,660) $(5,292) $ 95,975
==== ======= ======== ======== ======= ========
Net income............ -- -- 37,312 -- -- 37,312
Purchase of 152,802
shares of common
stock for treasury... -- -- -- (1,176) -- (1,176)
Sale of 379,306 shares
of common stock from
treasury............. -- 2,597 -- 669 -- 3,266
Issuance of notes
receivable from
stockholders......... -- -- -- -- (1,254) (1,254)
Proceeds from
principal repayment
on notes receivable
from stockholders.... -- -- -- -- 993 993
---- ------- -------- -------- ------- --------
Balances at December 31,
1997................... $610 $ 8,562 $158,664 $(27,167) $(5,553) $135,116
==== ======= ======== ======== ======= ========
Net income............ -- -- 30,780 -- -- 30,780
Purchase of 8,829
shares of common
stock for treasury... -- -- -- (100) -- (100)
Sale of 485,380 shares
of common stock from
treasury............. -- 4,033 -- 856 -- 4,889
Proceeds from
principal repayment
on notes receivable
from stockholders ... -- -- -- -- 1,361 1,361
---- ------- -------- -------- ------- --------
Balances at December 31,
1998................... $610 $12,595 $189,444 $(26,411) $(4,192) $172,046
==== ======= ======== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
KBW, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1996 1997 1998
<S> <C> <C> <C>
Cash flows from operating activities:
Net income....................................... $ 17,945 $ 37,312 $ 30,780
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred income taxes (benefit)................. 2,563 4,131 (5,397)
Unrealized gain from principal transactions and
investments.................................... (8,495) (11,440) (13,294)
Realized gain from investments.................. (232) (11,292) (3,313)
Depreciation and amortization................... 297 1,128 1,332
(Increase) decrease in operating assets:
Securities owned............................... 28,389 (7,040) 2,990
Receivable from clearing brokers............... (2,535) (40,468) (23,482)
Accounts receivable............................ 8 (1,955) (3,035)
Other assets................................... (411) 1,481 (1,958)
Increase (decrease) in operating liabilities:
Securities sold but not yet purchased.......... (32,615) 15,886 7,555
Accounts payable and accrued expenses.......... 1,322 2,484 5,661
Income taxes payable........................... 1,453 5,658 (6,634)
-------- -------- --------
Total adjustments.............................. (10,256) (41,427) (39,575)
-------- -------- --------
Net cash provided by (used in) operating
activities...................................... $ 7,689 $ (4,115) $ (8,795)
-------- -------- --------
Cash flows from investing activities:
Purchase of furniture, fixtures and leasehold
improvements.................................... (229) (290) (932)
Purchases of investments......................... (3,718) (7,029) (10,200)
Proceeds from sale of investments................ 269 14,383 13,211
-------- -------- --------
Net cash provided by (used in) investing
activities..................................... $ (3,678) $ 7,064 $ 2,079
-------- -------- --------
Cash flows from financing activities:
Sale of common stock from treasury............... $ 1,165 $ 2,012 $ 4,889
Purchase of common stock for treasury............ (6,304) (1,176) (100)
Repayment of notes receivable from stockholders.. 1,467 993 1,361
Issuance of subordinated borrowings.............. 3,029 -- --
Installment payments on subordinated borrowings.. (1,290) (2,132) (1,090)
-------- -------- --------
Net cash provided by (used in) financing
activities.................................... (1,933) (303) 5,060
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................... 2,078 2,646 (1,656)
Cash and cash equivalents at beginning of
period.......................................... 1,686 3,764 6,410
======== ======== ========
Cash and cash equivalents at end of period....... $ 3,764 $ 6,410 $ 4,754
======== ======== ========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Income taxes................................... $ 9,620 $ 13,129 $ 36,497
======== ======== ========
Interest....................................... $ 2,306 $ 980 $ 53
======== ======== ========
Supplemental non-cash financing activities:
Issuance of common stock from treasury for
purchase of Charles Webb & Company............ $ 3,092 $ -- $ --
======== ======== ========
Issuance of treasury stock for notes receivable
from stockholders............................. $ 3,027 $ 1,254 $ --
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
KBW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)
1. Summary of Significant Accounting Policies and Other
Organization and Basis of Presentation
KBW, Inc. (the "Company") is a newly formed holding company which, as of the
pricing of the Offering referred to below, 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. Prior to
the pricing of the Offering, the stockholders of KBWI will vote to place
ownership of KBWI under a holding company structure which will be effected by
merger (the "Reorganization"). As part of the Reorganization, KBWI will
contribute the capital stock of KBWAM to the Company. In connection therewith,
all of the outstanding common stock of KBWI will be converted into shares of
common stock of the Company at an exchange ratio of 16.259 shares of common
stock of the Company for each share of KBWI common stock.
Prior to the Reorganization, KBWI and its consolidated subsidiary, KBWAM,
reported as Keefe Bruyette & Woods, Inc. and subsidiary. KBW, Inc. had no
operations prior to the Reorganization. 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 consolidated 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 will be created as a result of the
Reorganization. All share and per share amounts and stock option data have been
retroactively restated in the consolidated financial statements to reflect the
share exchange ratio in the Reorganization.
In August 1998, the Company filed a registration statement with the
Securities and Exchange Commission to register the primary and secondary
initial public offering of the Company's common stock (the "Offering").
Business Activities
KBW is an institutionally oriented investment banking firm that specializes
in commercial banks, thrifts and other financial institutions. KBW's activities
include investment banking, underwriting and sales and trading of stocks and
bonds of banks and other financial institutions.
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.
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, 1996, 1997 and 1998, cash equivalents
totaled $3,440, $4,046 and $4,319, respectively.
F-7
<PAGE>
KBW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, except per share data)
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.
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, 1997 and 1998 was $4,629, and
$11,578, 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 453,854 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.
Other Comprehensive Income
The Company had no items of other comprehensive income during the years ended
December 31, 1996, 1997 and 1998.
F-8
<PAGE>
KBW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, except per share data)
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.
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,
-------------
Notes due 1997 1998
<S> <C> <C>
March 1999................................................... $ 38 $ --
April 2000................................................... 1,205 723
June 2000.................................................... 171 93
September 2000............................................... 1,355 863
------ ------
$2,769 $1,679
====== ======
</TABLE>
All notes outstanding bore interest at 1% above a reference bank rate not to
exceed 7-1/2%. Interest rates at December 31, 1997 and 1998 were 2.5% per annum
and 2.0% per annum, respectively.
F-9
<PAGE>
KBW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, except per share data)
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, 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
======= ======= =======
Year ended December 31, 1998:
U.S. Federal................................... $21,282 $(4,644) $16,638
State and local................................ 8,582 (753) 7,829
------- ------- -------
$29,863 $(5,397) $24,467
======= ======= =======
</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>
1996 1997 1998
------------------ ------------------- ------------------
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.............. $11,022 35.0% $21,091 35.0% $19,336 35.0%
State and local taxes,
net of related federal
income tax benefit..... 1,407 4.5 2,910 4.8 5,089 9.2
Dividend exclusion and
other.................. 1,118 3.5 (1,052) (1.7) 42 0.1
------- ---- ------- ---- ------- ----
$13,547 43.0% $22,949 38.1% $24,467 44.3%
======= ==== ======= ==== ======= ====
</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, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Deferred tax assets:
Other liabilities and accrued expenses.................. $ 1,168 $ 1,712
Fixed assets............................................ 657 831
Deferred tax liabilities:
Investments............................................. (9,786) (5,107)
------- -------
Net deferred tax liabilities.............................. $(7,961) $(2,564)
======= =======
</TABLE>
There are no valuation allowances recorded against deferred tax assets at
December 31, 1997 and 1998, 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)
(Dollar amounts in thousands, except per share data)
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, 1998, the Company's regulatory net capital and excess net
capital were $125,648 and $124,961, respectively.
5. Commitments and Contingencies
Leases
The Company leases its headquarters and other office locations under
noncancellable lease agreements which expire in 2014 and 2001, respectively.
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 as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year
----
<S> <C>
1999................................................................. $ 4,194
2000................................................................. 3,216
2001................................................................. 3,218
2002................................................................. 3,073
2003................................................................. 3,076
Thereafter........................................................... 30,515
-------
$47,292
=======
</TABLE>
Rent expense for the years ended December 31, 1996, 1997 and 1998, aggregated
$1,668, $1,679, and $2,459, 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.
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>
Years ended December
31,
------------------------
1996 1997 1998
<S> <C> <C> <C>
Fixed income...................................... $ (797) $ 3,192 $ 8,092
Equity (including options)........................ 37,069 43,884 22,106
------- ------- -------
$36,272 $47,076 $30,198
======= ======= =======
</TABLE>
F-11
<PAGE>
KBW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, except per share data)
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 risk.
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 monitoring the
creditworthiness of 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.
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, 1997:
Purchased options...................... $ 2,370 $248 $ 54
Written options........................ 28,778 815 696
December 31, 1998:
Purchased options...................... $ -- $ 27 $ --
Written options........................ 14,308 639 582
</TABLE>
Open commitments at December 31, 1998, 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,
F-12
<PAGE>
KBW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, except per share data)
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 equity
and credit markets and actions of regulatory authorities.
10. Book Value Stock Purchase Plan
The Company maintains a book value stock purchase plan whereby employees may
purchase shares of the Company's stock at book value as calculated in
accordance with a stockholders' agreement (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.)
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 $1,245, $1,742 and $2,250 in 1996, 1997 and 1998,
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>
Years ended December
31,
-----------------------
1996 1997 1998
<S> <C> <C> <C>
Numerator:
Net income....................................... $17,945 $37,312 $30,780
Denominator:
Weighted average shares outstanding.............. 13,479 13,885 14,536
Dilutive effect of stock options and other
exercisable shares.............................. -- -- --
------- ------- -------
Adjusted weighted average shares outstanding..... 13,479 13,885 14,536
------- ------- -------
Basic earnings per share........................... $ 1.33 $ 2.69 $ 2.12
======= ======= =======
Diluted earnings per share......................... $ 1.33 $ 2.69 $ 2.12
======= ======= =======
</TABLE>
13. Industry Segment Data
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and
Related Information," in disclosing its business segments. Pursuant to that
statement, an entity is required to determine its business segments based on
the way management organizes the segments within the enterprise for making
operating decisions and assessing
F-13
<PAGE>
KBW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, except per share data)
performance. Based upon this criteria, the Company has determined that its
entire business should be considered a single segment. Revenues and expenses,
along with assets and liabilities, of the operating segment, and thus the
amounts reviewed and used by the chief operating decision maker of the Company,
are consistent with the amounts reported in the consolidated statements of
income and consolidated statements of financial condition, respectively.
Further, revenues from external customers for each product or service are
consistent with those presented in the consolidated statements of income. All
of the Company's business activities are carried out domestically, and there
were no individual customers who contributed more than ten percent of the
Company's total revenues.
14. Recent Accounting Developments
In June 1998 the Financial Accounting Standards Board 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
Treasury Stock Retirement
In connection with the Reorganization, the former treasury stock of KBWI was
retired. The pro forma effect on the Company's December 31, 1998 equity was as
follows:
<TABLE>
<CAPTION>
Pro Forma
December 31, December 31,
1998 1998
------------ ------------
<S> <C> <C>
Preferred stock.................................... $ -- $ --
Common stock....................................... 610 146
Paid-in capital.................................... 12,595 12,595
Retained earnings.................................. 189,444 163,497
Common stock in treasury........................... (26,411) --
Notes receivable from stockholders................. (4,192) (4,192)
-------- --------
$172,046 $172,046
======== ========
</TABLE>
Restricted Stock Unit Awards
Prior to the consummation of the Offering, the Company intends to grant
193,220 restricted stock units ("Units") pursuant to commitments made in
connection with recruiting certain employees. The Units each represent one
share of common stock and generally vest ratably on each of the first three
anniversaries of the date of grant. Upon vesting, Units can be converted into
common stock when requested by the employee. Compensation expense equivalent to
the initial public offering price per share will be recognized by the Company
over the vesting period.
Employee Stock Purchase Plan
Upon the conversion of outstanding shares of common stock of KBWI into shares
of common stock of the Company (see note 1), the book value stock purchase plan
of KBWI became inoperative. The Company has adopted a new employee stock
purchase plan relating to the common stock of the Company, which becomes
F-14
<PAGE>
KBW, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollar amounts in thousands, except per share data)
effective upon the pricing of the initial public offering. 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 lesser of the fair market value of such
shares on the date of purchase or on the offering date for such offering
period. The offering dates are January 1 and July 1 of each year, and each
offering period consists 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).
The last sale of stock under the former book value stock purchase plan was
more than one year prior to the date of the Offering. Accordingly, pursuant to
generally accepted accounting principles, the Company will not recognize any
compensation expense adjustment related to the former book value stock purchase
plan in connection with the Offering.
Employee Stock and Annual Incentive Plan
The Company has adopted an employee stock and annual incentive plan (the
"1999 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, performance awards and restricted stock (collectively, the
"Awards") to employees as determined by the compensation committee or other
designated committee of the Board of Directors. Options granted under the 1999
Plan will generally vest ratably over three years from the date of grant and
will have terms which may not exceed 10 years. Unless otherwise determined by a
designated committee of the Company's Board of Directors (the "Committee"),
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 cash or, if approved by the Committee, with previously
acquired shares of common stock or a combination thereof. At the discretion of
the Committee, a participant may receive a replacement or "reload" option when
exercising an option with previously owned shares of common stock. In the event
of a change of control as defined in the 1999 Plan, any option or stock
appreciation right that is not then exercisable and vested will become fully
exercisable and vested, restrictions on restricted stock will lapse and
performance units will be deemed earned. The 1999 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.
Non-Employee Director Stock and Option Plan
The Company has adopted a non-employee director compensation plan (the
"Director Stock and Option Plan") whereby non-employee directors of the Company
will be required to receive 25% of their director fees in shares of common
stock (determined based upon the then fair market value of the common stock).
Such directors may elect to receive additional portions of their fees in shares
of common stock. On the day of the pricing of the Offering, each non-employee
director will be granted options for 10,000 shares of common stock. After each
annual meeting of stockholders during such director's term, each non-employee
director will be granted options for 5,000 shares of common stock. Each new
non-employee director will be granted options for 10,000 shares of common
stock. The exercise price for the options will be equal to the fair market
value of common stock on the date of the grant. Options granted under the
Director Stock and Option Plan will vest upon the first anniversary of the date
of 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
as defined in the 1999 Plan.
Employment Agreements
The Company will enter into employment agreements with four key executives.
Each agreement is for a term of three years, commencing upon the consummation
of the offering. Under the agreements, the executives will have annual base
salaries which total $1,260, and will participate in the Company's annual bonus
plan, the 1999 Plan, and other benefit plans and programs on a basis no less
favorable than peer executives of the
F-15
<PAGE>
Company. If the employment of an executive is terminated, other than for cause,
death or disability or an executive terminates employment for good reason,
during the three-year term, the executive will be entitled to a lump-sum cash
payment equal to any earned and unpaid compensation through the date of
termination, base salary, annual bonus and Company-contributions to the Profit
Sharing Retirement Plan, for the greater of twelve months and the remaining
portion of the three-year term. The agreements also contain certain restrictive
covenants and non-compete arrangements with respect to each executive.
F-16
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or other person has been authorized to give any in-
formation 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 Under-
writers. This Prospectus does not constitute an offer to sell or the solicita-
tion of any offer to buy any security other than the shares of Common Stock
offered by this Prospectus, nor does it constitute an offer to sell or a so-
licitation of any offer to buy the shares of Common Stock by anyone in any ju-
risdiction 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
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary....................................................... 3
Recent Results........................................................... 7
Risk Factors............................................................. 8
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Historical Consolidated Financial Data.......................... 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 24
Business................................................................. 32
Management............................................................... 48
Principal and Selling Stockholders....................................... 59
Certain Transactions Occurring Prior to the Offering..................... 61
Description of Capital Stock............................................. 62
Certain Anti-takeover Provisions......................................... 64
Shares Eligible for Future Sale.......................................... 68
Underwriting............................................................. 70
Tax Consequences to Non-U.S. Holders..................................... 73
Legal Matters............................................................ 75
Experts.................................................................. 75
Additional Information................................................... 75
Index to Consolidated Financial Statements............................... F-1
</TABLE>
----------------
Until , 1999 (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 addition to the obligation of dealers to deliver a Prospectus when act-
ing as underwriters and with respect to their unsold allotments or
subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4,722,000 Shares
[KBW LOGO]
KBW, Inc.
Common Stock
----------------
PROSPECTUS
----------------
Donaldson, Lufkin & Jenrette
Goldman, Sachs & Co.
Keefe, Bruyette & Woods, Inc.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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:
<TABLE>
<CAPTION>
Amount*
----------
<S> <C>
SEC registration fee............................................. $ 33,925
NASD filing fee.................................................. 12,000
New York Stock Exchange listing fee.............................. 126,000
Printing and engraving expenses.................................. 150,000
Legal fees and expenses.......................................... 575,000
Accounting fees and expenses..................................... 225,000
Blue sky fees and expenses (including legal fees and expenses)... 2,500
Transfer agent and registrar fees and expenses................... 25,000
Miscellaneous.................................................... 100,575
----------
Total............................................................ $1,250,000
==========
</TABLE>
* 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
II-1
<PAGE>
to the extent that the Court of 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 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 14,571,345 shares of common stock, par value $0.01 per share,
of KBW, Inc. 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.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
1.01 --Form of Underwriting Agreement.
2.01 --Form of Amended and Restated 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 --1999 Stock and Annual Incentive Plan.
10.03 --Form of 1999 Employee Stock Purchase Plan.*
10.04 --Non-Employee Director Stock and Option Compensation Plan.
10.05 --Form of Employment Agreement for certain executives.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
10.06 --Fully Disclosed Clearing Agreement, dated as of October 22, 1992,
between the Pershing Division of Donaldson, Lufkin & Jenrette
Securities Corporation and Keefe, Bruyette & Woods, Inc., as
amended.*
10.07 --Lease Agreement, dated as of June 19, 1998, between The Port
Authority of New York and New Jersey and Keefe, Bruyette & Woods,
Inc.*
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 Registration Statement filed on
August 14, 1998).*
27.01 --Financial Data Schedule.*
99.01 --Consent of a Person Named to Become a Director.
99.02 --Consent of a Person Named to Become a Director.
</TABLE>
- --------
*Previously filed.
(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 Amendment No. 2 to the 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 16th day of
April, 1999.
KBW, INC.
/s/ James J. McDermott, Jr.*
By: _________________________________
Chairman of the Board of
Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to the Registration Statement has been signed by the following
persons in the capacities on the 16th day of April, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<C> <S>
/s/ James J. McDermott, Jr.* Chairman of the Board of Directors and
____________________________________ Chief Executive Officer (Principal
(James J. McDermott, Jr.) 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
____________________________________
(Stanley T. Wells)
/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)
/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)
</TABLE>
/s/ Mitchell B. Kleinman
*By: ________________________________
Mitchell B. Kleinman, attorney-in-fact
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<S> <C> <C>
1.01 -- Form of Underwriting Agreement.
2.01 -- Form of Amended and Restated 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 -- 1999 Stock and Annual Incentive Plan.
10.03 -- Form of 1999 Employee Stock Purchase Plan.*
10.04 -- Non-Employee Director Stock and Option Compensation Plan.
10.05 -- Form of Employment Agreement for certain executives.
10.06 -- Fully Disclosed Clearing Agreement, dated as of October 22, 1992,
between the Pershing Division of Donaldson, Lufkin & Jenrette
Securities Corporation and Keefe, Bruyette & Woods, Inc., as
amended.*
10.07 -- Lease Agreement, dated as of June 19, 1998, between The Port
Authority of New York and New Jersey and Keefe, Bruyette &
Woods, Inc.*
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 Registration Statement filed
on August 14, 1998).*
27.01 -- Financial Data Schedule.*
99.01 -- Consent of Person Named to Become a Director.
99.02 -- Consent of Person Named to Become a Director.
</TABLE>
- --------
* Previously filed.
II-5
<PAGE>
EXHIBIT 1.01
__________ Shares
KBW, INC.
Common Stock
FORM OF
-------
UNDERWRITING AGREEMENT
----------------------
__________, 1999
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
KEEFE, BRUYETTE & WOODS, INC.
As representatives of the several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
KBW, Inc., a Delaware corporation (the "Company"), proposes to issue and
sell to the several underwriters named in Schedule I hereto (the
"Underwriters"), and the selling stockholders listed in Schedule II-A (such
selling stockholders are referred to herein as the "Management Selling
Stockholders") and the selling stockholder listed in Schedule II-B (the
"Additional Selling Stockholder" and together with the Management Selling
Stockholders, the "Selling Stockholders") severally propose to sell to the
several Underwriters, an aggregate of _______________ shares of the Common
Stock, par value $0.01 per share, of the Company (the "Firm Shares"), of which
_____________ shares are to be issued and sold by the Company and _____________
shares are to be sold by the Selling Stockholders, each Selling Stockholder
selling the amount of Firm Shares set forth opposite such Selling Stockholder's
name in Schedule II hereto. The Management Selling Stockholders also propose to
issue and sell to the several Underwriters not more than an additional _______
shares of the Common Stock, par value $0.01 per share, (the "Additional Shares")
if requested by the Underwriters as provided in Section 2 hereof. The Firm
Shares and the Additional Shares are hereinafter referred to collectively as the
"Shares." The shares of common stock of the Company to be outstanding after
giving effect to the sales contemplated hereby are hereinafter referred to as
the "Common Stock". The Company and the Selling Stockholders are hereinafter
sometimes referred to collectively as the "Sellers."
The Company, the Selling Stockholders and the Underwriters agree that up to
____ shares of the Securities to be purchased by the Underwriters (the "Reserved
Securities") shall be reserved for sale by the Underwriters to certain eligible
Company employees, as part of the distribution of the Securities by the
Underwriters, subject to the terms of this Agreement, the
<PAGE>
applicable rules, regulations and interpretations of the National Association of
Securities Dealers, Inc. (the "NASD") and all other applicable laws, rules and
regulations. To the extent that such Reserved Securities are not orally
confirmed for purchase by such eligible employees by the end of the first
business day after the day of the Agreement, such Reserved Securities may be
offered to the public as part of the public offering contemplated hereby.
Section 1. Registration Statement and Prospectus. The Company has prepared
and filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-1, including a prospectus, relating
to the Shares. The registration statement (including the exhibits thereto), as
amended at the time it became effective, including the information (if any)
deemed to be part of the registration statement at the time of effectiveness
pursuant to Rule 430A under the Act, is hereinafter referred to as the
"Registration Statement;" and the prospectus in the form first used to confirm
sales of Shares is hereinafter referred to as the "Prospectus." If the Company
has filed or is required pursuant to the terms hereof to file a registration
statement pursuant to Rule 462(b) under the Act registering additional shares of
Common Stock (a "Rule 462(b) Registration Statement"), then, unless otherwise
specified, any reference herein to the term "Registration Statement" shall be
deemed to include such Rule 462(b) Registration Statement.
Section 2. Agreements to Sell and Purchase and Lock-Up Agreements. On the
basis of the representations and warranties contained in this Agreement, and
subject to its terms and conditions, (i) the Company agrees to issue and sell
______________ Firm Shares, (ii) each Selling Stockholder agrees, severally and
not jointly, to sell the number of Firm Shares set forth opposite such Selling
Stockholder's name in Schedule II-A hereto and (iii) each Underwriter agrees,
severally and not jointly, to purchase from each Seller at a price per Share of
$______ (the "Purchase Price") the number of Firm Shares (subject to such
adjustments to eliminate fractional shares as you may determine) that bears the
same proportion to the total number of Firm Shares to be sold by such Seller as
the number of Firm Shares set forth opposite the name of such Underwriter in
Schedule I hereto bears to the total number of Firm Shares.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Selling Stockholders
agree to sell the Additional Shares and the Underwriters shall have the right to
purchase, severally and not jointly, all or a portion of the Additional Shares
from the Selling Stockholders at the Purchase Price. Additional Shares may be
purchased solely for the purpose of covering over-allotments made in connection
with the offering of the Firm Shares. The Underwriters may exercise their right
to purchase Additional Shares in whole or in part from time to time by giving
written notice thereof to the Company and the Selling Stockholders within 30
days after the date of this Agreement. You shall give any such notice on behalf
of the Underwriters and such notice shall specify the aggregate number of
Additional Shares to be purchased pursuant to such exercise and the date for
payment and delivery thereof, which date shall be a business day (i) no earlier
than two business days after such notice has been given (and, in any event, no
earlier than the Closing Date (as hereinafter defined)) and (ii) no later than
ten business days after such notice has been given. If
2
<PAGE>
any Additional Shares are to be purchased, each Underwriter, severally and not
jointly, agrees to purchase from the Selling Stockholders the number of
Additional Shares (subject to such adjustments to eliminate fractional shares as
you may determine) which bears the same proportion to the total number of
Additional Shares to be purchased from the Selling Stockholders as the number of
Firm Shares set forth opposite the name of such Underwriter in Schedule I bears
to the total number of Firm Shares and each Selling Stockholder, severally and
not jointly, agrees to sell to the Underwriters the number of Additional Shares
which bears the same proportion to the total number of Additional Shares to be
purchased from all of the Selling Stockholders as the number of Additional
Shares set forth opposite the name of such Selling Stockholder in Schedule III
bears to the total number of Additional Shares set forth in Schedule III.
