SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|X| Preliminary Proxy Statement |_| Confidential, for use of the Commission
|_| Definitive Proxy Statement Only (as permitted by Rule 14a-6(e)(2))
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 14a-12
RESEARCH PARTNERS INTERNATIONAL, INC.
_______________________________________________________________________________
(Name of Registrant as Specified in Its Charter)
_______________________________________________________________________________
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|_| No fee required.
|x| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, no par value ("Common Stock") of Gaines, Berland Inc.
("GBI")
________________________________________________________________________
(2) Aggregate number of securities to which transaction applies:
________________________________________________________________________
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11:*
________________________________________________________________________
(4) Proposed maximum aggregate value of transaction:
$8,787,000 - based upon the total book value of the company being
acquired by Research Partners International, Inc. (the public reporting
company), pursuant to Exchange Act Rule 0-11(c)(1)
________________________________________________________________________
(5) Total fee paid:
$1,757.40
________________________________________________________________________
|_| Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the form or
schedule and the date of its filing.
(1) Amount previously paid:
________________________________________________________________________
(2) Form, Schedule or Registration Statement No.:
________________________________________________________________________
(3) Filing Party:
________________________________________________________________________
(4) Date Filed:
________________________________________________________________________
- --------
* Set forth the amount on which the filing fee is calculated and state how it
was determined.
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC.
One State Street Plaza
New York, New York 10004
-------------------------------
NOTICE OF SPECIAL MEETING
OF STOCKHOLDERS
TO BE HELD ON JANUARY 29, 1999
-------------------------------
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders ("Meeting")
of Research Partners International, Inc., a Delaware corporation ("Company"),
will be held at One State Street Plaza, 24th Floor, New York, New York 10004, on
January 29, 1999, at 10:00 a.m., for the following purposes, all as more fully
described in the attached Proxy Statement:
1. To consider and vote upon a proposal ("Merger Proposal") to approve
the issuance of (a) 6,000,000 shares of common stock, par value $.0001
per share, of the Company ("Common Stock") and (b) warrants to
purchase an aggregate of 2,000,000 shares of Common Stock at an
initial exercise price of $3.50 per share, pursuant to a Merger
Agreement, dated as of November 4, 1998, by and among the Company,
RPII Acquisition Corporation, a New York corporation and a
wholly-owned subsidiary of the Company ("Newco"), Gaines, Berland
Inc., a New York corporation ("GBI"), and the principal shareholders
of GBI ("GBI Principal Shareholders"), which provides for the merger
("Merger") of Newco with and into GBI and for GBI to become a
wholly-owned subsidiary of the company;
2. To authorize an amendment to the Company's Restated Certificate of
Incorporation to change the name of the Company from Research Partners
International, Inc. to Research Partners International Group Ltd.;
3. To elect 14 directors of the Company's Board of Directors, such
directors to hold office commencing on the effective date of the
Merger and until the next annual meeting of stockholders; and
4. To transact such other business as may properly come before the
Meeting and any and all adjournments thereof.
Approval of proposals 1 through 3 above is required in order for the Merger
Proposal to be consummated, and consummation of the Merger is required for
proposals 1 through 3, if approved by the stockholders at the Meeting, to become
effective. The Board of Directors of the Company unanimously recommends that the
stockholders of the Company vote "FOR" the Merger Proposal, the proposal to
change the name of the Company and the election of the nominees for the
Company's Board of Directors. Certain directors and executive officers of the
Company, who own approximately 33% of the outstanding voting securities of the
Company, have agreed to vote all Common Stock over which they have voting
control in favor of such proposals and the election of these nominees.
<PAGE>
The Board of Directors has fixed the close of business on December 31, 1998
as the record date for the determination of stockholders entitled to notice of,
and to vote at, the Meeting or any adjournment thereof.
YOU ARE URGED TO READ THE ATTACHED PROXY STATEMENT, WHICH CONTAINS
INFORMATION RELEVANT TO THE ACTIONS TO BE TAKEN AT THE MEETING. YOU ARE
EARNESTLY REQUESTED TO DATE, SIGN AND RETURN THE ACCOMPANYING FORM OF PROXY IN
THE ENVELOPE ENCLOSED FOR THAT PURPOSE (TO WHICH NO POSTAGE NEED BE AFFIXED IF
MAILED IN THE UNITED STATES) WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING IN
PERSON. THE PROXY IS REVOCABLE BY YOU AT ANY TIME PRIOR TO ITS EXERCISE AND WILL
NOT AFFECT YOUR RIGHT TO VOTE IN PERSON IN THE EVENT YOU ATTEND THE MEETING OR
ANY ADJOURNMENT THEREOF. THE PROMPT RETURN OF THE PROXY WILL BE OF ASSISTANCE IN
PREPARING FOR THE MEETING AND YOUR COOPERATION IN THIS RESPECT WILL BE
APPRECIATED.
By Order of the Board of Directors,
Herbert Sontz, Secretary
New York, New York
January 8, 1999
<PAGE>
PRELIMINARY COPIES
RESEARCH PARTNERS INTERNATIONAL, INC.
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JANUARY 29, 1999
This Proxy Statement and the accompanying form of proxy is furnished to
stockholders of Research Partners International, Inc., a Delaware corporation
("Company") in connection with the solicitation of proxies, in the accompanying
form, by the Board of Directors of the Company for use in voting at the Special
Meeting of Stockholders ("Meeting") to be held at One State Street Plaza, 24th
Floor, New York, New York 10004, on January 29, 1999, at 10:00 a.m., and at any
and all adjournments thereof.
At the Meeting, the stockholders of the Company will be asked:
1. To consider and vote upon a proposal ("Merger Proposal") to approve the
issuance of (a) 6,000,000 shares of common stock, par value $.0001 per share, of
the Company ("Common Stock") and (b) warrants to purchase an aggregate of
2,000,000 shares of Common Stock at an initial exercise price of $3.50 per
share, pursuant to a Merger Agreement, dated as of November 4, 1998, by and
among the Company, RPII Acquisition Corporation, a New York corporation and a
wholly-owned subsidiary of the Company ("Newco"), Gaines, Berland Inc., a New
York corporation ("GBI"), and the principal shareholders of GBI ("GBI Principal
Shareholders"), which provides for the merger ("Merger") of Newco with and into
GBI and for GBI to become a wholly-owned subsidiary of the Company.
