UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended January 31, 2000
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ________ to ________
Commission file number 1-15733
SHOCHET HOLDING CORP.
(Exact name of registrant as specified in its charter)
Delaware 59-2651232
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2351 East Hallandale Beach Boulevard, Hallandale Beach, Florida 33998
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(Address of principal executive offices) (Zip Code)
(954) 454-0304
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: common stock, $.0001
par value
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __ No _X__
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year $8,112,000.
The aggregate market value (based upon the last sale price) of the registrant's
Common Stock held by nonaffiliates on April 25, 2000, was $3,105,000.
On April 25, 2000, 2,245,000 shares of the registrant's common stock were
outstanding.
Transitional Small Business Disclosure Format (Check One)
Yes ___ No _X_
Documents incorporated by reference:
-none-
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Shochet Holding Corp.
Form 10-KSB Annual Report
For the fiscal year ended January 31, 2000
Page
Part I
Item 1. Description of Business 2
Item 2. Description of Property 14
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 16
Item 6. Management's Discussion and Analysis 17
Item 7. Financial Statements 20
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 20
Part III
Item 9. Directors, Executive Officers; Compliance with
Section 16(a) of the Exchange Act 21
Item 10. Executive Compensation 25
Item 11. Security Ownership of Certain Beneficial Owners and
Management 27
Item 12. Certain Relationships and Related Transactions 27
Item 13. Exhibits, Lists, and Reports on Form 8-K 29
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
We operate a full service, discount brokerage through our wholly-owned
subsidiary, Shochet Securities, Inc. Shochet Securities operates five branch
offices, all of which are in Florida. We provide our customers a broad range of
financial services. We assign each of our customers a registered representative
to supervise his or her account. In January 2000, we commenced offering online
brokerage services through Shochet Online!, our online brokerage division,
through our website, located at www.shochet.com. As of April 25, 2000, Shochet
Online! had approximately 330 registered account holders. As of April 25, 2000,
approximately 580 additional people had registered to use our website for news,
quotes and other market information.
We were incorporated in Delaware in July 1999. Our executive offices
are located at 2351 East Hallandale Beach Boulevard, Hallandale Beach, Florida.
We are majority owned (approximately 55%) by our parent company, Research
Partners International, Inc., a publicly traded holding company, which is the
sole stockholder of another broker-dealer subsidiary, GKN Securities Corp., and
a majority stockholder of EarlyBirdCapital.com Inc., which is in turn, the sole
stockholder of two other broker-dealers, EBCapital (Europe) AG and
EarlyBirdCapital, Inc.
In March 2000 we completed an initial public offering of 1,045,000
shares of our common stock. These securities are listed on Nasdaq SmallCap
Market System under the symbol SHOC. We raised gross proceeds of $9,405,000
through this offering
We provide brokerage services in equity and fixed income securities,
options, annuities and mutual funds. We charge our clients commissions that are
generally less than those charged by other full service firms for similar
services, and pay our brokers a percentage of that commission. As of April 2000,
we employed approximately 50 brokers, who manage approximately 15,000 client
accounts.
Our online services and products presently include:
o financial news;
o online order entry for equity securities;
o charting;
o access to portfolios;
o real-time posting of positions; and
o real-time and delayed quotes;
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Our online services and products will include:
o online order entry for options, mutual funds and fixed income
securities;
o company and industry research; and
o access to initial public offerings and private financings
distributed through our sister company, EarlyBirdCapital.
Strategy
Our business strategy is comprised of two parallel, complementary
directions. The first is to build our traditional and online brokerage
businesses. The second prong of our strategy, which we recently developed, is to
create an Internet portal for seniors, which will be linked to Shochet Online!
Building our brokerage business
We intend to establish ourselves as a premier Internet brokerage firm
and continue to develop our presence as a discount broker in Florida. We believe
that our advantage over other online brokers lies with our securities brokerage
industry experience embodied by our experienced brokers. Our strategy includes
the following elements:
o Leverage our existing operations capabilities and experienced
management team to build our online brokerage business. We
believe that our account representatives and our longevity in
the brokerage industry have contributed to our reputation as a
quality brokerage firm. Our expertise derives from over 18
years of operation and will provide the backbone of our online
brokerage services business.
o Emphasize the role of the broker in our online service
offerings. Each of our online customers is assigned a broker
to service his or her account. The customer will decide how
active a role the broker plays in the customer's investment
decisions. The customer may trade online without assistance or
may call upon the broker for investment advice and execute
trades through the broker. Our online services complement the
services provided by our brokers and appeal to those clients
who may feel that their needs are not met by large online-only
brokerage firms.
o Open branch offices and mini-offices. We intend to open new
branch offices to expand our presence into areas of Florida
where currently we are not represented. We plan to increase
our visibility further by opening mini-offices: smaller
satellite offices located in highly trafficked areas, each
within a short drive of a branch office, staffed by two to
four brokers.
Developing our Internet portal for seniors
We have recently begun building our Internet portal for seniors,
through which we intend to leverage our existing community of retirement age
brokerage
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clients into an online affinity group. Our goal is to become a leading
online destination for the growing South Florida seniors community, where users
can obtain financial information, health information, information about families
and relationships and can interact among a community of their peers.
We intend to derive revenues from this new business through a variety
of means, including obtaining advertising revenue from other vendors and by
driving traffic to Shochet Online!, which will result in the opening of online
accounts. We recently signed agreements with Paytrust, an online bill payment
provider and Sickbay.com, an online provider of health-related content, but to
date have not derived any significant revenues from these agreements. We intend
to explore all opportunities available to us, including acquisitions, to acquire
content and strategic relationships on our portal for seniors. This prong of our
strategy is comprised of the following elements:
o grow our membership and usage;
o enhance and expand our networks;
o increase sponsor and advertising revenues; and
o generate e-commerce revenues.
Brokerage Industry Overview
The securities brokerage industry has recently undergone a period of
significant change, led by electronic and online commerce. Internet and online
services have created new methods of conducting business for organizations and
individuals that have traditionally conducted business in person, through the
mail or over the telephone. Consumers have shown a growing desire to transact
various types of business electronically, such as bill payment and trading
securities. Online commerce has enabled individuals to execute these
transactions faster, less expensively and more conveniently than could be
conducted previously.
Prior to the 1975 passage of a law that deregulated brokerage
commissions, an individual investor could access the financial markets only
through a full-commission broker. The deregulation of brokerage commissions led
to the emergence of the discount brokerage firms, which gave rise to the
electronic brokerage firms. Electronic brokerage services permit investors to
reduce further brokerage costs and expand clients' access to information. As
investors obtain more access to investment information, we believe they will
desire greater control over their financial decisions and seek alternative ways
to invest more conveniently and cost-effectively. We believe that this trend has
created a growing opportunity to provide online trading services that are easy
to use, cost-effective and secure.
In recent years, there has been substantial growth in the ownership of
equity and fixed income securities worldwide. According to the Investment
Company Institute, total financial assets of U.S. households were $14.0 trillion
at the end of 1995, and are expected to grow to over $22.5 trillion by the year
2000. These assets are invested in, among other things, more than 8,500 publicly
traded companies in the United States, including more than 2,900 companies that
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have completed initial public offerings in the last five years, and thousands
more internationally. The growth in financial assets has resulted from a number
of factors, including an increase in the number of mutual funds and increased
cash flows into those mutual funds, households allocating more of their assets
to equity investments, sustained high returns in the equity markets over a
number of years, and lower trading costs as a result of regulatory changes and
improved technologies.
The online brokerage services segment of the brokerage industry has
undergone rapid growth and is expected to continue to grow significantly. Piper
Jaffray estimates that at June 30, 1999, there were 9.7 million online accounts,
compared to 3.7 million in 1997 and 7.3 million in 1998. Piper Jaffray also
reported a daily average of 547,500 online trades during the three months ended
June 30, 1999. Earlier this year, CS First Boston estimated that online trades
account for almost one in every six stock market trades. Forrester Research
predicts that by 2003, 9.7 million households in the United States will hold
greater than $3 trillion in 20.4 million accounts, compared to $415 billion in
1998, an increase of more than 700%.
Internet Industry Overview
The Internet has emerged as a significant global communications medium,
enabling millions of people to share information and conduct business
electronically, and providing advertisers and businesses with an attractive
means of marketing and selling their products and services. International Data
Corporation estimates the number of users accessing the Web will increase from
approximately 142 million at the end of 1998 to approximately 502 million by the
end of 2003. According to International Data Corporation, the amount of commerce
conducted over the Web will top $1 trillion by 2003. Forrester Research
estimates that the amount spent on online advertising in the United States is
expected to increase from approximately $2.8 billion in 1999 to approximately
$22.2 billion by 2004. The Internet enables features and functions that are
unavailable in traditional media, permitting online retailers to interact
effectively with customers and advertisers to target specific demographic groups
by capturing valuable data on customer tastes, preferences and shopping and
buying patterns.
Seniors' increasing use of the Internet and their importance in the economy
Seniors represent an attractive demographic group for advertisers and
businesses. According to Jupiter Communications, 10.7 million older adults were
online at the end of 1998. By 2003, Jupiter predicts that number to increase to
27.3 million. We believe that seniors are increasing their use of the Internet
for commercial purposes. Although seniors are underrepresented in the online
spending category, accounting for a small proportion of online sales in 1998, we
expect this gap to narrow over the next several years as more seniors become
comfortable with and embrace the Internet.
Although seniors are increasingly turning to the Internet, we believe
that many are frustrated by the technical challenges and social distance
inherent in going online, and are thus unable to maximize their enjoyment and
fulfillment. Our website offers solutions and support for seniors managing
finance and health issues, and we anticipate that it will soon offer topics such
as families, travel and leisure, shopping and relationships. We intend our
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networks to do more than merely supply information and content; they will
integrate information, feature senior citizen experts, peer interaction,
workshops, and, perhaps most importantly, the opportunity to open an account at
Shochet Online! and establish a relationship with one of our experienced
brokers. We believe that our services will provide members of the Shochet
community a personal touch seldom found on the Internet.
Traditional Product Lines
Equities
We offer access to all United States equities and to equities in most
foreign markets. We do not make markets in equity securities and do not maintain
any inventory positions of equities for customers to purchase, except that we
take principal positions on a case-by-case basis only to facilitate customer
transactions. Equity executions are automatically routed to a third party market
maker, wholesale trader or an electronic clearing network to achieve the best
execution for our customers.
Fixed Income
We maintain a trading desk to locate, buy and sell fixed income
securities, such as municipal bonds, corporate bonds, government securities,
notes and other fixed income products. We maintain inventories in fixed income
securities on a case-by-case basis only to facilitate customer transactions.
Research Services
We provide our customers with research prepared by several sources
including Ryan, Beck & Co. Southeast Research Group, EarlyBirdCapital and our
clearing firm, Schroder. We make this research available in our branches,
enclose it in customer statements and provide it on our website.
Mutual Funds
We sell and market mutual funds to our customers from numerous mutual
fund providers. Our customers have access to over 4,000 mutual funds through
Schroder.
Insurance Products
Our insurance division markets a range of fixed and variable annuities,
universal life insurance, term life insurance, long term health care insurance
and other insurance products. We expect to increase our emphasis on this
business and our marketing efforts of these and related products through the
expansion of our insurance division into a financial planning division, Shochet
Financial Services Group.
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Other Products and Services
We offer additional investment products, such as retirement accounts,
check writing, cash management accounts, debit cards and other products.
Online Brokerage Services
Our online brokerage services enable customers to:
o enter orders to sell or buy equities;
o review the securities positions in their portfolios with
real-time posting of positions;
o determine their buying power and margin balances (if
applicable);
o obtain real-time and delayed stock quotes.
Our website offers earnings reports, stock performance, charting and
screening capabilities, company news and other research.
Investment Banking
We intend to expand our full-service operations to include investment
banking. We have recently received approval to co-manage or participate as a
selling group member in public offerings. Our customers will have the ability to
participate in corporate finance transactions, including initial public
offerings and private placements of other companies, distributed through our
sister company, EarlyBirdCapital. This product line will provide an additional
source of revenue for us.
Marketing and Advertising
Historically, our brokerage marketing efforts have been limited to
advertisements in local news publications and local radio. We intend to build
brand awareness, attract new customers and sell our existing customers
additional products and services by marketing our online brokerage services
through advertisements appearing in various online sites, in a broader variety
of newspapers and magazines, on the radio and through inserts appearing in
monthly customer statements. To date, these efforts have been limited, but we
have allocated a significant portion of the proceeds derived in our initial
public offering to this endeavor. In addition, we plan to sponsor seminars and
educational programs on topics such as estate planning and tax savings
workshops.
Clearing Arrangements
We do not hold any funds or securities of our clients nor do we
directly execute and process either our own or our clients' securities
transactions. We currently carry our customer accounts and clear our customer
orders through Schroder. Each account carried by Schroder is covered by the
Securities Investors Protection Corporation, or SIPC, which provides each client
insurance for an aggregate of $500,000 in assets, which includes a maximum of
$100,000 in cash or cash equivalents. Each account carries an additional $99.5
million in coverage, which coverage is provided by an outside insurance company.
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Our agreement with Schroder provides that it process all securities
transactions for our account and the accounts of our clients for a fee. Services
include billing and credit control and receipt, custody and delivery of
securities, for which we pay a per ticket charge. We have agreed to indemnify
and hold Schroder harmless from certain liabilities or claims, including claims
arising from the transactions of its clients, which could be material in amount.
Our clearing agreement may be terminated by either party upon 60 days' written
notice. We depend on the operational capacity and the ability of Schroder for
the orderly processing of transactions.