Each Seller hereby agrees 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), except to the Underwriters pursuant to this Agreement, for a
period of 180 days after the date of the Prospectus without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation. Notwithstanding
the foregoing, during such period (i) the Company may grant stock options
pursuant to the Company's stock option plan described in the Prospectus, (ii)
the Company may issue shares of Common Stock upon the exercise of an option or
warrant or the conversion of a security outstanding on the date hereof and (iii)
the Company may issue, offer and sell shares of Common Stock or securities
convertible, exercisable or exchangeable therefor as an inducement for employees
to join the Company provided that in each case the recipient of such securities
agrees in writing to be bound by the restrictions set forth in this paragraph
for the shares of Common Stock issued or issuable pursuant to this clause (iii).
The Company also agrees not to file any registration statement with respect to
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock for a period of 180 days after the date of the
Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation, except that the Company may file a registration
statement on Form S-8 under the Act to register the shares of Common Stock
issuable upon exercise of options granted under the Company's stock option plans
as described in the Registration Statement. In addition, each Selling
Stockholder agrees that, for a period of 180 days after the date of the
Prospectus without the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation, it will not 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. The
Company shall, prior to or concurrently with the execution of this Agreement,
deliver an agreement (the "Lock-Up Agreements") executed by (i) each Selling
Stockholder, (ii) each of the directors and officers of the Company who is not a
Selling Stockholder and (iii) each stockholder listed on Annex I hereto to the
effect that such person will not, during the period commencing on the date
3
<PAGE>
such person signs such agreement and ending 180 days after the date of the
Prospectus, without the prior written consent of Donaldson, Lufkin & Jenrette
Corporation, (A) with respect to shares of Common Stock owned by such
stockholders immediately prior to consummation of the offering contemplated
hereby, engage in any of the transactions described in the first sentence of
this paragraph or (B) 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.
The Company hereby confirms its engagement of Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ") as, and DLJ hereby confirms its agreement with
the Company to render services as, a "qualified independent underwriter," within
the meaning of Section (b)(15) of Rule 2720 of the National Association of
Securities Dealers, Inc. with respect to the offering and sale of the Shares.
DLJ, solely in its capacity as the qualified independent underwriter and not
otherwise, is referred to herein as the "QIU." As compensation for the services
of the QIU hereunder, the Company agrees to pay the QIU $5,000 on the Closing
Date. The price at which the Shares will be sold to the public shall not be
higher than the maximum price recommended by the QIU.
Section 3. Terms of Public Offering. The Sellers are advised by you that
the Underwriters propose (i) to make a public offering of their respective
portions of the Shares as soon after the execution and delivery of this
Agreement as in your judgment is advisable and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus.
Section 4. Delivery and Payment. The Shares shall be represented by
definitive certificates and shall be issued in such authorized denominations and
registered in such names as Donaldson, Lufkin & Jenrette Securities Corporation
shall request no later than two business days prior to the Closing Date or the
applicable Option Closing Date (as defined below), as the case may be. The
Shares shall be delivered by or on behalf of the Sellers, with any transfer
taxes thereon duly paid by the respective Sellers, to Donaldson, Lufkin &
Jenrette Securities Corporation through the facilities of The Depository Trust
Company ("DTC"), for the respective accounts of the several Underwriters,
against payment to the Sellers of the Purchase Price therefor by wire transfer
of Federal or other funds immediately available in New York City. The
certificates representing the Shares shall be made available for inspection not
later than 10:00 A.M., New York City time, on the business day prior to the
Closing Date or the applicable Option Closing Date, as the case may be, at the
office of DTC or its designated custodian (the "Designated Office"). The time
and date of delivery and payment for the Firm Shares shall be 9:00 A.M., New
York City time, on ________, 1999 or such other time on the same or such other
date as Donaldson, Lufkin & Jenrette Securities Corporation and the Company
shall agree in writing. The time and date of delivery and payment for the Firm
Shares are hereinafter referred to as the "Closing Date." The time and date of
delivery and payment for any Additional Shares to be purchased by the
Underwriters shall be 9:00 A.M., New York City time, on the date specified in
the applicable exercise notice given by you pursuant to Section 2 or such other
time on the same or such other date as Donaldson, Lufkin & Jenrette Securities
Corporation and the
4
<PAGE>
Company shall agree in writing. The time and date of delivery and payment for
any Additional Shares are hereinafter referred to as the "Option Closing Date."
The documents to be delivered on the Closing Date or any Option Closing
Date on behalf of the parties hereto pursuant to Section 10 of this Agreement
shall be delivered at the offices of Brown & Wood LLP, One World Trade Center,
New York, New York 10048, and the Shares shall be delivered at the Designated
Office, all on the Closing Date or such Option Closing Date, as the case may be.
Section 5. Agreements of the Company. The Company agrees with you:
(a) To advise you promptly and, if requested by you, to confirm such advice
in writing, (i) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus or for
additional information, (ii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the suspension
of qualification of the Shares for offering or sale in any jurisdiction, or the
initiation of any proceeding for such purposes, (iii) when the Registration
Statement or any amendment to the Registration Statement becomes effective, (iv)
if the Company is required to file a Rule 462(b) Registration Statement after
the effectiveness of this Agreement, when the Rule 462(b) Registration Statement
has become effective and (v) of the happening of any event during the period
referred to in Section 5(d) below which makes any statement of a material fact
made in the Registration Statement or the Prospectus untrue or which requires
any additions to or changes in the Registration Statement or the Prospectus in
order to make the statements therein not misleading. If at any time the
Commission shall issue any stop order suspending the effectiveness of the
Registration Statement, the Company will use its reasonable best efforts to
obtain the withdrawal or lifting of such order at the earliest possible time.
(b) To furnish to you four (4) copies of the Registration Statement as
first filed with the Commission and of each amendment to it, including all
exhibits, and to furnish to you and each Underwriter designated by you such
number of conformed copies of the Registration Statement as so filed and of each
amendment to it, without exhibits, as you may reasonably request.
(c) To prepare the Prospectus, the form and substance of which shall be
satisfactory to you, and to file the Prospectus in such form with the Commission
within the applicable period specified in Rule 424(b) under the Act; during the
period specified in Section 5(d) below, not to file any further amendment to the
Registration Statement and not to make any amendment or supplement to the
Prospectus of which you shall not previously have been advised or to which you
shall reasonably object after being so advised; and, during such period, to
prepare and file with the Commission, promptly upon your reasonable request, any
amendment to the Registration Statement or amendment or supplement to the
Prospectus which may be necessary or advisable in connection with the
distribution of the Shares by you, and to use its reasonable best efforts to
cause any such amendment to the Registration Statement to become promptly
effective.
5
<PAGE>
(d) Prior to 10:00 A.M., New York City time, on the first business day
after the date of this Agreement and from time to time thereafter for such
period as in the opinion of counsel for the Underwriters a prospectus is
required by law to be delivered in connection with sales by an Underwriter or a
dealer, to furnish in New York City to each Underwriter and any dealer as many
copies of the Prospectus (and of any amendment or supplement to the Prospectus)
as such Underwriter or dealer may reasonably request.
(e) If during the period specified in Section 5(d), any event shall occur
or condition shall exist as a result of which, in the opinion of counsel for the
Underwriters or for the Company, it becomes necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not misleading,
or if, in the opinion of counsel for the Underwriters, it is necessary to amend
or supplement the Prospectus to comply with applicable law, forthwith to prepare
and file with the Commission an appropriate amendment or supplement to the
Prospectus so that the statements in the Prospectus, as so amended or
supplemented, will not in the light of the circumstances when it is so
delivered, be misleading, or so that the Prospectus will comply with applicable
law, and to furnish to each Underwriter and to any dealer as many copies thereof
as such Underwriter or dealer may reasonably request.
(f) Prior to any public offering of the Shares, to cooperate with you and
counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters and
by dealers under the state securities or Blue Sky laws of such jurisdictions as
you may request, to continue such registration or qualification in effect so
long as required for distribution of the Shares and to file such consents to
service of process or other documents as may be necessary in order to effect
such registration or qualification; provided, however, that the Company shall
not be required in connection therewith to qualify as a foreign corporation in
any jurisdiction in which it is not now so qualified or to take any action that
would subject it to general consent to service of process or taxation other than
as to matters and transactions relating to the Prospectus, the Registration
Statement, any preliminary prospectus or the offering or sale of the Shares, in
any jurisdiction in which it is not now so subject.
(g) To make generally available to its stockholders as soon as practicable
an earnings statement covering the twelve-month period ending ___________, 2000
that shall satisfy the provisions of Section 11(a) of the Act, and to advise you
in writing when such statement has been so made available.
(h) During the period of three years after the date of this Agreement, to
furnish to you as soon as available copies of all reports or other
communications furnished to the record holders of Common Stock or furnished to
or filed with the Commission or any national securities exchange on which any
class of securities of the Company is listed.
(i) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of the Sellers' obligations under this
Agreement, including: (i) the fees,
6
<PAGE>
disbursements and expenses of the Company's counsel, the Company's accountants
and any Selling Stockholder's counsel (in addition to the Company's counsel) in
connection with the registration and delivery of the Shares under the Act and
all other fees and expenses in connection with the preparation, printing, filing
and distribution of the Registration Statement (including financial statements
and exhibits), any preliminary prospectus, the Prospectus and all amendments and
supplements to any of the foregoing, including the mailing and delivery of
copies thereof to the Underwriters and dealers in the quantities provided for
herein, (ii) all costs and expenses related to the transfer and delivery of the
Shares to the Underwriters, including any transfer or other taxes payable
thereon, (iii) all costs of printing or producing this Agreement and any other
agreements or documents in connection with the offering, purchase, sale or
delivery of the Shares, (iv) all expenses in connection with the registration or
qualification of the Shares for offer and sale under the securities or Blue Sky
laws of the several states and all costs of printing or producing any
Preliminary and Supplemental Blue Sky Memoranda in connection therewith
(including the filing fees and fees and disbursements of counsel for the
Underwriters in connection with such registration or qualification and memoranda
relating thereto), (v) the filing fees and disbursements of counsel for the
Underwriters in connection with the review and clearance of the offering of the
Shares by the National Association of Securities Dealers, Inc., (vi) all fees
and expenses in connection with the preparation and filing of the registration
statement on Form 8-A relating to the Common Stock and all costs and expenses
incident to the listing of the Shares on the New York Stock Exchange ("NYSE"),
(vii) the cost of printing certificates representing the Shares, (viii) the
costs and charges of any transfer agent, registrar and/or depositary, (ix) the
reasonable fees and expenses of the QIU (including the reasonable fees and
disbursements of counsel to the QIU) and (x) all other costs and expenses
incident to the performance of the obligations of the Company and the Selling
Stockholders hereunder for which provision is not otherwise made in this
Section. The provisions of this Section shall not supersede or otherwise affect
any agreement that the Company and the Selling Stockholders may otherwise have
for allocation of such expenses among themselves.
(j) To use its reasonable best efforts to list, subject to notice of
issuance, the Shares on the NYSE and to use its reasonable best efforts to
maintain the listing of the Shares on the NYSE for a period of three years after
the date of this Agreement.
(k) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company prior to
the Closing Date or any Option Closing Date, as the case may be, and to satisfy
all conditions precedent to the delivery of the Shares.
(l) If the Registration Statement at the time of the effectiveness of this
Agreement does not cover all of the Shares, to file a Rule 462(b) Registration
Statement with the Commission registering the Shares not so covered in
compliance with Rule 462(b) by 10:00 P.M., New York City time, on the date of
this Agreement and to pay to the Commission the filing fee for such Rule 462(b)
Registration Statement at the time of the filing thereof or to give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act.
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(m) The Company hereby agrees to use its reasonable best efforts to ensure
that the Reserved Securities will be restricted as required by the NASD or the
NASD rules from sale, transfer, assignment, pledge or hypothecation for a period
of three months following the effectiveness of this Agreement. At the request of
the Underwriters, the Company will direct the transfer agent to place a stop
transfer restriction upon such securities for such period of time. Should the
Company release, or seek to release, from such restrictions any of the Reserved
Securities, the Company agrees to reimburse the Underwriters for any reasonable
expenses (including, without limitation, legal expenses) they incur in
connection with such release.
Section 6. Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter that:
(a) The Registration Statement has become effective (other than any Rule
462(b) Registration Statement to be filed by the Company after the effectiveness
of this Agreement); any Rule 462(b) Registration Statement filed after the
effectiveness of this Agreement will become effective no later than 10:00 P.M.,
New York City time, on the date of this Agreement; and no stop order suspending
the effectiveness of the Registration Statement is in effect, and no proceedings
for such purpose are pending before or, to the knowledge of the Company,
threatened by the Commission.
(b) (i) The Registration Statement (other than any Rule 462(b) Registration
Statement to be filed by the Company after the effectiveness of this Agreement),
when it became effective, did not contain and, as amended, if applicable, will
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, (ii) the Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness of
this Agreement) and the Prospectus comply and, as amended or supplemented, if
applicable, will comply in all material respects with the Act, (iii) if the
Company is required to file a Rule 462(b) Registration Statement after the
effectiveness of this Agreement, such Rule 462(b) Registration Statement and any
amendments thereto, when they become effective (A) will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading and
(B) will comply in all material respects with the Act and (iv) the Prospectus
does not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, except that the representations and
warranties set forth in this paragraph do not apply to statements or omissions
in the Registration Statement or the Prospectus based upon information relating
to any Underwriter furnished to the Company in writing by or on behalf of such
Underwriter through you expressly for use therein.
(c) Each preliminary prospectus filed as part of the registration statement
as originally filed or as part of any amendment thereto, or filed pursuant to
Rule 424 under the Act, complied when so filed in all material respects with the
Act, and did not contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or
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necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, except that the representations and
warranties set forth in this paragraph do not apply to statements or omissions
in any preliminary prospectus based upon information relating to any Underwriter
furnished to the Company in writing by or on behalf of such Underwriter through
you expressly for use therein.
(d) Each of the Company and its subsidiaries has been duly incorporated, is
validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation and has the corporate power and authority to carry
on its business and to own, lease and operate its properties as described in the
Prospectus, and each is duly qualified and is in good standing as a foreign
corporation authorized to do business in each jurisdiction in which the nature
of its business or its ownership or leasing of property requires such
qualification, except where the failure to be so qualified would not have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole (a
"Material Adverse Effect").
(e) There are no outstanding subscriptions, rights, warrants, options,
calls, convertible securities, commitments of sale or liens granted or issued by
the Company or any of its subsidiaries relating to or entitling any person to
purchase or otherwise to acquire any shares of the capital stock of the Company
or any of its subsidiaries, except as otherwise disclosed in the Registration
Statement.
(f) All the outstanding shares of capital stock of the Company (including
the Shares to be sold by the Selling Stockholders) have been duly authorized and
validly issued and are fully paid, non-assessable and not subject to any
preemptive or similar rights other than such rights as may be provided by the
Former Stockholders' Agreement (as defined in the Registration Statement), which
rights will be terminated prior to consummation of the offering contemplated
hereby, the Stockholders' Agreement (as defined in the Registration Statement)
and the Lock-Up Agreements; the Company shall have taken by the Closing Date
sufficient corporate action to ensure that the Shares to be sold by the Selling
Stockholders to the Underwriters are not subject to any restrictions under the
Stockholders' Agreement; and the Shares to be issued and sold by the Company
have been duly authorized and, when issued and delivered to the Underwriters
against payment therefor as provided by this Agreement, will be validly issued,
fully paid and non-assessable, and the issuance of such Shares will not be
subject to any preemptive or similar rights.
(g) All of the outstanding shares of capital stock of each of the Company's
subsidiaries have been duly authorized and validly issued and are fully paid and
non-assessable, and will be, as of the Closing Date, owned by the Company,
directly or indirectly through one or more subsidiaries, free and clear of any
security interest, claim, lien, encumbrance or adverse interest of any nature.
(h) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
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(i) Neither the Company nor any of its subsidiaries is in violation of its
respective charter or by-laws or in default in the performance of any
obligation, agreement, covenant or condition contained in any indenture, loan
agreement, mortgage, lease or other agreement or instrument to which the Company
or any of its subsidiaries is a party or by which the Company or any of its
subsidiaries or their respective property is bound except for such defaults that
would not result in a Material Adverse Effect .
(j) The execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not (i) require any
consent, approval, authorization or other order of, or qualification with, any
court or governmental body or agency (except (a) such as may be required under
the securities or Blue Sky laws of the various states and (b) registration under
the Act, NASD clearance and NYSE approval for listing, all of which shall have
been obtained by the Closing Date), (ii) conflict with or constitute a breach of
any of the terms or provisions of, or a default under, (A) the charter or by-
laws of the Company or any of its subsidiaries or (B) any indenture, loan
agreement, mortgage, lease or other agreement or instrument that, in each case,
is material to the Company and its subsidiaries, taken as a whole, to which the
Company or any of its subsidiaries is a party or by which the Company or any of
its subsidiaries or their respective property is bound, (iii) violate or
conflict with any applicable law or any rule, regulation, judgment, order or
decree of any court or any governmental body or agency having jurisdiction over
the Company, any of its subsidiaries or their respective property or (iv) result
in the suspension, termination or revocation of any Authorization (as defined
below) of the Company or any of its subsidiaries or any other impairment of the
rights of the holder of any such Authorization except for such suspensions,
terminations or revocations that would not adversely affect the ability of the
Company to conduct its business as described in the Registration Statement or
the transactions contemplated hereby.
(k) There are no legal or governmental proceedings pending or, to the
knowledge of the Company, threatened to which the Company or any of its
subsidiaries is or, in the case of threatened proceedings, could be a party or
to which any of their respective property is or, in the case of threatened
proceedings, could be subject that are required to be described in the
Registration Statement or the Prospectus and are not so described; nor are there
any statutes, regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not so described or filed as
required.
(l) Neither the Company nor any of its subsidiaries has violated any
foreign, federal, state or local law or regulation relating to the protection of
human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("Environmental Laws"), any provisions of the
Employee Retirement Income Security Act of 1974, as amended, or any provisions
of the Foreign Corrupt Practices Act or the rules and regulations promulgated
thereunder, except for such violations which, singly or in the aggregate, would
not have a Material Adverse Effect.
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(m) Each of the Company and its subsidiaries has such permits, licenses,
consents, exemptions, franchises, authorizations and other approvals (each, an
"Authorization") of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory organizations and all
courts and other tribunals, including, without limitation, under any applicable
Environmental Laws, as are necessary to own, lease, license and operate its
respective properties and to conduct its business, except where the failure to
have any such Authorization or to make any such filing or notice would not,
singly or in the aggregate, have a Material Adverse Effect. Each such
Authorization is valid and in full force and effect and each of the Company and
its subsidiaries is in compliance with all the terms and conditions thereof and
with the rules and regulations of the authorities and governing bodies having
jurisdiction with respect thereto; and no event has occurred (including, without
limitation, the receipt of any notice from any authority or governing body)
which allows or, after notice or lapse of time or both, would allow, revocation,
suspension or termination of any such Authorization or results or, after notice
or lapse of time or both, would result in any other impairment of the rights of
the holder of any such Authorization; and such Authorizations contain no
restrictions that are burdensome to the Company or any of its subsidiaries;
except where such failure to be valid and in full force and effect or to be in
compliance, the occurrence of any such event or the presence of any such
restriction would not, singly or in the aggregate, have a Material Adverse
Effect.
(n) This Agreement has been duly authorized, executed and delivered by the
Company.
(o) KPMG Peat Marwick LLP are independent public accountants with respect
to the Company and its subsidiaries as required by the Act.
(p) The consolidated financial statements included in the Registration
Statement and the Prospectus (and any amendment or supplement thereto), together
with related schedules and notes, present fairly the consolidated financial
position, results of operations and changes in financial position of the Company
and its subsidiaries on the basis stated therein at the respective dates or for
the respective periods to which they apply; such statements and related
schedules and notes have been prepared in accordance with United States
generally accepted accounting principles consistently applied throughout the
periods involved, except as disclosed therein; the supporting schedules, if any,
included in the Registration Statement present fairly in accordance with United
States generally accepted accounting principles the information required to be
stated therein; the other financial information and data set forth in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto) are, in all material respects, accurately presented and prepared, as
applicable, on a basis consistent with such financial statements and the books
and records of the Company. The statistical information and data related to the
Company, its employees and its business set forth in the Registration Statement
and the Prospectus (and any amendment or supplement thereto) are true and
correct in all material respects and to the best of the Company's knowledge all
other statistical information and data set forth in the Registration Statement
and the Prospectus (and any amendment or supplement thereto) are true and
correct in all material respects.
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(q) The Company is not and, after giving effect to the offering and sale of
the Shares and the application of the proceeds thereof as described in the
Prospectus, will not be, an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended.
(r) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the Company to
file a registration statement under the Act with respect to any securities of
the Company or to require the Company to include such securities with the Shares
registered pursuant to the Registration Statement.
(s) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there has not occurred any material adverse change or any development involving
a prospective material adverse change in the financial condition or the
earnings, business, management or operations of the Company and its
subsidiaries, taken as a whole, (ii) there has not been any material adverse
change or any development which would reasonably be expected to result in a
material adverse change in the capital stock or in the long-term debt of the
Company or any of its subsidiaries and (iii) neither the Company nor any of its
subsidiaries has incurred any material liability or obligation, direct or
contingent.
(t) Each certificate signed by any officer of the Company and delivered to
the Underwriters or counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to the Underwriters as to the matters
covered thereby.
(u) The Company has filed a registration statement pursuant to Section
12(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
to register the Common Stock, has filed an application to list the Shares on the
New York Stock Exchange and has received notification that the listing has been
approved, subject to notice of issuance of the Shares.
(v) The Company and each of its subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which they are
engaged; and neither the Company nor any of its subsidiaries (i) has received
notice from any insurer or agent of such insurer that substantial capital
improvements or other material expenditures will have to be made in order to
continue such insurance or (ii) has any reason to believe that it will not be
able to renew its existing insurance coverage as and when such coverage expires
or to obtain similar coverage from similar insurers at a cost that would not
have a Material Adverse Effect.
(w) The Company has not taken, and will not take, directly or indirectly,
any action designed to, or which might reasonably be expected to, cause or
result in stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Shares pursuant to the
distribution contemplated by this Agreement (other than any actions taken by
Keefe, Bruyette & Woods, Inc. in its capacity as an Underwriter as permitted by
the Act), and
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other than as permitted by the Act, the Company has not distributed and will not
distribute any prospectus or other offering material in connection with the
offering and sale of the Shares.
(x) Keefe, Bruyette & Woods, Inc. is registered as a broker-dealer with the
Commission and under the laws of all fifty U.S. states, the District of Columbia
and Puerto Rico, is a member of the NASD and the NYSE, and, in each case, is in
compliance with all applicable laws, rules, regulations, orders, by-laws and
similar requirements in connection with such registrations and membership,
including without limitation Rule 15c-1 under the Exchange Act (the "Net Capital
Rule"), except where the failure to be so registered or in such compliance would
not have a Material Adverse Effect.
(y) KBW Asset Management, Inc. is registered as an investment advisor with
the Commission, is registered or exempt from registration in all fifty states,
the District of Columbia and Puerto Rico, and is in compliance in all material
respects with all applicable laws, rules, regulations, orders and similar
requirements in connection therewith except where the failure to be so
registered or in such compliance therewith except where the failure to be so
registered or in such compliance would not have a Material Adverse Effect.
(z) Prior to consummation of the Offering, both the Merger and the
Contribution (as each term is defined in the Prospectus) will be effective. Both
the Merger and the Contribution have been duly authorized by the Company, Keefe,
Bruyette & Woods, Inc. or KBW Asset Management, Inc., as applicable, and will
not conflict with or constitute a breach of any of the terms or provisions of,
or a default under any contract, indenture, mortgage, loan agreement, credit
agreement, note, guarantee, lease or other instrument or agreement to which the
Company, Keefe, Bruyette & Woods, Inc. or KBW Asset Management, Inc. is or was a
party or by which any of them is or was bound, or to which any of the property
or assets of the Company, Keefe, Bruyette & Woods, Inc. or KBW Asset Management
Inc. is or was subject, except where such conflict, breach or default, singly or
in the aggregate, would not have a Material Adverse Effect, nor did the Merger
and Contribution result in any violation of the provisions of the charter or by-
laws of the Company, Keefe, Bruyette & Woods, Inc. and KBW Asset Management,
Inc. or any applicable law, administrative regulation or administrative or court
decree.
(aa) The Company and each of its subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with United States generally
accepted accounting principles and to maintain asset accountability; (iii)
access to assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
(bb) All material tax returns required to be filed by the Company and each
of its subsidiaries in any jurisdiction have been filed, other than those
filings being contested in good faith, and all material taxes, including
withholding taxes, payroll taxes, penalties and interest, assessments, fees and
other charges due pursuant to such returns or pursuant to any assessment
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received by the Company or any of its subsidiaries have been paid, other than
those being contested in good faith and for which reserves which the Company
reasonably believes to be adequate have been provided.
Section 7. Representations and Warranties of the Selling Stockholders.