2. To consider and vote upon a proposal ("Name Change Proposal") to approve
an amendment to the Restated Certificate of Incorporation of the Company to
change its name to Research Partners International Group Ltd.;
3. To elect 14 directors of the Company's Board of Directors ("Director
Proposal"), such directors to hold office commencing on the effective date of
the Merger and until the next annual meeting of stockholders of the Company; and
4. To transact such other business as may properly come before the Meeting
and any and all adjournments thereof.
Approval of proposals 1 through 3 above is required in order for the Merger
to be consummated, and consummation of the Merger is required for proposals 1
through 3, if approved by the stockholders at the Meeting, to become effective.
The consummation of the Merger is also dependent upon obtaining certain
regulatory approvals and satisfaction of other conditions to closing, as
<PAGE>
described in more detail in this Proxy Statement and in the Merger Agreement, a
copy of which is annexed as Appendix A and is incorporated herein by reference.
On or about January 8, 1999, this Proxy Statement and the accompanying form
of proxy are being mailed to each stockholder of record at the close of business
on December 31, 1998.
The affirmative vote by the holders of the outstanding Common Stock and
Series A Preferred Stock of the Company, par value $.10 per share ("Preferred
Shares"), voting as a single class (with each Preferred Share having voting
power equivalent to 0.16 shares of Common Stock), constituting a majority of the
voting power of the Company's outstanding voting securities present in person or
represented by proxy at the Meeting and voting on the Merger Proposal is
required to approve the Merger Proposal. Approval of the Name Change Proposal
requires the affirmative vote of the holders of a majority of the voting power
of the Company's outstanding voting securities. The directors will be elected by
a plurality vote of the voting power of the voting securities voted at the
Meeting with respect to the election of directors. Plurality means that the
individuals who receive the largest number of votes cast "FOR" are elected as
directors.
The Board of Directors of the Company has obtained an opinion from its
financial advisor,________________________ , that the terms of the Merger are
fair, from a financial point of view, to the holders of Common Stock. The Board
of Directors of the Company unanimously recommends that the stockholders of the
Company vote "FOR" the Merger Proposal, the Name Change Proposal and the
Director Proposal. Certain executive officers and directors of the Company, who
own in the aggregate approximately 33% of the voting power of the Company's
outstanding voting securities, have executed voting agreements pursuant to which
they have agreed to vote in favor of these proposals.
Holders of the Company's voting securities will not be entitled to any
dissenters or appraisal rights in connection with the Merger.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it by giving notice to the Secretary of the Company in person, or by
written notification actually received by the Secretary, at any time prior to
its being exercised. Unless otherwise specified in the proxy, voting securities
represented by proxies will be voted for the Merger Proposal, the Name Change
Proposal and the Director Proposal.
The Company's executive offices are located at One State Street Plaza, New
York, New York 10004.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
Page
<S> <C>
SUMMARY .........................................................................................................3
Meeting ................................................................................................3
The Merger...............................................................................................3
Parties to the Merger....................................................................................4
Lock-Up Agreements.......................................................................................5
Reasons for the Merger...................................................................................6
Fairness Opinion.........................................................................................6
Recommendation of the Board of Directors.................................................................6
No Appraisal Rights for Dissenters.......................................................................6
Certain Federal Income Tax Consequences..................................................................6
Accounting Treatment.....................................................................................6
Market Price Data........................................................................................7
Summary Pro Forma Condensed Combined Financial Information...............................................8
Selected Financial Data of the Company...................................................................9
Summary Selected Financial Data of GBI...................................................................10
Comparative Per Share Data...............................................................................11
THE MEETING......................................................................................................12
Meeting and Record Date.................................................................................12
Quorum; Proxies and Voting Instructions.................................................................12
Votes Required..........................................................................................12
Solicitation of Proxies.................................................................................13
PROPOSAL I: MERGER PROPOSAL.....................................................................................14
The Merger Proposal Generally...........................................................................14
Effective Time..........................................................................................14
Background of the Merger................................................................................14
Reasons for the Merger..................................................................................16
Opinion of Financial Advisor............................................................................16
Recommendation of the Board of Directors................................................................16
Regulatory Approval.....................................................................................16
Material Contacts Between the Company and GBI...........................................................16
Accounting Treatment....................................................................................17
Certain Federal Income Tax Consequences.................................................................17
No Appraisal Rights for Dissenters Appraisal............................................................17
Merger Agreement........................................................................................17
Management After the Merger; Employment Agreements......................................................24
BUSINESS OF THE COMPANY..........................................................................................26
Brokerage and Distribution..............................................................................26
Investment Banking......................................................................................28
</TABLE>
i
<PAGE>
<TABLE>
Page
<S> <C>
Principal Transactions..................................................................................29
Research ...............................................................................................29
Other Services..........................................................................................29
Money Management........................................................................................30
Merchant Banking........................................................................................30
Government Regulation...................................................................................31
Competition.............................................................................................31
Employees...............................................................................................32
Properties..............................................................................................32
Legal Proceedings.......................................................................................32
SELECTED FINANCIAL DATA OF THE COMPANY...........................................................................33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF THE COMPANY................................................................34
Business Environment....................................................................................34
Results of Operations...................................................................................35
Liquidity and Capital Resources.........................................................................40
Other Matters...........................................................................................40
BUSINESS OF GBI..................................................................................................42
General ...............................................................................................42
Brokerage and Distribution..............................................................................42
Trading ...............................................................................................43
Investment Banking......................................................................................43
Principal Transactions..................................................................................43
Other Services..........................................................................................43
Government Regulation...................................................................................43
Competition.............................................................................................44
Employees...............................................................................................44
Properties..............................................................................................44
Change in Accountants...................................................................................44
Legal Proceedings.......................................................................................45
SELECTED FINANCIAL DATA OF GBI...................................................................................46
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...................................................................................47
Business Environment....................................................................................47
Results of Operations...................................................................................47
</TABLE>
ii
<PAGE>
<TABLE>
pAGE
<S> <C>
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION...............................................................51
Notes to Unaudited Pro forma Condensed Combined Financial Statements.............................................54
PROPOSAL II: DIRECTOR PROPOSAL...................................................................................55
Information About the Nominees..........................................................................55
Information About the Current Classified Board and Other Current Directors Who Are Not
Nominees and Other Current Executive Officers..................................................58
Board and Committee Information.........................................................................60
EXECUTIVE COMPENSATION...........................................................................................61
Option Grants in Last Fiscal Year.......................................................................62
Option Exercises and Holdings...........................................................................62
Stock Price Performance Graph...........................................................................63
Compensation Arrangements...............................................................................64
Committee Report on Executive Compensation..............................................................66
Section 16(a) Beneficial Ownership Reporting Compliance.................................................67
CERTAIN TRANSACTIONS.............................................................................................67
PRINCIPAL STOCKHOLDERS OF THE COMPANY............................................................................69
MARKET AND DIVIDEND INFORMATION..................................................................................71
Market Information......................................................................................71
Holders of Common Stock.................................................................................72
Dividends...............................................................................................72
DESCRIPTION OF THE COMPANY'S CAPITAL STOCK.......................................................................73
Common Stock............................................................................................73
Preferred Stock.........................................................................................73
Delaware Law and Certain Charter Provisions.............................................................74
Transfer Agent and Registrar............................................................................74
PROPOSAL III: THE NAME CHANGE PROPOSAL..........................................................................75
INDEPENDENT ACCOUNTANTS..........................................................................................75
FISCAL 1999 STOCKHOLDER PROPOSALS................................................................................75
AVAILABLE INFORMATION............................................................................................76
THE COMPANY'S ANNUAL REPORT ON FORM 10-K.........................................................................76
OTHER MATTERS....................................................................................................76
</TABLE>
III
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement and the Appendices hereto. This summary does not contain a
complete statement of all material features of the proposals to be voted on and
is qualified in its entirety by reference to the full text of this Proxy
Statement and the Appendices. Stockholders are urged to read this Proxy
Statement and the Appendices in their entirety.