Account Security
We use proprietary and industry standard security measures to protect
our clients' assets. Online clients will be assigned individual account numbers,
user identification and passwords that must be input each time they log on to
the system. In accordance with standard industry practices, telephone orders
require authentication through personal identification numbers, passwords or
other personal information. In addition, our trade processing system compares
our account database with the clearing firm's account information on a daily
basis to detect any discrepancies.
We rely on encryption and authentication technology, including public
key cryptography technology licensed from other parties, to provide the security
and authentication necessary to effect the secure exchange of information.
Firewalls and other software limit not only system access to the
authorized users, but also the authorized users to specifically approved
applications. This firewall software prevents unauthorized access to critical
areas of our system such as account information.
We have implemented policies relating to the transfer or withdrawal of
funds by clients to prevent unauthorized withdrawals. Checks will be issued only
in the account holder's name and wire transactions will be sent only to a bank
account in the account holder's name.
Client Support
Our client service organization handles product and service inquiries
and addresses all brokerage and technical questions. Live client support is
available 10 hours a day from 8:00 a.m. to 6:00 p.m. EST Monday through Friday.
We employ 5 client service associates, who are available to accept and execute
client orders, research past trades, discuss account information, and provide
detailed technical support to those customers not requiring the attention of our
full service brokers.
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Risk Management
Our risk management is implemented through a risk management principal,
our legal and compliance departments and an operations group comprised of our
personnel and Research Partners' supervisory personnel.
Risk Management
Our in-house risk management principal monitors and maintains firm and
customer margin credit and securities concentrations and monitors our adherence
to securities and lending regulations.
Legal and Compliance
Aided by Research Partner's legal and compliance departments, we
maintain a comprehensive compliance program, which monitors and implements
policies to ensure our adherence to securities laws, regulations and rules,
rules imposed by the self-regulatory organizations, lending rules and other
similar rules and regulations to which we are subject. Our own compliance
department will continue to operate in conjunction with Research Partners'
compliance department for the foreseeable future.
Operations
Our operations department plays a key role in the day-to-day function
and control of our business. Its duties include ensuring that all checks have
been properly deposited into customer accounts, that all disbursements have been
distributed accurately and that all customer account applications are processed
correctly, among others.
Relationship with Research Partners
Four of our seven directors serve simultaneously as officers or
directors of Research Partners or its other subsidiaries. Service as a director
or officer of both us and Research Partners or its subsidiaries could create
conflicts of interest if these directors and officers are faced with decisions
that could have materially different implications for us and for Research
Partners. If and when a conflict of interest arises, our directors intend to
take all actions necessary to comply with their fiduciary duties to our
stockholders under Delaware law. Our charter provides for the limitation of
liability of our officers, directors and employees who serve in similar
capacities for Research Partners in situations where there may be a breach of
fiduciary duty caused by conflicts of interest between us and Research Partners.
We have entered into an intercompany services agreement with Research
Partners and its subsidiaries. Its material terms are summarized below. This
agreement was not negotiated on an arms-length basis, but we believe its terms
are no less favorable to us than those that could have been obtained from an
unaffiliated third party. Our by-laws also provide that we will not enter into
new material agreements with Research Partners unless those agreements are
approved by a majority of our directors who are not affiliated with Research
Partners. This provision can be amended only by a majority of non-affiliate
directors.
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Intercompany Service Agreement
The intercompany services agreement permits us to obtain services as
needed from Research Partners and its affiliates on a cost reimbursement basis.
The services we anticipate receiving under the agreement include accounting and
bookkeeping, financial planning and financial reporting, internal audit, legal,
computer management, records management, payroll management, purchasing
assistance, regulatory compliance, marketing, human resources management and
compliance, tax reporting and tax filing, office services and office space. We
may change the scope of services or obtain them from another party at our
discretion. Services provided by Research Partners will be performed by
personnel of Research Partners or one of the subsidiaries, who will be held to a
standard of care equal to that of their work for their employer. Either Research
Partners or we may cancel the agreement upon 60 days' notice. Additionally,
either party may cancel the agreement in the event of breach by the other party,
which has not been cured, or by liquidation, bankruptcy or insolvency of the
other party. We, in turn, will provide services to Research Partners when
requested, also on a cost reimbursement basis. The terms of this agreement may
not be changed unless a majority of our non-affiliate directors consent. Unless
terminated earlier, the agreement will be effective until the earlier of the
date Research Partners owns less than 50% of our outstanding capital stock or
three years from the date of this prospectus.
Competition
We encounter intense competition in all aspects of the securities
business and compete directly with other securities firms, a significant portion
of which have greater capital and other resources. Our competition includes
traditional full service and discount brokerage firms that also utilize the
Internet to transact retail brokerage business, including Merrill Lynch & Co.,
Charles Schwab, TD Waterhouse Securities, Morgan Stanley Dean Witter & Co, Quick
and Reilly and Prudential Securities. Additionally, we face competition from
Internet-based firms such as Datek Securities Corp., Ameritrade and E*Trade,
Inc. Other sources of competition, such as commercial banks, mutual funds, and
insurance companies, have entered our market. We believe that the principal
factors affecting competition in the securities industry are the quality and
abilities of professional personnel and the quality, range and relative prices
of services and products offered. While we do not expect to provide the lowest
commissions available, we expect to compete on the basis of quality customer
service and availability of professional advice and service. Our Internet-based
commissions range from approximately $14.95 to $49.95, depending on the nature
of services provided by us, for trades of fewer than 2,000 shares.
Non-Internet-based trade commissions range from $40 for 100 shares to
approximately $450 for 5,000 shares.
A wide range of prices, services and products exist among firms that
are primarily Internet-based brokerage operations. Many firms, such as Datek,
Ameritrade and E*Trade feature listed commission prices lower than ours. Unlike
us, however, these firms do not assign a permanent full service broker ready to
assist the client when needed.
Other firms such as Muriel Siebert, Quick & Reilly and Merrill Lynch
Direct feature branch office networks similar to ours and, like us, assign
brokers to their customers' online accounts. However, when an Internet client of
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these firms trades with his or her assigned broker, the customer is charged the
same listed commission as a non-Internet client. When one of our online clients
uses his or her assigned broker, on the other hand, the client is charged a
commission discounted from commissions charged to our non-Internet clients.
Competition from Internet companies
The market for members, visitors and Internet advertising is new and
rapidly evolving, and competition for members, visitors and advertisers is
intense and is expected to increase significantly in the future. We expect that
competition will continue to intensify as there are few barriers to entry.
We believe that the primary competitive factors in the creation of an
online community are:
o brand recognition;
o quality of service;
o demographic focus;
o member affinity and loyalty;
o functionality;
o variety of value-added services;
o ease-of-use; and
o reliability and critical mass.
Other companies or sites which are primarily focused on targeting
seniors online include Seniors.com and SeniorSite.com as well as Websites
targeted to categories such as health. We will likely also face competition in
the future from:
o developers of Web directories;
o search engine providers;
o content sites;
o commercial online services;
o sites maintained by Internet service providers; and
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o other entities that attempt to establish communities on the
Internet by developing their own or purchasing one of our
competitors.
There can be no assurance that our competitors and potential
competitors will not develop communities that are equal or superior to ours or
that achieve greater market acceptance than our community.
We also compete with traditional forms of media, such as newspapers,
magazines, radio and television, for advertisers and advertising revenues. We
believe that the principal competitive factors in attracting advertisers are:
o the amount of traffic on our Websites;
o brand recognition;
o the demographics of our members and visitors;
o our ability to offer targeted audiences; and
o the overall cost-effectiveness of the advertising medium
offered by us.
We believe that the number of Internet companies relying on Web-based
advertising revenues will increase greatly in the future. Accordingly, we will
likely face increased competition, which could in turn have a material adverse
effect on our business, results of operations and financial condition.
Many of our current and potential competitors, including developers of
Web directories and search engines and traditional media companies, have:
o longer operating histories;
o significantly greater financial, technical and marketing
resources;
o greater name recognition; and
o larger existing customer bases.
These competitors are able to undertake more extensive marketing
campaigns for their brands and services, adopt more aggressive advertising
pricing policies and make more attractive offers to potential employees,
distribution partners, commerce companies, advertisers and third-party content
providers. There can be no assurance that Internet content providers and
Internet service providers, including developers of Web directories, search
engines, sites that offer professional editorial content and commercial online
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services, will not be perceived by advertisers as having more desirable
Websites for placement of advertisements. Accordingly, there can be no assurance
that:
o we will be able to grow our membership, traffic levels and
advertiser customer-base at satisfactory levels;
o competitors will not experience greater growth in traffic as a
result of these relationships which could have the effect of
marking their Web sites more attractive to advertisers; or
o our strategic partners will not sever or will elect not to
renew their agreements with us.
There can be no assurance that we will be able to compete successfully
against our current or future competitors or that competitive pressures faced by
us will not have a material adverse effect on our business, results of
operations and financial condition.
Government Regulation
The securities industry in the United States is subject to extensive
and frequently changing federal and state laws and substantial regulation by the
SEC and various state agencies and regulatory organizations, such as the NASD.
Shochet Securities is registered as a broker-dealer with the SEC and is a member
firm of the NASD. Much of the regulation of broker-dealers has been delegated to
self-regulatory organizations, principally NASD Regulation, Inc., known as
NASDR, which has been designated by the SEC as the primary regulator of Shochet
Securities. NASDR adopts rules that govern members of the NASD and conducts
periodic examinations of member firms' operations. Securities firms are also
subject to regulation by state securities administrators in those states in
which they conduct business. Shochet Securities is registered as a broker-dealer
in 38 states and the District of Columbia.
Broker-dealers are subject to regulations which cover all aspects of
the securities business, including sales methods and supervision, trading
practices among broker-dealers, use and safekeeping of customers' funds and
securities, capital structure of securities firms, record keeping and the
conduct of directors, officers and employees. Additional legislation, changes in
rules promulgated by the SEC and self-regulatory organizations or changes in the
interpretation or enforcement of existing laws and rules may directly affect the
mode of operation and profitability of broker-dealers. The SEC, self-regulatory
organizations and state securities commissions may conduct administrative
proceedings that can result in censure, fine, the issuance of cease-and-desist
orders or the suspension or expulsion of a broker-dealer, its officers or
employees. The principal purpose of regulation and discipline of broker-dealers
is the protection of customers and the integrity of the securities markets.
We are subject to federal and state securities laws, which govern the
offer and sale of securities and the operation of the securities markets and
broker-dealers. When enacted, these securities laws did not contemplate the
conduct of a securities business through the Internet. Although the SEC has
provided guidance on various issues related to the offer and sale of securities
and the conduct of a securities business through the Internet, the application
of the laws to the conduct of a securities business through the Internet
continues to evolve.
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Net Capital Requirements
The SEC, NASD and other self-regulatory agencies have stringent rules
requiring the maintenance of specific levels of net capital by securities
brokers, including the SEC's uniform net capital rule. As of January 31, 2000
Shochet Securities was required to maintain minimum net capital of $100,000 and
had total net capital of approximately $195,000, which was $95,000 in excess of
the required amount.
If we fail to maintain the required net capital, we may be subject to
suspension or revocation of registration by the SEC and suspension or expulsion
by the NASD and other regulatory bodies, which ultimately could require our
liquidation. In addition, a change in the net capital rules, the imposition of
new rules, a specific operating loss, or any unusually large charge against net
capital could limit our operations that require the intensive use of capital and
could limit our ability to expand our business. The net capital rules also could
restrict our ability to withdraw capital, which could limit our ability to pay
dividends, repay debt and repurchase shares of our outstanding stock.
Trademark
We have registered the trademark "Shochet Online!" in the United
States, which appears on our website. We own no other trademarks, patents or
registered copyrights.
Employees
In April, we had a total of 75 employees; 37 of which are registered
representatives, 26 of which are support staff, and 12 of which are management
personnel, who are also registered. We believe our relations with our employees
are generally good and we have no collective bargaining agreement with any labor
unions.
ITEM 2. DESCRIPTION OF PROPERTIES
<TABLE>
<CAPTION>
Approx.
Sq. Annual
Location Footage Lease Exp. Lease Payments
- -------- ------- ---------- --------------
<S> <C> <C> <C>
Hallandale (principal office)............................ 5,000 February 2006 $129,000
Boca Raton............................................... 1,500 October 2004 $60,000
Miami Beach.............................................. 3,000 April 2003 $71,000
South Miami.............................................. 3,155 November 2003 $76,000
Tamarac.................................................. 2,516 June 2001 $45,000
Delray Beach............................................. 2,400 November 2002 $36,000
</TABLE>
We have not yet commenced active operations in our Boca Raton office.
We intend to open this office during the second quarter of calendar 2000.
14
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, our principals and we are, and may
become a party to, legal or regulatory proceedings or arbitrations. Except as
described below, no pending legal proceeding is expected to have a material
adverse effect on our financial condition or results of operations.
In August 1999 Shochet Securities was found jointly and severally
liable with respect to an arbitration claim by a former customer against Shochet
Securities, a current employee and a former employee regarding unauthorized
execution of transactions in the former customer's account and improper
disbursements from the account during the period from June 1995 through November
1996. The former customer was awarded approximately $211,000 in compensatory and
punitive damages, interest and costs. In November 1999, Shochet Securities
agreed to pay $200,000 to settle the former customer's claim for attorney's
fees. Research Partners paid an aggregate of $411,000 on behalf of Shochet
Securities. Research Partners believes it has a claim against the former owners
of Shochet Securities for indemnification of the amounts it has paid since it
believes that most of the activity upon which the former customer's complaint
was based occurred prior to Research Partners' acquisition of Shochet
Securities. If Research Partners collects under this indemnification, it would
reduce the amount Shochet Securities would be required to reimburse Research
Partners. We have reached an agreement in principle with the previous owners of
Shochet Securities whereby Research Partners will be reimbursed approximately
$271,260. To date, $9,000 has been received. We anticipate the remainder of
these payments will be received within 24 months.