(a) Representations and Warranties of the Management Selling Stockholders.
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Each Management Selling Stockholder, severally and not jointly, represents and
warrants to each Underwriter, solely in such Management Selling Stockholder's
capacity as a Management Selling Stockholder, that:
(i) Such Management Selling Stockholder is the lawful owner of the
Shares to be sold by such Management Selling Stockholder pursuant to this
Agreement and has, and on the Closing Date will have, good and clear title
to such Shares, free of all restrictions on transfer, liens, encumbrances,
security interests, equities and claims whatsoever, other than, in each
case, pursuant to the Custody Agreement, if any, the Power of Attorney,
this Agreement, the Former Stockholders' Agreement (as defined in the
Registration Statement) (which Former Stockholders' Agreement will be
terminated as of, or prior to, the Closing Date, as described in the
Registration Statement), and other than any such restriction on transfer,
lien, encumbrance, security interest, equity or claim created by an
Underwriter or resulting from any actions taken by an Underwriter.
(ii) Such Management Selling Stockholder has, and on the Closing Date
will have, full legal right, power and authority, and all authorization and
approval required by law, to enter into this Agreement, the Custody
Agreement signed by such Management Selling Stockholder and
_________________________, as Custodian, relating to the deposit of the
Shares to be sold by such Management Selling Stockholder (the "Custody
Agreement") and the Power of Attorney of such Management Selling
Stockholder appointing certain individuals as such Management Selling
Stockholder's attorneys-in-fact (the "Attorneys") to the extent set forth
therein, relating to the transactions contemplated hereby and by the
Registration Statement and the Custody Agreement (the "Power of Attorney")
and to sell, assign, transfer and deliver the Shares to be sold by such
Management Selling Stockholder in the manner provided herein and therein.
(iii) This Agreement has been duly authorized, executed and delivered by
or on behalf of such Management Selling Stockholder.
(iv) The Custody Agreement of such Management Selling Stockholder has
been duly authorized, executed and delivered by such Management Selling
Stockholder and is a valid and binding agreement of such Management Selling
Stockholder, enforceable in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting the rights of creditors generally and
by general principles of equity.
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(v) The Power of Attorney of such Management Selling Stockholder has
been duly authorized, executed and delivered by such Management Selling
Stockholder and is a valid and binding instrument of such Management
Selling Stockholder, enforceable in accordance with its terms, except as
such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the rights of
creditors generally and by general principles of equity, and, pursuant to
such Power of Attorney, such Management Selling Stockholder has, among
other things, authorized the Attorneys, or any one of them, to execute and
deliver on such Management Selling Stockholder's behalf this Agreement and
any other document that they, or any one of them, may deem necessary or
desirable in connection with the transactions contemplated hereby and
thereby and to deliver the Shares to be sold by such Management Selling
Stockholder pursuant to this Agreement.
(vi) Upon delivery of and payment for the Shares to be sold by such
Management Selling Stockholder pursuant to this Agreement, good and clear
title to such Shares will pass to the Underwriters, free of all
restrictions on transfer, liens, encumbrances, security interests, equities
and claims whatsoever, other than any such restriction on transfer, lien,
encumbrance, security interest, equity or claim created by an Underwriter
or resulting from any actions taken by an Underwriter.
(vii) The execution, delivery and performance of this Agreement and the
Custody Agreement and Power of Attorney of such Management Selling
Stockholder by or on behalf of such Management Selling Stockholder, the
compliance by such Management Selling Stockholder with all the provisions
hereof and thereof and the consummation of the transactions contemplated
hereby and thereby will not (i) require any consent, approval,
authorization or other order of, or qualification with, any court or
governmental body or agency applicable to such Management Selling
Stockholder (except (A) such as may be required in connection with this
offering under the Act or the Exchange Act or by the NYSE or the NASD, all
of which shall have been obtained by the Closing Date and (B) such as may
be required under the securities or Blue Sky laws of the various states),
(ii) conflict with or constitute a breach of any of the terms or provisions
of, or a default under, the organizational documents of such Management
Selling Stockholder, if such Management Selling Stockholder is not an
individual, or any indenture, loan agreement, mortgage, lease or other
agreement or instrument to which such Management Selling Stockholder is a
party or by which such Management Selling Stockholder or any property of
such Management Selling Stockholder is bound or (iii) assuming the
representations and warranties of the Company in Section 6 hereof are true
and accurate in all material respects, violate or conflict with any
applicable law or any rule, regulation, judgment, order or decree of any
court or any governmental body or agency having jurisdiction over such
Management Selling Stockholder or any property of such Management Selling
Stockholder.
(viii) Each Management Selling Stockholder has reviewed and is familiar
with the Registration Statement and Prospectus and, to the knowledge
without any additional
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inquiry of each Management Selling Stockholder, neither the Prospectus nor
any amendments or supplements thereto includes any untrue statement of a
material fact or omits to state a material fact necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
(ix) At any time during the period described in Section 5(d), if, to the
Management Selling Stockholder's actual knowledge without independent
investigation, there is any change in the information referred to in
Section 7(a)(viii), such Management Selling Stockholder will immediately
notify you of such change.
(x) Each certificate signed by or on behalf of such Management Selling
Stockholder and delivered to the Underwriters or counsel for the
Underwriters shall be deemed to be a representation and warranty by such
Management Selling Stockholder to the Underwriters as to the matters
covered thereby.
(b) Representations and Warranties of the Additional Selling Stockholder.
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The Additional Selling Stockholder, severally and not jointly, represents and
warrants to each Underwriter, solely in such Additional Selling Stockholder's
capacity as an Additional Selling Stockholder, that:
(i) Such Additional Selling Stockholder is the lawful owner of the
Shares to be sold by such Additional Selling Stockholder pursuant to this
Agreement and has, and on the Closing Date will have, good and clear title
to such Shares, free of all restrictions on transfer, liens, encumbrances,
security interests, equities and claims whatsoever, other than, in each
case, pursuant to the Custody Agreement, if any, the Power of Attorney,
this Agreement, the Former Stockholders' Agreement (which Former
Stockholders' Agreement will be terminated as of, or prior to, the Closing
Date, as described in the Registration Statement), and other than any such
restriction on transfer, lien, encumbrance, security interest, equity or
claim created by an Underwriter or resulting from any actions taken by an
Underwriter.
(ii) Such Additional Selling Stockholder has, and on the Closing Date
will have, full legal right, power and authority, and all authorization and
approval required by law, to enter into this Agreement, the Custody
Agreement and the Power of Attorney of such Additional Selling Stockholder
appointing the Attorneys as the Additional Selling Stockholder's attorneys-
in-fact to the extent set forth therein, relating to the transactions
contemplated hereby and by the Registration Statement and the Custody
Agreement and to sell, assign, transfer and deliver the Shares to be sold
by such Additional Selling Stockholder in the manner provided herein and
therein.
(iii) This Agreement has been duly authorized, executed and delivered by
or on behalf of such Additional Selling Stockholder.
(iv) The Custody Agreement of such Additional Selling Stockholder has
been duly authorized, executed and delivered by such Additional Selling
Stockholder and is a
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valid and binding agreement of such Additional Selling Stockholder,
enforceable in accordance with its terms, except as such enforceability may
be limited by bankruptcy, insolvency, reorganization, moratorium or similar
laws affecting the rights of creditors generally and by general principles
of equity.
(v) The Power of Attorney of such Selling Stockholder has been duly
authorized, executed and delivered by such Additional Selling Stockholder
and is a valid and binding instrument of such Additional Selling
Stockholder, enforceable in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting the rights of creditors generally and
by general principles of equity, and, pursuant to such Power of Attorney,
such Additional Selling Stockholder has, among other things, authorized the
Attorneys, or any one of them, to execute and deliver on such Additional
Selling Stockholder's behalf this Agreement and any other document that
they, or any one of them, may deem necessary or desirable in connection
with the transactions contemplated hereby and thereby and to deliver the
Shares to be sold by such Additional Selling Stockholder pursuant to this
Agreement.
(vi) Upon delivery of and payment for the Shares to be sold by such
Additional Selling Stockholder pursuant to this Agreement, good and clear
title to such Shares will pass to the Underwriters, free of all
restrictions on transfer, liens, encumbrances, security interests, equities
and claims whatsoever, other than any such restriction on transfer, lien,
encumbrance, security interest, equity or claim created by an Underwriter
or resulting from any actions taken by an Underwriter.
(vii) The execution, delivery and performance of this Agreement and the
Custody Agreement and Power of Attorney of such Additional Selling
Stockholder by or on behalf of such Additional Selling Stockholder, the
compliance by such Additional Selling Stockholder with all the provisions
hereof and thereof and the consummation of the transactions contemplated
hereby and thereby will not (i) require any consent, approval,
authorization or other order of, or qualification with, any court or
governmental body or agency applicable to such Additional Selling
Stockholder (except (A) such as may be required in connection with this
offering under the Act or the Exchange Act or by the NYSE or the NASD, all
of which shall have been obtained by the Closing Date and (B) such as may
be required under the securities or Blue Sky laws of the various states),
(ii) conflict with or constitute a breach of any of the terms or provisions
of, or a default under, the organizational documents of such Additional
Selling Stockholder, if such Additional Selling Stockholder is not an
individual, or any indenture, loan agreement, mortgage, lease or other
agreement or instrument to which such Additional Selling Stockholder is a
party or by which such Additional Selling Stockholder or any property of
such Additional Selling Stockholder is bound or (iii) assuming the
representations and warranties of the Company in Section 6 hereof are true
and accurate in all material respects, violate or conflict with any
applicable law or any rule, regulation, judgment, order or decree of any
court or any governmental body or agency having jurisdiction over
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such Additional Selling Stockholder or any property of such Additional
Selling Stockholder.
(viii) The Additional Selling Stockholder has reviewed and is familiar
with the Registration Statement and the Prospectus and the information
concerning such Additional Selling Stockholder in the Registration
Statement and the Prospectus is true, complete and correct in all material
respects.
(ix) At any time during the period described in Section 5(d), if there
is any change in the information referred to in Section 7(b)(viii), such
Additional Selling Stockholder will immediately notify you of such change.
(x) Each certificate signed by or on behalf of such Additional Selling
Stockholder and delivered to the Underwriters or counsel for the
Underwriters shall be deemed to be a representation and warranty by such
Additional Selling Stockholder to the Underwriters as to the matters
covered thereby.
Section 8. Indemnification. (a) The Company and the Management Selling
Stockholders, jointly and severally, agree to indemnify and hold harmless each
Underwriter, its directors, its officers and each person, if any, who controls
any Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, from and against any and all losses, claims, damages, liabilities
and judgments (including, without limitation, any reasonable legal or other
expenses incurred in connection with investigating or defending any matter,
including any action, that could give rise to any such losses, claims, damages,
liabilities or judgments) caused by any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement (or any
amendment thereto), the Prospectus (or any amendment or supplement thereto) or
any preliminary prospectus, or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or judgments are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information relating
to any Underwriter furnished in writing to the Company by or on behalf of such
Underwriter through you expressly for use therein; and provided, further, that
the Company shall not be liable to an Underwriter or its directors, its officers
and each person, if any, who controls any Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act under the indemnity
agreement in this subsection (a) with respect to any preliminary prospectus to
the extent that any such loss, claim, damage or liability of such Underwriter
results from the fact that such Underwriter sold Shares to a person as to whom
it shall be established that there was not sent or given, at or prior to the
written confirmation of such sale, a copy of the Prospectus in any case where
such delivery is required by the Act if the Company has previously furnished
copies thereof in sufficient quantity to such Underwriter and the loss, claim,
damage or liability of such Underwriter results from an untrue statement or
omission of a material fact contained in the preliminary prospectus which was
corrected in the Prospectus or in the Prospectus as then amended or supplemented
and such correction would have cured the defect giving rise to such loss, claim,
damage or liability.
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(b) The Additional Selling Stockholder agrees to indemnify and hold
harmless each Underwriter, its directors, its officers and each person, if any,
who controls any Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act to the same extent as the foregoing indemnity
from the Company and the Management Selling Stockholders to such persons, as set
forth in Section 8(a) above, but only to the extent that any such untrue
statement or alleged untrue statement or omission or alleged omission was made
or omitted in reliance upon and in conformity with information relating to such
Additional Selling Stockholder furnished by such Additional Selling Stockholder
for use in connection therewith, which information is set forth under the
caption "Principal and Selling Stockholders" in the Prospectus.
(c) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement, each person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, each Selling
Stockholder and each person, if any, who controls such Selling Stockholder
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act to
the same extent as the foregoing indemnity from the Company and the Management
Selling Stockholders to such Underwriter but only with reference to information
relating to such Underwriter furnished in writing to the Company by or on behalf
of such Underwriter through you expressly for use in the Registration Statement
(or any amendment thereto), the Prospectus (or any amendment or supplement
thereto) or any preliminary prospectus.
(d) In case any action shall be commenced involving any person in respect
of which indemnity may be sought pursuant to Sections 8(a), 8(b) or 8(c) (the
"indemnified party"), the indemnified party shall promptly notify the person
against whom such indemnity may be sought (the "indemnifying party") in writing
and the indemnifying party shall assume the defense of such action, including
the employment of counsel reasonably satisfactory to the indemnified party and
the payment of all reasonable fees and expenses of such counsel, as incurred
(except that in the case of any action in respect of which indemnity may be
sought pursuant to both Sections 8(a) and/or 8(b) and Section 8(c), the
Underwriter shall not be required to assume the defense of such action pursuant
to this Section 8(d), but may employ separate counsel and participate in the
defense thereof, but the fees and expenses of such counsel, except as provided
below, shall be at the expense of such Underwriter). Any indemnified party shall
have the right to employ separate counsel in any such action and participate in
the defense thereof, but the fees and expenses of such counsel shall be at the
expense of the indemnified party unless (i) the employment of such counsel shall
have been specifically authorized in writing by the indemnifying party, (ii) the
indemnifying party shall have failed to assume the defense of such action or
employ counsel reasonably satisfactory to the indemnified party or (iii) the
named parties to any such action (including any impleaded parties) include both
the indemnified party and the indemnifying party, and the indemnified party
shall have been advised by such counsel that there may be one or more legal
defenses available to it which are different from or additional to those
available to the indemnifying party (in which case the indemnifying party shall
not have the right to assume the defense of such action on behalf of the
indemnified party). In any such case, the indemnifying party shall not, in
connection with any one action or separate but substantially similar or related
actions in the same jurisdiction arising out of the same general
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allegations or circumstances, be liable for (i) the reasonable fees and expenses
of more than one separate firm of attorneys (in addition to any local counsel)
for all Underwriters, their officers and directors and all persons, if any, who
control any Underwriter within the meaning of either Section 15 of the Act or
Section 20 of the Exchange Act, (ii) the reasonable fees and expenses of more
than one separate firm of attorneys (in addition to any local counsel) for the
Company, its directors, its officers who sign the Registration Statement and all
persons, if any, who control the Company within the meaning of either such
Section and (iii) the reasonable fees and expenses of more than one separate
firm of attorneys (in addition to any local counsel) for all Selling
Stockholders and all persons, if any, who control any Selling Stockholder within
the meaning of either such Section, and all such fees and expenses shall be
reimbursed as they are incurred. In the case of any such separate firm for the
Underwriters, their officers and directors and such control persons of any
Underwriters, such firm shall be designated in writing by Donaldson, Lufkin &
Jenrette Securities Corporation. In the case of any such separate firm for the
Company and such directors, officers and control persons of the Company, such
firm shall be designated in writing by the Company. In the case of any such
separate firm for the Selling Stockholders and such control persons of any
Selling Stockholders, such firm shall be designated in writing by the Attorneys.
The indemnifying party shall indemnify and hold harmless the indemnified party
from and against any and all losses, claims, damages, liabilities and judgments
by reason of any settlement of any action (i) effected with its written consent
or (ii) effected without its written consent if the settlement is entered into
more than thirty days after the indemnifying party shall have received a request
from the indemnified party for reimbursement for the fees and expenses of
counsel (in any case where such fees and expenses are at the expense of the
indemnifying party) and, prior to the date of such settlement, the indemnifying
party shall have failed to comply with such reimbursement request. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement or compromise of, or consent to the entry of
judgment with respect to, any pending or threatened action in respect of which
the indemnified party is or could have been a party and indemnity or
contribution may be or could have been sought hereunder by the indemnified
party, unless such settlement, compromise or judgment (i) includes an
unconditional release of the indemnified party from all liability on claims that
are or could have been the subject matter of such action and (ii) does not
include a statement as to or an admission of fault, culpability or a failure to
act, by or on behalf of the indemnified party.
(e) In situations where the provisions of Sections 8(a) and (c) would be
applicable but the indemnification provided for in this Section 8 is unavailable
to an indemnified party or insufficient in respect of any losses, claims,
damages, liabilities or judgments referred to therein, then each indemnifying
party, in lieu of indemnifying such indemnified party, shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages, liabilities and judgments (i) in such proportion as is
appropriate to reflect the relative benefits received by the Sellers on the one
hand and the Underwriters on the other hand from the offering of the Shares or
(ii) if the allocation provided by clause 8(e)(i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause 8(e)(i) above but also the relative
fault of the Sellers on the one hand and the Underwriters on the other hand in
connection with the statements or omissions which resulted in
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such losses, claims, damages, liabilities or judgments, as well as any other
relevant equitable considerations. The relative benefits received by the Sellers
on the one hand and the Underwriters on the other hand shall be deemed to be in
the same proportion as the total net proceeds from the offering (after deducting
underwriting discounts and commissions, but before deducting expenses) received
by the Sellers, and the total underwriting discounts and commissions received by
the Underwriters, bear to the total price to the public of the Shares, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault of the Sellers on the one hand and the Underwriters on the other hand
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or the
Selling Stockholders on the one hand or the Underwriters on the other hand and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission.
The Sellers and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 8(e) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any reasonable legal or other expenses incurred by such indemnified
party in connection with investigating or defending any matter, including any
action, that could have given rise to such losses, claims, damages, liabilities
or judgments. Notwithstanding the provisions of this Section 8, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 8(e) are several in proportion to the respective number
of Shares purchased by each of the Underwriters hereunder and not joint.
(f) Notwithstanding any other provision of this Agreement, the maximum
aggregate liability of any Selling Stockholder pursuant to this Section 8 and
Section 9 shall be limited to an amount equal to the gross proceeds (after
deducting underwriting discounts and commissions and expenses) received by such
Selling Stockholder from the Underwriters for the sale of the Shares sold by
such Selling Stockholder hereunder.
(g) The remedies provided for in this Section 8 are not exclusive and shall
not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
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(h) Each Selling Stockholder hereby designates KBW, Inc., Two World Trade
Center, New York, New York 10048, as its authorized agent, upon which process
may be served in any action which may be instituted in any state or federal
court in the State of New York by any Underwriter, any director or officer of
any Underwriter or any person controlling any Underwriter asserting a claim for
indemnification or contribution under or pursuant to this Section 8, and each
Selling Stockholder will accept the jurisdiction of such court in such action,
and waives, to the fullest extent permitted by applicable law, any defense based
upon lack of personal jurisdiction or venue. A copy of any such process shall be
promptly sent or given to such Selling Stockholder, at the address for notices
specified in Section 13 hereof.
Section 9. Indemnification of QIU. (a) The Company and the Management
Selling Stockholders, jointly and severally, agree to indemnify and hold
harmless the QIU, its directors, its officers and each person, if any, who
controls the QIU within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act, from and against any and all losses, claims, damages,
liabilities and judgments (including, without limitation, any reasonable legal
or other expenses incurred in connection with investigating or defending any
matter, including any action, that could give rise to any such losses, claims,
damages, liabilities or judgments) related to, based upon or arising out of (i)
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement (or any amendment thereto), the Prospectus (or any
amendment or supplement thereto) or any preliminary prospectus, or any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading or (ii) the
QIU's activities as QIU under its engagement pursuant to Section 2 hereof,
except in the case of this clause (ii) insofar as any such losses, claims,
damages, liabilities or judgments are found in a final judgment by a court of
competent jurisdiction, not subject to further appeal, to have resulted solely
from the willful misconduct or gross negligence of the QIU.
(b) The Additional Selling Stockholder agrees to indemnify and hold
harmless the QIU, its directors, its officers, and each person, if any, who
controls the QIU within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act, as set forth in Section 9(a) above, but only to the extent
that any such untrue statement or alleged untrue statement or omission or
alleged omission was made or omitted in reliance upon and in conformity with
information relating to such Additional Selling Stockholder furnished by such
Additional Selling Stockholder for use in connection therewith, which
information is set forth under the caption "Principal and Selling Stockholders"
in the Prospectus.
(c) In case any action shall be commenced involving any person in respect
of which indemnity may be sought pursuant to Section 9(a) or 9(b) (the "QIU
Indemnified Party"), the QIU Indemnified Party shall promptly notify the Sellers
in writing and the Sellers shall assume the defense of such action, including
the employment of counsel reasonably satisfactory to the QIU Indemnified Party
and the payment of all reasonable fees and expenses of such counsel, as
incurred. Any QIU Indemnified Party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of the QIU Indemnified
Party unless (i) the employment of such counsel shall
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have been specifically authorized in writing by the Sellers, (ii) the Sellers
shall have failed to assume the defense of such action or employ counsel
reasonably satisfactory to the QIU Indemnified Party or (iii) the named parties
to any such action (including any impleaded parties) include both the QIU
Indemnified Party and one or more of the Sellers, and the QIU Indemnified Party
shall have been advised by such counsel that there may be one or more legal
defenses available to it which are different from or additional to those
available to the Sellers (in which case the Sellers shall not have the right to
assume the defense of such action on behalf of the QIU Indemnified Party). In
any such case, the Sellers shall not, in connection with any one action or
separate but substantially similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys (in
addition to any local counsel) for all QIU Indemnified Parties, which firm shall
be designated by the QIU, and all such fees and expenses shall be reimbursed as
they are incurred. The Sellers shall indemnify and hold harmless the QIU
Indemnified Party from and against any and all losses, claims, damages,
liabilities and judgments by reason of any settlement of any action (i) effected
with the Sellers' written consent or (ii) effected without the Sellers' written
consent if the settlement is entered into more than thirty days after the
Sellers shall have received a request from the QIU Indemnified Party for
reimbursement for the fees and expenses of counsel (in any case where such fees
and expenses are at the expense of the Sellers) and, prior to the date of such
settlement, the Sellers shall have failed to comply with such reimbursement
request. The Sellers shall not, without the prior written consent of the QIU
Indemnified Party, effect any settlement or compromise of, or consent to the
entry of judgment with respect to, any pending or threatened action in respect
of which the QIU Indemnified Party is or could have been a party and indemnity
or contribution may be or could have been sought hereunder by the QIU
Indemnified Party, unless such settlement, compromise or judgment (i) includes
an unconditional release of the QIU Indemnified Party from all liability on
claims that are or could have been the subject matter of such action and (ii)
does not include a statement as to or an admission of fault, culpability or a
failure to act, by or on behalf of the QIU Indemnified Party.
(d) In situations where the provisions of Section 9(a) or 9(b) would be
applicable but the indemnification provided for in this Section 9 is unavailable
to a QIU Indemnified Party or insufficient in respect of any losses, claims,
damages, liabilities or judgments referred to therein, then the Sellers, in lieu
of indemnifying such QIU Indemnified Party, shall contribute to the amount paid
or payable by such QIU Indemnified Party as a result of such losses, claims,
damages, liabilities and judgments (i) in such proportion as is appropriate to
reflect the relative benefits received by the Sellers on the one hand and the
QIU on the other hand from the offering of the Shares or (ii) if the allocation
provided by clause 9(d)(i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause 9(d)(i) above but also the relative fault of the Sellers on the one
hand and the QIU on the other hand in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
judgments, as well as any other relevant equitable considerations. The relative
benefits received by the Sellers on the one hand and the QIU on the other hand
shall be deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Sellers, and the fee
received by the QIU
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pursuant to Section 2 hereof, bear to the sum of such total net proceeds and
such fee. The relative fault of the Sellers on the one hand and the QIU on the
other hand shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
or the Selling Stockholders on the one hand or the QIU on the other hand and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission and whether the QIU's activities
as QIU under its engagement pursuant to Section 2 hereof involved any willful
misconduct or gross negligence on the part of the QIU.
The Company and the QIU agree that it would not be just and equitable if
contribution pursuant to this Section 9(d) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by a QIU Indemnified Party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses incurred by such QIU Indemnified Party
in connection with investigating or defending any matter, including any action,
that could have given rise to such losses, claims, damages, liabilities or
judgments. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
(e) Notwithstanding any other provision of this Agreement, the maximum
aggregate liability of any Selling Stockholder pursuant to Section 8 and this
Section 9 shall be limited to an amount equal to the gross proceeds (after
deducting underwriting discounts and commissions and expenses) received by such
Selling Stockholder from the Underwriters for the sale of the Shares sold by
such Selling Stockholder hereunder.
(f) The remedies provided for in this Section 9 are not exclusive and shall
not limit any rights or remedies which may otherwise be available to any QIU
Indemnified Party at law or in equity.
Section 10. Conditions of Underwriters' Obligations. The several
obligations of the Underwriters to purchase the Firm Shares under this Agreement
are subject to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company and the Selling
Stockholders contained in this Agreement shall be true and correct on the
Closing Date with the same force and effect as if made on and as of the Closing
Date.