Meeting
There will be a Meeting of the Company's stockholders at One State Street
Plaza, 24th Floor, New York, New York 10004 on January 29, 1999 at 10:00 a.m. At
the Meeting, stockholders of the Company will be asked to consider and vote upon
the Merger Proposal, the Name Change Proposal and the Director Proposal and to
consider and act upon any other matters which may properly come before the
Meeting or any adjournment thereof.
Approval of all these proposals is required in order for the Merger
Proposal to be consummated, and the consummation of the Merger is required for
such proposals, if approved by the stockholders of the Company, to become
effective. The consummation of the Merger is also dependent upon obtaining
certain regulatory approvals and satisfaction of other conditions to Closing, as
described in more detail in this Proxy Statement and in the Merger Agreement, a
copy of which is annexed as Appendix A and is incorporated herein by reference.
The close of business on December 31, 1998, was the record date ("Record
Date") for determining which holders of the Company's outstanding voting
securities are entitled to vote at the Company's Meeting.
Although the Delaware General Corporation Law (the "GCL") does not require
that the stockholders of the Company approve the Merger Proposal, under the
rules of The Nasdaq Stock Market ("Nasdaq"), the Company must obtain stockholder
approval prior to the issuance of the Merger Consideration since the Merger
Shares and the Common Stock issuable upon exercise of the Merger Warrants are in
excess of 20% of the Common Stock outstanding before such issuance.
The affirmative vote by the holders of the outstanding Common Stock and
Series A Preferred Stock of the Company, par value $.10 per share ("Preferred
Shares"), voting as a single class (with each Preferred Share having voting
power equivalent to 0.16 shares of Common Stock), constituting a majority of the
voting power of the Company's outstanding voting securities present in person or
represented by proxy at the Meeting and voting on the Merger Proposal is
required to approve the Merger Proposal. Approval of the Name Change Proposal
requires the affirmative vote of the holders of a majority of the voting power
of the Company's outstanding voting securities. The directors will be elected by
a plurality vote of the voting power of the voting securities voted at the
Meeting with respect to the election of directors. Plurality means that the
individuals who receive the largest number of votes cast "FOR" are elected as
directors.
The Merger
Structure
Pursuant to the Merger Agreement, Newco, a wholly-owned subsidiary of the
Company, will be merged with and into GBI ("Merger"). Following the Merger, GBI
shall continue as the surviving corporation (sometimes also referred to herein
3
<PAGE>
as the "Surviving Corporation") and wholly-owned subsidiary of the Company and
change its name to Research Partners International, Inc., and Newco shall cease
to exist. If stockholders approve the Merger Proposal, the Name Change Proposal
and the Director Proposal, it is contemplated that the Merger will become
effective as soon as certain regulatory approvals are obtained and the other
conditions to Closing are satisfied. The Merger will become effective on the
date and time of filing of Certificate of Merger with the New York Department of
State ("Effective Time").
Parties to the Merger
The Company, founded in 1987, through its principal operating subsidiaries,
provides institutional research, investment banking, securities brokerage and
trading services. As of October 31, 1998, these subsidiaries consisted of GKN
Securities Corp. ("GKN"), Southeast Research Partners, Inc. ("SERP"), Shochet
Securities, Inc. ("Shochet") and Research Partners International AG ("RPII-AG").
The Company also has operations in the merchant banking business through its
Dalewood Associates, Inc. ("Dalewood") subsidiary. Newco was formed as a
wholly-owned subsidiary of the Company on October 30, 1998, for the sole purpose
of merging with and into GBI. The principal executive offices of the Company and
Newco are located at One State Street Plaza, New York, New York 10004 and their
telephone number is (212) 509-3800.
GBI is a New York corporation, founded in 1983, which is engaged in the
securities brokerage and trading business and provides investment banking and
research services. GBI's principal executive office is located at 1055 Stewart
Avenue, Bethpage, New York 11714 and its telephone number is (516) 470- 1000.
Merger Consideration
Each share of common stock of GBI outstanding immediately prior to the
Effective Time (such common stock representing the only outstanding securities
of GBI) will be converted into the right to receive its pro rata portion of (i)
6,000,000 shares of Common Stock ("Merger Shares") and (ii) warrants to purchase
an aggregate of 2,000,000 shares of Common Stock at $3.50 per share ("Merger
Warrants" and, together with the Merger Shares, the "Merger Consideration"). The
Merger Warrants are exercisable only if certain performance standards are met by
the Company. For a detailed discussion of the terms of the Merger, see "Merger
Proposal." The Merger Consideration will be reduced, on a pro rata basis, if any
GBI shareholder votes against the Merger and seeks appraisal rights, since such
dissenting shareholders will be paid cash by GBI.
The Merger Shares would represent, on an after-issued basis, approximately
42% of the outstanding Common Stock and 41% of the voting power of all
outstanding voting securities of the Company. In addition, the GBI Principal
Shareholders will own approximately 30% of the outstanding shares of Common
Stock and voting power of the Company's voting securities and will become
executive officers and directors of the Company. See "Merger
Proposal--Management After the Merger; Employment Agreements."