In January 2000, the Division of Securities and Investor Protection of
the Department of Banking of the State of Florida notified us that, based on the
circumstances described in the paragraph above, it believed that Shochet
Securities, the current employee and a former member of our management, had
violated provisions of the Florida Securities and Investor Protection Act.
Although the Division of Securities and Investor Protection proposed a
settlement to us at the same time as we were informed of its interest in this
matter, we intend to explore our options to defend or otherwise resolve this
matter. There can be no assurance that this matter will be resolved in a manner
favorable to us. The proposed settlement would have no material adverse effect
on our financial condition or results of operations, although adverse publicity
associated with acceptance of the proposed settlement might materially hurt our
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of fiscal 2000.
15
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Dividends
To date, we have not paid any dividends on our common stock. The
payment of dividends, if any, in the future is within the discretion of the
Board of Directors and will depend upon our earnings, its capital requirements
and financial condition, and other relevant factors. Our ability to pay
dividends in the future also may be restricted by our brokerage subsidiaries'
obligations to comply with the net capital requirements imposed on
broker-dealers by the SEC and the NASD. We do not intend to declare any
dividends in the foreseeable future, but instead intends to retain all earnings
for use in our business.
Market Information
Our common stock began trading on the Nasdaq SmallCap Market System
under the symbol SHOC on March 15, 2000. On April 28, 2000, the last sale price
of our common stock was $2.50 per share. There was no trading market for our
securities before our initial public offering.
On March 31, 2000, there were approximately 11 holders of record of
our common stock. We believe there are in excess of 700 beneficial owners of our
common stock.
Sales of Unregistered Securities
In fiscal 2000, as part of a corporate reorganization into a holding
company structure, Research Partners contributed all 200,000 issued and
outstanding shares of Shochet Securities to Shochet Holding Corp. in exchange
for 1,200,000 shares of common stock of Shochet Holding Corp. Inasmuch as this
transaction did not involve a public offering, this transaction was exempt from
registration within the meaning of Section 4(2) of the Securities Act.
Public Offering
On March 14, 2000, the Securities and Exchange Commission declared
effective our registration statement on Form SB-2 in connection with our initial
public offering. A total of 1,045,000 shares of our common stock (including
45,000 shares issued pursuant to the exercise of the underwriters'
over-allotment option) were sold at a price of $9.00 per share to the
underwriters Gaines, Berland Inc. and Shochet Securities, Inc. The aggregate
gross proceeds raised in connection with the IPO were $9,405,000.
As of April 28, 2000, none of our net proceeds from the IPO had been
utilized. Our net proceeds will be used for advertising and promotion, repayment
of debt owed Research Partners, branch office and expansion, hiring of
personnel, technology improvements, and working capital and general corporate
purposes.
16
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following analysis of the consolidated results of operations and
financial condition of us and Shochet Securities should be read in conjunction
with our consolidated financial statements included elsewhere in Item 7 of this
document.
Business Environment
Our primary business activity, full service discount brokerage, is
subject to general economic and market conditions and the volatility of trading
markets. The twelve-month period ended January 31, 2000 was characterized by
favorable market conditions, which represented a recovery from the negative
effects caused by volatile market conditions which characterized most of fiscal
1999.
Our focus is to develop our presence as an Internet brokerage firm and
continue to develop our physical presence as a premier discount broker in
Florida. This focus led us to discontinue the on-site day trading segment of our
business in July 1999 which had proven unprofitable. The results of operations
of the on-site day trading segment is separately disclosed in the statement of
operations as discontinued operations.
Results of operations for any individual period should not be
considered representative of future profitability. A substantial portion of our
expenses is fixed and does not vary with market activity. Substantial
fluctuations could occur in our revenues and profitability from period to
period.
Results of Operations
Year ended January 31, 2000 vs. year ended January 31, 1999
Net loss for the year ended January 31, 2000 was $538,000, as compared
to a net loss of $327,000 for the year ended January 31, 1999. Loss from
continuing operations for the year ended January 31, 2000 was $211,000, as
compared to income of $75,000 for the same period in fiscal 1999. Basic and
diluted loss per share of common stock was $0.45 for fiscal year 2000, compared
to a loss of $0.27 for fiscal 1999. Basic and diluted loss from continuing
operations per common share was $0.18 for the year ended January 31, 2000, as
compared to earnings of $0.06 per common share for fiscal 1999.
Revenues
Total revenues increased by 5% to $8,112,000 for fiscal 2000, as a
result of increases in all revenue categories.
17
<PAGE>
Commission revenues increased by 2%, or $141,000, in fiscal 2000. This
was due to a 22% increase in trade volume, partially offset by a 17% decrease in
average commissions per ticket.
Interest revenues increased 29%, or $174,000, in fiscal 2000 as a
result of increased interest on customer balances held at our clearing firm.
Other revenues increased 176%, or $44,000 primarily due to the
collection of inactive account fees in fiscal 2000 and increased order flow
income in fiscal 2000 as compared with fiscal 1999.
Expenses
Total expenses for fiscal 2000 were $8,363,000, a 9% increase from
$7,653,000 for fiscal 1999. The increase is attributable to increases in all
expense categories, except for decreases in occupancy and equipment, and
communication expenses.
Compensation and benefits expense increased 7% or $301,000. The
majority of these expenses are variable because commissions to brokers are paid
as a percentage of commission revenues generated. The increase is consistent
with the increase in commission revenue for the same period.
Brokerage, clearing and exchange fees increased 10%, or $109,000. This
increase is consistent with our increase in trade volume.
Occupancy and equipment expense decreased 3%, or $18,000, primarily due
to lower equipment and repair costs.
Communications expenses decreased 3%, or $21,000, primarily due to
lower costs of obtaining market data services.
Management fee expense of $228,000 was consistent with the prior year.
We pay GKN Securities a management fee for services rendered to us in connection
with its provision of accounting, legal, compliance and executive management
services.
Business development expenses increased by 148%, or $158,000, due to
increased advertising and promotional activities.
Professional fees increased 22%, or $21,000, primarily due to
consulting services in connection with technological and structural improvements
throughout several branch offices.
Other expenses increased 32%, or $160,000 primarily due to a reserve
for contingencies recorded in the third quarter of fiscal 2000 related to an
arbitration claim by a former customer against Shochet Securities.
18
<PAGE>
Income taxes
For the year ended January 31, 2000, we recognized a total tax benefit
of $209,000, primarily resulting from the loss from both discontinued and
continuing operations, partially offset by the recognition of a valuation
reserve for the recognition of future deferred tax benefits of $31,000. This
compares to a $25,000 tax expense in the prior year as a result of the gain from
operations and a tax benefit of $132,000 generated by the loss from discontinued
operations.
Discontinued Operations
On July 31, 1999, management discontinued the operations of the on-site
day trading segment of our business. Losses from the discontinuation of this
segment were estimated and recorded at this date and are included in loss from
discontinued operations for fiscal 2000 of $327,000, which compares with losses
of $402,000 for the prior fiscal year. Each of these losses are net of the
income tax benefit recognized in conjunction with each of them of $169,000 and
$132,000, respectively. All equipment and contracts utilized by this segment
have been renegotiated or are in use by other branches of our company, with the
result that we do not expect the costs of disposal to generate additional
losses.
Weighted average common shares outstanding
The average number of common shares outstanding used in the computation
of basic and diluted loss per common share was 1,200,000 for each of the fiscal
periods presented.
Liquidity and Capital Resources
Approximately 26% of our assets at January 31, 2000 were highly liquid,
consisting primarily of cash and cash equivalents, securities inventories and
receivables from other broker-dealers, all of which fluctuate depending upon the
levels of customer business and trading activity. Receivables from
broker-dealers, which are primarily from our clearing broker, turn over rapidly.
As a securities dealer, we may carry significant levels of securities
inventories to meet customer needs. Our inventory of securities is readily
marketable; however, holding large blocks of the same security may limit
liquidity and prevent realization of full market value for the securities. The
total assets or the individual components of total assets may vary significantly
from period to period because of changes relating to customer demand and
economic and market conditions.
In March 2000, we sold 1,045,000 shares of our common stock to the
public through an initial public offering under SEC Form SB-2. The stock was
priced at $9 per share. We raised gross proceeds of $9,405,000.
Our brokerage subsidiary, Shochet Securities, is subject to the net
capital rules of the NASD and the SEC. Therefore, we and Shochet Securities are
subject to restrictions on the use of capital and related liquidity. In August
1999 and February 2000 Research Partners contributed $2,000,000 of additional
regulatory capital in the form of additional paid-in capital and subordinated
debt. $1,500,000 of this amount was repaid to Research Partners in April 2000.
Shochet Securities' net capital position as of January 31, 2000, was $195,000,
which was $95,000 in excess of its net capital requirements.
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<PAGE>
We continually review our overall capital and funding needs to ensure
that our capital base can support the estimated needs of our business. Our
review takes into account business needs as well as regulatory capital
requirements of our subsidiary. Based upon these reviews, we believe that the
funds on hand following our initial public offering generated are sufficient to
fund our capital requirements for at least the next 24 months.
ITEM 7. FINANCIAL STATEMENTS
See our Financial Statements beginning on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Our directors, executive officers and key employees are as follows:
<TABLE>
<CAPTION>
NAME POSITION
- ---- --------
<S> <C>
Roger N. Gladstone...................................... Chairman of the Board and Chief Executive
Officer
David F. Greenberg...................................... President, Chief Operating Officer and Director
Howard B. Landers....................................... Executive Vice President-Online Products and
Director
Andrew W. Lockwood...................................... Executive Vice President-Business Development
and General Counsel
Arnold I. Roseman....................................... Chief Financial Officer of Shochet Securities
Richard Y. Roberts...................................... Director
James I. Krantz......................................... Director
John P. Margaritis...................................... Director
John P. Reynolds........................................ Director
</TABLE>
Roger N. Gladstone, 45 years old, has served as our chairman and chief
executive officer since November 1999, and an executive officer and director of
Shochet Securities since it became a subsidiary of Research Partners in November
1995. Mr. Gladstone has served as vice chairman of the board of Research
Partners since June 1999 and as a director of that company since January 1987.
From 1987 to June 1999, he served as president of Research Partners. He also
serves as a director of GKN Securities, GKN Realty Corp. and GKN Property
Management, subsidiaries of Research Partners. He is also a member of the Young
Presidents Organization and an honorary member of the board of directors of the
Sid Jacobson Community Center in Roslyn, New York. Mr. Gladstone is a director
of No Small Affair South, a charitable foundation which provides positive
experiences for disadvantaged children. From 1984 through 1986, Mr. Gladstone
was engaged primarily in the acquisition, management, syndication and operation
of real estate projects. From 1980 through 1984, Mr. Gladstone was engaged in
the private practice of law in New York. Mr. Gladstone received his B.A. from
Stanford University, his M.B.A. from New York University and his J.D. from the
Benjamin N. Cardozo School of Law, Yeshiva University. Mr. Gladstone is a member
in good standing of both the New York and Florida Bar Associations.
David F. Greenberg, 52 years old, has served as our president, chief
operating officer and director since November 1999, and as chief operating
officer and director of Shochet Securities since it became a subsidiary of
Research Partners in November 1995. He has served as president of Shochet
Securities since June 1999. Mr. Greenberg was employed by GKN Securities from
1991 to July 1999, initially as director of Compliance then as branch manager of
GKN Securities' New York office. In January 1996, he became senior vice
president and director of Operations and Risk Management, in which capacity he
served until January 2000. From 1985 to 1986, Mr. Greenberg served as president
21
<PAGE>
and chief executive officer of First New York Discount Corp., a broker-dealer,
which he founded. From 1978 to 1985, Mr. Greenberg served in several capacities,
including as director of Compliance and Branch Liaison Manager and General
Securities and Options Principal for US Clearing Corp. Mr. Greenberg also serves
as a member of Securities Industry Association-Discount Brokerage Committee Year
2000.
Howard B. Landers, 43 years old, became our executive vice
president-online products in November 1999 and has served as an executive
officer of Shochet Securities since February 1998. From October 1994 through
January 1998, Mr. Landers provided compliance, operations, trading and marketing
consulting services to NASD member firms through Coral Capital Group, Inc., a
consulting firm of which Mr. Landers was a principal. From 1990 to October 1994,
Mr. Landers held various executive and supervisory positions with VereinWest
Capital Markets, First Banquehouse Investment Group, and The Partners Financial
Group, all of which are broker dealers. From 1979 to 1989, Mr. Landers was
employed by Merrill Lynch & Co., Inc. in various capacities, including
supervisory positions in the areas of operations, compliance, trading and as a
registered representative.
Andrew W. Lockwood, 31 years old, has served as executive vice
president - business development and general counsel of each of Shochet Holding
Corp. and Shochet Securities since April 2000. From April 1999 to April 2000,
Mr. Lockwood was employed as an attorney in the corporate and securities
department of Atlas Pearlman, P.A., a law firm located in Fort Lauderdale,
Florida. Since April 2000, Mr. Lockwood has served on the board of directors of
Virtual Academics.com, Inc., a publicly traded Internet distance learning
company (OTC-BB: VADC). From November 1999 to the present, Mr. Lockwood has
served on the board of directors, and, until April 2000, as an executive
officer, of Educational Trading Tools, Inc., a privately held financial software
educational company, which he co-founded. From September 1996 to March 1999, Mr.