(b) If the Company is required to file a Rule 462(b) Registration Statement
after the effectiveness of this Agreement, such Rule 462(b) Registration
Statement shall have become effective by 10:00 P.M., New York City time, on the
date of this Agreement; and no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no
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proceedings for that purpose shall have been commenced or shall be pending
before or, to the knowledge of the Company, contemplated by the Commission.
(c) You shall have received on the Closing Date a certificate dated the
Closing Date, signed by James J. McDermott and Guy G. Woelk, in their capacities
as the chief executive officer and chief financial officer of the Company,
confirming the matters set forth in Sections 6(t), 10(a) and 10(b) and that the
Company has complied in all materials respects with all of the agreements and
satisfied in all material respects all of the conditions herein contained and
required to be complied with or satisfied by the Company on or prior to the
Closing Date.
(d) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there shall not have occurred any change or any development involving a
prospective change in the financial condition or the earnings, business,
management or operations of the Company and its subsidiaries, taken as a whole,
(ii) there shall not have been any change or any development which would
reasonably be expected to result in a change in the capital stock or in the
long-term debt of the Company or any of its subsidiaries and (iii) neither the
Company nor any of its subsidiaries shall have incurred any liability or
obligation, direct or contingent, the effect of which, in any such case
described in clause 10(d)(i), 10(d)(ii) or 10(d)(iii), in your judgment, is
material and adverse and, in your judgment, makes it impracticable to market the
Shares on the terms and in the manner contemplated in the Prospectus.
(e) All the representations and warranties of each Selling Stockholder
contained in this Agreement shall be true and correct on the Closing Date with
the same force and effect as if made on and as of the Closing Date and you shall
have received on the Closing Date a certificate dated the Closing Date from each
Selling Stockholder to such effect and to the effect that such Selling
Stockholder has complied in all material respects with all of the agreements and
satisfied all of the conditions herein contained and required to be complied
with or satisfied in all material respects by such Selling Stockholder on or
prior to the Closing Date.
(f) You shall have received on the Closing Date an opinion (satisfactory to
you and counsel for the Underwriters and containing such customary
qualifications and limitations, including reliance upon certifications of
officers of the Company, for such opinions as shall be satisfactory to you and
counsel for the Underwriters), dated the Closing Date, of Wachtell, Lipton,
Rosen & Katz, special counsel for the Company and the Selling Stockholders, to
the effect that:
(i) each of the Company and its subsidiaries has been duly incorporated,
is validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation; and each of the Company and its subsidiaries
has the corporate power and authority to carry on its business and to own,
lease and operate its properties, in each case, as described in the
Prospectus;
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(ii) all the outstanding shares of capital stock of the Company
(including the Shares to be sold by the Selling Stockholders) have been
duly authorized and validly issued and are fully paid, non-assessable and
not subject to any preemptive or similar rights arising by operation of
law, under the certificate of incorporation or by-laws of the Company, any
agreement known to such counsel to which the Company or any of its
subsidiaries is a party, except as may be provided by the Former
Stockholders' Agreement, the Stockholders' Agreement and the Lock-Up
Agreements;
(iii) the Shares to be issued and sold by the Company hereunder have
been duly authorized and, when issued and delivered to the Underwriters
against payment therefor as provided by this Agreement, will be validly
issued, fully paid and non-assessable, and the issuance and sale of such
Shares will not be subject to any preemptive or similar rights arising by
operation of law, under the certificate of incorporation or by-laws of the
Company, any agreement known to such counsel to which the Company or any of
its subsidiaries is a party;
(iv) this Agreement has been duly authorized, executed and delivered by
the Company and by or on behalf of each Selling Stockholder;
(v) as of the time of the purchase of the Shares pursuant to this
Agreement, the authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus under the
caption "Description of Capital Stock";
(vi) the Registration Statement has become effective under the Act, no
stop order suspending its effectiveness has been issued and no proceedings
for that purpose are, to such counsel's knowledge, pending before or
contemplated by the Commission;
(vii) the statements under the captions "Risk Factors -- Anti-takeover
Effects of Certain Charter and Bylaw Provisions," "Management," "Certain
Transactions Occurring Prior to the Offering," "Description of Capital
Stock" "Certain Anti-Takeover Provisions," "Shares Eligible for Future
Sale" and "Tax Consequences to Non-U.S. Holders" in the Prospectus and
Items 14 and 15 of Part II of the Registration Statement, insofar as such
statements constitute a summary of the legal matters, documents or
proceedings referred to therein, fairly present in all material respects
the information called for with respect to such legal matters, documents
and proceedings;
(viii) the execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and
the consummation of the transactions contemplated hereby will not (A) with
respect to the Subject Laws (as defined below), require any consent,
approval, authorization or other order of, or qualification with, any court
or governmental body or agency (except such as may be required under the
securities or Blue Sky laws of the various states as to which no opinion is
expressed), (B)(1) conflict with or constitute a breach of any of the terms
or provisions of, or a default under, the charter or by-laws of the Company
or (2) any
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indenture, loan agreement, mortgage, lease or other agreement or
instrument that is either (x) filed as an exhibit to the Registration
Statement or (y) known to such counsel and which is binding upon the
Company or any of its subsidiaries that is material to the Company and its
subsidiaries, taken as a whole or (C) with respect to the Subject Laws,
violate or conflict with any applicable law, rule, regulation, or, to the
knowledge of such counsel, judgment, order or decree of any court or any
governmental body or agency having jurisdiction over the Company, any of
its subsidiaries or their respective property, which in the case of clauses
(A), (B)(2) or (C) would individually or in the aggregate have a Material
Adverse Effect or impair the consummation of the transaction contemplated
hereby. "Subject Laws" means (A) the laws of the State of New York, (B) the
general corporation law of the State of Delaware and (C) the federal laws
of the United States normally applicable, in our experience, to
transactions of the type contemplated by this Agreement;
(ix) after due inquiry, but without having performed a docket search
or other independent investigation, such counsel does not know of any legal
or governmental proceedings pending or threatened to which the Company or
any of its subsidiaries is a party or to which any of their respective
property is subject that are required to be described in the Registration
Statement or the Prospectus and are not so described, or of any statutes or
regulations that are required to be described in the Registration Statement
or the Prospectus;
(x) the Company is not and, after giving effect to the offering and sale
of the Shares and the application of the proceeds thereof as described in
the Prospectus, will not be, an "investment company" as such term is
defined in the Investment Company Act of 1940, as amended;
(xi) the Registration Statement and the Prospectus and any supplement or
amendment thereto (except for the financial statements and other financial
data included therein as to which no opinion need be expressed) comply as
to form in all material respects with the Act. Such counsel has
participated in conferences with officers and other representatives of the
Company, representatives of the independent public accountants for the
Company, and representatives of and counsel to the Underwriters, all of
whom participated in the preparation of the Registration Statement and the
Prospectus, at which conferences the contents of the Registration Statement
and Prospectus were discussed, and, although such counsel is not passing
upon and does not assume responsibility for the accuracy, completeness or
fairness of the statements contained in the Registration Statement and
Prospectus, and has not otherwise verified or made independent
investigation thereof, no facts have come to its attention during the
course of such participation (relying as to materiality and for an
explanation of technical terms to an extent we deemed appropriate upon the
statements of officers and other representatives of the Company) which
leads such counsel to believe that (i) as of its date and as of the Closing
Date, the Prospectus, as amended or supplemented through such date, (other
than the financial statements and schedules and other financial and
statistical data and information included therein or omitted therefrom, as
to which no opinion is expressed) contained or contains an untrue statement
of a material fact or omitted or omits to state a material fact necessary
to make the statements therein, in light of the circumstances under which
they were made, not misleading or (ii) as of its effective date and as of
the date of this Agreement, the Registration Statement (other than the
financial statements and schedules and other financial and statistical data
and
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information included therein or omitted therefrom, as to which no
opinion is expressed) contained or contains an untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading;
(xii) to such counsel's knowledge, each Selling Stockholder owns the
Shares to be sold by such Selling Stockholder pursuant to this Agreement,
free and clear of any pledge, liens, encumbrances, security interests,
equities and claims whatsoever, other than pursuant to the Custody
Agreement, the Power of Attorney, the Underwriting Agreement and other than
any such restriction on transfer, lien, encumbrance, security interest,
equity or claim created by an Underwriter or resulting from any actions
taken by an Underwriter;
(xiii) to such counsel's knowledge, each Selling Stockholder has full
legal right, power and authority, and all authorization and approval
required by law (other than as required by the NASD and state securities
and Blue Sky laws as to which no opinion need be expressed), to enter into
this Agreement and the Custody Agreement and the Power of Attorney of such
Selling Stockholder and to sell, assign, transfer and deliver the Shares to
be sold by such Selling Stockholder in the manner provided herein and
therein;
(xiv) to such counsel's knowledge, the Custody Agreement of each Selling
Stockholder has been duly authorized, executed and delivered by such
Selling Stockholder and is a valid and binding agreement of such Selling
Stockholder, enforceable in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting the rights of creditors generally and
by general principles of equity;
(xv) to such counsel's knowledge, the Power of Attorney of each Selling
Stockholder has been duly authorized, executed and delivered by such
Selling Stockholder and is a valid and binding instrument of such Selling
Stockholder, enforceable in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar law affecting the rights of creditors generally and
by general principles of equity;
(xvi) upon sale and delivery of and payment for the Shares to be sold by
each Selling Stockholder pursuant to this Agreement, and assuming the
Underwriters purchase such shares for value and in good faith without
notice of any adverse claim (within the meaning of Section 8-102 of the
Uniform Commercial Code as in effect in the State of New York (the "UCC")),
each Selling Stockholder will have transferred to the Underwriters
ownership of the Shares being sold by such Selling Stockholder at the
28
<PAGE>
Closing, free and clear of any adverse claim (within the meaning of the
UCC) and any restrictions on transfer imposed by the Company; and
(xvii) to the knowledge of such counsel, assuming that the
representations and warranties of the Company in this Agreement as to
factual matters are true and correct, the execution, delivery and
performance of this Agreement and the Custody Agreement and Power of
Attorney of each Selling Stockholder by such Selling Stockholder, the
compliance by such Selling Stockholder with all the provisions hereof and
thereof and the consummation of the transactions contemplated hereby and
thereby will not (A) with respect to the Subject Laws, require any consent,
approval, authorization or other order of, or qualification with, any court
or governmental body or agency applicable to such Selling Stockholder
(except (a) such as may be required under the securities or Blue Sky laws
of the various states as to which no opinion is expressed, and (b)
registration under the Act, NASD clearance and NYSE approval for listing,
all of which shall have been obtained by the Closing Date), (B) conflict
with or constitute a breach of any of the terms or provisions of, or a
default under, the organizational documents of such Selling Stockholder, if
such Selling Stockholder is not an individual, or any indenture, loan
agreement, mortgage, lease or other agreement or instrument to which such
Selling Stockholder is a party or by which any property of such Selling
Stockholder is bound or (C) with respect to the Subject Laws, violate or
conflict with any applicable law or any rule, regulation, judgment, order
or decree of any court or any governmental body or agency having
jurisdiction over such Selling Stockholder or any property of such Selling
Stockholder.
The opinion of Wachtell, Lipton, Rosen & Katz described in Section 10(f)
above shall be rendered to you at the request of the Company and the Selling
Stockholders and shall so state therein.
(g) You shall have received on the Closing Date an opinion (satisfactory to
you and counsel for the Underwriters, and containing customary qualifications
and limitations, including reliance upon certifications of officers of the
Company, for such opinions), dated the Closing Date, of Mitchell B. Kleinman,
General Counsel of the Company, to the effect that:
(i) each of the Company and its subsidiaries is duly qualified and is in
good standing as a foreign corporation authorized to do business in each
jurisdiction in which the nature of its business or its ownership or
leasing of property requires such qualification, except where the failure
to be so qualified would not have a Material Adverse Effect;
(ii) all the outstanding shares of capital stock of the Company
(including the Shares to be sold by the Selling Stockholders) have been
duly authorized and validly issued and are fully paid, non-assessable and
not subject to any preemptive or similar rights arising by operation of
law, under the certificate of incorporation or by-laws of the Company, or
to such counsel's knowledge, otherwise, except as may be provided by the
29
<PAGE>
Former Stockholders' Agreement, the Stockholders' Agreement and the Lock-up
Agreements;
(iii) the Shares to be issued and sold by the Company hereunder have
been duly authorized and, when issued and delivered to the Underwriters
against payment therefor as provided by this Agreement, will be validly
issued, fully paid and non-assessable, and the issuance and sale of such
Shares will not be subject to any preemptive or similar rights arising by
operation of law, under the certificate of incorporation or by-laws of the
Company or, to such counsel's knowledge, otherwise;
(iv) all of the outstanding shares of capital stock of each of the
Company's subsidiaries have been duly authorized and validly issued and are
fully paid and non-assessable, and are owned by the Company, directly or
indirectly through one or more subsidiaries, free and clear of any security
interest, claim, lien, encumbrance or adverse interest of any nature;
(v) the statements under the captions "Risk Factors -- Risks Relating to
Regulation," "Business -- Regulation," "Business -- Net Capital
Requirements," insofar as such statements constitute a summary of the legal
matters, documents or proceedings referred to therein, fairly present in
all material respects the information called for with respect to such legal
matters, documents and proceedings;
(vi) neither the Company nor any of its subsidiaries is in violation of
its respective charter or by-laws and, to the best of such counsel's
knowledge after due inquiry, neither the Company nor any of its
subsidiaries is in default in the performance of any obligation, agreement,
covenant or condition contained in any indenture, loan agreement, mortgage,
lease or other agreement or instrument that is material to the Company and
its subsidiaries, taken as a whole, to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries
or their respective property is bound;
(vii) the execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and
the consummation of the transactions contemplated hereby will not (a)
conflict with or constitute a breach of any of the terms or provisions of,
or a default under, the charter or by-laws of any of its subsidiaries or
any indenture, loan agreement, mortgage, lease or other agreement or
instrument that is material to the Company and its subsidiaries, taken as a
whole, to which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries or their respective property
is bound or (b) result in the suspension, termination or revocation of any
Authorization of the Company or any of its subsidiaries or any other
impairment of the rights of the holder of any such Authorization (other
than such suspensions, terminations or revocations as would not,
individually or in the aggregate, result in a Material Adverse Effect);
30
<PAGE>
(viii) after due inquiry, such counsel does not know of any contracts or
other documents that are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement that are not so described or filed as required;
(ix) to the knowledge of such counsel, neither the Company nor any of
its subsidiaries has violated any Environmental Law, any provisions of the
Employee Retirement Income Security Act of 1974, as amended, or any
provisions of the Foreign Corrupt Practices Act or the rules and
regulations promulgated thereunder, except for such violations which,
singly or in the aggregate, would not have a Material Adverse Effect;
(x) to the knowledge of such counsel, each of the Company and its
subsidiaries has such Authorizations of, and has made all filings with and
notices to, all governmental or regulatory authorities and self-regulatory
organizations and all courts and other tribunals as are necessary to own,
lease, license and operate its respective properties and to conduct its
business, except where the failure to have any such Authorization or to
make any such filing or notice would not, singly or in the aggregate, have
a Material Adverse Effect; each such Authorization is valid and in full
force and effect and each of the Company and its subsidiaries is in
compliance with all the terms and conditions thereof and with the rules and
regulations of the authorities and governing bodies having jurisdiction
with respect thereto; and no event has occurred (including, without
limitation, the receipt of any notice from any authority or governing body)
which allows or, after notice or lapse of time or both, would allow,
revocation, suspension or termination of any such Authorization or results
or, after notice or lapse of time or both, would result in any other
impairment of the rights of the holder of any such Authorization; except in
each case, as would not, singly or in the aggregate, have a Material
Adverse Effect;
(xi) to such counsel's knowledge after due inquiry, there are no
contracts, agreements or understandings between the Company and any person
granting such person the right to require the Company to file a
registration statement under the Act with respect to any securities of the
Company or to require the Company to include such securities with the
Shares registered pursuant to the Registration Statement;
(xii) Keefe, Bruyette & Woods, Inc. is registered as a broker-dealer
with the Commission and is registered or exempt from registration as a
broker-dealer under the laws of all fifty U.S. states, the District of
Columbia and Puerto Rico, is a member of the NASD and the NYSE, and, to the
knowledge of such counsel, in each case, is in compliance with all
applicable laws, rules, regulations, orders, by-laws and similar
requirements in connection with such registrations and memberships,
including without limitation the Net Capital Rule, except where the failure
to be so registered or in such compliance would not have a Material Adverse
Effect; and
31
<PAGE>
(xiii) KBW Asset Management, Inc. is registered as an investment adviser
with the Commission, is registered or exempt from registration in all fifty
U.S. states, the District of Columbia and Puerto Rico and to the knowledge
of such counsel, is in compliance with all applicable laws, rules,
regulations, orders and similar requirements in connection therewith except
where the failure to be so registered or in such compliance would not have
a Material Adverse Effect.
(h) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Brown & Wood LLP, counsel for the Underwriters, as to the
matters referred to in Sections 10(f)(iii), 10(f)(iv) (but only with respect to
the Company), 10(f)(vii) (but only with respect to the statements under the
caption "Description of Capital Stock" and "Underwriting") and 10(f)(xi).
In giving such opinions with respect to the matters covered by Section
10(f)(xi), Wachtell, Lipton, Rosen & Katz and Brown & Wood LLP may state that
their opinion and belief are based upon their participation in the preparation
of the Registration Statement and Prospectus and any amendments or supplements
thereto and review and discussion of the contents thereof, but are without
independent check or verification except as specified.
(i) You shall have received, on each of the date hereof and the Closing
Date, a letter dated the date hereof or the Closing Date, as the case may be, in
form and substance satisfactory to you, from KPMG Peat Marwick LLP, independent
public accountants, containing the information and statements of the type
ordinarily included in accountants' "comfort letters" to Underwriters with
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectus.
(j) The Company shall have delivered to you the agreements specified in
Section 2 hereof which agreements shall be in full force and effect on the
Closing Date.
(k) The Shares shall have been duly listed, subject to official notice of
issuance, on the NYSE.
(l) The Company and the Selling Stockholders shall not have failed on or
prior to the Closing Date to perform or comply in any material respect with any
of the agreements herein contained and required to be performed or complied with
by the Company or the Selling Stockholders, as the case may be, on or prior to
the Closing Date.
(m) You shall have received on the Closing Date, a certificate of each
Selling Stockholder who is not a U.S. Person (as defined under applicable U.S.
federal tax legislation) to the effect that such Selling Stockholder is not a
U.S. Person, which certificate may be in the form of a properly completed and
executed United States Treasury Department Form W-8 (or other applicable form or
statement specified by Treasury Department regulations in lieu thereof).
The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the applicable Option
Closing Date of such documents as
32
<PAGE>
you may reasonably request with respect to the good standing of the Company, the
due authorization and issuance of such Additional Shares and other matters
related to the issuance of such Additional Shares.
Section 11. Effectiveness of Agreement and Termination. This Agreement
shall become effective upon the execution and delivery of this Agreement by the
parties hereto.
This Agreement may be terminated at any time on or prior to the Closing
Date by you by written notice to the Sellers if any of the following has
occurred: (i) any outbreak or escalation of hostilities or other national or
international calamity or crisis or change in economic conditions or in the
financial markets of the United States or elsewhere that, in your judgment, is
material and adverse and, in your judgment, makes it impracticable to market the
Shares on the terms and in the manner contemplated in the Prospectus, (ii) the
suspension or material limitation of trading in securities or other instruments
on the New York Stock Exchange, the American Stock Exchange, the Chicago Board
of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade
or The Nasdaq Stock Market or limitation on prices for securities or other
instruments on any such exchange or The Nasdaq Stock Market, (iii) the
suspension of trading of any securities of the Company on any exchange or in the
over-the-counter market, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of any
court or other governmental authority which in your opinion materially and
adversely affects, or will materially and adversely affect, the business,
prospects, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole, (v) the declaration of a banking moratorium by
either federal or New York State authorities or (vi) the taking of any action by
any federal, state or local government or agency in respect of its monetary or
fiscal affairs which in your opinion has a material adverse effect on the
financial markets in the United States and, in your judgment, makes it
impracticable to market the Shares on the terms and in the manner contemplated
by the Prospectus.
If on the Closing Date or on an Option Closing Date, as the case may be,
any one or more of the Underwriters shall fail or refuse to purchase the Firm
Shares or Additional Shares, as the case may be, which it has or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase is not more
than one-tenth of the total number of Firm Shares or Additional Shares, as the
case may be, to be purchased on such date by all Underwriters, each non-
defaulting Underwriter shall be obligated severally, in the proportion which the
number of Firm Shares set forth opposite its name in Schedule I bears to the
total number of Firm Shares which all the non-defaulting Underwriters have
agreed to purchase, or in such other proportion as you may specify, to purchase
the Firm Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date; provided that in no event shall the number of Firm Shares or Additional
Shares, as the case may be, which any Underwriter has agreed to purchase
pursuant to Section 2 hereof be increased pursuant to this Section 11 by an
amount in excess of one-ninth of such number of Firm Shares or Additional
Shares, as the case may be, without the written consent of such Underwriter. If
on the Closing
33
<PAGE>
Date any Underwriter or Underwriters shall fail or refuse to purchase Firm
Shares and the aggregate number of Firm Shares with respect to which such
default occurs is more than one-tenth of the aggregate number of Firm Shares to
be purchased by all Underwriters, and arrangements satisfactory to you, the
Company and the Management Selling Stockholders for purchase of such Firm Shares
are not made within 48 hours after such default, this Agreement will terminate
without liability on the part of any non-defaulting Underwriter, the Company or
the Management Selling Stockholders. In any such case which does not result in
termination of this Agreement, either you or the Company shall have the right to
postpone the Closing Date, but in no event for longer than seven days, in order
that the required changes, if any, in the Registration Statement and the
Prospectus or any other documents or arrangements may be effected. If, on an
Option Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Additional Shares and the aggregate number of Additional Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Additional Shares to be purchased on such date, the non-defaulting
Underwriters shall have the option to (i) terminate their obligation hereunder
to purchase such Additional Shares or (ii) purchase not less than the number of
Additional Shares that such non-defaulting Underwriters would have been
obligated to purchase on such date in the absence of such default. Any action
taken under this paragraph shall not relieve any defaulting Underwriter from
liability in respect of any default of any such Underwriter under this
Agreement.
Section 12. Agreements of the Selling Stockholders. Each Selling
Stockholder agrees with you and the Company:
(a) To pay or to cause to be paid all costs and expenses, including any
transfer or other taxes payable in connection with the transfer of the Shares to
be sold by such Selling Stockholder to the Underwriters or incident to the
performance of the obligations of the Selling Stockholders hereunder for which
provision is not otherwise made.
(b) To do and perform all things to be done and performed by such Selling
Stockholder under this Agreement prior to the Closing Date and to use
commercially reasonable efforts to satisfy all conditions precedent to the
delivery of the Shares to be sold by such Selling Stockholder pursuant to this
Agreement.
Section 13. Miscellaneous. Notices given pursuant to any provision of this
Agreement shall be addressed as follows: (i) if to the Company, to KBW, Inc.,
Two World Financial Center, New York, New York 10048, Attention General Counsel
(ii) if to the Selling Stockholders, to [NAME OF ATTORNEY-IN-FACT] c/o [ADDRESS
OF ATTORNEY-IN-FACT] and (iii) if to any Underwriter or to you, to you c/o
Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York,
New York 10172, Attention: Syndicate Department, or in any case to such other
address as the person to be notified may have requested in writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company, the Selling Stockholders and the
several Underwriters set forth in or made pursuant to this Agreement shall
remain operative and in full force and effect regardless of (i) any
investigation, or statement as to the results thereof, made by or on behalf of
34
<PAGE>
any Underwriter, the officers or directors of any Underwriter, any person
controlling any Underwriter, any QIU Indemnified Party, the Company, the
officers or directors of the Company, any person controlling the Company, any
Selling Stockholder or any person controlling such Selling Stockholder, (ii)
acceptance of the Shares and payment for them hereunder and (iii) termination of
this Agreement.
If for any reason the Shares are not delivered by or on behalf of any
Seller as provided herein (other than as a result of any termination of this
Agreement pursuant to Section 11 or breach of this Agreement by any
Underwriter), the Company and the Management Selling Stockholders agree, jointly
and severally, to reimburse the several Underwriters for all out-of-pocket
expenses (including the reasonable fees and disbursements of counsel) incurred
by them. Notwithstanding any termination of this Agreement, the Company shall be
liable for all expenses which it has agreed to pay pursuant to Section 5(i)
hereof. The Company and the Management Selling Stockholders also agree, jointly
and severally, to reimburse the several Underwriters, their directors, officers
and any persons controlling any of the Underwriters, the QIU Indemnified Parties
(the "Reimbursed Parties") for any and all fees and expenses (including, without
limitation, the fees disbursements of counsel) incurred by them in connection
with enforcing their rights hereunder (including, without limitation, pursuant
to Section 8 hereof); provided, however, that the Reimbursed Parties shall not
be entitled to reimbursement pursuant to this sentence to the extent the
Reimbursed Party is determined not to be the prevailing party by a court of
competent jurisdiction in a final non-appealable judgment.