Management After the Merger
Following the Merger, the Board of Directors of the Company will consist of
the nominees named in the Director Proposal. See "Director Proposal." The
executive officers of the Company will be as follows: each of David M. Nussbaum
and Joseph Berland will serve as Co-Chairman of the Board, Roger N. Gladstone
will serve as Vice Chairman of the Board, Richard Rosenstock will serve as
President, Peter R. Kent will serve as Chief Executive Officer, David Thalheim
will serve as Chief Operating Officer, and each of Mark Zeitchick, Vincent
Mangone, Robert T. McAleer and Peter R. McMullin will serve as Executive Vice
Presidents. Each of these persons is currently a stockholder and an executive
4
<PAGE>
officer of the Company or GBI, except David Thalheim, who is a stockholder of
GBI and is the owner of a company currently providing consulting services to
GBI. The directors of the Surviving Corporation will be Joseph Berland, Mark
Zeitchick, David Nussbaum and Peter Kent. The officers of the Surviving
Corporation will be selected from among and by the directors of the Surviving
Corporation.
Concurrently with the execution of the Merger Agreement, each of Messrs.
Nussbaum, Berland, Gladstone, Rosenstock, Kent, Thalheim, Zeitchick and Mangone
entered into a one-year employment agreement with the Company, effective upon
consummation of the Merger. See "Merger Proposal--Management After the Merger;
Employment Agreements."
Conditions to Merger
The consummation of the Merger is subject to the satisfaction of certain
conditions including among other things, (i) approval of the Merger Proposal,
the Name Change Proposal, the Director Proposal by the requisite vote of the
Company's stockholders; (ii) approval of the Merger by the shareholders of GBI;
(iii) approval of the Merger by certain regulatory agencies, including the NASD
Regulation, Inc.; and (iv) that the "Liquid Net Worth" (as defined in the Merger
Agreement) of each of the Company and of GBI, as of specified dates prior to the
closing of the Merger, shall not be less than 75% of their respective Liquid Net
Worth as of August 31, 1998. There are a number of other usual and customary
conditions that must be satisfied before the Merger can occur. See "Merger
Proposal--Conditions to the Merger."
Indemnification
Pursuant to the terms of the Merger Agreement, all of the stockholders of
GBI (severally, in proportion to their ownership of shares of GBI), on the one
hand, and the Company, on the other hand, have agreed to indemnify the other,
subject to certain limits, for breach of their respective representations,
warranties and covenants under the Merger Agreement, which indemnification
obligation, at the indemnifying party's option, may be satisfied with shares of
Common Stock. See "Merger Proposal--Merger Agreement--Indemnification."
Termination
The transactions contemplated by the Merger may be terminated under the
following circumstances: (i) by mutual consent of the Company and GBI; (ii) by
either the Company or GBI if, without fault of such terminating party, the
Merger is not consummated on or prior to May 31, 1999; (iii) by either the
Company or GBI (if the terminating party is not then in material breach of its
obligations hereunder) if (a) a material default or breach is made by the other
party with respect to the performance of any of its obligations set forth in the
Merger Agreement and such default cannot be cured within a reasonable period of
time, or (b) if any of the other party's representations and warranties (x) made
without any materiality standard, are not true and correct in all material
respects as of the date the Merger Agreement was executed and as of the closing
date or (y) made with any materiality standard, are not true and correct in all
respects as of the date the Merger Agreement was executed and as of the closing
date; or (iv) by either the Company or GBI if, (i) the Board of Directors of the
Company withdraws, modifies or changes its recommendation so that it is not in
favor of the Merger Proposal or resolves to do any of the foregoing or (ii) the
Board of Directors recommends or resolves to recommend to the stockholders of
the Company a transaction other than the Merger. See "Merger Proposal--Merger
Agreement--Termination."
Lock-Up Agreements
Concurrently with the execution of the Merger Agreement, the GBI Principal
Shareholders and the principal executive officers of the Company executed
5
<PAGE>
lock-up agreements with the Company whereby they each agreed that, without the
Company's prior written consent, for a period of 24 months from the Effective
Time, they will not offer, sell, pledge or otherwise dispose of any shares of
Common Stock. Furthermore, GBI has agreed to cause each of its shareholders who
will be receiving Merger Consideration to execute an agreement with the Company
and GBI pursuant to which such shareholder will agree not to offer, sell, pledge
or otherwise dispose of any shares of Common Stock for a similar 24-month
period.
Reasons for the Merger
The combined firms resulting from the Merger have approximately $40 million
of stockholders' equity and $115 million of annual revenues, based on the pro
forma condensed combined statement of financial condition at July 31, 1998 and
the pro forma condensed combined statement of operations for the 12 months ended
January 31, 1998, respectively. In addition, as of October 31, 1998, the
combined firms employed in excess of 440 registered representatives. The
combination of the Company and GBI will result in a regional firm with
significant retail and institutional placement and brokerage capabilities, which
should allow the combined firms to recruit additional quality personnel and
facilitate the Company's ability to service corporate clients. In addition, with
the current trend toward the consolidation of smaller broker-dealers, the
increased financial strength of the Company will position it to take advantage
of increasing opportunities to continue to grow through acquisitions. The
Company also believes that, since its business is substantially similar to
GBI's, economies of scale and resulting operating efficiencies, together with
the addition of management personnel from GBI, can improve operating results.
Fairness Opinion
____________________________ ("Financial Advisor"), the financial advisor
retained by the Board of Directors of the Company in connection with the Merger,
has rendered its opinion that the terms of the Merger are fair, from a financial
point of view, to the stockholders of the Company. The full text of the
Financial Advisor's opinion is annexed as Appendix B to this Proxy Statement.
See "Merger Proposal--Opinion of Financial Advisor."
Recommendation of the Board of Directors
The Board of Directors of the Company unanimously recommends that
stockholders approve the Merger Proposal and the related Name Change Proposal
and Director Proposal. See "Merger Proposal--Recommendation of the Board of
Directors."
No Appraisal Rights for Dissenters
Under Delaware law, holders of the Company's Common Stock and Preferred
Shares will not be entitled to appraisal rights in connection with the Merger.
Certain Federal Income Tax Consequences
The Merger of GBI and Newco is intended to be a "tax-free reorganization,"
for Federal income tax purposes under Section 368(a)(2)(E) of the Internal
Revenue Code of 1986, as amended. Neither the Company nor GBI will recognize any
gain or loss in the Merger and neither the stockholders of the Company nor the
shareholders of GBI will recognize any gain or loss in the Merger.
Accounting Treatment
The Merger will be accounted for under the "purchase" method of accounting.