Lockwood was employed as an attorney in the corporate and securities department
of Graubard Mollen & Miller, a law firm located in New York, New York. Mr.
Lockwood received his J.D. from St. John's University School of Law and his B.A.
from Wesleyan University. Mr. Lockwood is a member in good standing of both the
New York and Florida Bar associations.
Arnold I. Roseman, 52 years old, has served as chief financial officer
of Shochet Securities since March 2000. From March 1999 to February 2000, Mr.
Roseman served as Director of Compliance of First Colonial Securities Group, a
broker-dealer located in Boca Raton, Florida. From February 1994 to October
1998, Mr. Roseman served as Compliance Director for Biltmore Securities, Inc.
From 1983 to 1993, Mr. Roseman served as Senior Vice President and CFO of First
Institutional Securities. In addition, from 1973 to 1976, Mr. Roseman was
employed by the National Association of Securities Dealers as a senior examiner
and performed special projects for Nasdaq in Washington DC. Mr. Roseman received
his B.A.-Finance (cum laude) from Franklin Pierce College.
Richard Y. Roberts, 48 years old, has served as our director since
November 1999 and as a director of Research Partners since December 1997. Mr.
Roberts became affiliated with Thelen Reid & Priest LLP in January 1997, as
counsel, where he participates in its Business and Finance, Infrastructure and
Government and Utility and Energy Practice Groups. From August 1995 to December
1996, Mr. Roberts served as General Counsel to Princeton Venture Research, Inc.,
22
<PAGE>
a venture capital securities consulting firm. From October 1990 to July 1995,
Mr. Roberts served as a Commissioner of the Securities and Exchange Commission.
Prior to his tenure with the Securities and Exchange Commission, Mr. Roberts
served as the administrative assistant and the legislative director for
then-Congressman and later Senator Richard Shelby. Mr. Roberts is a member of
the Legal Advisory Board of the NASD, the Advisory Board of Securities
Regulation & Law Reports, the Editorial Board of the Municipal Finance Journal,
and the National Board of Policy Advisors of the Institute of Law and Economic
Policy. He is a graduate of Auburn University where he received his B.S. in
Electrical Engineering. He received his J.D. from the University of Alabama
School of Law and his Master of Laws from the George Washington University Law
Center. Mr. Roberts is a member of the Alabama Bar and the District of Columbia
Bar.
James I. Krantz, 44 years old, has served as our director since
November 1999 and as a director of Research Partners since September 1990. Since
1977, Mr. Krantz has served as a Property, Casualty and Life Insurance Broker
and has been engaged in real estate management and investment. From 1993 to
September 1997, Mr. Krantz served as vice president, and since 1997, president
and chief executive officer, of York International Agency, Inc., a full service
insurance agency. Mr. Krantz received his B.A. from Syracuse University and
holds a Chartered Property Casualty Underwriter designation.
John P. Margaritis, 50 years old, has served as one of our directors
since February 2000, as president and chief executive officer of Research
Partners since December 1999 and as a director of Research Partners since August
1996. He is also a director of GKN Securities and Early Bird Capital Inc.,
subsidiaries of Research Partners. From September 1998 to December 1999, Mr.
Margaritis served as president and chief executive officer of The Hawthorn Group
New York, an international public relations firm. From June 1997 until September
1998, Mr. Margaritis served as chief executive officer of Margaritis &
Associates, a public relations consulting firm. Mr. Margaritis was the president
and chief executive officer of Ogilvy Adams & Rinehart (currently known as
Ogilvy Public Relations Worldwide), a public relations firm, from January 1994
through February 1997, and was the president and chief operating officer from
January 1992 to January 1994. From July 1988 until January 1992, Mr. Margaritis
was chairman and chief executive officer of Ogilvy & Mathers Public Relations.
Mr. Margaritis is a director and member of the executive committee of the Arthur
Ashe Institution for Urban Health and Research! America, a non-profit
organization to promote government support of medical research, and a member of
the President's Advisory Counsel for the Museum of Television and Radio. Mr.
Margaritis is also a trustee of Washington and Jefferson College. Mr. Margaritis
received his B.A. from Washington and Jefferson College and received his M.A.
from the New School for Social Research.
John P. Reynolds, 55 years old, has served as one of our directors
since February 2000. Mr. Reynolds currently serves as senior manager of
technology operations at Econotek Communications, LLC, a competitive local
exchange carrier, which position he has held since April 1999. From December
1995 to April 1999. Mr. Reynolds owned an information technology consulting
firm. From 1988 to November 1995, Mr. Reynolds served as director, of facilities
and information technology and was limited partner of Mabon Nugent, a fixed
income trading firm. From 1982 to October 1995, Mr. Reynolds served as senior
23
<PAGE>
national account manager in the brokerage-securities industry with AT&T. Mr.
Reynolds has served as chairman of the Security Industry Association's
Telecommunications and Information Management Committee and has served as a
member of that organization and the Wall Street Telecommunications Committee
since 1989. Mr. Reynolds received his B.B.A. from Manhattan College and has
completed coursework at the Massachusetts Institute of Technology.
Each director will hold office until the next meeting of stockholders
or until his successor is duly appointed and qualified. Roger Gladstone is the
brother-in-law of David Nussbaum, a director of Research Partners and director
and chief executive officer of EarlyBirdCapital, the brother of Robert H.
Gladstone, chief executive officer and director of GKN Securities, and the
brother-in-law of Andrew Lockwood, our executive vice president-business
development and general counsel. Mr. Lockwood is also the brother-in-law of
David Nussbaum.
The board of directors has established an audit committee, consisting
of Roger Gladstone, Richard Roberts and James Krantz. The audit committee will
review the scope of accounting audits, policies and recommend to whom reports
should be submitted, review with the independent auditors their final report,
review with internal and independent auditors overall accounting and financial
controls, and be available to the independent auditors during the year for
consultation purposes. In addition, this committee will review any related party
transaction on an ongoing basis for potential conflicts of interest.
The board of directors also established a compensation committee,
consisting of Roger Gladstone, David Greenberg, Richard Roberts and James
Krantz. The compensation committee will review and make recommendations to the
board regarding salaries, compensation and benefits of executive officers and
key employees.
NASDR Matter
In August 1997, GKN Securities and certain of its executive officers,
senior managers or former and present brokers, including Roger Gladstone and
David Greenberg, reached settlements with the NASDR resolving an NASDR
investigation concerning alleged excessive mark-ups on warrants for seven
companies underwritten by GKN Securities and for which it made a market during
the period from December 1993 through April 1996. This settlement was entered
into without admitting or denying the NASDR's allegations. Under the settlement,
GKN Securities consented to sanctions including censure, the payment of
restitution, interest and fines of $1,723,000 and engaged an independent
consultant to review GKN Securities' policies, practices and procedures relating
to the fair pricing and commissions charged to customers and related to
supervisory and compliance policies and structure and agreed to implement the
recommendations of the independent consultant. Roger Gladstone consented to a
censure, a $50,000 fine and a suspension from association in a capacity with any
member of the NASD for 30 days. David Greenberg consented to a $15,000 fine and
to a suspension from any supervisory position with any member of the NASD for 10
days.
24
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
None of our current officers, including Roger Gladstone, who has served
as our chief executive officer since November 1999, received in excess of
$100,000 compensation from us during any of the past three fiscal years. L.
Donald Yarkin, who served as our chief executive officer until November 1999,
received a salary of $157,441 in fiscal 1999, $132,526 in fiscal 1998 and
$144,793 in fiscal 1997. During the past three fiscal years, Mr. Yarkin received
options to purchase an aggregate of 13,000 shares of Research Partners' common
stock, 10,000 of which have an exercise price of $6.00, the remainder of which
have an exercise price of $3.69. These options vest over a period from March 11,
2000 to June 24, 2000 and expire between March 12, 2007 and June 29, 2009.
Employment Agreements
We have entered into employment agreements with each of Roger
Gladstone, David Greenberg, Howard Landers and Andrew Lockwood. The term of each
of Mr. Gladstone's, Mr. Greenberg's and Mr. Landers' agreement commenced on
March 15, 2000 and expires on its one-year anniversary date, or March 15, 2001.
The term of Mr. Lockwood's agreement commenced on April 11, 2000 and expires on
its one year anniversary date, or April 11, 2001. Each employment agreement is
subject to automatic renewals of one-year terms unless 30 days' prior written
notice of termination is given by either party. Each agreement provides for the
granting of options to purchase 36,000 shares of common stock at the per share
offering price of the initial public offering, or $9.00 per share. The options
vest in equal annual installments over a three-year period commencing on the
one-year anniversary date of the employment agreements. Each of Mr. Gladstone's,
Mr. Landers' and Mr. Lockwood's agreement provides for an annual base salary of
$120,000. Mr. Greenberg's agreement provides for an annual base salary of
$150,000. Each agreement provides for a bonus as may be awarded by our board of
directors, in its discretion. Each of the agreements gives the executive the
right to terminate his employment in the event of a change in control of our
company, in which case the executive will be entitled to immediate vesting of
his options and continued payment of his salary and benefits through the
expiration of the then current term of his employment agreement. Mr. Gladstone
and Mr. Lockwood will also be entitled to a minimum bonus of $120,000, and Mr.
Greenberg will be entitled to a minimum bonus of $150,000, in the event of
termination by them because of a change in control. Each of Mr. Gladstone's, Mr.
Lockwood's and Mr. Greenberg's agreement also contains a prohibition on
competing with us for one year after termination of employment for any reason.
Mr. Gladstone's agreement provides that he devote substantially all of his
business time to us; each of Mr. Greenberg's, Mr. Landers' and Mr. Lockwood's
agreement provides for full-time services.
1999 Performance Equity Plan
In November 1999, the board of directors adopted, and in December 1999,
the sole stockholder approved, our 1999 Performance Equity Plan. This plan
authorizes the granting of awards of up to 350,000 shares of common stock to our
key employees, officers, directors and consultants. Awards consist of stock
options (both nonqualified options and options intended to qualify as incentive
stock options under Section 422 of the Internal Revenue Code of 1986),
restricted stock awards, deferred stock awards, stock appreciation rights and
other stock-based awards, as described in the plan. As of April 25, 2000,
25
<PAGE>
194,000 incentive stock options are outstanding under the plan, 144,000 of which
were issued under the employment agreements described above. No options have
vested.
The plan is administered by our board of directors which determines the
persons to whom awards will be granted, the number of awards to be granted and
the specific terms of each grant, including their vesting schedule, subject to
the provisions of the plan.
In connection with incentive stock options, the exercise price of each
option may not be less than 100% of the fair market value of the common stock on
the date of grant (or 110% of the fair market value of the case of a grantee
holding more than 10% of our outstanding stock). The aggregate fair market value
of shares for which incentive stock options are exercisable for the first time
by an employee during any calendar year may not exceed $100,000. Nonqualified
stock options granted under the plan may be granted at a price determined by the
board of directors, not to be less than the fair market value of the common
stock on the date of grant.
26
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of our common
stock by all stockholders that hold 5% or more of the outstanding shares of our
common stock, each director and executive officer. Each stockholder named has
sole voting and investment power with respect to his or its shares. This table
does not include options not exercisable within 60 days of the date of this
report. As of the date of this report, there are 2,245,000 shares of common
stock issued and outstanding.
<TABLE>
<CAPTION>
NAME AND ADDRESS OR NUMBER OF SHARES
IDENTITY OF GROUP BENEFICIALLY OWNED PERCENTAGE
- ------------------------ ------------------ ----------
<S> <C> <C>
Research Partners International, Inc. 1,200,000 55%
One State Street Plaza
New York, New York 10004
Roger N. Gladstone 10,000 Less than 1%
433 Plaza Real, Suite 245
Boca Raton, Florida 33434
David F. Greenberg -0- -0-
2351 East Hallandale Beach Blvd
Hallandale, Florida 33998
Howard B. Landers -0- -0-
2351 East Hallandale Beach Blvd
Hallandale, Florida 33998
Andrew W. Lockwood -0- -0-
433 Plaza Real, Suite 245
Boca Raton, FL 33432
Richard Y. Roberts -0- -0-
Thelen Reid & Priest LLP
701 Pennsylvania Avenue, N.W
Washington, DC 20004-2608
James I. Krantz -0- -0-
One Executive Boulevard
Yonkers, New York 10701
John P. Margaritis -0- -0-
One State Street Plaza
New York New York 10004
John P. Reynolds -0- -0-
352 Seventh Avenue
New York New York 10001
All officers and directors as a group 10,000 Less than 1%
(8 persons)
</TABLE>
Roger N. Gladstone, our chief executive officer, beneficially owns
approximately 13.7%, of the outstanding common stock of Research Partners, our
parent.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We, Shochet Securities, Research Partners and affiliates of Research
Partners engage in a variety of transactions between and among each other in the
ordinary course of our businesses. We have not retained an independent third
party to evaluate transactions with Research Partners and its affiliates and, to
date, there has been no independent committee of the board of directors to
27
<PAGE>
evaluate these transactions. The terms and conditions of these transactions,
including fees or other amounts paid by us connection with these transactions,
were agreed upon by all parties. We believe that the terms of each affiliated
transaction were no less favorable then those that could have been obtained on
an arms-length basis from an unaffiliated party.
All future material transactions with any of our officers, directors or
5% stockholders will be made or entered into on terms no less favorable to any
party than those that can be obtained from unaffiliated third parties. Any
future affiliated transactions must be approved by our independent directors,
who do not have an interest in the transaction and who have access, at our
expense, to their own legal counsel.