Except as otherwise provided, this Agreement has been and is made solely
for the benefit of and shall be binding upon the Company, the Selling
Stockholders, the Underwriters, the Underwriters' directors and officers, any
controlling persons referred to herein, the QIU Indemnified Parties, the
Company's directors and the Company's officers who sign the Registration
Statement and their respective successors and assigns, all as and to the extent
provided in this Agreement, and no other person shall acquire or have any right
under or by virtue of this Agreement. The term "successors and assigns" shall
not include a purchaser of any of the Shares from any of the several
Underwriters merely because of such purchase.
This Agreement shall be governed and construed in accordance with the laws
of the State of New York.
This Agreement may be signed in various counterparts which together shall
constitute one and the same instrument.
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<PAGE>
Please confirm that the foregoing correctly sets forth the agreement among
the Company, the Selling Stockholders and the several Underwriters.
Very truly yours,
KBW, INC.
By: ________________________________________
Title:
THE SELLING STOCKHOLDERS NAMED IN SCHEDULE II
HERETO, ACTING SEVERALLY
By: ________________________________________
Attorney-in-fact
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
KEEFE, BRUYETTE & WOODS, INC.
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By: DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:_____________________________
36
<PAGE>
SCHEDULE I
----------
Number of Firm Shares
Underwriters to be Purchased
- ------------ ---------------
Donaldson, Lufkin & Jenrette Securities
Corporation
Goldman, Sachs & Co.
Keefe, Bruyette & Woods, Inc.
_________________
Total
S-1
<PAGE>
SCHEDULE II-A
-------------
Selling Stockholders
--------------------
Number of Firm
Name Shares Being Sold
- ---- -----------------
_________
Total
S-2
<PAGE>
SCHEDULE II-B
-------------
Selling Stockholders
--------------------
Number of Firm
Name Shares Being Sold
- ---- -----------------
_________
Total
S-3
<PAGE>
SCHEDULE III
------------
Selling Stockholders
--------------------
Number of Additional
Name Shares Being Sold
- ---- -----------------
_________
Total
S-4
<PAGE>
Annex I
[Insert names of stockholders of the Company who will be
required to sign lock ups]
A-1
<PAGE>
EXHIBIT 2.01
FORM OF
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
BY AND AMONG KBW, INC.,
KEEFE, BRUYETTE & WOODS, INC., AND
KBWI ACQUISITION CORP.
Dated as of April , 1999
================================================================================
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated
as of April , 1999, by and among KBW, Inc., a Delaware corporation ("New KBW"),
-------
Keefe, Bruyette & Woods, Inc., a New York corporation formed under the name
Keefe & Company, Inc. ("Old KBW"), and KBWI Acquisition Corp., a New York
-------
corporation and a wholly-owned subsidiary of New KBW ("Merger Sub").
----------
WHEREAS, New KBW, Old KBW and Merger Sub entered into an Agreement and Plan
of Merger, dated as of December 11, 1998 (the "Original Merger Agreement");
WHEREAS, New KBW, Old KBW and Merger Sub desire to amend the Original
Merger Agreement pursuant to Section 1 of Article III of the Original Merger
Agreement and to restate the Original Merger Agreement, as set forth herein;
WHEREAS, 896,205 shares of common stock, par value $0.01, of Old KBW ("Old
KBW Stock") are outstanding and 100 shares of common stock, par value $0.01, of
Merger Sub ("Merger Sub Stock") are outstanding;
WHEREAS, the Board of Directors of each of New KBW, Old KBW and Merger Sub
has determined that it is in the best interests of New KBW, Old KBW and Merger
Sub, respectively, to consummate the business combination transaction provided
for herein in which Merger Sub will, subject to the terms and conditions set
forth herein, merge with and into Old KBW (the "Merger"), with Old KBW the
------
surviving corporation in the Merger; and
WHEREAS, the parties desire to make agreements in connection with the
Merger and also to prescribe certain conditions to the Merger;
NOW, THEREFORE, in consideration of the premises and mutual agreements
contained herein, and intending to be legally bound hereby, the parties hereto
agree as follows:
ARTICLE I
THE MERGER
Section 1. The Merger. Subject to the terms and conditions of this
Agreement, in accordance with the New York Business Corporation Law (the
"NYBCL"), at the Effective Time (as defined in Section 3 of this Article I),
-----
Merger Sub shall merge with and into Old KBW. Upon consummation of the Merger,
the separate corporate existence of Merger Sub shall terminate, and Old KBW
shall be the surviving corporation under the laws of the State of New York (the
"Surviving Corporation").
---------------------
<PAGE>
Section 2. Effects of the Merger. The Merger shall have the effects
specified in the NYBCL.
Section 3. Effective Time. Subject to the provisions of this Agreement,
the parties shall deliver a certificate of merger to the department of state of
the State of New York executed in accordance with Section 104(d) of the NYBCL
and shall make any filings or recordings or take any other lawful actions
necessary to cause the Merger to become effective. Unless the parties agree
otherwise, the Merger shall become effective on the date of the pricing of the
initial public offering of New KBW Common Stock (the "IPO") or at such
other time as the conditions to be satisfied prior to the Merger are satisfied
and a certificate of merger is duly filed by the department of state
of the State of New York (the time the Merger becomes effective, the "Effective
---------
Time").
- ----
Section 4. Certificate of Incorporation of the Surviving Corporation. At
and after the Effective Time and without any further action on the part of Old
KBW or Merger Sub, the Certificate of Incorporation of the Surviving Corporation
shall be amended and restated, as effected by the Merger, to read in its
entirety as set forth in Exhibit 1 to this Merger Agreement until thereafter
changed or amended as provided therein or under applicable law.
Section 5. By-laws of the Surviving Corporation. At and after the
Effective Time and without any further action on the part of Old KBW or
Merger Sub, the By-laws of Merger Sub in effect immediately prior to the
Effective Time shall be the By-laws of the Surviving Corporation until
thereafter changed or amended as provided therein or under applicable law.
Section 6. Board of Directors and Officers of the Surviving Corporation.
The directors and officers of Old KBW immediately prior to the Effective Time
shall be the directors and officers of the Surviving Corporation following the
Merger, each to hold office in accordance with the Certificate of Incorporation
and By-laws of the Surviving Corporation until their successors are duly elected
or appointed and qualified.
Section 7. Conversion of Old KBW Common Stock. At the Effective Time, by
virtue of the Merger and without any action on the part of Merger Sub, Old KBW
or the holder of any of the following securities:
(a) Each share of Merger Sub Stock outstanding immediately prior to
the Effective Time shall be converted into one share of common stock, par
value $0.01 per share, of the Surviving Corporation. The share
certificates of Merger Sub shall, from and after the Effective Time,
evidence shares of common stock of the Surviving Corporation until
canceled, redeemed or exchanged.
(b) Each share of Old KBW Stock issued and outstanding immediately
prior to the Effective Time shall be converted into the right to receive
16.259 shares of common stock, par value $0.01 per share, of New KBW
("New KBW Common Stock").
--------------------
-2-
<PAGE>
(c) Promptly upon consummation of the Merger, New KBW and Old KBW
shall make such arrangements as they deem appropriate to effect the
exchange of certificates that previously evidenced shares of the common
stock of Old KBW (the "Old Certificates") for certificates evidencing the
----------------
shares of New KBW Common Stock ("New Certificates"), which New Certificates
----------------
such holder is entitled to receive pursuant to the terms hereof upon proper
delivery of the Old Certificates and documents or evidence of payment of
any transfer or other taxes as Old KBW and New KBW may reasonably request.
From and after the Effective Time, a holder of an Old Certificate shall
have no further rights of any kind as a stockholder of Old KBW, other than
the right to receive the shares of New KBW Common Stock described in this
Section 7 of this Article I. In the case of lost, missing or stolen Old
Certificates, New KBW may require the posting of a bond or indemnity prior
to the issuance of any New Certificate in respect of such Old Certificate.
(d) No certificates or scrip representing less than one full share of
New KBW Common Stock shall be issued upon the delivery of any Old
Certificate pursuant to Section 7(c) hereof. In lieu of any such fractional
share, each holder of one or more Old Certificates who would otherwise have
been entitled to a fraction of a share of New KBW Common Stock upon
delivery of such holder's Old Certificate(s) pursuant to Section 7(c)
hereof shall be paid upon such delivery cash (without interest) in an
amount equal to such fraction multiplied by the initial public offering
price of the New KBW Common Stock. The fractional New KBW Common Stock
interests of each holder of one or more Old Certificates will be
aggregated, and no such holder will receive cash in an amount equal to or
greater than the initial public offering price of one full share of New KBW
Common Stock.
Section 8. New KBW Stockholders' Agreement. At and after the Effective
Time, all shares of New KBW issued pursuant to Section 7 hereof to employees of
New KBW or any of its subsidiaries who hold a title at or above the level of
Senior Vice President at the Effective Time shall be governed by the terms of
the Stockholders' Agreement, the form of which is attached hereto as Exhibit 2.
ARTICLE II
CONDITIONS TO THE MERGER
Section 1. Conditions to Each Party's Obligation to Effect the Merger.
The respective obligations of each party to this Agreement to consummate the
Merger shall be subject to the following conditions, which may not be waived:
(a) All necessary filings shall have been made and all necessary
approvals shall have been obtained.
(b) This Agreement shall have been approved and adopted by the
requisite vote of the shareholders of Old KBW and Merger Sub required by
Old KBW's and Merger Sub's respective Certificates of Incorporation, the
NYBCL, and, in the case of Old KBW, the Amended and Restated Stockholders'
Agreement dated as of July 25, 1996 (the "Amended and Restated
Stockholders' Agreement").
ARTICLE III
TERMINATION
Section 1. Amendment and Termination. This Agreement may be amended or
terminated at any time prior to the Effective Time by the mutual consent of the
parties hereto
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<PAGE>
in a written instrument, if the Board of Directors of each so
determines by a vote of a majority of all of its members and, if required by
applicable law, if approved by a majority of all shareholders of each.
Section 2. Effect of Termination. In the event of termination of this
Agreement by any party hereto as provided in this Article III, this Agreement
shall forthwith become void and have no effect, and no party hereto nor any of
their respective officers or directors or partners shall have any liability of
any nature whatsoever hereunder, or in connection with the transactions
contemplated hereby.
ARTICLE IV
MISCELLANEOUS PROVISIONS
Section 1. Governing Law. This Agreement shall be governed and construed
in accordance with the laws of the State of New York without regard to any
applicable conflicts of law principles.
Section 2. Severability; No Third Party Beneficiaries. Any term or
provision of this Agreement that is invalid or unenforceable in any jurisdiction
shall, as to that jurisdiction, be ineffective to the extent of such invalidity
or unenforceability without rendering invalid or unenforceable the remaining
terms and provisions of this Agreement or affecting the validity or
enforceability of any of the terms or provisions of this Agreement in any other
jurisdiction. If any provision of this Agreement is so broad as to be
unenforceable, the provision shall be interpreted to be only so broad as is
enforceable. This Agreement is not intended to confer upon any person other than
the parties hereto any rights or remedies hereunder.
Section 3. Contribution by Old KBW. Prior to the Effective Time, Old KBW
shall contribute to New KBW all of the outstanding capital stock of KBW Asset
Management, Inc. (formerly Keefe Management Services, Inc.).
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first above written.
KBW, INC.
By:
------------------------------------------
Name: James J. McDermott
Title: Chairman of the Board and
Chief Executive Officer
KEEFE, BRUYETTE & WOODS, INC.
By:
-------------------------------------------
Name: James J. McDermott
Title: Chairman of the Board and
Chief Executive Officer
KBWI ACQUISITION CORP.
By:
----------------------------------------------
Name: Mitchell B. Kleinman
Title: President
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<PAGE>
EXHIBIT 4.01
<TABLE>
<CAPTION>
<S> <C>
TEMPORARY CERTIFICATE--EXCHANGEABLE FOR DEFINITIVE ENGRAVED CERTIFICATE WHEN READY FOR DELIVERY
NUMBER COMMON STOCK
KBW
SHARES
KBW
===
SEE REVERSE FOR
CERTAIN DEFINITIONS
CUSIP 482423 10 0
KBW, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE PAR VALUE OF $.O1 EACH OF THE COMMON STOCK OF
============================================= KBW, INC.=================================================
transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney
upon surrender of this certificate properly endorsed.
This certificate is not valid unless countersigned and registered by the Transfer Agent and
Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized
officers.
CERTIFICATE OF STOCK
DATED:
[CORPORATE SEAL]
SECRETARY CHAIRMAN
</TABLE>
COUNTERSIGNED AND REGISTERED:
THE BANK OF NEW YORK
BY TRANSFER AGENT
AND REGISTRAR
AUTHORIZED OFFICER
<PAGE>
KBW, INC.
The Corporation will furnish without charge to each stockholder who so
requests a statement of the designations, powers, preferences and relative
participating, optional or other special rights of each class of stock or series
thereof of the Corporation and the qualifications, limitations or restrictions
of such preferences and/or rights. Such request may be made to the Corporation
or the Transfer Agent.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not as
tenants in common
UNIF GIFT MIN ACT - Custodian
----------------- ------------------
(Cust) (Minor)
under Uniform Gifts to Minors Act
------------
(State)
Additional abbreviations may also be used though not in the above list.
For value received, the undersigned hereby sell,
assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
--------------------------------------
--------------------------------------
------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING
ZIP CODE, OF ASSIGNEE)
------------------------------------------------------
------------------------------------------------------
----------------------------------------------- shares
of the capital stock represented by the within
Certificate, and do hereby irrevocably constitute
and appoint
--------------------------------------------- Attorney
to transfer the said stock on the books of the within
named Corporation with full power of substitution in
the premises.
Dated
------------------------------
----------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON
THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP
IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 10.02
KBW, INC.
1999 STOCK AND ANNUAL INCENTIVE PLAN
SECTION 1. Purpose; Definitions
The purpose of the Plan is to give the Company a competitive advantage
in attracting, retaining and motivating officers, employees and/or consultants
and to provide the Company and its Subsidiaries and Affiliates with an incentive
compensation plan providing incentives directly linked to the profitability of
the Company's businesses and/or increases in the Company's stockholder value.
For purposes of the Plan, the following terms are defined as set forth
below:
a. "Affiliate" means a corporation or other entity controlled by,
controlling or under common control with the Company and designated by the
Committee from time to time as such.
b. "Award" means a Stock Appreciation Right, Stock Option, Restricted
Stock, Performance Unit, Restricted Unit, unrestricted share of Common Stock,
dividend equivalent, interest equivalent or other stock-based award.
c. "Award Cycle" shall mean a period of consecutive calendar years or
portions thereof designated by the Committee over which Performance Units are to
be earned.
d. "Board" means the Board of Directors of the Company.
e. "Cause" means, unless otherwise provided by the Committee, (i) "Cause"
as defined in any Individual Agreement to which the participant is a party, or
(ii) if there is no such Individual Agreement or if it does not define Cause:
(A) conviction of the participant for committing a felony under federal law or
the law of the state in which such action occurred, (B) dishonesty in the course
of fulfilling the participant's employment duties, (C) willful and deliberate
failure on the part of the participant to perform his or her employment duties
in any material respect, or (D) prior to a Change in Control, such other events
as shall be determined by the Committee. The Committee shall, unless otherwise
provided in an Individual Agreement with the participant, have the sole
discretion to determine whether "Cause" exists, and its determination shall be
final.
f. "Change in Control" and "Change in Control Price" have the meanings set
forth in Sections 11(b) and (c), respectively.
g. "Code" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor thereto.
h. "Committee" means the Committee referred to in Section 2.
<PAGE>
i. "Common Stock" means the common stock, par value $0.01 per share, of the
Company.
j. "Company" means KBW, Inc., a Delaware corporation.
k. "Disability" means, unless otherwise provided by the Committee, (i)
"Disability" as defined in any Individual Agreement to which the participant is
a party, or (ii) if there is no such Individual Agreement or it does not define
"Disability," permanent and total disability as determined under the Company's
Long-Term Disability Plan applicable to the participant or as determined by the
Committee for purposes of an Award under the Plan.
l. "Effective Date" shall have the meaning set forth in Section 16.
m. "Eligible Individuals" means the directors, officers, employees and
consultants of the Company or any of its Subsidiaries or Affiliates, and
prospective employees and consultants who have accepted offers of employment or
consultancy from the Company or its Subsidiaries or Affiliates, who are or will
be responsible for or contribute to the management, growth or profitability of
the businesses of the Company, or its Subsidiaries or Affiliates.
n. "Exchange Act" means the Securities Exchange Act of 1934, as amended from
time to time, and any successor thereto.
o. "Fair Market Value" means, as of any given date, the mean between the
highest and lowest reported sales prices on the immediately preceding date (or,
if there are no reported sales on such immediately preceding date, on the last
date prior to such date on which there were sales) of the Common Stock on the
New York Stock Exchange Composite Tape or, if not listed on such exchange, on
any other national securities exchange on which the Common Stock is listed or on
NASDAQ. If there is no regular public trading market for such Common Stock, the
Fair Market Value of the Common Stock shall be determined by the Committee in
good faith.
p. "Incentive Stock Option" means any Stock Option designated as, and
qualified as, an "incentive stock option" within the meaning of Section 422 of
the Code.
q. "Individual Agreement" means an employment, consulting or similar
agreement between a participant and the Company or one of its Subsidiaries or
Affiliates.
r. "Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
s. "Performance Goals" means the performance goals established by the
Committee in connection with the grant of Restricted Stock or Performance Units.
t. "Performance Units" means an Award granted under Section 8.
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<PAGE>
u. "Plan" means the KBW, Inc. 1999 Stock and Annual Incentive Plan, as set
forth herein and as hereinafter amended from time to time.
v. "Restricted Stock" means an Award granted under Section 7.
w. "Restricted Unit" means an Award granted under Section 8.
x. "Retirement" means early or normal retirement under the terms of the
pension or retirement plan of the Company, Subsidiary or Affiliate applicable to
an employee, or retirement from employment with the Company, a Subsidiary or an
Affiliate as determined by the Committee for purposes of an Award under the
Plan.
y. "Stock Appreciation Right" means an Award granted under Section 6.
z. "Stock Option" means an Award granted under Section 5.
aa. "Subsidiary" means any corporation, partnership, joint venture or other
entity during any period in which at least a 50% voting or profits interest is
owned, directly or indirectly, by the Company or any successor to the Company.
bb. "Termination of Employment" means the termination of the participant's
employment with, or performance of services for, the Company and any of its
Subsidiaries or Affiliates. A participant employed by, or performing services
for, a Subsidiary or an Affiliate shall also be deemed to incur a Termination of
Employment if the Subsidiary or Affiliate ceases to be such a Subsidiary or an
Affiliate, as the case may be, and the participant does not immediately
thereafter become an employee of, or service-provider for, the Company or
another Subsidiary or Affiliate. Temporary absences from employment because of
illness, vacation or leave of absence and transfers among the Company and its
Subsidiaries and Affiliates shall not be considered a Termination of Employment.
In addition, certain other terms used herein have definitions given to them
in the first place in which they are used.
SECTION 2. Administration
The Plan shall be administered by the Compensation Committee or such other
committee of the Board as the Board may from time to time designate (the
"Committee"), which shall be composed of not less than two directors, and shall
be appointed by and serve at the pleasure of the Board.
The Committee shall have plenary authority to grant Awards pursuant to the
terms of the Plan to Eligible Individuals.
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<PAGE>
Among other things, the Committee shall have the authority, subject to the
terms of the Plan:
(a) To select the Eligible Individuals to whom Awards may from time to time
be granted;
(b) To determine whether and to what Awards are to be granted hereunder;
(c) To determine the number of shares of Common Stock to be covered by each
Award granted hereunder;
(d) To determine the terms and conditions of any Award granted hereunder
(including, but not limited to, the option price (subject to Section 5(a)), any
vesting condition, restriction or limitation (which may be related to the
performance of the participant, the Company or any Subsidiary or Affiliate) and
any vesting acceleration or forfeiture or waiver regarding any Award and the
shares of Common Stock relating thereto, based on such factors as the Committee
shall determine;
(e) To modify, amend or adjust the terms and conditions of any Award, at
any time or from time to time, including but not limited to Performance Goals;
(f) To determine to what extent and under what circumstances Common Stock
and other amounts payable with respect to an Award shall be deferred; and
(g) To determine under what circumstances an Award may be settled in cash
or Common Stock under Sections 5(j), 6(b), 6(d)(ii), 8(b)(v) and 8(b)(vi).
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall
from time to time deem advisable, to interpret the terms and provisions of the
Plan and any Award issued under the Plan (and any agreement relating thereto)
and to otherwise supervise the administration of the Plan.
The Committee may act only by a majority of its members then in office,
except that the Committee may, except to the extent prohibited by applicable law
or the applicable rules of a stock exchange, allocate all or any portion of its
responsibilities and powers to any one or more of its members and may delegate
all or any part of its responsibilities and powers to any person or persons
selected by it. Any such allocation or delegation may be revoked by the
Committee at any time.
Any determination made by the Committee or pursuant to delegated authority
pursuant to the provisions of the Plan with respect to any Award shall be made
in the sole discretion of the Committee or such delegate at the time of the
grant of the Award or, unless in contravention of any express term of the Plan,
at any time thereafter. All decisions made by the Committee or
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<PAGE>
any appropriately delegated officer pursuant to the provisions of the Plan shall
be final and binding on all persons, including the Company and Plan
participants.
Any authority granted to the Committee may also be exercised by the full
Board, and, to the extent that any permitted action taken by the Board conflicts
with action taken by the Committee, the Board action shall control.
SECTION 3. Common Stock Subject to Plan
Subject to adjustment as described below, the total number of shares of
Common Stock reserved and available for grant pursuant to Awards under the Plan
shall not exceed 3,400,000 shares. Shares subject to Awards under the Plan may
be authorized and unissued shares or may be treasury shares, or both.
If any shares of Restricted Stock or any Restricted Units or Performance
Units are forfeited, or if any Stock Option or Stock Appreciation Right
terminates without being exercised, or if any Stock Appreciation Right (whether
granted alone or in conjunction with a Stock Option) is exercised for cash,
shares subject to such Awards shall again be available for distribution in
connection with Awards under the Plan.
In the event of any change in corporate capitalization (including, but not
limited to, a change in the number of shares of Common Stock outstanding), such
as a stock split or a corporate transaction, such as any merger, consolidation,
separation, including a spin-off, or other distribution of stock or property of
the Company, any reorganization (whether or not such reorganization comes within
the definition of such term in Section 368 of the Code) or any partial or
complete liquidation of the Company, the Committee or Board may make such
substitution or adjustments in the aggregate number and kind of shares reserved
for issuance under the Plan, in the number, kind and option price, as
applicable, of shares subject to outstanding Stock Options, and in the number
and kind of shares subject to other outstanding Awards granted under the Plan,
and/or such other equitable substitution or adjustments as it may determine to
be appropriate in its sole discretion; provided, however, that the number of
shares subject to any Award shall always be a whole number. Such adjusted
option price shall also be used to determine the amount payable by the Company
upon the exercise of any Stock Appreciation Right associated with any Stock
Option.
SECTION 4. Eligibility
Awards may be granted under the Plan to Eligible Individuals. No grant
shall be made under this Plan to a director who is not an officer or a salaried
employee of the Company, its Subsidiaries or Affiliates.
-5-
<PAGE>
SECTION 5. Stock Options
Stock Options may be granted alone or in addition to other Awards granted
under the Plan and may be of two types: Incentive Stock Options and Non-
Qualified Stock Options. Any Stock Option granted under the Plan shall be in
such form as the Committee may from time to time approve.
The Committee shall have the authority to grant any optionee Incentive
Stock Options, Non-Qualified Stock Options or both types of Stock Options (in
each case with or without Stock Appreciation Rights). Incentive Stock Options
may be granted only to employees of the Company and its subsidiaries or parent
corporation (within the meaning of Section 424(f) of the Code). To the extent
that any Stock Option is not designated as an Incentive Stock Option or, even if
so designated, does not qualify as an Incentive Stock Option on or subsequent to
its grant date, it shall constitute a Non-Qualified Stock Option.
Stock Options shall be evidenced by option agreements, the terms and
provisions of which may differ. An option agreement shall indicate on its face
whether it is intended to be an agreement for an Incentive Stock Option or a
Non-Qualified Stock Option. The grant of a Stock Option shall occur on the date
the Committee by resolution selects an Eligible Individual to receive a grant of
a Stock Option, determines the number of shares of Common Stock to be subject to
such Stock Option to be granted to such Eligible Individual and specifies the
terms and provisions of the Stock Option. The Company shall notify an Eligible
Individual of any grant of a Stock Option, and a written option agreement or
agreements shall be duly executed and delivered by the Company to the
participant. Such agreement or agreements shall become effective upon execution
by the Company and the participant.
Stock Options granted under the Plan shall be subject to the following
terms and conditions and shall contain such additional terms and conditions as
the Committee shall deem desirable:
(a) Option Price. The option price per share of Common Stock purchasable
under a Stock Option shall be determined by the Committee and set forth in the
option agreement, and with respect to Incentive Stock Options, shall not be less
than the Fair Market Value of the Common Stock subject to the Stock Option on
the date of grant.