Under purchase accounting, the fair value of the total Merger Consideration will
6
<PAGE>
be allocated to the individual GBI assets and liabilities based on their fair
values. The excess of the purchase price over the face value of the net assets
acquired will be amortized over the estimated period benefitted. The individual
allocations are subject to valuations as of the date of the Merger based on
appraisal and other studies, which are not yet completed. Accordingly, the final
allocations will be different from the amounts reflected in the unaudited pro
forma condensed combined financial information. Notwithstanding this, the
unaudited pro forma condensed combined financial information reflects the
Company's best estimate based on currently available information as of the date
of this Proxy Statement. See "Pro Forma Condensed Combined Financial
Information."
Market Price Data
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol RPII. On November 3, 1998, the last trading day for which last sale
information is available prior to the public announcement of the execution and
delivery of the Merger Agreement, the high and low sales prices of the Common
Stock were $2.00 and $1 3/4, respectively. On _____ __, the most recent date for
which it was practicable to obtain market price information prior to the
printing of this Proxy Statement, the high and low sales prices were $____ and
$____, respectively. There is no public market for the capital stock of GBI.
7
<PAGE>
Summary Pro Forma Condensed Combined Financial Information
The following tables set forth certain unaudited pro forma condensed
combined financial data for the Company and GBI. The following data gives effect
to the Merger under the method of purchase accounting as if those events had
occurred as of February 1, 1997, with respect to the operating and balance sheet
data. The unaudited pro forma condensed financial information has been prepared
based on a number of assumptions that are directly attributable to the Merger
and which are expected to have a continuing impact on the operations of the
combined companies. For further information on the manner in which the summary
pro forma was derived, see "Pro Forma Condensed Combined Financial Information."
The following data should be read in conjunction with the consolidated financial
statements of the Company and the financial statements of GBI and with the pro
forma condensed combined financial information regarding the Merger, all
appearing elsewhere in this Proxy Statement.
The unaudited pro forma condensed combined information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have occurred if the Merger had been
consummated as of such dates, nor is it necessarily indicative of future
operating results or financial position.
Unaudited Pro Forma Condensed Combined Financial Information
for the Company and GBI
<TABLE>
<CAPTION>
Fiscal Year Ended Six Months Ended
January 31, 1998 July 31, 1998
------------------ -----------------
<S> <C> <C>
Statement of Operations
Total revenues.................................................. $115,265,000 $ 52,471,000
Total expenses.................................................. $122,842,000 $ 55,126,000
Loss before income taxes........................................ $ (7,577,000) $ (2,655,000)
Net loss........................................................ $ (5,618,000) $ (1,998,000)
As of
July 31, 1998
Balance Sheet Data
Total assets.................................................... $ 61,975,000
Total liabilities............................................... $ 22,135,000
Stockholders' equity............................................ $ 39,830,000
</TABLE>
8
<PAGE>
Summary Selected Financial Data of the Company
Certain of the summary selected consolidated financial data presented below
for each of the five fiscal years ended January 31, 1998, has been derived from
the Company's consolidated financial statements which were audited by KPMG Peat
Marwick LLP for 1998, 1997, 1996 and 1995, and by Goldstein Golub Kessler &
Company, P.C. for 1994, each independent certified public accountants. Certain
of the selected consolidated financial data presented below for the six months
ended July 31, 1998 and July 31, 1997, has been derived from the Company's
unaudited consolidated financial statements on the same basis as the audited
financial statements and include all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the results of these periods.
This data should be read in conjunction with the Company's Consolidated
Financial Statements, related notes and other financial information included
elsewhere in this Proxy Statement. The information below is in thousands except
for per share amounts and other data.
<TABLE>
<CAPTION>
Six months ended
July 31, Fiscal Year ended January 31,
1998 1997 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Total revenues $27,794 $23,344 $48,676 $67,750 $43,019 $32,410 $32,956
Total expenses $30,277 $27,457 $58,632 $56,394 $36,732 $31,516 $25,534
Pre-tax (loss) income $(2,483) $(4,113) $(9,956) $11,356 $6,287 $894 $7,422
Net (loss) income $(1,671) $(2,449) $(6,513) $6,329 $3,469 $381 $4,006
Basic (loss) earnings
per common share $(0.21) $(0.30) $(0.80) $0.93 $0.69 $0.08 $0.81
Diluted (loss) earnings
per common share $(0.21) $(0.30) $(0.80) $0.88 $0.60 $0.07 $0.72
Weighted average shares
outstanding - basic 8,100 8,132 8,114 6,824 5,037 5,063 4,963
Weighted average shares
outstanding - diluted 8,100 8,132 8,114 7,175 5,737 5,695 5,530
Balance Sheet Data
(at end of period):
Total assets $32,380 $47,875 $36,972 $51,633 $27,853 $16,096 $16,123
Total liabilities (excluding
subordinated debt) $5,569 $15,909 $8,775 $15,869 $12,143 $4,339 $4,685
Subordinated debt $498 $567 $576 $738 $934 - -
Convertible subordinated notes - - - - - - $162
Stockholders' equity $26,313 $31,399 $27,621 $35,026 $14,776 $11,757 $11,276
</TABLE>
9
<PAGE>
Summary Selected Financial Data of GBI
Certain of the summary selected consolidated financial data presented below
for each of the five fiscal years ended August 31, 1998, has been derived from
the Company's consolidated financial statements which were audited by Goldstein
Golub Kessler LLP ("Goldstein Golub") for 1998, by Lerner, Sipkin & Co. CPAs
("Lerner Sipkin") for 1997, 1996 and 1995 and by Todman & Co., CPAs, P.C. for
1994, each independent certified public accountants. This data should be read in
conjunction with GBI's Financial Statements, related notes and other financial
information included elsewhere in this Proxy Statement. The information below is
in thousands except for per share amounts and other data.
<TABLE>
<CAPTION>
Fiscal Year ended August 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Total revenues $57,895 $62,355 $39,944 $22,921 $11,615
Total expenses $57,108 $54,879 $38,896 $22,684 $11,410
Pre-tax income $787 $7,476 $1,048 $237 $205
Net income $352 $4,178 $448 $13 $73
Basic and diluted earnings per
common share $675 $8,423 $988 $31 $209
Weighted average shares
outstanding - basic and
diluted 521 496 454 426 350
Balance Sheet Data
(at end of period):
Total assets $20,053 $20,700 $6,276 $5,550 $5,575
Total liabilities (excluding
subordinated debt) $10,266 $13,986 $4,051 $3,788 $2,812
Subordinated debt $1,000 $1,000 $1,000 $1,000 $2,000
Notes $833 - - - -
Shareholders' equity $8,787 $5,714 $1,225 $762 $763
</TABLE>
Comparative Per Share Data
The following tables set forth unaudited data concerning the net income
(loss), cash dividends and book value per share for the Company and GBI (i) on a
condensed combined pro forma basis after giving effect to the Merger and (ii) on
a historical basis for each of the Company and GBI.