In 1996, in connection with the purchase of Shochet Securities by
Research Partners, Shochet Securities entered into a subordinated loan agreement
for $1,000,000 with Research Partners. The loan bears an annual interest rate of
12% and total interest paid was $137,000 for the fiscal year ended January 31,
1999 and $145,000 for the year ended January 31, 1998. All payments under the
note are due in May 2000. We used a portion of the proceeds of our initial
public offering to repay this loan.
In August 1999, Research Partners loaned $500,000 to Shochet Securities
in the form of a subordinated note. The note bears an annual interest rate of
eight percent and its term is for two years, expiring August 31, 2001. In
February 2000, Research Partners loaned $1,500,000 to Shochet Holding in the
form of a demand promissory note bearing an interest rate of 8% per annum.
Shochet Holding, in turn, contributed $500,000 as additional paid-in capital of
Shochet Securities. In March 2000, Shochet Holding lent the remaining $1,000,000
to Shochet Securities as a temporary subordinated loan, as defined by the NASD.
Both of these transactions were effected in order to support the net capital
position of Shochet Securities in its role as an underwriter of the initial
public offering of Shochet Holding. Shochet Securities repaid Shochet Holding
$1,000,000 and Shochet Holding repaid Research Partners $1,500,000.
James Krantz, one of our directors, provides to us commercial property
and umbrella insurance through York Insurance Agency, a company of which he is a
principal. Our aggregate payments to York for each of the past two fiscal years
were $25,415 and $24,816, respectively.
In the year ended January 31, 2000, we paid to GKN Securities a
management fee of an aggregate of $258,000 for management services rendered to
us, which included $30,000 paid for services to discontinued operations no
longer rendered. These services included accounting, legal, compliance and
executive management services. We have paid an aggregate of $283,000 for the
year ended January 31, 1999, which included $55,000 paid for services to
discontinued operations no longer rendered.
We have entered into an intercompany services agreement with Research
Partners under which Research Partners provides us with services on an as-needed
basis on a cost reimbursement basis. These services include: accounting and
bookkeeping; financial planning; financial reporting; internal audit; legal;
computer management; records management; payroll management; purchasing
assistance; regulatory compliance; marketing; human resources management and
compliance; tax reporting and filing; office services and use of office space.
28
<PAGE>
ITEM 13. EXHIBITS, LIST, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibit No.Description
<S> <C>
1.1 -- Form of Underwriting Agreement*
2.1 -- Certificate of Incorporation of Shochet Holding Corp.*
3.2 -- Certificate of Amendment of Shochet Holding Corp.*
3.2(a) -- Certificate of Amendment of Shochet Holding Corp.*
3.3 -- Bylaws of Shochet Holding Corp.*
3.4 -- Amendment No. 1 to Bylaws of Shochet Holding Corp.*
4.1 -- Specimen Common Stock Certificate*
4.2 -- Underwriter's Purchase Option*
10.1 -- 1999 Performance Equity Plan*
10.2 -- Employment Agreement between Shochet Holding Corp. and Roger
Gladstone*
10.3 -- Employment Agreement between Shochet Holding Corp. and David
Greenberg*
10.4 -- Employment Agreement between Shochet Holding Corp. and Howard
Landers*
10.5 -- Intercompany Services Agreement between Research Partners
International, Inc. and Shochet Holding Corp.*
10.6 -- Clearing Agreement between Shochet Securities, Inc. and Schroder & Co,
Inc.*
10.7 -- Form of Option Agreement*
10.8 -- Employment Agreement between Shochet Holding Corp. and Andrew
Lockwood
21.1 -- Subsidiaries of Shochet Holding Corp.*
27.1 -- Financial Data Schedule
</TABLE>
(b) List and Reports on Form 8-K
None
- -----------------------
*Incorporated by reference to our registration statement filed on Form SB-2
registration number 333-92307.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Shochet Holding Corp.
/s/ Roger N. Gladstone
----------------------
Roger N. Gladstone
Chairman of the Board and
Chief Executive Officer (Principal
Executive Officer)
Date: May 15, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on May 15, 2000.
/s/ Roger N. Gladstone Chairman of the Board and Chief
- ---------------------- Executive Officer (Principal
Roger N. Gladstone Executive Officer)
/s/ David F. Greenberg President, Director, Chief Operating
- ----------------------
David F. Greenberg Officer and Principal Accounting Officer
/s/ Howard B. Landers Executive Vice President-Online Products
- ---------------------
Howard B. Landers Director
/s/ Richard Y. Roberts Director
- ----------------------
Richard Y. Roberts
/s/ James I. Krantz Director
- -------------------
James I. Krantz
/s/ John P. Margaritis Director
- ----------------------
John P. Margaritis
/s/ John P. Reynolds Director
- --------------------
John P. Reynolds
<PAGE>
<TABLE>
<CAPTION>
SHOCHET HOLDING CORP. AND SUBSIDIARY
Index to Consolidated Financial Statements
<S> <C>
Independent Auditors' Report....................................................................................F-2
Consolidated Statements of Financial Condition as of January 31, 2000 and
January 31, 1999............................................................................................F-3
Consolidated Statements of Operations for the years ended January 31, 2000 and
January 31, 1999............................................................................................F-4
Consolidated Statements of Changes in Stockholder's Equity for the years ended January 31, 2000 and
January 31, 1999............................................................................................F-5
Consolidated Statements of Cash Flows for the years ended January 31, 2000 and
January 31, 1999............................................................................................F-6
Notes to Consolidated Financial Statements......................................................................F-7
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors of Shochet Holding Corp.:
We have audited the accompanying consolidated statements of financial condition
of Shochet Holding Corp. and subsidiary (the "Company") as of January 31, 2000
and 1999, and the related consolidated statements of operations, changes in
stockholder's equity, and cash flows for each of the years in the two-year
period ended January 31, 2000 and 1999. 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 the Company as of
January 31, 2000, and the results of their operations and their cash flows for
each of the years in the two-year period ended January 31, 2000, in conformity
with generally accepted accounting principles.
/s/ KPMG LLP
- ------------
KPMG LLP
New York, New York
April 7, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
SHOCHET HOLDING CORP. AND SUBSIDIARY
Consolidated Statements of Financial Condition
January 31, January 31,
ASSETS 2000 1999
------------------ -------------------
<S> <C> <C>
Cash and cash equivalents.............................................. $ 574,000 $ 868,000
Receivable from brokers and dealers.................................... 407,000 298,000
Securities owned, at market value...................................... 190,000 119,000
Office furniture, equipment and leasehold improvements, net............ 798,000 646,000
Goodwill, net.......................................................... 1,563,000 1,637,000
Income taxes receivable................................................ 224,000 106,000
Deferred IPO costs..................................................... 301,000 --
Other assets........................................................... 518,000 241,000
------------------ -------------------
Total assets........................................................... $ 4,575,000 $ 3,915,000
================== ===================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Securities sold, not yet purchased, at market value.................... $ 39,000 $ 4,000
Commissions payable.................................................... 240,000 276,000
Payable to related parties............................................. 673,000 77,000
Accrued expenses and other liabilities................................. 405,000 302,000
------------------ -------------------
1,357,000 659,000
Liability subordinated to the claims of general creditors.............. 1,500,000 1,000,000
------------------ -------------------
Total liabilities...................................................... 2,857,000 1,659,000
------------------ -------------------
Stockholder's equity:
Preferred stock, $0.0001 par value; 1,000,000 shares
authorized; no shares issued ......................................... -- --
Common stock, $0.0001 par
value; 15,000,000 shares authorized; 1,200,000 shares
issued and outstanding................................................ -- --
Additional paid-in capital............................................. 2,270,000 2,270,000
Accumulated deficit.................................................... (552,000) (14,000)
------------------ -------------------
Total stockholder's equity............................................. 1,718,000 2,256,000
------------------ -------------------
Total liabilities and stockholder's equity............................. $ 4,575,000 $ 3,915,000
================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
SHOCHET HOLDING CORP. AND SUBSIDIARY
Consolidated Statements of Operations
Year Ended January 31,
----------------------------------------
2000 1999
------------------ -----------------
Revenues:
<S> <C> <C>
Commissions $ 7,268,000 $ 7,127,000
Interest 775,000 601,000
Other 69,000 25,000
----------- -----------
Total revenues 8,112,000 7,753,000
----------- -----------
Expenses:
Compensation and benefits 4,525,000 4,224,000
Brokerage, clearing and exchange fees 1,238,000 1,129,000
Occupancy and equipment 698,000 716,000
Communications 639,000 660,000
Management fee 228,000 228,000
Business development 265,000 107,000
Professional fees 116,000 95,000
Other 654,000 494,000
----------- -----------
Total expenses 8,363,000 7,653,000
----------- -----------
Income (loss) before income taxes (251,000) 100,000
Income tax benefit (provision) 40,000 (25,000)
----------- -----------
Net (loss) income from continuing operations (211,000) 75,000
Discontinued operations:
Loss from operations of the
discontinued On-site Day Trading
segment, net of income tax benefit of
$169,000 and $132,000, respectively (327,000) (402,000)
----------- -----------
Net (loss) income $ (538,000) $ (327,000)
=========== ===========
Weighted average common shares
outstanding-basic and diluted 1,200,000 1,200,000
=========== ===========
Basic and diluted earnings per
Net (loss) income from
continuing operations $ (0.18) $ 0.06
=========== ===========
Loss from discontinued operations $ (0.27) $ (0.33)
=========== ===========
Net (loss) income $ (0.45) $ (0.27)
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
SHOCHET HOLDING CORP. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholder's Equity
Common Stock
-------------------------- Additional Accumulated
Shares Amount Paid-in Capital Deficit Total
------ ------ ------------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at
January 31, 1998...... 1,200,000 $ $ 1,640,000 $ 313,000 $ 1,953,000
Capital contribution...... -- -- 630,000 -- 630,000
Net loss.................. -- -- -- (327,000) (327,000)
---------- ------------ ------------------ ---------------- --------------
Balance at
January 31, 1999...... 1,200,000 2,270,000 (14,000) 2,256,000
Net loss.................. -- -- -- (538,000) (538,000)
---------- ------------ ------------------ ---------------- --------------
Balance at
January 31, 2000...... 1,200,000 $ -- $ 2,270,000 $ (552,000) $ 1,718,000
========== ============ ================== ================ ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
SHOCHET HOLDING CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Year ended January 31,
-----------------------------------------
2000 1999
------------------ ------------------
Operating activities:
<S> <C> <C>
Net (loss) income $ (538,000) $ (327,000)
Adjustments to reconcile net (loss) income
Depreciation and amortization 202,000 212,000
Deferred taxes -- 2,000
----------- -----------
(336,000) (113,000)
Decrease (increase) in operating assets:
Receivable from brokers and dealers (109,000) (298,000)
Securities owned, at market value (71,000) 78,000
Income taxes receivable (78,000) (106,000)
Deferred IPO costs (301,000) --
Other assets (277,000) 12,000
Increase (decrease) in operating liabilities:
Securities sold, not yet purchased 35,000 4,000
Commissions payable (36,000) 116,000
Payable to brokers and dealers -- (40,000)
Payable to related parties 596,000 47,000
Income taxes payable (40,000) (64,000)
Accrued expenses and other liabilities 103,000 127,000
----------- -----------
Net cash (used in) provided by operating activities (514,000) (237,000)
----------- -----------
Investing activities:
Purchase of office furniture, equipment and
Leasehold improvements (280,000) (414,000)
Goodwill resulting from acquisition -- (158,000)
----------- -----------
Net cash used in investing activities (280,000) (572,000)
----------- -----------
Financing activities:
Issuance of subordinated loan 500,000 --
Capital contribution -- 630,000
----------- -----------
Net cash provided by financing activities 500,000 630,000
----------- -----------
Net (decrease) increase in cash and cash
equivalents (294,000) (179,000)
Cash and cash equivalents at beginning of period 868,000 1,047,000
----------- -----------
Cash and cash equivalents at end of period $ 574,000 $ 868,000
=========== ===========
Cash paid for:
Interest $ 167,000 $ 100,000
=========== ===========
Income taxes $ -- $ --
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SHOCHET HOLDING CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
January 31, 2000 and 1999
1. Organization
The consolidated financial statements include the activities of Shochet
Holding Corp. and its subsidiary (the "Company"). The Company, a wholly
owned subsidiary of Research Partners International, Inc. ("Research
Partners"), is primarily engaged in providing discount securities
brokerage and trading services for individuals through the Company's
wholly owned subsidiary, Shochet Securities, Inc. ("Shochet Securities"),
a broker-dealer registered with the Securities and Exchange Commission
(the "SEC") and a member firm of the National Association of Securities
Dealers, Inc. (the "NASD").
On November 30, 1999, in a corporate reorganization, the Company acquired
all of the outstanding common stock of Shochet Securities from Research
Partners in exchange for 1,200,000 shares of the Company's common stock.
The acquisition was accounted for in a manner similar to a pooling of
interests since both the Company and Shochet Securities were under common
control. Accordingly, the financial statements of the Company include the
combined financial condition, results of operations and cash flows of the
Company and Shochet Securities. All significant intercompany accounts and
transactions are eliminated in consolidation. Where appropriate, prior
year amounts have been reclassified to conform to the current
presentation.
The financial statements conform with generally accepted accounting
principles ("GAAP"). The preparation of financial statements in
conformity with GAAP requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
2. Summary of Significant Accounting Policies
Fair value of financial instruments
Substantially all of the Company's financial assets and liabilities are
carried at market or fair values or at amounts which approximate current
fair value due to their short-term nature.