(b) Option Term. The term of each Stock Option shall be fixed by the
Committee, but no Stock Option shall be exercisable more than 10 years after the
date the Stock Option is granted.
(c) Exercisability. Except as otherwise provided herein, Stock Options
shall be exercisable at such time or times and subject to such terms and
conditions as shall be determined by the Committee. Unless otherwise determined
by the Committee, Stock Options shall become
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<PAGE>
exercisable ratably on each of the first three anniversaries of the date of
grant. In addition, the Committee may at any time accelerate the exercisability
of any Stock Option.
(d) Method of Exercise. Subject to the provisions of this Section 5, Stock
Options may be exercised, in whole or in part, at any time during the option
term by giving written notice of exercise to the Company specifying the number
of shares of Common Stock subject to the Stock Option to be purchased.
Such notice shall be accompanied by payment in full of the aggregate option
price in cash or by certified or bank check or such other instrument as the
Company may accept. If approved by the Committee, payment, in full or in part,
may also be made in the form of unrestricted Common Stock (by delivery of shares
or attestation) already owned by the optionee of the same class as the Common
Stock subject to the Stock Option (based on the Fair Market Value of the Common
Stock on the date the Stock Option is exercised); provided, however, that, in
the case of an Incentive Stock Option, the right to make a payment in the form
of already owned shares of Common Stock of the same class as the Common Stock
subject to the Stock Option may be authorized only at the time the Stock Option
is granted; provided, further, that such already owned shares have been held by
the optionee for at least six months at the time of exercise or had been
purchased on the open market.
If approved by the Committee, payment, in full or in part, may also be made
by delivering a properly executed exercise notice to the Company, together with
a copy of irrevocable instructions to a broker to deliver promptly to the
Company the amount of sale or loan proceeds necessary to pay the aggregate
option price, and, if requested, reduced by the amount of any federal, state,
local or foreign withholding taxes. To facilitate the foregoing, the Company
may enter into agreements for coordinated procedures with one or more brokerage
firms.
If approved by the Committee, payment, in full or in part, may also be made
by instructing the Committee to withhold a number of such shares having a Fair
Market Value on the date of exercise equal to the aggregate option price of such
Stock Option.
No shares of Common Stock shall be issued until full payment therefor has
been made. Except as otherwise provided in Section 5(l) below, an optionee
shall have all of the rights of a stockholder of the Company holding the class
or series of Common Stock that is subject to such Stock Option (including, if
applicable, the right to vote the shares and the right to receive dividends),
when the optionee has given written notice of exercise, has paid in full for
such shares and, if requested, has given the representation described in Section
15(a).
If determined by the Committee at or, with respect to a Non-Qualified Stock
Option, subsequent to the date of grant of a Stock Option, in the event an
optionee who has not incurred a Termination of Employment pays the option price
of such Stock Option, in full or in part, by delivering (or attesting to
ownership of) shares of Common Stock previously owned by the optionee, such
optionee shall automatically be granted a reload Stock Option (a "Reload
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<PAGE>
Option") for the number of shares of Common Stock used to pay the option price.
Unless otherwise determined by the Committee, the Reload Option shall be subject
to the same terms and conditions as the Option, except that the Reload Option
shall be a Non-Qualified Stock Option, have an option price equal to the Fair
Market Value of the Common Stock on the date the Reload Option is granted,
expire the same date as the expiration date of the Stock Option so exercised,
shall vest and become exercisable six months following the date of grant of such
Reload Option and shall not have the right set forth in Section 5(k) hereof
despite the fact that the exercised Stock Option had such a right.
(e) Non-Transferability of Stock Options. No Stock Option shall be
transferable by the optionee other than (i) by will or by the laws of descent
and distribution, (ii) in the Committee's discretion, pursuant to a written
beneficiary designation, or pursuant to a gift to such optionee's "immediate
family" members directly, or indirectly or by means of a trust, partnership or
limited liability company. For purposes of this Section 5(e), "immediate family"
shall mean, except as otherwise defined by the Committee, the optionee's spouse,
children, siblings, stepchildren, grandchildren, parents, stepparents,
grandparents, in-laws and persons related by legal adoption. Such transferees
may transfer a Stock Option only by will or by the laws of descent and
distribution. All Stock Options shall be exercisable, subject to the terms of
this Plan, only by the optionee, guardian, legal representative or beneficiary
of the optionee or permitted transferee, it being understood that the terms
"holder" and "optionee" include any such guardian, legal representative or
beneficiary or transferee.
(f) Termination by Death. Unless otherwise determined by the Committee, if an
optionee's Termination of Employment is by reason of death, any Stock Option
held by such optionee may thereafter be exercised, to the extent exercisable at
the time of such termination, for a period of 12 months (or such other period as
the Committee may specify in the option agreement) from the date of such
termination or until the expiration of the stated term of such Stock Option,
whichever period is the shorter.
(g) Termination by Reason of Disability. Unless otherwise determined by the
Committee, if an optionee incurs a Termination of Employment by reason of
Disability, any Stock Option held by such optionee may thereafter be exercised
by the optionee, to the extent it was exercisable at the time of termination, or
on such accelerated basis as the Committee may determine, for a period of two
years (or such other period as the Committee may specify in the option
agreement) from the date of such Termination of Employment or until the
expiration of the stated term of such Stock Option, whichever period is the
shorter; provided, however, that if the optionee dies within such period, any
unexercised Stock Option held by such optionee shall, notwithstanding the
expiration of such period, continue to be exercisable to the extent to which it
was exercisable at the time of death for a period of 12 months from the date of
such death or until the expiration of the stated term of such Stock Option,
whichever period is the shorter. In the event of Termination of Employment by
reason of Disability, if an Incentive Stock Option is exercised after the
expiration of the exercise periods that apply for purposes of Section 422 of the
Code, such Stock Option will thereafter be treated as a Non-Qualified Stock
Option.
-8-
<PAGE>
(h) Termination by Reason of Retirement. Unless otherwise determined by the
Committee, if an optionee incurs a Termination of Employment by reason of
Retirement, any Stock Option held by such optionee may thereafter be exercised
by the optionee, to the extent it was exercisable at the time of such
Retirement, or on such accelerated basis as the Committee may determine, for a
period of two years (or such other period as the Committee may specify in the
option agreement) from the date of such Termination of Employment or until the
expiration of the stated term of such Stock Option, whichever period is the
shorter; provided, however, that if the optionee dies within such period any
unexercised Stock Option held by such optionee shall, notwithstanding the
expiration of such period, continue to be exercisable to the extent to which it
was exercisable at the time of death for a period of 12 months from the date of
such death or until the expiration of the stated term of such Stock Option,
whichever period is the shorter. In the event of Termination of Employment by
reason of Retirement, if an Incentive Stock Option is exercised after the
expiration of the exercise periods that apply for purposes of Section 422 of the
Code, such Stock Option will thereafter be treated as a Non-Qualified Stock
Option.
(i) Other Termination. Unless otherwise determined by the Committee: (i) if
an optionee incurs a Termination of Employment for Cause, all Stock Options held
by such optionee shall thereupon terminate; and (ii) if an optionee incurs a
Termination of Employment for any reason other than death, Disability,
Retirement or for Cause, any Stock Option held by such optionee, to extent it
was then exercisable at the time of termination, or on such accelerated basis as
the Committee may determine, may be exercised for the lesser of three months
from the date of such Termination of Employment or the balance of such Stock
Option's term; provided, however, that if the optionee dies within such three-
month period, any unexercised Stock Option held by such optionee shall,
notwithstanding the expiration of such three-month period, continue to be
exercisable to the extent to which it was exercisable at the time of death for a
period of 12 months from the date of such death or until the expiration of the
stated term of such Stock Option, whichever period is the shorter.
Notwithstanding any other provision of this Plan to the contrary, in the event
an optionee incurs a Termination of Employment other than for Cause during the
24-month period following a Change in Control, any Stock Option held by such
optionee may thereafter be exercised by the optionee, to the extent it was
exercisable at the time of termination, or on such accelerated basis as set
forth in Section 11, for (A) the longer of (1) one year from such date of
termination or (2) such other period as may be provided in the Plan for such
Termination of Employment or as the Committee may provide in the option
agreement, or (B) until expiration of the stated term of such Stock Option,
whichever period is the shorter. If an Incentive Stock Option is exercised after
the expiration of the post-termination exercise periods that apply for purposes
of Section 422 of the Code, such Stock Option will thereafter be treated as a
Non-Qualified Stock Option.
(j) Cashing Out of Stock Option. On receipt of written notice of exercise,
the Committee may elect to cash out all or part of the portion of the shares of
Common Stock for which a Stock Option is being exercised by paying the optionee
an amount, in cash or Common Stock, equal to the excess of the Fair Market Value
of the Common Stock over the option price times the
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number of shares of Common Stock for which the Option is being exercised on the
effective date of such cash-out.
(k) Change in Control Cash-Out. Notwithstanding any other provision of the
Plan, during the 60-day period from and after a Change in Control (the "Exercise
Period"), unless the Committee shall determine otherwise at the time of grant,
an optionee shall have the right, whether or not the Stock Option is fully
exercisable and in lieu of the payment of the option price for the shares of
Common Stock being purchased under the Stock Option and by giving notice to the
Company, to elect (within the Exercise Period) to surrender all or part of the
Stock Option to the Company and to receive cash, within 30 days of such
election, in an amount equal to the amount by which the Change in Control Price
per share of Common Stock on the date of such election shall exceed the option
price per share of Common Stock under the Stock Option multiplied by the number
of shares of Common Stock granted under the Stock Option as to which the right
granted under this Section 5(k) shall have been exercised. Notwithstanding the
foregoing, if any right granted pursuant to this Section 5(k) would make a
Change in Control transaction ineligible for pooling-of-interests accounting
under APB No. 16 that but for the nature of such grant would otherwise be
eligible for such accounting treatment, the Committee shall have the ability to
substitute for the cash payable pursuant to such right Common Stock with a Fair
Market Value (as of the date of delivery of such stock) equal to the cash that
would otherwise be payable hereunder or, if necessary to preserve such
accounting treatment, otherwise modify or eliminate such right.
(l) Deferral of Option Shares. The Committee may from time to time establish
procedures pursuant to which an optionee may elect to defer, until a time or
times later than the exercise of an Option, receipt of all or a portion of the
shares of Common Stock subject to such Option and/or to receive cash at such
later time or times in lieu of such deferred shares, all on such terms and
conditions as the Committee shall determine. If any such deferrals are
permitted, then notwithstanding Section 5(d) above, an optionee who elects such
deferral shall not have any rights as a stockholder with respect to such
deferred shares unless and until such shares are actually delivered to the
optionee with respect thereto, except to the extent otherwise determined by the
Committee.
SECTION 6. Stock Appreciation Rights
(a) Grant and Exercise. Stock Appreciation Rights may be granted in
conjunction with all or part of any Stock Option granted under the Plan. In the
case of a Non-Qualified Stock Option, such rights may be granted either at or
after the time of grant of such Stock Option. In the case of an Incentive Stock
Option, such rights may be granted only at the time of grant of such Stock
Option. In addition, Stock Appreciation Rights may be granted without
relationship to a Stock Option to employees residing in foreign jurisdictions,
where the grant of a Stock Option is impossible or impracticable because of
securities or tax laws or other governmental regulations.
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(b) Freestanding Stock Appreciation Rights. A Stock Appreciation Right
granted without relationship to a Stock Option, pursuant to Section 6(a), shall
be exercisable as determined by the Committee, but in no event after ten years
from the date of grant. The base price of a Stock Appreciation Right granted
without relationship to a Stock Option shall be the Fair Market Value of a share
of Common Stock on the date of grant. A Stock Appreciation Right granted without
relationship to a Stock Option shall entitle the holder, upon receipt of such
right, to an amount in cash, shares of Common Stock or both, with a value equal
to the product of (i) the excess of the Fair Market Value of a share of Common
Stock on the date of exercise of the Stock Appreciation Right over the base
price of the Stock Appreciation Right and (ii) the number of shares of Common
Stock as to which such Stock Appreciation Right shall have been exercised with
the Committee having the right to determine the form of payment. A freestanding
Stock Appreciation Right may be exercised by giving written notice of exercise
to the Company or its designated agent specifying the number of shares of Common
Stock as to which such Stock Appreciation Right is being exercised.
(c) Tandem Stock Appreciation Rights. A Stock Appreciation Right granted in
conjunction with a Stock Option may be exercised by an optionee in accordance
with Section 6(d) by surrendering the applicable portion of the related Stock
Option in accordance with procedures established by the Committee. Upon such
exercise and surrender, the optionee shall be entitled to receive an amount
determined in the manner prescribed in Section 6(d). Stock Options which have
been so surrendered shall no longer be exercisable to the extent the related
Stock Appreciation Rights have been exercised. A Stock Appreciation Right shall
terminate and no longer be exercisable upon the termination or exercise of the
related Stock Option.
(d) Tandem Stock Appreciation Right Terms and Conditions. Stock Appreciation
Rights granted in conjunction with a Stock Option shall be subject to such terms
and conditions as shall be determined by the Committee, including the following:
(i) Stock Appreciation Rights shall be exercisable only at such time or
times and to the extent that the Stock Options to which they relate are
exercisable in accordance with the provisions of Section 5 and this Section
6.
(ii) Upon the exercise of a Stock Appreciation Right, an optionee shall
be entitled to receive an amount in cash, shares of Common Stock or both,
in value equal to the product of (A) the excess of the Fair Market Value of
a share of Common Stock on the date of exercise over the option price per
share specified in the related Stock Option and (B) the number of shares in
respect of which the Stock Appreciation Right shall have been exercised,
with the Committee having the right to determine the form of payment.
(iii) Stock Appreciation Rights shall be transferable only to permitted
transferees of the underlying Stock Option in accordance with Section 5(e).
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(iv) Upon the exercise of a Stock Appreciation Right, the Stock Option or
part thereof to which such Stock Appreciation Right is related shall be
deemed to have been exercised for the purpose of the limitation set forth
in Section 3 on the number of shares of Common Stock to be issued under the
Plan, but only to the extent of the number of shares covered by the Stock
Appreciation Right at the time of exercise based on the value of the Stock
Appreciation Right at such time.
SECTION 7. Bonus Shares and Restricted Stock
(a) Administration. Shares of Restricted Stock may be awarded either alone
or in addition to other Awards granted under the Plan. In addition, a
participant may receive unrestricted shares of Common Stock or Restricted Stock
in lieu of certain cash payments awarded under other plans or programs of the
Company. The Committee shall determine the Eligible Individuals to whom and the
time or times at which grants of unrestricted shares of Common Stock and
Restricted Stock will be awarded, the number of shares to be awarded to any
Eligible Individual, the conditions for vesting, the time or times within which
such Awards may be subject to forfeiture and any other terms and conditions of
the Awards, in addition to those contained in Section 7(c).
(b) Awards and Certificates. Awards of unrestricted shares of Common Stock
and Restricted Stock shall be evidenced in such manner as the Committee may deem
appropriate, including book-entry registration or issuance of one or more stock
certificates. Any certificate issued in respect of unrestricted shares or shares
of Restricted Stock shall be registered in the name of such participant and
shall bear an appropriate legend referring to the terms, conditions, and
restrictions applicable to such Award, substantially in the following form:
"The transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions (including
forfeiture) of the KBW, Inc. 1999 Stock and Annual Incentive Plan and
a Restricted Stock Agreement. Copies of such Plan and Agreement are
on file at the offices of KBW, Inc., Two World Trade Center, 85th
Floor, New York, New York 10048."
The Committee may require that the certificates evidencing shares of Restricted
Stock be held in custody by the Company until the restrictions thereon shall
have lapsed and that, as a condition of any Award of Restricted Stock, the
participant shall have delivered a stock power, endorsed in blank, relating to
the Common Stock covered by such Award.
(c) Terms and Conditions. Shares of Restricted Stock shall be subject to the
following terms and conditions:
(i) The Committee may, prior to or at the time of grant, condition the
grant or vesting, as applicable, of an award of Restricted Stock upon the
attainment of Performance Goals. The Committee may also condition the grant
or vesting of Restricted Stock
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upon the continued service of the participant. The conditions for grant or
vesting and the other provisions of Restricted Stock Awards (including
without limitation any applicable Performance Goals) need not be the same
with respect to each recipient. The Committee may at any time, in its sole
discretion, accelerate or waive, in whole or in part, any of the foregoing
restrictions.
(ii) Subject to the provisions of the Plan and the terms of the
Restricted Stock Agreement referred to in Section 7(c)(vii), during the
period, if any, set by the Committee, commencing with the date of such
Award for which such participant's continued service is required (the
"Restriction Period"), and until the later of (A) the expiration of the
Restriction Period and (B) the date the applicable Performance Goals (if
any) are satisfied, the participant shall not be permitted to sell, assign,
transfer, pledge or otherwise encumber shares of Restricted Stock; provided
that the foregoing shall not prevent a participant from pledging Restricted
Stock as security for a loan, the sole purpose of which is to provide funds
to pay the option price for Stock Options.
(iii) Except as provided in this paragraph (iii) and Sections 7(c)(i)
and 7(c)(ii) and the terms of the Restricted Stock Agreement, the
participant shall have, with respect to the shares of Restricted Stock, all
of the rights of a stockholder of the Company holding the class or series
of Common Stock that is the subject of the Restricted Stock, including, if
applicable, the right to vote the shares and the right to receive any cash
dividends. If so determined by the Committee in the applicable Restricted
Stock Agreement and subject to Section 15(e) of the Plan, (A) cash
dividends on the class or series of Common Stock that is the subject of the
Restricted Stock Award shall be automatically deferred and reinvested in
additional Restricted Stock, held subject to the vesting of the underlying
Restricted Stock, or held subject to meeting Performance Goals applicable
only to dividends, and (B) dividends payable in Common Stock shall be paid
in the form of Restricted Stock of the same class as the Common Stock with
which such dividend was paid, held subject to the vesting of the underlying
Restricted Stock, or held subject to meeting Performance Goals applicable
only to dividends.
(iv) Except to the extent otherwise provided in the applicable
Restricted Stock Agreement and Sections 7(c)(i), 7(c)(ii), 7(c)(v) and
11(a)(ii), upon a participant's Termination of Employment for any reason
during the Restriction Period or before the applicable Performance Goals
are satisfied, all shares still subject to restriction shall be forfeited
by the participant.
(v) Except to the extent otherwise provided in Section 11(a)(ii), in the
event of a participant's Termination of Employment by reason of Retirement,
the Committee shall have the discretion to waive, in whole or in part, any
or all remaining restrictions with respect to any or all of such
participant's shares of Restricted Stock.
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(vi) If and when any applicable Performance Goals are satisfied and the
Restriction Period expires without a prior forfeiture of the Restricted
Stock, unlegended certificates for such shares shall be delivered to the
participant upon surrender of the legended certificates, or the
restrictions on such shares shall be removed from the book-entry
registration.
(vii) Each Award shall be confirmed by, and be subject to, the terms of
a Restricted Stock Agreement.
SECTION 8. Performance Units and Restricted Units
(a) Administration. Performance Units and Restricted Units may be
awarded either alone or in addition to other Awards granted under the Plan. The
Committee shall determine the Eligible Individuals to whom, and the time or
times at which Performance Units or Restricted Units shall be awarded, the
number of Performance Units or Restricted Units to be awarded to any Eligible
Individual, the duration of the Award Cycle or the Restriction Period and any
other terms and conditions of the Award, in addition to those contained in
Section 8(b) or 8(c).
(b) Terms and Conditions. Performance Unit and Restricted Unit Awards
shall be subject to the following terms and conditions:
(i) The Committee may award Performance Units or Restricted Units,
which condition the settlement thereof upon the attainment of Performance
Goals and/or upon the continued service of the participant. The provisions
of such Awards (including without limitation any applicable Performance
Goals or Restriction Period) need not be the same with respect to each
recipient. Subject to the provisions of the Plan and the Performance Unit
or Restricted Unit Agreement referred to in Section 8(b)(vii), Performance
Units and Restricted Units may not be sold, assigned, transferred, pledged
or otherwise encumbered during the Award Cycle or Restriction Period.
(ii) Except to the extent otherwise provided in the applicable
Performance Unit or Restricted Unit Agreement and Sections 8(b)(iii) and
11(a)(iii), upon a participant's Termination of Employment for any reason
during the Award Cycle or the Restriction Period or before any applicable
Performance Goals are satisfied, all rights to receive cash or stock in
settlement of the Performance Units or Restricted Units shall be forfeited
by the participant.
(iii) Except to the extent otherwise provided in Section 11(a)(iii), in
the event that a participant's employment is terminated (other than for
Cause), or in the event of a participant's Retirement, the Committee shall
have the discretion to waive, in whole or in part, any or all remaining
payment limitations or restrictions with respect to any or all of such
participant's Performance Units or Restricted Units.
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(iv) A participant may elect to further defer receipt of cash or shares
in settlement of Performance Units or Restricted Units for a specified
period or until a specified event, subject in each case to the Committee's
approval and to such terms as are determined by the Committee. Subject to
any exceptions adopted by the Committee, such election must generally be
made prior to commencement of the Award Cycle for Performance Units or
Restriction Period for Restricted Units.
(v) With respect to Performance Units, at the expiration of the Award
Cycle, the Committee shall evaluate the Company's performance in light of
any Performance Goals for such Award, and shall determine the number of
Performance Units granted to the participant which have been earned, and
the Committee shall then cause to be delivered (A) a number of shares of
Common Stock equal to the number of Performance Units determined by the
Committee to have been earned or (B) cash equal to the Fair Market Value of
such number of shares of Common Stock, to the participant as determined by
the Committee in its discretion (subject to any deferral pursuant to
Section 8(b)(iv)).
(vi) With respect to Restricted Units, at the expiration of the
Restriction Period for such Award, the Committee shall cause to be
delivered to the participant either (A) a number of shares of Common Stock
equal to the number of Restricted Units with respect to which the Award was
granted or (B) cash equal to the Fair Market Value of such number of shares
of Common Stock, as determined by the Committee in its discretion (subject
to any deferral pursuant to Section 8(b)(iv)).
(vii) Each Award shall be confirmed by, and be subject to, the terms of a
Performance Unit or Restricted Unit Agreement as applicable.
SECTION 9. Dividend Equivalents, Interest Equivalents and Other Stock-Based
Awards
(a) The Committee may provide that a participant to whom a Stock Option,
Performance Unit or Restricted Unit has been awarded, which is exercisable or
distributable in whole or in part at a future time for shares of Common Stock,
shall be entitled to receive an amount per share of Common Stock subject to such
Award, equal in value to the cash dividends, if any, paid per share of Common
Stock on issued and outstanding shares, as of the dividend record dates
occurring during the period between the date of grant of the Award and the time
each share of Common Stock subject to such Award is delivered pursuant to the
exercise of a Stock Option, the expiration of the Restriction Period or the
satisfaction of the Performance Goals, as the case may be. Such amounts (herein
called "dividend equivalents") may, in the discretion of the Committee, be:
(i) paid in cash or shares of Common Stock from time to time prior to
or at the time of the delivery of such shares of Common Stock or upon
expiration of the Stock
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Option if it shall not have been fully exercised (except that payment of
the dividend equivalents on an Incentive Stock Option may not be made prior
to exercise); or
(ii) converted into contingently credited shares of Common Stock (with
respect to which dividend equivalents shall accrue) in such manner, at such
value, and deliverable at such time or times, as may be determined by the
Committee.
Such shares of Common Stock (whether delivered or contingently credited) shall
be charged against the limitations set forth in Section 3.
(b) The Committee, in its discretion, may authorize payment of interest
equivalents on any portion of any Award payable at a future time in cash, and
interest equivalents on dividend equivalents which are payable in cash at a
future time.
(c) Other Awards of Common Stock and other Awards that are valued in whole
or in part by reference to, or are otherwise based upon, Common Stock, may be
granted either alone or in conjunction with other Awards granted under the Plan.
SECTION 10. Annual Cash Bonus Awards
(a) Bonus Pool. For each calendar year of the Company, a bonus pool (the
"Bonus Pool") will be established by the Committee. Notwithstanding the
foregoing, if the Company's aggregate compensation and benefits expenses with
respect to the calendar year (including payments under this Section 10) would
otherwise exceed a specified percentage of revenue or a measure of corporate
profitability, as determined by the Committee with respect to each calendar year
(the "Maximum Expense"), the Committee shall reduce the Bonus Pool to the
greatest amount which would cause compensation and benefits expense for such
calendar year not to exceed the Maximum Expense.
(b) Allocation of Bonus Pool. The Committee shall determine the allocation
of the Bonus Pool for each calendar year, with the input of the department heads
and other members of the Company's operating committee. Such allocation may be
made at any time prior to payment of Bonus Awards. In the event the Bonus Pool
is reduced pursuant to paragraph (a) above, the Committee shall determine the
required reductions in Bonus Awards. Such reduction need not be on a pro-rata
basis among the participants.
(c) Payment of Awards. Bonus Awards under the Plan shall be paid in cash
or, at the Committee's discretion, in Common Stock, in advance of the end of the
applicable calendar year, or, in the Committee's discretion, as soon as
practicable following the end of the applicable calendar year but in no event
later than 90 days following the end of such calendar year. Upon a Change in
Control, a pro-rata Bonus Award shall be paid to each participant, unless the
Board determines to continue the annual bonus cycle for such calendar year.