Pro Forma Condensed Combined for the Company and GBI
<TABLE>
<CAPTION>
For Fiscal Year
Ended Six Months Ended
January 31, 1998 July 31, 1998
---------------- ---------------
<S> <C> <C>
Net income (loss) per share (basic and diluted)........................ $(.40) $(.14)
Cash dividends declared per share...................................... 0 0
Book value per share at end of period.................................. $2.94 $2.82
</TABLE>
- ------------------------------------------
Per share data is based on the then outstanding Common Stock of the Company,
adjusted for the 6,000,000 Merger Shares which will be issued in connection with
the Merger, less 11,776 shares of Common Stock which will be retired in
connection with the Merger both as of the beginning of the period. Weighted
average common and equivalent Shares outstanding is 14,102,469 and 14,088,350
for the fiscal year ended January 31, 1998 and the six months ended July 31,
1998, respectively.
10
<PAGE>
The Company's Historical For Fiscal Year For Six Months
<TABLE>
<CAPTION>
Ended Ended
January 31, 1998 July 31, 1998
---------------- -------------
<S> <C> <C>
Net income (loss) per share (basic and diluted)........................ $(.80) $(.21)
Cash dividends declared per share...................................... 0 0
Book value per share at end of period.................................. $3.41 $3.24
</TABLE>
- -------------------------------------------
Per share data is based on the then outstanding Common Stock of the Company.
Weighted average common and equivalent shares outstanding is 8,114,245 and
8,100,126 for the fiscal year ended January 31, 1998 and the six months ended
July 31, 1998, respectively.
GBI's Historical
<TABLE>
<CAPTION>
For Fiscal Year
Ended August 31, 1998
---------------------
<S> <C>
Net income per share (basic and diluted)............................... $675
Cash dividends declared per share...................................... 0
Book value per share at end of period.................................. $11,237
</TABLE>
- -------------------------------------------
Per share data is based on the then outstanding common stock of GBI. Weighted
average common and equivalent shares outstanding is 521 for the fiscal year
ended August 31, 1998. At August 31, 1998, 782 shares of GBI common stock were
outstanding. Book value per share reflects shareholders equity divided by the
number of GBI shares outstanding at the end of the period. The historical
financial statements have been adjusted to reflect cash received subsequent to
the report date for a material portion of the common stock subscribed for at
August 31, 1998.
When used in this Proxy Statement the words or phrases "will likely result,"
"the Company expects," "will continue," "is anticipated," "estimated,"
"project," or "outlook" or similar expressions are intended to identify
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, each of which
speaks only as of the date made. Such statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. Factors that
could affect the Company's results of operations and cause its results to differ
from these statements include the volatility and price level of the securities
markets; the volume, size and timing of securities transactions; the demand for
investment banking services; the level and volatility of interest rates; the
availability of credit; legislation affecting the business and financial
communities; and the economy in general. For a more complete discussion of these
and other factors, see the Company's registration statement filed on Form S-1,
as amended (No. 333-05273), and the Company's periodic Form 10-K, 10-Q, and 8-K
filings with the SEC. The Company has no obligation to publicly release the
result of any revisions that may be made to any forward-looking statements to
reflect anticipated or unanticipated events or circumstances occurring after the
date of such statements.
11
<PAGE>
THE MEETING
Meeting and Record Date
The Meeting is scheduled to be held at One State Street Plaza, 24th Floor,
New York, New York 10004, on January 29, 1998, at 10:00 a.m. December 31, 1998
has been fixed as the Record Date. Only holders of shares of Common Stock and
Preferred Shares as of the Record Date are entitled to vote at the Meeting.
Quorum; Proxies and Voting Instructions
The presence at the Meeting in person or by proxy of the holders of Common
Stock and Preferred Shares possessing a majority of the voting power of all of
the outstanding voting securities of the Company constitutes a quorum at the
Meeting. Proxies relating to "street name" shares that are returned to the
Company but marked by brokers as "not voted," will be treated as shares present
for purposes of determining the presence of a quorum on all matters but will not
be treated as shares entitled to vote on the matter as to which authority to
vote is withheld by the broker ("broker non-votes").
All proxies that are properly executed and returned, unless revoked prior
to the Meeting, will be voted at the Meeting and any postponements or
adjournments thereof in accordance with the instructions indicated thereon or,
except for broker non-votes, if no direction is indicated, in accordance with
the recommendations of the Board. Management knows of no matters to be submitted
at the Meeting other than as specified in the Notice of Meeting included with
this Proxy Statement. However, if any other business properly comes before the
Meeting, it is the intention of the persons named in the proxy to vote in
respect thereof in accordance with their best judgment. The execution of a proxy
will not affect a stockholder's right to attend the Meeting and vote in person.
A stockholder who has given a proxy may revoke it at any time before it is
exercised at the Meeting by filing with the Secretary of the Company a written
notice of revocation. Attendance at the Meeting will not, by itself, revoke a
proxy.
Votes Required
Although the GCL does not require that the stockholders of the Company approve
the Merger Proposal, under the rules of Nasdaq, the Company must obtain
stockholder approval prior to the issuance of the Merger Consideration since the
Merger Shares and the Common Stock issuable upon exercise of the Merger Warrants
are in excess of 20% of the Common Stock outstanding before such issuance.
At the close of business on the Record Date, the Company had issued and
outstanding 8,410,899 shares of Common Stock and 1,140,000 Preferred Shares, the
Company's only classes of voting securities outstanding, which will vote as one
class at the Meeting. Each holder of Common Stock will be entitled to one vote
for each share of Common Stock registered in his or her name on the Record Date.
Each holder of Preferred Shares will be entitled to a vote equivalent to the
vote of the number of shares of Common Stock into which the Preferred Shares may
be converted on the Record Date. As of the Record Date, each Preferred Share was
convertible into 0.16 shares of Common Stock. Accordingly, the Preferred Shares
in the aggregate may cast votes equivalent to the votes of 182,400 shares of
Common Stock. Thus, as of the Record Date, the outstanding Common Stock and
Preferred Shares collectively had voting power equivalent to 8,593,299 shares of
Common Stock.