Cash and cash equivalents
Cash equivalents are highly liquid securities with maturities of three
months or less when purchased.
Receivable from brokers and dealers
Receivable from brokers and dealers consists primarily of amounts due
from the Company's clearing organization, which provides clearing and
depository services for brokerage transactions on a fully disclosed
basis.
F-7
<PAGE>
SHOCHET HOLDING CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
January 31, 2000 and 1999 - (Continued)
2. Summary of Significant Accounting Policies--(Continued)
Securities
Securities transactions and the related revenues and expenses, including
commission revenues and expenses, are recorded on a trade-date basis.
Securities owned and securities sold, not yet purchased, consist
primarily of equities and are stated at quoted market values. Unrealized
gains and losses are included in other revenues.
Depreciation and amortization
Office furniture, equipment and leasehold improvements are stated at
cost, net of accumulated depreciation and amortization of $312,000 at
January 31, 2000 and $185,000 at January 31, 1999. Office furniture and
equipment are depreciated using either an accelerated method or a
straight-line method, where applicable, over their estimated useful
lives. Leasehold improvements are amortized over the lesser of the life
of the lease or estimated useful life of the improvement.
Goodwill
Goodwill represents the excess of the purchase price paid by Research
Partners over the Company's net assets at the November 30, 1995 purchase
date and the excess purchase price paid by the Company for the business
of Litwin Securities Inc. on May 4, 1998. Goodwill is being amortized
over 25 years on a straight-line basis. Management reviews goodwill for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable.
Computer software costs
The Company capitalizes the cost of any computer software developed or
obtained for internal use. These costs are amortized over the estimated
useful life of the software on a straight-line basis in accordance with
AICPA Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use".
Stock-based compensation
The Company uses the intrinsic value method to account for stock-based
employee compensation plans. Under this method, compensation cost is
recognized for stock option awards only if the quoted market price (or
estimated fair market value of the stock prior to the stock becoming
publicly traded) is greater than the amount the employee must pay to
acquire the stock. Pro forma disclosures required by SFAS No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"), based on the fair
value-based method are presented in note 8.
F-8
<PAGE>
SHOCHET HOLDING CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
January 31, 2000 and 1999 - (Continued)
2. Summary of Significant Accounting Policies--(Continued)
Income taxes
Deferred income taxes are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts and existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using the enacted
tax rates. The effect on deferred taxes of a change in tax rate is
recognized in income in the period that includes the enactment date.
3. Related Party Transactions
(a) Payable to related parties consists of amounts due to Research
Partners.
(b) In connection with the purchase of the Company by Research
Partners, the Company entered into a subordinated loan
agreement, which qualifies for net capital purposes, for
$1,000,000 with Research Partners in April 1996. The rate of
interest on the loan is 12%. In August 1999, the Company
entered into an additional subordinated loan agreement, which
qualifies for net capital purposes, with Research Partners for
$500,000. The rate of interest on the loan is 8%. The total
interest expense included in other expenses resulting from an
effective rate of interest on the combined loans of 10.3% and
13.7% was $154,000 and $137,000 for the years ended January
31, 2000 and 1999, respectively.
(c) The Company paid a management fee of $258,000 and $283,000 to
GKN Securities Corp., a wholly owned subsidiary of Research
Partners, for the years ended January 31, 2000 and 1999,
respectively. Of these amounts $30,000 and $55,000 was paid to
GKN Securities Corp. by the discontinued On-site Day Trading
segment for the years ended January 31, 2000 and 1999,
respectively.
(d) Professional fees includes fees for research services provided
totaling $20,000 and $24,000 for the years ended January 31,
2000 and 1999, respectively, and were paid by the Company to
Southeast Research Partners, Inc., formerly a wholly owned
subsidiary of Research Partners.
F-10
<PAGE>
SHOCHET HOLDING CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
January 31, 2000 and 1999 - (Continued)
4. Office Furniture, Equipment and Leasehold Improvements
Office furniture, equipment and leasehold improvements, net consist of
the following:
<TABLE>
<CAPTION>
January 31, January 31,
2000 1999
------------- -------------
<S> <C> <C>
Office furniture....................................... $ 178,000 $ 178,000
Equipment.............................................. 276,000 118,000
Computer software...................................... 120,000 --
Leasehold improvements................................. 536,000 535,000
------------- -------------
1,110,000 831,000
Accumulated depreciation and amortization.............. (312,000) (185,000)
------------- -------------
$ 798,000 $ 646,000
============= =============
</TABLE>
5. Commitments and Contingencies
The Company leases office facilities and equipment under noncancelable
operating leases. Certain leases have renewal options and clauses for
escalation and operating cost adjustments. At January 31, 2000, future
minimum rental commitments under such leases were as follows for the
fiscal years ending January 31:
2001................................................... $ 339,000
2002................................................... 328,000
2003................................................... 314,000
2004................................................... 247,000
2005................................................... 175,000
Thereafter............................................. 134,000
----------
$1,537,000
==========
Total rent expense was $419,000 and $434,000 for the years ended January
31, 2000 and 1999, respectively.
The Company's broker-dealer subsidiary is involved in various other legal
proceedings arising from its securities activities. Management believes
that resolution of these proceedings will have no material adverse effect
on the Company's consolidated financial position or results of
operations.
F-11
<PAGE>
SHOCHET HOLDING CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
January 31, 2000 and 1999 - (Continued)
6. Employee Benefits
The Company participates in a defined contribution plan (the "Defined
Plan") sponsored by Research Partners. The Defined Plan covers
substantially all of the Company's employees meeting certain eligibility
requirements. Prior to May 1, 1996, the Company's employees were covered
by a separate 401(k) plan. The Company makes discretionary matching
contributions to the Defined Plan annually, which amounted to $30,000 and
$29,000 for the years ended January 31, 2000 and 1999, respectively.
7. Income Taxes
The benefit provision for income tax expense relating to continuing
operations is as follows:
<TABLE>
<CAPTION>
January 31, 2000 January 31, 1999
----------------- -----------------
Current:
<S> <C> <C>
Federal........................... $ 40,000 $ (21,000)
State and local................... -- (4,000)
----------------- -----------------
40,000 (25,000)
Deferred:
Federal........................... -- --
State and local................... -- --
----------------- -----------------
-- --
$ 40,000 $ (25,000)
================= =================
</TABLE>
Deferred income taxes reflect temporary differences in the basis of the
Company's assets and liabilities for income tax purposes and for
financial reporting purposes, using current tax rates. These temporary
differences result in taxable or deductible amounts in future years.
F-12
<PAGE>
SHOCHET HOLDING CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
January 31, 2000 and 1999 - (Continued)
7. Income Taxes--(Continued)
Net deferred taxes at January 31, 2000 and 1999 are comprised as follows:
<TABLE>
<CAPTION>
January 31, January 31,
2000 1999
---------------- ----------------
Gross deferred tax asset:
<S> <C> <C>
Depreciation and amortization .............................. $ 25,000 $ 28,000
Deferred rent .............................................. 12,000 17,000
Other ...................................................... -- 3,000
-------- --------
Total gross deferred tax asset .................... 37,000 48,000
Less: valuation allowance ......................... (31,000) (10,000)
-------- --------
Net deferred tax asset ............................ 6,000 38,000
-------- --------
Gross deferred tax liability:
Amortization ............................................... (6,000) --
Bonus and other ............................................ -- (38,000)
-------- --------
Net deferred taxes .......................... $ -- $ --
======== ========
</TABLE>
Management believes that the valuation allowance is adequate as timing
differences will reverse in the carryforward period.
The effective tax rates reflected in the consolidated financial
statements differ from the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
January 31, January 31,
2000 1999
--------------- --------------
<S> <C> <C>
Statutory tax rate................................... 34.0% 34.0%
Other - permanent differences........................ (18.0) (9.4)
--------------- --------------
Effective tax rate................................... 16.0% 24.6%
=============== ==============
</TABLE>
The Company is included in Research Partner's consolidated federal and
combined New York State and New York City income tax returns. Current and
deferred income taxes are allocated to the Company on a stand-alone basis
taking into account benefits used in consolidation.
F-13
<PAGE>
SHOCHET HOLDING CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
January 31, 2000 and 1999 - (Continued)
8. Stock Compensation Plan
Employee incentive plan
The Company participates in Research Partners' 1991 Employee Incentive
Plan (the "Plan"), which provides for the issuance of stock, stock
options and other stock purchase rights to executive officers, other key
employees and consultants of Research Partners and its subsidiaries.
Research partners may grant options for up to five million shares of
common stock under the Plan. The options may qualify as incentive stock
options under Section 433 of the Internal Revenue Code of 1986 (the
"Code"), as amended. The exercise price of each option granted under the
Plan is determined by Research Partners' Board of Directors at the time
of grant. Under the Code, the exercise price of incentive stock options
must be at least equal to the fair market value of Research Partners'
stock on the date of grant. The exercise price of non-qualified options
must be at least equal to 65% of the fair market value of Research
Partners' stock on the date of grant. The vesting period is at least one
year for all grants and incentive stock options have maximum terms of 10
years and non-qualified options have maximum terms of 13 years.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"). Accordingly, no compensation cost has been
recognized for stock options granted to employees of the Company under
the Plan. Had compensation cost been determined based on the fair value
at the grant dates for stock option awards consistent with the method of
SFAS 123, the Company would have reported the following net (loss) income
and earnings per share ("EPS"):
<TABLE>
<CAPTION>
January 31, 2000 January 31, 1999
----------------- -----------------
<S> <C> <C>
Net (loss) income...................As reported $ (538,000) $ (327,000)
Pro forma $ (593,000) $ (413,000)
Basic EPS...........................As reported $ (0.45) $ (0.27)
Pro forma $ (0.49) $ (0.34)
Diluted EPS.........................As reported $ (0.45) $ (0.27)
Pro forma $ (0.49) $ (0.24)
</TABLE>
In April 1998, Research Partners offered employees holding certain
options having an exercise price of $4.50 to $6.00 the opportunity to
convert their options into options for a fewer number of shares, but with
a lower exercise price. Options for 2,000 shares were canceled and new
options for 1,000 shares were granted to employees of the Company in the
conversions.
F-14
<PAGE>
SHOCHET HOLDING CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
January 31, 2000 and 1999 - (Continued)
8. Stock Compensation Plan--(Continued)
A summary of the status of the Company's participation in the Plan and
changes during the periods then ended is presented below:
<TABLE>
<CAPTION>
January 31, January 31,
------------------------------ ------------------------------
2000 2000 1999 1999
----------- ------------ -------------
-------------
Weighted Weighted
Shares Average Shares Average
Stock Options (000) Price (000) Price
--------------------------------------------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Outstanding at
beginning of period.................. 126 $ 3.82 28 $ 6.00
Granted.................................. 13 4.17 101 3.28
Forfeited................................ (51) 3.25 (1) 6.00
Swapped.................................. (3) 3.34 (2) 6.00
----------- ------------- ------------ -------------
Outstanding at end of
period............................... 85 $ 4.14 126 $ 3.82
=========== ============= ============ =============
Weighted-average fair value of options
granted during the
period............................... $ 2.73 $ 1.75
============= =============
Options exercisable at
period-end........................... 14 none
</TABLE>
The fair value of the options was estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
dividend yield of 0%, expected volatility of 44%, risk-free interest rate
of 6%, and an expected life of 10 years.
The following table summarizes information about stock options
outstanding at January 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding
------------------------------------------------------
Weighted- Options Exercisable
----------------------------------
Average Weighted- Weighted-
Remaining Average Average
Shares Contractual Exercise Shares Exercise
Outstanding Life Price Exercisable Prices
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
$3.125 to $3.3125 51 9.36 years 3.27 14 3.25
$4.3125 10 9.23 years 4.3125
$6.00 24 10 years 6.00
--------------- ---------------
85 14
--------------- ---------------
</TABLE>
F-15
<PAGE>
SHOCHET HOLDING CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
January 31, 2000 and 1999 - (Continued)
8. Stock Compensation Plan--(Continued)
Stock award plan
The Company's participates in Research Partners' 1996 Incentive
Compensation Plan, which provides for a portion of annual incentive
awards payable to executive management and business unit managers to be
made in restricted shares of Research Partners' common stock. All awards
are subject to a minimum three-year vesting period. The maximum number of
shares which may be awarded under the plan is one million. As of January
31, 2000, less than 1,000 shares had been awarded to employees of the
Company. The Company recognized no compensation expense for stock awards
under this plan.
Non-employee stock compensation
Research Partners granted stock options to purchase 25,000 shares to the
former owner of Shochet Securities on the date of Research Partners'
initial public offering in accordance with the Shochet Securities
purchase agreement. The fair value of the options, which was recorded as
an adjustment to the purchase price, was estimated to be $36,000 on the
date of grant using the Black-Scholes option-pricing model with the
following assumptions: dividend yield of 0%, expected volatility of 27%,
risk-free interest rate of 6.4%, and expected life of 2.5 years. All of
the options were outstanding at January 31, 2000.
9. Earnings per Common Share
In March 1997, the FASB issued SFAS No. 128, "Earnings per Share" ("SFAS
128"). This statement changes the calculation and presentation of EPS.