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(d) Termination of Employment. A participant shall not be entitled to
receive payment of a Bonus Award, unless the Committee determines otherwise, if
at any time prior to the end of the calendar year the participant's Termination
of Employment occurs or, if at any time, following the end of the calendar year
the participant's employment is terminated for Cause. In the event that a
participant's Termination of Employment (other than for Cause) occurs following
the end of the applicable calendar year, such participant shall be entitled to
receive payment of his or her Bonus Award for such calendar year.
SECTION 11. Change in Control Provisions
(a) Impact of Event. Notwithstanding any other provision of the Plan to the
contrary, in the event of a Change in Control:
(i) Any Stock Options and Stock Appreciation Rights outstanding as of
the date such Change in Control is determined to have occurred, and which
are not then exercisable and vested, shall become fully exercisable and
vested to the full extent of the original grant.
(ii) The restrictions and deferral limitations applicable to any
Restricted Stock shall lapse, and such Restricted Stock shall become free
of all restrictions and become fully vested and transferable to the full
extent of the original grant.
(iii) All Performance Units or Restricted Units shall be considered to
be earned and payable in full, and any deferral or other restrictions shall
lapse and such Performance Units or Restricted Units shall be settled in
cash or Common Stock with a Fair Market Value (as of the date of delivery
of such stock) equal to the cash that would otherwise be payable hereunder,
if any right granted pursuant to this Section 11(a)(iii) would make a
Change in Control transaction ineligible for pooling-of-interests
accounting under APB No. 16 that but for the nature of such Award would
otherwise be eligible for such accounting treatment, as promptly as is
practicable.
(b) For purposes of the Plan, a "Change in Control" shall mean the
happening of any of the following events:
(i) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act (a "Person"),
of beneficial ownership (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) of 20% or more of either (A) the then outstanding shares
of common stock of the Company (the "Outstanding Company Common Stock") or
(B) the combined voting power of the then outstanding voting securities of
the Company entitled to vote generally in the election of directors (the
"Outstanding Company Voting Securities"); provided, however, that for
purposes of this subsection (i), the following acquisitions shall not
constitute a Change in Control: (1) any acquisition directly from the
Company, (2) any acquisition by the
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Company, (3) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation controlled
by the Company, or (4) any acquisition by any corporation pursuant to a
transaction which complies with clauses (A), (B) and (C) of subsection
(iii) of this definition;
(ii) Individuals who, as of the Effective Date, constitute the Board
(the "Incumbent Board") cease to constitute at least a majority of those
individuals who are members of the Board; provided, however, that any
individual becoming a director subsequent to the date hereof whose
election, or nomination for election by the Company's stockholders, was
approved by a vote of at least a majority of the directors then comprising
the Incumbent Board shall be considered as though such individual were a
member of the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result of an
actual or threatened election contest with respect to the election or
removal of directors or other actual or threatened solicitation of proxies
or consents by or on behalf of a Person other than the Board; or
(iii) Consummation of a reorganization, merger or consolidation or sale
or other disposition of all or substantially all of the assets of the
Company or the acquisition of assets or stock of another corporation (a
"Corporate Transaction"), in each case, unless, following such Corporate
Transaction, (A) all or substantially all of the individuals and entities
who were the beneficial owners, respectively, of the Outstanding Company
Common Stock and Outstanding Company Voting Securities immediately prior to
such Corporate Transaction beneficially own, directly or indirectly, more
than 50% of, respectively, the then outstanding shares of common stock and
the combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors, as the case may
be, of the corporation resulting from such Corporate Transaction
(including, without limitation, a corporation which as a result of such
transaction owns the Company or all or substantially all of the Company's
assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership, immediately prior to
such Corporate Transaction of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the case may be, (B) no Person
(excluding any employee benefit plan (or related trust) of the Company or
such corporation resulting from such Corporate Transaction) beneficially
owns directly or indirectly, 20% or more of, respectively, the then
outstanding shares of common stock of the corporation resulting from such
Corporate Transaction or the combined voting power of the then outstanding
voting securities of such corporation except to the extent that such
ownership existed prior to the Corporate Transaction and (C) at least a
majority of the members of the board of directors of the corporation
resulting from such Corporate Transaction were members of the Incumbent
Board at the time of the execution of the initial agreement, or of the
action of the Board, providing for such Corporate Transaction; or
(iv) The approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company.
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(c) Change in Control Price. For purposes of the Plan, "Change in Control
Price" means the higher of (i) the highest reported sales price, regular way, of
a share of Common Stock in any transaction reported on the New York Stock
Exchange Composite Tape or other national exchange on which such shares are
listed or on NASDAQ during the 60-day period prior to and including the date of
a Change in Control or (ii) if the Change in Control is the result of a tender
or exchange offer or a Corporate Transaction, the highest price per share of
Common Stock paid in such tender or exchange offer or Corporate Transaction;
provided, however, that in the case of Incentive Stock Options and Stock
Appreciation Rights relating to Incentive Stock Options, the Change in Control
Price shall be in all cases the Fair Market Value of the Common Stock on the
date such Incentive Stock Option or Stock Appreciation Right is exercised. To
the extent that the consideration paid in any such transaction described above
consists all or in part of securities or other non-cash consideration, the value
of such securities or other non-cash consideration shall be determined in the
sole discretion of the Board.
SECTION 12. Tax Offset Bonuses
At the time an Award is made hereunder or at any time thereafter, the
Committee may grant to the participant receiving such Award the right to receive
a cash payment in an amount specified by the Committee, to be paid at such time
or times (if ever) as the Award results in compensation income to the
participant, for the purpose of assisting the participant to pay the resulting
taxes, all as determined by the Committee and on such other terms and conditions
as the Committee shall determine.
SECTION 13. Amendment and Termination
The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration or discontinuation shall be made which would impair the rights of
participants under any Award theretofore granted without the participants'
consent, except such an amendment made to comply with applicable law, stock
exchange rules or accounting rules. In addition, no such amendment shall be
made without the approval of the Company's stockholders to the extent such
approval is required by law or stock exchange rule.
The Committee may amend the terms of any Stock Option or other Award
theretofore granted, prospectively or retroactively, but no such amendment shall
impair the rights of any holder without the holder's consent, except such an
amendment made to cause the Plan or Award to comply with applicable law, stock
exchange rules or accounting rules.
Subject to the above provisions, the Board shall have authority to amend
the Plan to take into account changes in law and tax and accounting rules as
well as other developments, and to grant Awards which qualify for beneficial
treatment under such rules without stockholder approval.
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SECTION 14. Unfunded Status of Plan
It is presently intended that the Plan constitute an "unfunded" plan for
incentive and deferred compensation. The Committee may authorize the creation
of trusts or other arrangements to meet the obligations created under the Plan
to deliver Common Stock or make payments; provided, however, that unless the
Committee otherwise determines, the existence of such trusts or other
arrangements is consistent with the "unfunded" status of the Plan.
SECTION 15. General Provisions
(a) The Committee may require each person purchasing or receiving shares
pursuant to an Award to represent to and agree with the Company in writing that
such person is acquiring the shares without a view to the distribution thereof.
The certificates for such shares may include any legend, which the Committee
deems appropriate to reflect any restrictions on transfer.
Notwithstanding any other provision of the Plan or agreements made pursuant
thereto, the Company shall not be required to issue or deliver any stock
certificate or certificates for shares of Common Stock, under the Plan prior to
fulfillment of all of the following conditions:
(1) Listing or approval for listing upon notice of issuance, of such
shares on the New York Stock Exchange, Inc., or such other securities
exchange as may at the time be the principal market for the Common Stock;
(2) Any registration or other qualification of such shares of the
Company under any state, federal or foreign law or regulation, or the
maintaining in effect of any such registration or other qualification which
the Committee shall, in its absolute discretion upon the advice of counsel,
deem necessary or advisable; and
(3) Obtaining any other consent, approval, or permit from any state or
federal governmental agency or foreign governmental body which the
Committee shall, in its absolute discretion after receiving the advice of
counsel, determine to be necessary or advisable.
(b) Nothing contained in the Plan shall prevent the Company or any
Subsidiary or Affiliate from adopting other or additional compensation
arrangements for its employees.
(c) The Plan shall not constitute a contract of employment, and adoption of
the Plan shall not confer upon any employee any right to continued employment,
nor shall it interfere in any way with the right of the Company or a Subsidiary
or an Affiliate to terminate the employment of any employee at any time.
(d) No later than the date as of which an amount first becomes includible
in the gross income of the participant for federal income tax purposes with
respect to any Award under the
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Plan, the participant shall pay to the Company, or make arrangements
satisfactory to the Company regarding the payment of, any federal, state, local
or foreign taxes of any kind required by law to be withheld with respect to such
amount. Unless otherwise determined by the Company, withholding obligations may
be settled with Common Stock, including Common Stock that is part of the Award
that gives rise to the withholding requirement. The obligations of the Company
under the Plan shall be conditional on such payment or arrangements, and the
Company and its Subsidiaries or Affiliates shall, to the extent permitted by
law, have the right to deduct any such taxes from any payment otherwise due to
the participant. The Committee may establish such procedures as it deems
appropriate, including making irrevocable elections, for the settlement of
withholding obligations with Common Stock.
(e) Reinvestment of dividends in additional Restricted Stock at the time of
any dividend payment shall only be permissible if sufficient shares of Common
Stock are available under Section 3 for such reinvestment (taking into account
then outstanding Stock Options and other Awards).
(f) The Committee, in its sole discretion, may establish such procedures as
it deems appropriate for a participant to designate a beneficiary to whom any
amounts payable in the event of the participant's death are to be paid or by
whom any rights of the participant, after the participant's death, may be
exercised.
(g) In the case of a grant of an Award to any employee of a Subsidiary or
Affiliate, the Company may, if the Committee so directs, issue or transfer the
shares of Common Stock, if any, covered by the Award to the Subsidiary or
Affiliate, for such lawful consideration as the Committee may specify, upon the
condition or understanding that the Subsidiary or Affiliate will transfer the
shares of Common Stock to the employee in accordance with the terms of the Award
specified by the Committee pursuant to the provisions of the Plan. All shares of
Common Stock underlying Awards that are forfeited or canceled shall revert to
the Company.
(h) The Plan and all Awards made and actions taken thereunder shall be
governed by and construed in accordance with the laws of the State of Delaware,
without reference to principles of conflict of laws.
SECTION 16. Effective Date of Plan
The Plan shall be effective upon the pricing of the Offering of the
Company's Common Stock, pursuant to the registration statement filed by the
Company under the Securities Act of 1933, as amended, registering the initial
public offering of the Common Stock (the "Effective Date").
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<PAGE>
EXHIBIT 10.04
KBW, INC. NON-EMPLOYEE
DIRECTOR STOCK AND
OPTION COMPENSATION PLAN
Section 1. Purpose
The purposes of the Plan are to assist the Company in (a) promoting a
greater identity of interests between the Company's non-employee directors and
its stockholders, and (b) attracting and retaining directors by affording them
an opportunity to share in the future successes of the Company.
Section 2. Definitions
"Award" shall mean an award of Common Stock or Share Units as
contemplated by Sections 7 and 8 of this Plan.
"Board" shall mean the Board of Directors of the Company.
"Change in Control" shall mean the happening of any of the following
events:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act (a "Person"), of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 20% or more of either (i) the then outstanding shares of common
stock of the Company (the "Outstanding Company Common Stock") or (ii) the
combined voting power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors (the "Outstanding
Company Voting Securities"); provided, however, that for purposes of this
subsection (a), the following acquisitions shall not constitute a Change in
Control: (i) any acquisition directly from the Company, (ii) any acquisition by
the Company, (iii) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation controlled by
the Company, or (iv) any acquisition by any corporation pursuant to a
transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of
this definition;
(b) Individuals who, as of the Effective Date, constitute the Board (the
"Incumbent Board") cease to constitute at least a majority of those individuals
who are members of the Board; provided, however, that any individual becoming a
director subsequent to the date hereof whose election, or nomination for
election by the Company's stockholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than the
Board; or
<PAGE>
(c) Consummation of a reorganization, merger or consolidation or sale or
other disposition of all or substantially all of the assets of the Company or
the acquisition of assets or stock of another corporation (a "Corporate
Transaction"), in each case, unless, following such Corporate Transaction, (i)
all or substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities immediately prior to such Corporate Transaction
beneficially own, directly or indirectly, more than 50% of, respectively, the
then outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the election of
directors, as the case may be, of the corporation resulting from such Corporate
Transaction (including, without limitation, a corporation which as a result of
such transaction owns the Company or all or substantially all of the Company's
assets either directly or through one or more subsidiaries) in substantially the
same proportions as their ownership, immediately prior to such Corporate
Transaction of the Outstanding Company Common Stock and Outstanding Company
Voting Securities, as the case may be, (ii) no Person (excluding any employee
benefit plan (or related trust) of the Company or such corporation resulting
from such Corporate Transaction) beneficially owns directly or indirectly, 20%
or more of, respectively, the then outstanding shares of common stock of the
corporation resulting from such Corporate Transaction or the combined voting
power of the then outstanding voting securities of such corporation except to
the extent that such ownership existed prior to the Corporate Transaction and
(iii) at least a majority of the members of the board of directors of the
corporation resulting from such Corporate Transaction were members of the
Incumbent Board at the time of the execution of the initial agreement, or of the
action of the Board, providing for such Corporate Transaction; or
(d) The approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time, and the rules and regulations thereunder.
"Committee" shall have the meaning set forth in Section 6.
"Common Stock" shall mean the common stock, $0.01 par value, of the
Company.
"Company" shall mean KBW, Inc., a Delaware corporation.
"Deferral Election" shall have the meaning set forth in Section 8(a).
"Effective Date" shall have the meaning set forth in Section 15.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Fair Market Value" shall mean, as of any given date, the mean between
the highest and lowest reported sales prices on such date (or, if there are no
reported sales on such date, on the last date prior to such date in which there
were sales) of the Common Stock on the
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<PAGE>
New York Stock Exchange Composite Tape or, if not listed on such exchange, on
any other national securities exchange on which the Common Stock is listed or on
NASDAQ). If there is no regular public trading market for such Common Stock, the
Fair Market Value of the Common Stock shall be determined by the Committee in
good faith.
"Fees" shall mean the annual retainer fee for a Non-Employee Director
in connection with his or her service on the Board for any calendar year of the
Company, additional annual fees for serving as chairman of a Board or Committee
and fees scheduled to be paid for attending at Board or committee meetings,
including telephonic meetings.
"IPO" shall mean the Company's initial public offering of Common Stock
pursuant to a registration statement under the Securities Act of 1933, as
amended.
"Mandatory Stock Grant" shall have the meaning set forth in Section
7(a).
"New Director" shall have the meaning set forth in Section 7(b).
"Non-Employee Director" shall mean each member of the Board who is not
an employee of the Company.
"Plan" shall mean the KBW, Inc. Non-Employee Director Stock and Option
Compensation Plan.
"Retirement" shall mean the retirement by a Non-Employee Director from
the Board in accordance with any Company stated policy on retirement.
"Share Election" shall have the meaning set forth in Section 7(b).
"Stock Option" shall mean a non-qualified stock option.
Section 3. Eligibility
Each Non-Employee Director shall be eligible to participate in the
Plan. Any Non-Employee Director who becomes an employee of the Company shall
not be entitled to additional Stock Options or Awards under the Plan, but shall
retain all Options and existing Awards pursuant to the terms of the Plan.
Section 4. Shares Subject to the Plan
The maximum number of shares of Common Stock which shall be reserved
and available for use under the Plan shall be 250,000, subject to adjustment
pursuant to Section 14 hereunder. The shares issued under the Plan may be
authorized and unissued shares or may be treasury shares or both.
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<PAGE>
Section 5. Duration of Plan
Unless earlier terminated pursuant to Section 11 hereof, this Plan
shall automatically terminate on, and no grants, awards or elections may be made
after the tenth anniversary of the Effective Date of the Plan, other than the
exercise of outstanding Stock Options, the receipt of Common Stock under Section
7 for Fees earned prior to such date and the payment of Share Accounts under
Section 8 for share of Common Stock deferred prior to such date.
Section 6. Administration
The Plan shall be administered by the Board or any committee thereof
so designated by the Board (the "Committee"), which shall have full authority to
construe and interpret the Plan, to establish, amend and rescind rules and
regulations relating to the Plan, and to take all such actions and make all such
determinations in connection with the Plan as it may deem necessary or
desirable.
Section 7. Stock in Lieu of Retainer
(a) Mandatory Stock In Lieu of Retainer. Each Non-Employee Director shall
receive (subject to a Deferral Election) in lieu of cash the number of shares of
Common Stock equal in value to 25% of the Fees (the "Mandatory Stock Grant").
Such shares of Common Stock shall be transferred quarterly pursuant to Section
7(b) hereof.
(b) Elective Stock In Lieu of Retainer. Each Non-Employee Director who
delivers to the Company written notice of an irrevocable election (a "Share
Election") concerning the portion of the Fees remaining after the Mandatory
Stock Grant shall receive in lieu of cash (subject to a Deferral Election) an
amount of shares of Common Stock equal in value to the portion of such remaining
Fees, as so designated by the Non-Employee Director in such written notice (but
only in increments of 25% or a multiple thereof, and in no event to exceed 100%
of the Fees). The shares of Common Stock to be delivered with respect to a
Mandatory Stock Grant shall be determined by dividing 25% of the Non-Employee
Director's Fees for the applicable calendar quarter by the Fair Market Value of
a share of Common Stock on the last business day of such calendar quarter. The
shares of Common Stock to be delivered with respect to a Share Election shall be
determined by dividing the dollar amount of a Non-Employee Director's Fee for
the appropriate calendar quarter to which the Share Election applies, by the
Fair Market Value of the Common Stock on the last business day of such calendar
quarter. Only whole numbers of shares shall be obtainable pursuant to this
Section 7, and any remaining Fees which otherwise would have purchased a
fractional share shall be paid in cash. Any Share Election shall remain in
effect for subsequent Plan years unless such Non-Employee Director delivers a
written notice setting forth a different election with respect to Fees which
shall be applied to future Plan years. In the event a Deferral Election is not
made, the shares of Common Stock shall be transferred to the Non-Employee
Director on the first business day after the end of each calendar quarter. Share
Elections must be delivered prior to the commencement of the calendar year in
which the fees are to be earned; provided, however, that any Non-Employee
Director who commences his or her directorship during a calendar year may make a
Share Election during the
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<PAGE>
thirty-day period immediately following commencement of his or her directorship
(a "New Director"); provided, further, that Non-Employee Directors may make
Share Elections with respect to 1999 prior to the Effective Date.
Section 8. Deferral Election
(a) In General. Each Non-Employee Director may irrevocably elect annually
(a "Deferral Election") to defer receiving all or a portion of the shares of
Common Stock (that would otherwise be transferred upon a Mandatory Stock Grant
or Share Election). Deferral Elections shall be made in multiples of ten
percent. A Non-Employee Director who makes a Deferral Election with respect to a
Mandatory Stock Grant or Share Election shall have the amount of deferred shares
of Common Stock credited to a "Share Account" in the form of "Share Units".
(b) Timing of Deferral Election. The Deferral Election shall be in writing
and delivered to the Secretary of the Company on or prior to December 31 of the
calendar year immediately preceding the calendar year in which the applicable
Fees are to be earned; provided, however, that a New Director may make a
Deferral Election with respect to Fees earned subsequent to such election during
the thirty-day period immediately following the commencement of his or her
directorship; provided, further that Non-Employee Directors may make Deferral
Elections prior to the Effective Date. A Deferral Election, once made, shall be
irrevocable for the calendar year with respect to which it is made and shall
remain in effect for future calendar years unless modified or revoked by a
subsequent Deferral Election in accordance with the provisions hereof.
(c) Cash Dividends and Share Accounts. Whenever cash dividends are paid by
the Company on outstanding Common Stock, there shall be credited to a Non-
Employee Director's Share Account additional Share Units equal to (i) the
aggregate dividend that would be payable on outstanding shares of Common Stock
equal to the number of Share Units in such Share Account on the record date for
the dividend, divided by (ii) the Fair Market Value of the Common Stock on the
last trading business day immediately preceding the date of payment of the
dividend.
(d) Commencement of Distributions. Except as otherwise provided in Sections
8(e) or 12, a Non-Employee Director's Share Account shall become distributable
as soon as practicable following the date the Non-Employee Director terminates
service as a director. Distributions from a Share Account shall be made by
converting Share Units into Common Stock on a one-for-one basis, with payment of
fractional shares to be made in cash.
(e) Manner of Distributions. In his or her Deferral Election, each Non-
Employee Director shall elect to receive distribution of his or her Share
Account either in a single distribution or in two to fifteen substantially equal
annual distributions. In the event of a Non-Employee Director's death,
distribution of the remaining portion of the Non-Employee Director's Share
Account will be made to the Non-Employee Director's beneficiary in a single
distribution as soon as practicable following the Non-Employee Director's death.
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<PAGE>
(f) Hardship Distribution. Notwithstanding any Deferral Election, in the
event of severe financial hardship to a Non-Employee Director resulting from a
sudden and unexpected illness, accident or disability of the Director or other
similar extraordinary and unforeseeable circumstances arising as a result of
events beyond the control of the Non-Employee Director, all as determined by the
Committee, a Non-Employee Director may withdraw any portion of the Share Units
in his or her Share Account by providing written notice to the Secretary of the
Company.
(g) Designation of Beneficiary. Each Non-Employee Director or former Non-
Employee Director entitled to a distribution from a Share Account hereunder,
from time to time may designate any beneficiary or beneficiaries (who may be
designated concurrently, contingently or successively) to whom any such Share
Units are to be distributed in case of the Non-Employee Director's death before
receipt of any or all of such Share Units. Each designation will revoke all
prior designations by the Non-Employee Director or former Non-Employee Director,
shall be in a form prescribed by the Company, and will be effective only when
filed by the Non-Employee Director or former Non-Employee Director, during his
or her lifetime, in writing with the Secretary of the Company. Reference in this
Plan to a Non-Employee Director's "beneficiary" at any date shall include such
persons designated as concurrent beneficiaries on the Non-Employee Director's
beneficiary designation form then in effect. In the absence of any such
designation, any Share Units remaining in a Non-Employee Director's or former
Non-Employee Director's Share Account at the time of the Non-Employee Director's
death shall be distributed to such Non-Employee Director's estate in a single
distribution.
Section 9. Stock Options
(a) Initial Grant. Effective as of the Effective Date, each Non-Employee
Director shall be granted a Stock Option to purchase 10,000 shares of Common
Stock (the "Initial Grant"). The option price per share for the Initial Grant
shall be the initial public offering price pursuant to the IPO.
(b) Subsequent Grants. Each person who first becomes a Non-Employee
Director after the IPO shall be granted a Stock Option to purchase 10,000 shares
of Common Stock as of the date such person is elected or appointed to the Board;
provided, that no such grant shall be made to a Non-Employee Director who
received an option grant under the Company's 1999 Stock Incentive Plan during
the two-year period immediately preceding such election or appointment to the
Board.
(c) Annual Grants. Commencing in 2000, a Stock Option to purchase 5,000
shares of Common Stock shall be granted to each Non-Employee Director
automatically on the first business day following the Company's Annual Meeting
of stockholders for such year. Grants under this Section 9(c) shall be in
addition to any grants of Stock Options under Sections 9(a) or 9(b) above.
(d) Option Price. Options granted under Sections 9(b) or 9(c) above shall
be exercisable at a price per share equal to Fair Market Value on the grant
date.
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<PAGE>
(e) Exercisability. A Stock Option shall vest and become exercisable on the
first anniversary of the grant date. In the event a Non-Employee Director's
membership on the Board terminates before a Stock Option has vested (whether by
reason of death, disability, Retirement, removal from office or otherwise), then
any such unvested Stock Option granted to such Non-Employee Director shall be
canceled and the Non-Employee Director shall have no further right or interest
in such forfeited Stock Option.
(f) Termination. Each vested Stock Option shall remain outstanding until
the tenth anniversary of the date of grant; provided, that in the event a Non-
Employee Director's membership on the Board terminates (other than for "cause"
as described in Section 13), any vested Stock Option then held by the Non-
Employee Director shall be canceled one year after such termination of Board
membership.
(g) Pro Rata Grants. In the event that the number of shares of Common Stock
available for future grant under the Plan is insufficient to make all automatic
grants required to be made on such date, then all Non-Employee Directors
entitled to a grant on such date shall share ratably in the number of Stock
Options on shares available for grant under the Plan.
Section 10. Transferability
No Stock Option or Share Unit shall be transferable by a Non-Employee
Director other than (a) by will or by the laws of descent and distribution, (b)
pursuant to a written beneficiary designation (in the Committee's discretion, in
the case of a Stock Option) or (c) in the case of a Stock Option only, in the
Committee's discretion, pursuant to a transfer to such Non-Employee Director's
immediate family, whether directly or indirectly, by means of a trust,
partnership, limited liability company or otherwise. For purposes of this
Section 10, "immediate family" shall mean, except as otherwise defined by the
Committee, the Non-Employee Director's spouse, children, siblings, stepchildren,
grandchildren, parents, stepparents, grandparents, in-laws and persons related
by legal adoption. Such permitted transferees may transfer a Stock Option only
by will or by the laws of descent and distribution. All Stock Options shall be
exercisable, subject to the terms of this Plan, only by the optionee, guardian,
legal representative or beneficiary of the optionee, or permitted transferee, it
being understood that the terms "holder" and "optionee" include any such
guardian, legal representative, beneficiary, or transferee.