12
<PAGE>
The affirmative vote by the holders of the outstanding Common Stock and
Preferred Shares, voting as a single class (with each Preferred Share having
voting power equivalents to 0.16 shares of Common Stock), constituting a
majority of the voting power of the Company's outstanding voting securities
present in person or representation by proxy at the Meeting and voting on the
Merger Proposal is required to approve the Merger Proposal. Abstentions
regarding this proposal are considered present and entitled to vote on the
matter and, therefore, will have the same effect as a vote against this
proposal, but because shares held by brokers will not be considered entitled to
vote on matters as to which brokers withhold authority, a broker non-vote on
this proposal will have no effect on the vote.
Approval of the Name Change Proposal requires the affirmative vote of the
holders of a majority of the voting power of the Company's outstanding voting
securities, voting as a single class. Accordingly, abstentions and broker
non-votes regarding this proposal, since they are not counted in favor of the
proposal, will have the same effect as a vote against this proposal.
The directors will be elected by a plurality vote of the voting power of
the voting securities, voting as a single class, voted at the Meeting with
respect to the election of directors. Plurality means that the individuals who
receive the largest number of votes cast "FOR" are elected as directors.
Consequently, any securities not voted "FOR" a particular nominee a result of a
director to withhold authority to vote will not be counted in such nominee's
favor.
All other matters that may be voted on will be decided by the affirmative
vote of the voting securities, voting as a single class, present or represented
at the meeting and entitled to vote. On any such matter, an abstention will have
the same effect as a negative vote, but broker non-votes will have no effect on
the vote regarding such matter. Unless otherwise specified in the proxy, voting
securities represented by proxies will be voted "FOR" the Merger Proposal, the
Name Change Proposal and the Director Proposal.
The adoption of the Merger Proposal, the Name Change Proposal and the
Director Proposal is a condition to the effectiveness of each of the proposals
and the consummation of the Merger is required for each of such proposals, if
approved by the stockholders of the Company, to become effective. Consummation
of the Merger Proposal is dependent upon a number of other conditions. See
"Merger Proposal--Merger Agreement--Conditions to the Merger."
Messrs. David M. Nussbaum, Roger N. Gladstone, Robert H. Gladstone and
Peter R. Kent have agreed in writing to vote all outstanding voting securities
of the Company owned by them (approximately 33% of the voting power of the
Company's outstanding voting securities) in favor of the Merger Proposal, the
Name Change Proposal and the Director Proposal.
Solicitation of Proxies
The Company will bear the entire cost of solicitation of proxies from its
stockholders as well as the cost of preparing, assembling, printing and mailing
this Proxy Statement, the proxy card and any additional information furnished to
stockholders. Copies of solicitation material will be furnished to brokerage
houses, fiduciaries and custodians holding in their names shares of Common Stock
and Preferred Shares beneficially owned by others to forward to such beneficial
owners. The Company may reimburse persons representing beneficial owners of
shares for their expenses in forwarding solicitation material to such beneficial
owners. Solicitation of proxies by mail may be supplemented by telephone or
other electronic or personal solicitation by directors, officers or other
regular employees of the Company who will not receive additional compensation
for such services.
13
<PAGE>
PROPOSAL I: MERGER PROPOSAL
The following is a brief summary of certain aspects of the Merger Proposal,
the Merger Agreement and the Merger contemplated thereby. This summary does not
purport to be complete and is qualified in its entirely by reference to the
Merger Agreement, annexed as Appendix A and incorporated herein by reference.
Stockholders of the Company are urged to read the Merger Agreement in its
entirety.
The Merger Proposal Generally
The Merger Proposal contemplates the issuance by the Company of (i)
6,000,000 shares of Common Stock and (ii) Merger Warrants to purchase 2,000,000
shares of Common Stock in exchange for all of the outstanding stock of GBI
pursuant to the Merger Agreement, under which Newco, a wholly-owned subsidiary
of the Company will merge with and into GBI. Following the Merger, GBI will
become the Surviving Corporation and a wholly-owned subsidiary of the Company
and will change its name to Research Partners International, Inc. Although the
GCL does not require that the stockholders of the Company approve the Merger
Proposal, under the rules of Nasdaq, the Company must obtain stockholder
approval prior to the issuance of the Merger Consideration since the Merger
Shares and the Common Stock issuable upon exercise of the Merger Warrants are in
excess of 20% of the Common Stock outstanding before such issuance.
Effective Time
The Merger will become effective upon the filing of Certificate of Merger
with the Department of State of New York. It is expected that such filing will
take place as promptly as practicable after the approval by stockholders of all
of the proposals submitted to the stockholders at this Meeting and the
satisfaction of the other conditions to the Merger, including obtaining
necessary regulatory approvals. The time of the filing of the Certificate of
Merger (or such later time as may be specified for effectiveness of the Merger
in the Certificate of Merger) is referred to as the "Effective Time."
Background of the Merger
The terms of the Merger Agreement are the result of arm's length
negotiations between executive officers and representatives of the Company and
GBI. The following is a brief description of the background of these
negotiations and the Merger.
The Company and GBI have historically been, and currently are, engaged in
similar businesses. Certain principals of each company have known each other
professionally and personally for more than twenty years. The companies have
interacted with each other in the securities business and have participated in
each other's underwritings. The two companies have also co-managed six public
underwritings.
During August 1998, certain members of the GBI management team approached
the Company concerning the possibility of subleasing space at the Company's New
York City location. These discussions led to the realization that, to a certain
extent, each company's strengths and weaknesses complemented the other, and that
a combination of the two companies could be beneficial to both.
During the first two weeks of September, multiple meetings between the
principals of the two firms were held at various locations, including the
14
<PAGE>
Company's offices, GBI's offices, and offices of counsel. In a series of
meetings occurring on Friday, September 11, 1998 and Tuesday, September 15,
1998, the terms of the potential merger were negotiated. The majority of all of
the principals of the two firms were involved in these negotiations.
On September 18, 1998, a memorandum describing the initial term of the
transaction was delivered to members of the Company's Board of Directors and
other key Company executives. At the regularly scheduled meeting of the
Company's Board of Directors on September 23, 1998, the potential merger was
initially discussed. At that meeting, the Board of Directors authorized the
Company's management to continue with the discussions and negotiations with GBI.
During the month of October 1998 management, in-house counsel and
accounting personnel and outside counsel of the respective firms conducted due
diligence. At the Company's request, GBI hired a new independent auditor to
audit its financial statements as of August 31, 1998. Coincident with the
ongoing due diligence, a definitive merger agreement was negotiated between the
parties.