The new presentation consists of basic EPS, which includes no dilution
and is computed by dividing net income by the weighted-average number of
common shares outstanding for the period, and diluted EPS, which is
similar to the previously disclosed fully diluted EPS. SFAS 128 will
result in basic EPS results higher than EPS as calculated under the
previous method. All Earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the SFAS 128
requirements. The following table sets forth the computation of basic and
diluted EPS:
<TABLE>
<CAPTION>
January 31, January 31,
2000 1999
--------------- --------------
Numerator for basic and diluted EPS:
<S> <C> <C>
Income (loss) from continuing operations ......................... $ (211,000) $ 75,000
Loss from discontinued operations ................................ (327,000) (402,000)
----------------- -------------
Net (loss) income ................................................ $ (538,000) $ (327,000)
================= =============
Denominator for basic EPS ............................................ 1,200,000 1,200,000
----------------- -------------
Denominator for diluted EPS .......................................... 1,200,000 1,200,000
================= =============
Basic EPS from:
Income from continuing operations ................................ $ (0.18) $ 0.06
================= =============
Loss from discontinued operations ................................ $ (0.27) $ (0.33)
================= =============
Net (loss) income ................................................ $ (0.45) $ (0.27)
================= =============
Diluted EPS from:
Income from continuing operations ................................ $ (0.18) $ 0.06
================= =============
Loss from discontinued operations ................................ $ (0.27) $ (0.33)
================= =============
Net (loss) income ................................................ $ (0.45) $ (0.27)
================= =============
</TABLE>
F-16
<PAGE>
SHOCHET HOLDING CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
January 31, 2000 and 1999 - (Continued)
10. Concentration of Credit Risk and Off-Balance Sheet Risk
In the normal course of business, the Company's broker-dealer subsidiary
executes securities transactions on behalf of customers through a
clearing broker. The execution of these transactions includes the
purchase and sale of securities, including the sale of securities not
currently owned. These activities expose the Company to off-balance sheet
risk in the event that customers fail to fulfill their contractual
obligations and margin requirements are not sufficient to fully cover
losses. The Company is obligated to its clearing broker for losses
sustained from the Company's customers. Should a customer fail to deliver
cash or securities as agreed, the Company may be required to purchase or
sell securities at unfavorable market prices. The Company limits its risk
by requiring customers to maintain margin collateral that is in
compliance with regulatory and internal guidelines and by making credit
inquiries when establishing customer relationships.
Securities sold, not yet purchased, represent the Company's obligations
to deliver specified securities at contracted prices. The Company is
exposed to risk of loss if securities prices increase prior to closing
the transactions.
11. Net Capital Requirements
Shochet Securities is a registered broker-dealer with the SEC and a
member firm of the NASD and, as such, is subject to the SEC's Uniform Net
Capital Rule (SEC rule 15c3-1), which requires the maintenance of minimum
net capital.
Shochet Securities computes net capital under the standard aggregate
indebtedness method permitted by the net capital rule, which requires
that the ratio of aggregate indebtedness to net capital, both as defined,
shall not exceed 15 to 1. At January 31, 2000, Shochet Securities had net
capital of $195,000, which was $95,000 in excess of its net capital
requirement of $100,000. Shochet Securities' ratio of aggregate
indebtedness to net capital was 5.43 to 1.
12. Discontinued Operation
On July 31, 1999 (measurement date), the Company discontinued the
operations of the On-site Day Trading division. Pursuant to Accounting
Principles Board Opinion ("APB") No. 30, "Reporting the Results of
Operations- Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," losses from this segment, net of tax effect, have been
separately disclosed on the consolidated financial statements. Losses
from this division are as follows:
<TABLE>
<CAPTION>
January 31, January 31,
2000 1999
---------------- ----------------
<S> <C> <C>
Loss from discontinued operations...................... $ (496,000) $ (534,000)
Income tax benefit..................................... 169,000 132,000
---------------- ----------------
Net loss from discontinued operations.................. $ (327,000) $ (402,000)
================ ================
</TABLE>
F-17
<PAGE>
SHOCHET HOLDING CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
January 31, 2000 and 1999 - (Continued)
13. Litigation
In August 1999 Shochet Securities was found jointly and severally liable
with respect to an arbitration claim by a former customer against Shochet
Securities, a current employee and a former employee regarding
unauthorized execution of transactions in the former customer's account
and improper disbursements from the account during the period from June
1995 through November 1996. The former customer was awarded approximately
$211,000 in compensatory and punitive damages, interest and costs. In
November 1999, Shochet Securities agreed to pay $200,000 to settle the
former customer's claim for attorney's fees. Research Partners paid an
aggregate of $411,000 on behalf of Shochet Securities. Research Partners
believes it has a claim against the former owners of Shochet Securities
for indemnification of the amounts it has paid since it believes that
most of the activity upon which the former customer's complaint was based
occurred prior to Research Partners' acquisition of Shochet Securities.
If Research Partners collects under this indemnification, it would reduce
the amount Shochet Securities would be required to reimburse Research
Partners.
At October 31, 1999, management recorded a reserve against possible
future losses from this settlement of $225,000. In November 1999,
management decreased this reserve to $150,000 based on its current
estimate of Shochet Securities' ultimate liability in this case.
In connection with this case, the Division of Securities and Investor
Protection of the Department of Banking of the State of Florida notified
Shochet Securities in January 2000 that it believed that Shochet
Securities, a current employee and a former member of Shochet Securities'
management, had violated provisions of the Florida Securities and
Investor Protection Act. Although the Division of Securities and Investor
Protection proposed a settlement to Shochet Securities at the same time
as Shochet Securities was informed of its interest in this matter,
Shochet Securities intends to explore its options to defend or otherwise
resolve this matter. There can be no assurance that this matter will be
resolved in a manner favorable to Shochet Securities. The proposed
settlement would have no material adverse effect on Shochet Securities'
financial condition or results of operations, although adverse publicity
associated with acceptance of the proposed settlement might materially
hurt the business.
Shochet Securities is also involved in various other legal proceedings
arising from its securities activities. Management believes that
resolution of these proceedings will have no material adverse effect on
Shochet Securities' financial position or results of operations.
F-18
<PAGE>
SHOCHET HOLDING CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
January 31, 2000 and 1999 - (Continued)
14. Subsequent Events
In February 2000, Research Partners International, Inc. ("Research
Partners") loaned Shochet Holdings Corp. ("Shochet Holdings"), the Parent
company of Shochet Securities, Inc., and a wholly owned subsidiary of
Research Partners, $1.5 million. In turn, $500,000 was contributed to
Shochet Securities, Inc. as additional paid in capital. In March, the
remaining $1 million was loaned to Shochet as a "Temporary Subordinated
Loan" as defined by the NASD. In April, Shochet Holdings repaid the $1.5
million loan to Research Partners International Inc.
In March 2000, the Company, through a SEC Form SB-2, registered and sold
1,045,000 shares of its common stock to the public in an initial public
offering. The offering, priced at $9 per share, raised $8.0 million in
net proceeds for the Company.
Following the closing of the offering of common stock, Shochet Holdings
contributed $3 million to Shochet Securities as additional paid in
capital.
Upon the effectiveness of the offering, the Company granted 108,000
incentive stock options to employees of the Company. These options vest
over three years, have a ten-year life, and have an exercise price of $9
per share.
F-19
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
-------------
<S> <C>
1.1 -- Form of Underwriting Agreement*
2.1 -- Certificate of Incorporation of Shochet Holding Corp.*
3.2 -- Certificate of Amendment of Shochet Holding Corp.*
3.2(a) -- Certificate of Amendment of Shochet Holding Corp.*
3.3 -- Bylaws of Shochet Holding Corp.*
3.4 -- Amendment No. 1 to Bylaws of Shochet Holding Corp.*
4.1 -- Specimen Common Stock Certificate*
4.2 -- Underwriter's Purchase Option*
10.1 -- 1999 Performance Equity Plan*
10.2 -- Employment Agreement between Shochet Holding Corp. and Roger
Gladstone*
10.3 -- Employment Agreement between Shochet Holding Corp. and David
Greenberg*
10.4 -- Employment Agreement between Shochet Holding Corp. and Howard
Landers*
10.5 -- Intercompany Services Agreement between Research Partners
International, Inc. and Shochet Holding Corp.*
10.6 -- Clearing Agreement between Shochet Securities, Inc. and Schroder & Co,
Inc.*
10.7 -- Form of Option Agreement*
10.8 -- Employment Agreement between Shochet Holding Corp. and Andrew
Lockwood
21.1 -- Subsidiaries of Shochet Holding Corp.*
27.1 -- Financial Data Schedule
*Incorporated by reference to our registration statement filed on Form SB-2
registration number 333-92307.
</TABLE>
EMPLOYMENT AGREEMENT
--------------------
AGREEMENT dated as of April 11, 2000 between Andrew Lockwood,
residing at 9841 Arbor Oaks Lane, Boca Raton, Florida 33428 ("Executive"), and
SHOCHET HOLDING CORP., a Delaware corporation having its principal office at
2351 East Hallandale Beach Boulevard, Hallandale, Florida 33009 ("Company").
WHEREAS, the Company is engaged through its subsidiary
corporation in the business of operating and managing an investment banking and
securities brokerage firm, as well as other related enterprises; and
WHEREAS, the Company employs and desires to continue the
employment of Executive for the purpose of securing for the Company and its
subsidiary corporation the experience, ability and services of Executive; and
WHEREAS, Executive desires to continue his present employment
with the Company, pursuant to the terms and conditions herein set forth,
superseding all prior agreements between the Company, its subsidiary and/or
predecessors and Executive;
IT IS AGREED:
1. Employment, Duties and Acceptance.
---------------------------------
1.1 The Company hereby employs Executive as its Executive Vice
President - Business Development and General Counsel ("EVP"). All of Executive's
powers and authority in any capacity shall at all times be subject to the
direction and control of the Company's Board of Directors and the Chief
Executive Officer.
1.2 Executive's duties shall include general executive
operating supervision over the property, business and affairs, particularly
those duties related to enhancing the Company's business development and those
duties typical of a general counsel of a corporation, of the Company, its
subsidiary and divisions, subject to the guidelines and direction of the Board
of Directors of the Company, provided that these duties shall in no way include
any supervisory responsibility with regard to the oversight and or supervision
of the Company's or its registered representatives compliance with rules and
regulations of the Securities and Exchange Commission, the National
1
<PAGE>
Association of Securities Dealers and the Nasdaq or any self-regulatory
organization with regard to registered representatives or any associated person
as such terms are defined by any of the foregoing entities.
1.3 Executive accepts such employment and agrees to devote
substantially all of his business time, energies and attention to the
performance of his duties hereunder. Nothing herein shall be construed as
preventing Executive from making and supervising personal investments, provided
they will not interfere with the performance of Executive's duties hereunder or
violate the provisions of paragraph 5.4 hereof.
1.4 Executive shall be based in the southern Florida area, and
shall undertake such occasional travel, within or without the United States, as
is reasonably necessary in the interests of the Company.
2. Compensation and Benefits.
-------------------------
2.1 The Company shall pay to Executive a salary at the minimum
annual rate of $120,000 for each twelve-month period during the term hereof
(i.e., $10,000 per month). Executive's compensation shall be paid in equal,
periodic installments in accordance with the Company's normal payroll
procedures.
2.2 The Company shall also pay to Executive such bonuses as
may be determined from time to time by the Board of Directors. In connection
therewith, the Executive shall be entitled to participate at the level of EVP in
the Company's 1999 Performance Equity Plan adopted by the Board of Directors and
approved by the Company's sole stockholder, and thereafter as in effect from
time to time during the term hereof.
2.3 The Company shall grant to Executive under its 1999
Performance Equity Plan options to purchase 36,000 shares of its common stock,
exercisable at a price equal to the closing per share bid price of the common
stock on the date immediately preceding the date hereof as quoted on the Nasdaq
SmallCap Market or such other price as may be mutually agreed upon, provided
that this exercise price shall not be less than the fair market value of the
common stock on the date of grant. The options will vest in three equal annual
installments commencing on the one-
2
<PAGE>
year anniversary date of the date hereof. Executive and the Company shall enter
into a separate stock option agreement in connection therewith. In the event
that Executive terminates this Agreement for Good Reason (as defined) or the
Company terminates this Agreement without Cause (as defined) any and all options
which have not vested shall immediately and automatically vest in full without
any action being required by any of the parties hereto.
2.4 Executive shall be entitled to such medical, life,
disability and other benefits as are generally afforded to other senior
executives of the Company, subject to applicable waiting periods and other
conditions.
2.5 Executive shall be entitled to four weeks of vacation in
each calendar year and to a reasonable number of other days off for religious
and personal reasons.
2.6 The Company will pay or reimburse Executive for all
transportation, hotel and other expenses reasonably incurred by Executive on
business trips and for all other ordinary and reasonable out-of-pocket expenses
actually incurred by him in the conduct of the business of the Company against
itemized vouchers submitted with respect to any such expenses and approved in
accordance with customary procedures.
2.7 Executive shall maintain a suitable automobile for
business use. The Company shall reimburse Executive for the costs of leasing
such automobile and for all other costs associated with the use of the vehicle,
including insurance costs, repairs and maintenance. These reimbursements shall
be considered taxable income to Executive except to the extent that it is
documented to have been used by him for business purposes.
3. Term and Termination.
--------------------
3.1 The term of this Agreement commences as of the effective
date of the initial public offering and shall continue until the one-year
anniversary date thereof, unless sooner terminated as herein provided (the
"Term"). This Agreement shall be subject to automatic renewals of one-year terms
unless 60 days' prior written notice of termination is given by either party.
3
<PAGE>
3.2 If Executive dies during the term of this Agreement, this
Agreement shall thereupon terminate, except that the Company shall pay within 30
days from Executive's death to the legal representative of Executive's estate
(i) the base salary due Executive pursuant to paragraph 2.1 hereof through the
date of Executive's death, (ii) a pro rata allocation of bonus payments under
paragraph 2.2 during the year of death through the date of Executive's death,
(iii) all earned and previously approved but unpaid bonuses, (iv) all valid
expense reimbursements through the date of the termination of this Agreement,
(v) all accrued but unused vacation pay and (vi) all costs associated with
terminating the lease for Executive's automobile.