Section 11. Amendment and Termination
The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration or discontinuation shall be made which would impair the rights of a
Non-Employee Director under any Stock Option or Award theretofore granted
without such person's consent. In addition, no such amendment shall be made
without the approval of the Company's stockholders to the extent such approval
is required by law or stock exchange rule.
The Board or the Committee may amend the terms of any Stock Option or
other Award theretofore granted, prospectively or retroactively, but no such
amendment shall impair the rights of any holder without the holder's consent.
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<PAGE>
Subject to the above provisions, the Board shall have authority to
amend the Plan to take into account changes in law and tax and accounting rules
as well as other developments, and to grant Stock Options or Awards which
qualify for beneficial treatment under such rules without stockholder approval.
Section 12. Effect of Change in Control
Notwithstanding any other provision of the Plan to the contrary, in
the event of a Change in Control, (a) any Stock Options outstanding and not then
exercisable or vested as of the date such Change in Control is determined to
have occurred, shall become fully exercisable and vested to the full extent of
the original grant and (b) all Share Units credited to a Share Account shall be
converted into Common Stock (or into the consideration received by Stockholders
in the transaction constituting a Change in Control) and shall be transferred or
distributed as soon as practicable to the Non-Employee Director.
Section 13. Effect of Termination for Cause
If a Non-Employee Director incurs a termination of membership on the
Board for cause, such Non-Employee Director's Stock Options shall be
automatically canceled immediately. Unless otherwise determined by the Board,
for purposes of the Plan "cause" shall mean (a) the conviction of the Non-
Employee Director for commission of a felony under Federal law or the law in the
state in which such action occurred, or (b) dishonesty in the course of
fulfilling the Non-Employee Director's duties as a director.
Section 14. Adjustments Upon Changes in Capitalization
In the event of any change in corporate capitalization (including, but
not limited to, a change in the number of shares of Common Stock outstanding),
such as a stock split or a corporate transaction, such as any merger,
consolidation, separation, including a spin-off, or other distribution of stock
or property of the Company, any reorganization (whether or not such
reorganization comes within the definition of such term in Section 368 of the
Code) or any partial or complete liquidation of the Company, the Committee or
Board may make such substitution or adjustments in the aggregate number and
class of shares reserved for issuance under the Plan, the number and kind of
shares subject to Stock Options under Section 9, in the number, kind and option
price of shares subject to other outstanding Awards granted under the Plan, in
the number and kind of shares in each Share Account and/or such other equitable
substitution or adjustments as it may determine to be appropriate in its sole
discretion; provided, however, that the number of shares subject to any Award
shall always be a whole number.
Section 15. Effectiveness of Plan
The Plan shall become effective upon the pricing of the Offering of
the Company's Common Stock, pursuant to the registration statement filed by the
Company under the Securities Act of 1933, as amended, registering the IPO (the
"Effective Date").
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<PAGE>
Section 16. Governing Law
The Plan and all Awards made and actions taken thereunder shall be
governed by and construed in accordance with the laws of the State of Delaware,
without reference to principles of conflict of laws.
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<PAGE>
EXHIBIT 10.05
FORM OF EMPLOYMENT AGREEMENT
----------------------------
AGREEMENT by and between KBW, Inc., a Delaware corporation (the "Company"),
and __________________ (the "Executive"), dated as of the ___ day of _______,
1999.
WHEREAS, the Board of Directors of the Company (the "Board") has determined
that it is in the best interests of the Company and its shareholders to employ
the Executive as [position,] and the Executive desires to serve in that
capacity;
NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:
1. Employment Period. The Company shall employ the Executive, and the
-----------------
Executive shall serve the Company, on the terms and conditions set forth in this
Agreement, for the Employment Period (as defined in the next sentence). The
"Employment Period" shall mean the period beginning on the date on which the
registration statement filed by the Company under the Securities Act of 1933, as
amended, registering the initial public offering of the common stock of KBW,
Inc., par value $0.01, is effective (the "Effective Date") and ending on the
third anniversary thereof, unless earlier terminated as set forth herein.
2. Position and Duties. (a) During the Employment Period, the Executive shall
-------------------
serve as [position] with duties, responsibilities and authority commensurate
with such position and shall report directly to the Board.
(b) During the Employment Period, and excluding any periods of vacation and
sick leave to which the Executive is entitled, the Executive shall devote
reasonable attention and time during normal business hours to the business
and affairs of the Company and, to the extent necessary to discharge the
responsibilities assigned to the Executive under this Agreement, use the
Executive's reasonable best efforts to carry out such responsibilities
faithfully and efficiently. It shall not be considered a violation of the
foregoing for the Executive to (A) serve on corporate, civic or charitable
boards or committees, (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions and (C) manage personal investments, so
long as such activities do not significantly interfere with the performance
of the Executive's responsibilities as an employee of the Company in
accordance with this Agreement.
(c) The Executive's services shall be performed primarily at the principal
office location where the Executive performed his duties immediately prior
to the Effective Date, subject to any travel requirements necessary to
perform his duties hereunder.
3. Compensation. (a) Base Salary. During the Employment Period, the
------------ -----------
Executive shall receive an annual base salary ("Annual Base Salary") of $[ ],
payable in equal installments not less frequently than monthly. During the
Employment Period, the Annual Base Salary shall be reviewed for possible
increase at least annually. Any increase in
<PAGE>
the Annual Base Salary shall not limit or reduce any other obligation of the
Company under this Agreement. The Annual Base Salary shall not be reduced after
any such increase, and the term "Annual Base Salary" shall thereafter refer to
the Annual Base Salary as so increased.
(b) Annual Bonus. In addition to the Annual Base Salary, the Executive shall
------------
be eligible to be awarded, for each calendar year or portion of a calendar
year ending during the Employment Period, an annual bonus (the "Annual
Bonus") pursuant to the terms of the KBW, Inc. 1999 Stock and Annual
Incentive Plan.
(c) Other Benefits. During the Employment Period: (i) the Executive shall be
--------------
entitled to participate in incentive, savings and retirement plans,
practices, policies and programs of the Company to the same extent as
provided generally to peer executives (as defined in the next sentence);
and (ii) the Executive and/or the Executive's family, as the case may be,
shall be eligible for participation in, and shall receive benefits under,
welfare benefit plans, practices, policies and programs provided by the
Company (including, without limitation, medical, prescription, dental,
disability, employee life insurance, group life insurance, accidental death
and travel accident insurance plans and programs) to the same extent as
provided generally to peer executives. The term "peer executives" means
those executives of the Company with similar titles and authority.
(d) Expenses. During the Employment Period, the Executive shall be entitled to
--------
receive prompt reimbursement for all reasonable business expenses incurred
by the Executive in accordance with the Company's policies, practices and
procedures.
(e) Fringe Benefits. During the Employment Period, the Executive shall be
---------------
entitled to fringe benefits and perquisites, which shall be no less
favorable than the fringe benefits and perquisites provided generally to
peer executives.
(f) Office and Support Staff. During the Employment Period, the Executive
------------------------
shall be entitled to an office or offices of a size and with furnishings
and other appointments as provided generally at any time thereafter with
respect to other peer executives of the Company.
(g) Vacation. During the Employment Period, the Executive shall be entitled to
--------
paid vacation in accordance with the plans, policies, programs and
practices of the Company provided generally to peer executives.
4. Termination of Employment. (a) Death or Disability. The Executive's
------------------------- -------- ----------
employment shall terminate automatically upon the Executive's death during the
Employment Period. The Company shall be entitled to terminate the Executive's
employment because of the Executive's Disability during the Employment Period.
"Disability" means that (i) the Executive has been unable, for a period of 180
consecutive business days, to perform the Executive's duties under this
Agreement, as a result of physical or mental illness or injury, and (ii) a
physician selected by the Company or its insurers, and acceptable to the
Executive or the Executive's legal representative, has determined that the
Executive's incapacity is total and permanent. A termination of the Executive's
employment by the Company for Disability
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<PAGE>
shall be communicated to the Executive by written notice, and shall be effective
on the 30th day after receipt of such notice by the Executive (the "Disability
Effective Date"), unless the Executive returns to full-time performance of the
Executive's duties before the Disability Effective Date.
(b) By the Company. The Company may terminate the Executive's employment
--------------
during the Employment Period for Cause or without Cause. "Cause" means:
(i) the willful and continued failure of the Executive substantially to
perform the Executive's duties under this Agreement (other than as
a result of physical or mental illness or injury), after the Board
delivers to the Executive a written demand for substantial
performance that specifically identifies the manner in which the
Board believes that the Executive has not substantially performed
the Executive's duties; or
(ii) illegal conduct or gross misconduct by the Executive, in either
case that is willful and results in material and demonstrable
damage to the business or reputation of the Company, or
(iii) conviction of, or plea of guilty or nolo contendere to, a felony.
---- ----------
No act or failure to act on the part of the Executive shall be considered
"willful" unless it is done, or omitted to be done, by the Executive in bad
faith or without reasonable belief that the Executive's action or omission was
in the best interests of the Company. Any act or failure to act that is based
upon authority given pursuant to a resolution duly adopted by the Board or the
advice of counsel for the Company, shall be conclusively presumed to be done, or
omitted to be done, by the Executive in good faith and in the best interests of
the Company. A termination of the Executive's employment for Cause shall be
effected in accordance with the following procedures. The Company shall give
the Executive written notice ("Notice of Termination for Cause") of its
intention to terminate the Executive's employment for Cause, setting forth in
reasonable detail the specific conduct of the Executive that it considers to
constitute Cause and the specific provision(s) of this Agreement on which it
relies, and stating the date, time and place of the Special Board Meeting. The
"Special Board Meeting" shall mean a meeting of the Board called and held
specifically for the purpose of considering the Executive's termination for
Cause, that takes place not less than five and not more than fifteen business
days after the Executive receives the Notice of Termination for Cause. The
Executive shall be given an opportunity, together with counsel, to be heard at
the Special Board Meeting. The Executive's termination for Cause shall be
effective when and if a resolution is duly adopted at the Special Board Meeting
by affirmative vote of three-quarters of the entire membership of the Board
(excluding the Executive), stating that in the good faith opinion of the Board,
the Executive is guilty of the conduct described in the Notice of Termination
for Cause, and that conduct constitutes Cause under this Agreement.
(c) Good Reason. (i) The Executive may terminate employment for Good Reason
- --- -----------
or without Good Reason. "Good Reason" means:
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<PAGE>
A. the assignment to the Executive of any duties inconsistent in any
material respect with Section 2(a) of this Agreement, or any other action
by the Company that results in a material diminution in the Executive's
position, authority, duties or responsibilities, other than an isolated,
insubstantial and inadvertent action that is not taken in bad faith and
is remedied by the Company promptly after receipt of notice thereof from
the Executive;
B. any failure by the Company to comply with any provision of Section 3
of this Agreement, other than an isolated, insubstantial and inadvertent
failure that is not taken in bad faith and is remedied by the Company
promptly after receipt of notice thereof from the Executive;
C. any requirement by the Company that the Executive's services be
rendered primarily at a location or locations other than that provided
for in Section 2(c) of this Agreement;
D. any purported termination of the Executive's employment by the
Company for a reason or in a manner not expressly permitted by this
Agreement; or
E. any failure by the Company to comply with Section 10(c) of this
Agreement.
For purposes of this Section 4(c)(i), any good faith determination of "Good
Reason" made by the Executive shall be conclusive. A termination of employment
by the Executive for Good Reason shall be effectuated by giving the Company
written notice ("Notice of Termination for Good Reason") of the termination,
setting forth in reasonable detail the specific conduct of the Company that
constitutes Good Reason and the specific provision(s) of this Agreement on which
the Executive is relying. A termination of employment by the Executive for Good
Reason shall be effective on the fifth business day following the date when the
Notice of Termination for Good Reason is given, unless the notice sets forth a
later date (which date shall in no event be later than 30 days after the notice
is given).
(ii) A termination of the Executive's employment by the Executive without
Good Reason shall be effected by giving the Company written notice of the
termination.
(d) No Waiver. The failure to set forth any fact or circumstance in a Notice
---------
of Termination for Cause or a Notice of Termination for Good Reason shall
not constitute a waiver of the right to assert, and shall not preclude the
party giving notice from asserting, such fact or circumstance in an attempt
to enforce any right under or provision of this Agreement.
(e) Date of Termination. The "Date of Termination" means the date of the
-------------------
Executive's death, the Disability Effective Date, the date on which the
termination of the Executive's employment by the Company for Cause or by
the Executive for Good Reason is
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<PAGE>
effective, or the date on which the Executive gives the Company notice
of a termination of employment without Good Reason, as the case may be.
5. Obligations of the Company upon Termination. (a) Other Than for Cause,
------------------------------------------- ---------------------
Death or Disability; Good Reason. If, during the Employment Period, the Company
- --------------------------------
terminates the Executive's employment, other than for Cause, death or
Disability, or the Executive terminates employment for Good Reason, the Company
shall pay the amounts described in subparagraph (i) below to the Executive in a
lump sum in cash within 30 days after the Date of Termination; shall continue
the benefits described in subparagraph (ii) below for the period set forth
therein; and shall, at the Company's sole expense as incurred, provide the
Executive with reasonable outplacement services. The payments and benefits
provided pursuant to this Section 5(a) are intended as liquidated damages for a
termination of the Executive's employment by the Company other than for Cause,
death or Disability or for the actions of the Company leading to a termination
of the Executive's employment by the Executive for Good Reason, and shall be the
sole and exclusive remedy therefor.
(i) The amounts to be paid in a lump sum as described above are:
A. The sum of (1) the Executive's Annual Base Salary through the Date of
Termination, (2) the product of (x) the average annual bonus earned by
the Executive for the three years immediately prior to the year in which
the Date of Termination occurs (the "Bonus Amount") and (y) a fraction,
the numerator of which is the number of days in the calendar year in
which the Date of Termination occurs through the Date of Termination, and
the denominator of which is 365, and (3) the value of the Executive's
accrued, but unused, vacation days (based on the Executive's Annual Base
Salary), in each case to the extent not theretofore paid (the sum of the
amounts described in clauses (1), (2) and (3), shall be hereinafter
referred to as the "Accrued Obligations"); and
B. The amount equal to the product of (1) the greater of (A) the number
of months and portions thereof from the Date of Termination until the
expiration of the Employment Period and (B) twelve (the "Continuation
Period"), divided by twelve and (2) the sum of (x) the Executive's Annual
Base Salary, (y) the Bonus Amount and (z) the Company's contribution to
the Company's Profit Sharing Retirement Plan (or successor plan) with
respect to the Executive for the year immediately prior to the year in
which the Date of Termination occurs.
(ii) During the Continuation Period, the Executive and/or the Executive's
family shall be provided with benefits at least as favorable as those that would
have been provided to them under Section 3(c)(ii) of this Agreement if the
Executive's employment had continued until the end of the Continuation Period;
provided, however, that during any period when the Executive is eligible to
receive such benefits under another employer-provided plan,
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<PAGE>
the benefits provided by the Company under this Section 5(a)(ii) may be made
secondary to those provided under such other plan. For purposes of determining
eligibility (but not the time of commencement of benefits) of the Executive for
retiree benefits, the Executive shall be deemed to have retired upon the end of
the Continuation Period.
(c) Death or Disability. If, during Employment Period, the Executive's
-------------------
employment is terminated by reason of the Executive's death or Disability,
the Company shall pay the Accrued Obligations to the Executive or the
Executive's estate or legal representative, as applicable, in a lump sum in
cash within 30 days after the Date of Termination, and the Company shall
have no further obligations under this Agreement.
(d) Cause; Other than for Good Reason. If, during the Employment Period, the
---------------------------------
Executive's employment is terminated by the Company for Cause or the
Executive voluntarily terminates employment other than for Good Reason, the
Company shall pay the Executive the Accrued Obligations (less the amount
set forth in Section 5(a)(i)(A)(2)) in a lump sum in cash within 30 days
following the Date of Termination, and the Company shall have no further
obligations under this Agreement.
6. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit
-------------------------
the Executive's continuing or future participation in any plan, program, policy
or practice provided by the Company for which the Executive may qualify, nor,
subject to Section 11(g), shall anything in this Agreement limit or otherwise
affect such rights as the Executive may have under any contract or agreement
with the Company. Accrued benefits and other amounts that the Executive is
otherwise entitled to receive under any plan, policy, practice or program of, or
any contract or agreement with, the Company on or after the Date of Termination
shall be payable in accordance with such plan, policy, practice, program,
contract or agreement, as the case may be, except as explicitly modified by this
Agreement.
7. Full Settlement. The Company's obligation to make the payments provided for
---------------
in, and otherwise to perform its obligations under, this Agreement shall not be
affected by any set-off, counterclaim, recoupment, defense or other claim, right
or action that the Company may have against the Executive or others. In no
event shall the Executive be obligated to seek other employment or take any
other action by way of mitigation of the amounts payable to the Executive under
any of the provisions of this Agreement and, except as specifically provided in
Section 5(a)(ii), such amounts shall not be reduced, regardless of whether the
Executive obtains other employment.
8. Confidential Information; Noncompetition; Nonsolicitation. (a) The
---------------------------------------------------------
Executive shall hold in a fiduciary capacity for the benefit of the Company all
secret or confidential information, knowledge or data relating to the Company
and its respective businesses that the Executive obtains during the Executive's
employment by the Company and that is not public knowledge (other than as a
result of the Executive's violation of this Section 8(a)) ("Confidential
Information"). The Executive shall not communicate, divulge or disseminate
Confidential Information at any time during or after the Executive's employment
with the Company, except with the prior written consent of the Company or as
otherwise required by law or legal process.
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<PAGE>
(b) During the Noncompetition Period (as defined below), the Executive shall
not, without the prior written consent of the Board, engage in or become
associated, directly or indirectly, as a sole proprietor, member of a
partnership, or stockholder, investor, officer or director of a
corporation, or as an employee, agent, associate or consultant of any
person, firm, entity or corporation, other than the Company or a successor
corporation or one of its subsidiaries, that engages in a Competitive
Activity (as defined below). For purposes of this Section 8(b): (i) the
"Noncompetition Period" means the period during which the Executive is
employed by the Company pursuant to this Agreement and one year after the
Executive's termination of employment under this Agreement (other than a
termination of the Executive's employment by the Company without Cause or
by the Executive for Good Reason or a termination of employment occurring
on or after the expiration of the Employment Period); and (ii) a
"Competitive Activity" means engaging in any business within a 90 mile
radius of the metropolitan area in which the Executive conducted
substantial business for the twelve month period preceding the date the
Executive ceased to be an employee with the Company or any of its
subsidiaries which is in substantial competition with any substantial
business conducted in such area, at the time such engagement is commenced,
by the Company or its subsidiaries and in respect of which the Executive
had substantial responsibilities during the term of his employment by the
Company or its subsidiaries; provided, however, that this Agreement shall
-------- -------
not be construed as preventing the Executive from investing his personal
assets, or acquiring or holding any issue of stock or securities, in
businesses which engage in a Competitive Activity, provided that the
Executive does not participate in the operations of any such business.
(c) During the Noncompetition Period, the Executive shall not solicit any
business of the type engaged in by the Company or its subsidiaries from any
clients, customers, former clients or customers, or prospects of the
Company or its subsidiaries who were solicited directly by the Executive
when the Executive was an employee of the Company or any of its
subsidiaries or where any such Executive supervised, directly or
indirectly, in whole or in part, the solicitation activities related to any
such persons when the Executive was an employee of the Company.
(d) During the Noncompetition Period, the Executive shall not solicit any
business of the type engaged in by the Company from any person whatsoever
if such solicitation involves a product of the Company which the Board
deems, in its reasonable judgment, to be proprietary to the Company and
otherwise non-public.
(e) During the Noncompetition Period, the Executive shall not induce or solicit
any employee of the Company to terminate his or her employment.
(f) The provisions of Section 8(b), (c), (d) and (e) shall remain in full force
and effect until the expiration of the period specified herein
notwithstanding the earlier termination of the Executive's employment
hereunder. In the event of a breach of the Executive's covenants under
this Section 8, it is understood and agreed that the Company shall be
entitled to injunctive relief, as well as any other legal remedies. For
purposes of this
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<PAGE>
Section 8, the "Company" shall include all entities controlling, controlled
by or under common control with the Company.
9. Attorneys' Fees. The Company agrees to pay, as incurred (within ten
---------------
business days of receipt of an invoice from the Executive), to the fullest
extent permitted by law, all legal fees and expenses that the Executive may
reasonably incur as a result of any contest by the Company, the Executive or
others of the validity or enforceability of or liability under, or otherwise
involving, any provision of this Agreement (whether such contest is between the
Company and the Executive or between either of them and any third party),
together with interest on any delayed payment at the applicable federal rate
provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as
amended. Notwithstanding the foregoing, if an arbitrator determines that the
Executive has brought a claim under this Agreement in bad faith, the Executive
shall promptly return such legal fees to the Company.
10. Successors. (a) This Agreement is personal to the Executive and, without
----------
the prior written consent of the Company, shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and assigns.
(c) The Company shall require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all
of the business and/or assets of the Company expressly to assume and agree
to perform this Agreement in the same manner and to the same extent that
the Company would have been required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean both the
Company as defined above and any such successor that assumes and agrees to
perform this Agreement, by operation of law or otherwise.
11. Miscellaneous. (a) This Agreement shall be governed by, and construed in
-------------
accordance with, the laws of the State of Delaware, without reference to
principles of conflict of laws. The captions of this Agreement are not part of
the provisions hereof and shall have no force or effect. This Agreement may
not be amended or modified except by a written agreement executed by the parties
hereto or their respective successors and legal representatives.
(b) All notices and other communications under this Agreement shall be in
writing and shall be given by hand delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive: The most recent address on file
for the Executive at the Company.
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<PAGE>
If to the Company: KBW, Inc.
Two World Trade Center, 85th Floor
New York, New York 10048
Attention: General Counsel
or to such other address as either party furnishes to the other in writing in
accordance with this Section 11(b). Notices and communications shall be
effective when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of any other provision of this
Agreement. If any provision of this Agreement shall be held invalid or
unenforceable in part, the remaining portion of such provision, together
with all other provisions of this Agreement, shall remain valid and
enforceable and continue in full force and effect to the fullest extent
consistent with law.
(d) Any dispute or controversy between the parties relating to or arising out
of this Agreement or any amendment or modification hereof shall be
determined by arbitration in New York, New York by and pursuant to the
rules then prevailing of the American Arbitration Association, other than
claims for injunctive relief under Section 8. All claims for legal
remedies under Section 8 of this Agreement shall be limited to the actual
damages of the Company. The arbitration award shall be final and binding
upon the parties and judgment may be entered thereon by any court of
competent jurisdiction. The service of any notice, process, motion or
other document in connection with any arbitration under this Agreement or
the enforcement of any arbitration award hereunder may be effectuated
either by personal service upon a party or by certified mail duly addressed
to him or to his executors, administrators, personal representatives, next
of kin, successors or assigns, at the last known address or addresses of
such party or parties.
(e) Notwithstanding any other provision of this Agreement, the Company may
withhold from amounts payable under this Agreement all federal, state,
local and foreign taxes that are required to be withheld by applicable laws
or regulations.
(f) The Executive's or the Company's failure to insist upon strict compliance
with any provision of, or to assert any right under, this Agreement
(including, without limitation, the right of the Executive to terminate
employment for Good Reason pursuant to Section 4(c)(i) of this Agreement)
shall not be deemed to be a waiver of such provision or right or of any
other provision of or right under this Agreement.
(g) The Executive and the Company acknowledge that this Agreement supersedes
any other agreement between them concerning the subject matter hereof.
(h) This Agreement may be executed in several counterparts, each of which shall
be deemed an original, and said counterparts shall constitute but one and
the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and,
pursuant to the authorization of its Board of Directors, the Company has caused
this Agreement to be executed in its name on its behalf, all as of the day and
year first above written.
------------------------------
[Executive]
KBW, INC.
By
----------------------------
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<PAGE>
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 LLP
New York, New York
April 16, 1999
<PAGE>
EXHIBIT 99.01
CONSENT OF PERSON NAMED TO BECOME A DIRECTOR
I, Michael P. Esposito, Jr., hereby consent to the use, in the Registration
Statement on Form S-1 of KBW, Inc., to which this consent is filed as an
exhibit included therein, of my name as a person named to become a director of
KBW, Inc.
/s/ Michael P. Esposito, Jr.
-----------------------------
Michael P. Esposito, Jr.
Date: April 1, 1999
<PAGE>
EXHIBIT 99.02
CONSENT OF PERSON NAMED TO BECOME A DIRECTOR
I, Robert Ralph Parks, hereby consent to the use, in the Registration
Statement on Form S-1 of KBW, Inc., to which this consent is filed as an
exhibit included therein, of my name as a person named to become a director of
KBW, Inc.
/s/ R. Ralph Parks
-------------------------------------
Robert Ralph Parks
Date: April 1, 1999