3.3 The Company, by written notice to Executive, may terminate
this Agreement if Executive shall fail because of illness or incapacity to
render, for six consecutive months, services of the character contemplated by
this Agreement. Notwithstanding such termination, the Company shall pay to
Executive (i) the base salary due Executive pursuant to paragraph 2.1 hereof
through the date of such notice, less any amount Executive receives for such
period from any Company- sponsored or Company-paid source of insurance,
disability compensation or government program, (ii) a pro rata allocation of
bonus payments under paragraph 2.2 during the year in which the disability
commenced through the date of such notice, (iii) all earned and previously
approved but unpaid bonuses, (iv) all valid expense reimbursements through the
date of the termination of this Agreement, (v) all accrued but unused vacation
pay and (vi) all costs associated with terminating the lease for Executive's
automobile.
3.4 The Company, by notice to Executive, may terminate this
Agreement for cause. As used herein, "Cause" shall mean: (a) the refusal or
failure by Executive to carry out specific directions of the Board which are of
a material nature and consistent with his status as EVP or the refusal or
failure by Executive to perform a material part of Executive's duties hereunder;
(b) the commission by Executive of a material breach of any of the provisions of
this Agreement; (c) fraud or dishonest action by Executive in his relations with
the Company or any of its subsidiaries or affiliates ("dishonest" for these
purposes shall mean Executive's knowingly or recklessly making of a material
misstatement or omission for his personal benefit); or (d) the conviction of
Executive of any crime involving an act of moral turpitude, or the imposition
against Executive of a permanent bar from association with a securities firm by
any federal, state or regulatory agency or self-regulatory body after the
exhaustion of all judicial and administrative appeals therefrom. Notwithstanding
the foregoing, no termination for Cause shall be deemed to exist with respect to
Executive's acts
4
<PAGE>
described in clauses (a) or (b) above, unless the Company shall have given
written notice to Executive specifying the Cause with reasonable particularity
and, within thirty calendar days after such notice, Executive shall not have
cured or eliminated the problem or thing giving rise to such Cause; provided,
however, that a repeated breach after notice, cure and written acceptance of
such cure by the Board being delivered to Executive of any provision of clauses
(a) or (b) above involving the same or substantially similar actions or conduct,
shall be grounds for termination for Cause without any additional notice from
the Company.
3.5 If Executive's employment hereunder is terminated for any
reason, then Executive shall, at the Company's request, resign as a director of
the Company and all of its subsidiaries, effective upon the occurrence of such
termination.
3.6 The Executive, by notice to the Company, may terminate
this Agreement if a "Good Reason" exists. For purposes of this Agreement, Good
Reason shall mean the occurrence of any of the following circumstances without
the Executive's prior express written consent: (a) a substantial and material
adverse change in the nature of Executive's title, duties or responsibilities
with the Company that represents a demotion from his title, duties or
responsibilities as in effect immediately prior to such change; (b) a
substantial and material breach of this Agreement by the Company; (c) a failure
by the Company to make any payment to Executive when due, unless the payment is
not material and is being contested by the Company, in good faith; (d) (i) any
person or entity other than the Company or any officers, directors or
stockholders of the Company as of the date of this Agreement acquires securities
of the Company (in one or more transactions) having 25% or more of the total
voting power of all the Company's securities then outstanding and (ii) the Board
of Directors of the Company does not authorize or otherwise approve such
acquisition; or (e) a liquidation, bankruptcy or receivership of the Company.
Notwithstanding the foregoing, no Good Reason shall be deemed to exist with
respect to the Company's acts described in clauses (a), (b) or (c) above, unless
Executive shall have given written notice to the Company specifying the Good
Reason with reasonable particularity and, within thirty calendar days after such
notice, the Company shall not have cured or eliminated the problem or thing
giving rise to such Good Reason; provided, however, that a repeated breach after
notice and cure of any provision of clauses (a), (b) or (c) above involving the
same or substantially similar actions or conduct, shall be grounds for
termination for Good Reason without any additional notice from Executive.
5
<PAGE>
3.7 In the event that Executive terminates this Agreement for
Good Reason, pursuant to the provisions of paragraph 3.6, or the Company
terminates this Agreement without Cause, as defined in paragraph 3.4, the
Company shall continue to pay to Executive (or in the case of his death, the
legal representative of Executive's estate or such other person or persons as
Executive shall have designated by written notice to the Company), all payments,
compensation and benefits required under paragraph 2 hereof through the
expiration of the then current term of this Agreement; provided, however, that
(i) a minimum bonus of no less than $120,000 per annum shall be paid through the
term of this Agreement; (ii) Executive's insurance coverage shall terminate upon
the Executive becoming covered under a similar program by reason of employment
elsewhere; and (iii) Executive shall use reasonable efforts to obtain employment
elsewhere as an employee or consultant and all compensation for services paid or
earned and deferred in connection therewith shall be a reduction against the
Company's then future salary obligations pursuant to Section 2.1, but not bonus
obligations pursuant to Section 2.2, hereunder.
4. Executive Indemnity
4.1 The Company agrees to indemnify Executive and hold
Executive harmless against all costs, expenses (including, without limitation,
reasonable attorneys' fees) and liabilities (other than settlements to which the
Company does not consent, which consent shall not be unreasonably withheld)
(collectively, "Losses") reasonably incurred by Executive in connection with any
claim, action, proceeding or investigation brought against or involving
Executive with respect to, arising out of or in any way relating to Executive's
employment with the Company or Executive's service as a director of the Company;
provided, however, that the Company shall not be required to indemnify Executive
for Losses incurred as a result of Executive's intentional misconduct or gross
negligence (other than matters where Executive acted in good faith and in a
manner he reasonably believed to be in and not opposed to the Company's best
interests). Executive shall promptly notify the Company of any claim, action,
proceeding or investigation under this paragraph and the Company shall be
entitled to participate in the defense of any such claim, action, proceeding or
investigation and, if it so chooses, to assume the defense with counsel selected
by the Company; provided that Executive shall have the right to employ counsel
to represent him (at the Company's expense) if Company counsel would have a
"conflict of interest" in representing both the Company and Executive. The
Company shall not settle or compromise any claim, action, proceeding or
investigation without Executive's consent, which consent shall not be
unreasonably withheld; provided, however, that such
6
<PAGE>
consent shall not be required if the settlement entails only the payment of
money and the Company fully indemnifies Executive in connection therewith. The
Company further agrees to advance any and all expenses (including, without
limitation, the fees and expenses of counsel) reasonably incurred by the
Executive in connection with any such claim, action, proceeding or
investigation, provided Executive first enters into an appropriate agreement for
repayment of such advances if indemnification is found not to have been
available.
5. Protection of Confidential Information; Non-Competition.
-------------------------------------------------------
5.1 Executive acknowledges that:
(a) As a result of his current and prior employment
with the Company, Executive has obtained and will obtain secret and confidential
information concerning the business of the Company and its subsidiaries and
affiliates (referred to collectively in this paragraph 5 as the "Company"),
including, without limitation, financial information, proprietary rights, trade
secrets and "know-how," customers and sources ("Confidential Information").
(b) The Company will suffer substantial damage which
will be difficult to compute if, during the period of his employment with the
Company or thereafter, Executive should enter a business competitive with the
Company or divulge Confidential Information.
(c) The provisions of this Agreement are reasonable
and necessary for the protection of the business of the Company.
5.2 Executive agrees that he will not, at any time,
divulge to any person or entity any Confidential Information obtained or learned
by him as a result of his employment with the Company, except (i) in the course
of performing his duties hereunder, (ii) with the Company's express written
consent; (iii) to the extent that any such information is in the public domain
other than as a result of Executive's breach of any of his obligations
hereunder; or (iv) where required to be disclosed by court order, subpoena or
other government process. If Executive shall be required to make disclosure
pursuant to the provisions of clause (iv) of the preceding sentence, Executive
promptly, but in no event more than 72 hours after learning of such subpoena,
court order, or other government process, shall notify, by personal delivery or
by electronic means, confirmed by mail, the Company
7
<PAGE>
and, at the Company's expense, Executive shall: (a) take all reasonably
necessary and lawful steps required by the Company to defend against the
enforcement of such subpoena, court order or other government process, and (b)
permit the Company to intervene and participate with counsel of its choice in
any proceeding relating to the enforcement thereof.
5.3 Upon termination of his employment with the Company,
Executive will promptly deliver to the Company all memoranda, notes, records,
reports, manuals, drawings, blue prints and other documents (and all copies
thereof) relating to the business of the Company and all property associated
therewith, which he may then possess or have under his control; provided,
however, that Executive shall be entitled to retain copies of such documents
reasonably necessary to document his financial relationship with the Company.
5.4 During the period commencing on the date hereof and
ending on the one- year anniversary of the date Executive's employment hereunder
is terminated (and, if Executive is terminated with "Cause" or Executive
terminates this Agreement without "Good Reason," until Junel 30, 2001),
Executive, without the prior written permission of the Company, shall not (i) be
employed by, or render any services to, any person, firm or corporation engaged
in any business which is directly in competition with the Company or any of its
subsidiaries (a "Competitive Business"), (ii) employ or retain, or have or cause
any other person or entity to employ or retain, any person who was employed or
retained by the Company while Executive was employed by the Company, or (iii)
solicit, interfere with, or endeavor to entice away from the Company, for the
benefit of a Competitive Business, any of its customers or other persons with
whom the Company has a contractual rela tionship. Notwithstanding the foregoing,
nothing in this Agreement shall preclude Executive from investing his personal
assets in any manner he chooses, provided, however, that Executive may not,
during the period referred to in this Section 5.4, own more than 4.9% of the
equity securities of any Competitive Business.
5.5 If Executive commits a breach, or threatens to commit
a breach, of any of the provisions of Sections 5.2, 5.3 or 5.4, the Company
shall have the right and remedy:
(a) to have the provisions of this Agreement
specifically enforced by any court having equity jurisdiction, it being
acknowledged and agreed by Executive that the services being rendered hereunder
to the Company are of a special, unique and extraordinary character and
8
<PAGE>
that any such breach or threatened breach will cause irreparable injury to the
Company and that money damages will not provide an adequate remedy to the
Company; and
(b) to require Executive to account for and pay
over to the Company all monetary damages suffered by the Company as the result
of any transactions constituting a breach of any of the provisions of Sections
5.2 or 5.4, and Executive hereby agrees to account for and pay over such damages
to the Company.
Each of the rights and remedies enumerated in this Section 5.5
shall be independent of the other, and shall be severally enforceable, and such
rights and remedies shall be in addition to, and not in lieu of, any other
rights and remedies available to the Company under law or equity.
In connection with any legal action or proceeding arising out
of or relating to this Agreement, the prevailing party in such action or
proceeding shall be entitled to be reimbursed by the other party for the
reasonable attorneys' fees and costs incurred by the prevailing party.
5.6 If any provision of Sections 5.2 or 5.4 is held to be
unenforceable because of the scope, duration or area of its applicability, the
tribunal making such determination shall have the power to modify such scope,
duration, or area, or all of them, and such provision or provisions shall then
be applicable in such modified form.
5.7 The provisions of this paragraph 5 shall survive the
termination of this Agreement for any reason, except in the event Executive is
terminated by the Company without "Cause" in breach of this Agreement, or if
Executive terminates this Agreement with "Good Reason," in either of which
events, this paragraph 5.4 shall be void and of no further force or effect.
6. Miscellaneous Provisions.
------------------------
6.1 All notices provided for in this Agreement shall be in
writing, and shall be deemed to have been duly given when (i) delivered
personally to the party to receive the same, or (ii) when mailed first class
postage prepaid, by certified mail, return receipt requested, addressed to the
party to receive the same at his or its address set forth below, or such other
address as the party to receive the same shall have specified by written notice
given in the manner provided for in this
9
<PAGE>
Section 6.1. All notices shall be deemed to have been given as of the date of
personal delivery or mailing thereof.
If to Executive:
Andrew Lockwood
9841 Arbor Oaks Lane #102
Boca Raton, Florida 33428
If to the Company:
Shochet Holding Corp.
2351 East Hallandale Beach Boulevard
Hallandale, Florida 33009
Attn: Chief Executive Officer
6.2 This Agreement sets forth the entire agreement of the
parties relating to the employment of Executive and is intended to supersede all
prior negotiations, understandings and agreements. No provisions of this
Agreement, may be waived or changed except by a writing by the party against
whom such waiver or change is sought to be enforced. The failure of any party to
require performance of any provision hereof or thereof shall in no manner affect
the right at a later time to enforce such provision.
6.3 All questions with respect to the construction of this
Agreement, and the rights and obligations of the parties hereunder, shall be
determined in accordance with the law of the State of Florida applicable to
agreements made and to be performed entirely in Florida.
6.4 This Agreement shall inure to the benefit of and be
binding upon the successors and assigns of the Company. This Agreement shall not
be assignable by Executive, but shall inure to the benefit of and be binding
upon Executive's heirs and legal representatives.
6.5 Should any provision of this Agreement become legally
unenforceable, no other provision of this Agreement shall be affected, and this
Agreement shall continue as if the Agreement had been executed absent the
unenforceable provision.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
----------------------------------------------
ANDREW LOCKWOOD
SHOCHET HOLDING CORP.
------------------------------------------------
By: Roger Gladstone, Chief Executive Officer and
Chairman of the Board
10
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0
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