Throughout the month of October the Company's outside directors were kept
informed of the course of discussions by the Company's management. At a meeting
of the Board of Directors of the Company on October 27, 1998, the directors
reviewed the key terms of the Merger Agreement. Outside counsel to the Company
reviewed with the Company and its directors their fiduciary duties in
considering the business combination and reviewed the principal terms of the
Merger Agreement and other documents related to the Merger. The Company's
executive management also discussed the proposed management structure of the
business combination following the Merger whereby the combined entity would be
managed by a joint management team composed of key individuals from both firms.
The Company's management presented to the Board the results of the due
diligence conducted by them. The Board was informed that the due diligence was
not yet final and that there were certain steps yet to be completed. They also
summarized the synergies and benefits of the proposed combination. The Board
determined that they would also retain an independent investment bank to further
advise the Board regarding the fairness of the proposed business combination to
the Company's shareholders from a financial point of view. The Board confirmed
that a condition to closing was that the Company shall have received a fairness
opinion, stating that, in substance, the terms of the Merger are fair, from a
financial point of view, to the Company's stockholders. The Board agreed to
reconvene upon the satisfactory conclusion of the Company's due diligence.
On November 3, 1998, the Board of Directors of the Company reconvened with
all appropriate parties. At the meeting, a final due diligence report was
presented by the Company's management. After consideration of the various facts
presented and discussed at the meeting and over the prior six weeks, the
Company's Board of Directors concluded that the Merger was fair to, and in the
best interests of, the Company's stockholders and approved the Merger and the
Merger Agreement, and other matters and documents related thereto. The Board
then authorized the Company's management to enter into the Merger Agreement and
related agreements and also instructed management to solicit the approval of the
Merger Agreement from the stockholders of the Company and the necessary
regulatory authorities.
On November 4, 1998, the Company, Newco, GBI and the GBI Principal
Shareholders executed the Merger Agreement and related documents.
15
<PAGE>
Reasons for the Merger
The combined firms resulting from the Merger have approximately $40 million
of stockholders' equity and $115 million of annual revenues, based on the pro
forma condensed combined statement of financial condition at July 31, 1998 and
the pro forma condensed combined statement of operation for the 12 months ended
January 31, 1998, respectively. In addition, as of October 31, 1998, the
combined firms employed in excess of 440 registered representatives. The
combination of the Company and GBI will result in a regional firm with
significant retail and institutional placement and brokerage capabilities, which
should allow the combined firms to recruit additional quality personnel and
facilitate the Company's ability to service corporate clients. In addition, with
the current trend toward the consolidation of smaller broker-dealers, the
increased financial strength of the Company should position it to take advantage
of increasing opportunities to continue to grow through acquisitions. The
Company also believes that, since its business is substantially similar to
GBI's, economies of scale and resulting operating efficiencies, together with
the addition of management personnel from GBI, can improve operating results.
Opinion of Financial Advisor
[_____________________________ to provide a narrative discussing, in
detail, its opinion.]
Recommendation of the Board of Directors
The Board of Directors of the Company has unanimously approved the Merger
Proposal and related matters and believes it is fair to and in the best
interests of the Company's stockholders. The Board of Directors unanimously
recommends that stockholders approve the Merger Proposal, the Name Change
Proposal and the Director Proposal.
Regulatory Approval
The Company and GBI must comply with certain Federal and state regulatory
requirements and obtain certain regulatory approvals in order to consummate the
Merger, including (i) compliance with applicable Federal and state securities
laws providing for the issuance of the Merger Consideration in the absence of
registration under the Securities Act of 1933, as amended; and (ii) approval of
NASD Regulation, Inc. The Company and GBI have made the required filings with
the applicable authorities and are awaiting approval.
Material Contacts Between the Company and GBI
GBI and GKN are engaged in similar businesses and over the years they have
co-managed six public offerings and participated in each others' selling groups
and underwriting syndicates for public offerings. In addition, David Thalheim,
Richard Rosenstock and Joseph Berland, three of the GBI Principal Shareholders,
have invested in private placements of companies for which GKN has served as
placement agent. In December 1996, the Company purchased all of the outstanding
shares of Dalewood from David Thalheim, a director nominee of the Company and
from another person, for an aggregate of $777,000. The purchase price
represented the value of Dalewood's capital account for its limited partnership
and general partnership interest in Dalewood Associates, L.P. Mr. Thalheim was a
50% stockholder of Dalewood at the time of the purchase. See also "Certain
Transactions" regarding Mr. Thalheim's investment in and complete withdrawal
from Dalewood Associates, L.P.
16
<PAGE>
In October 1995, Richard Rosenstock became a limited partner in
Kaleidoscope Partners, L.P. ("Kaleidoscope"), a private investment partnership
of which a wholly-owned subsidiary of the Company served as general partner. Mr.
Rosenstock's total investment in Kaleidoscope amounted to $500,000. Mr.
Rosenstock subsequently transferred his interest in Kaleidoscope to a trust he
established, which in turn withdrew as a limited partner effective December 31,
1997.
In March 1995, David Thalheim became a limited partner in Kaleidoscope. His
total investment amounted to $400,000. Mr. Thalheim subsequently transferred his
interest in Kaleidoscope to a trust he established, which in turn withdrew as a
limited partner effective December 31, 1997.
Other than the foregoing and as described in "Merger Proposal -- Management
After the Merger; Employment Agreements" and "Certain Transactions," the Company
is not aware of any past, present, or proposed material contracts, arrangements,
understandings, relationships, negotiations or transactions since February 1,
1995 between GBI or the GBI Principal Shareholders and the Company or any of its
affiliates.
Accounting Treatment
The Merger will be accounted for under the purchase method of accounting.
Under purchase accounting, the fair value of the total Merger Consideration for
GBI will be allocated to the individual GBI assets and liabilities based on
their fair values. The excess of the purchase price over the face value of the
net assets acquired will be amortized over the estimated period benefitted. The
individual allocations are subject to valuations as of the date of the Merger
based on appraisal and other studies, which are not yet completed. Accordingly,
the final allocations will be different from the amounts reflected in the
unaudited pro forma condensed combined financial information. Although the final
allocations will differ, the unaudited pro forma condensed combined financial
information reflects the Company's best estimate based on currently available
information as of the date of this Proxy Statement. See "Pro Forma Condensed
Combined Financial Information".
Certain Federal Income Tax Consequences
The Merger of GBI and Newco is intended to be a "tax-free reorganization",
for Federal income tax purposes under Section 368(a)(2)(E) of the Internal
Revenue Code of 1986, as amended. Neither the Company nor GBI will recognize any
gain or loss in the Merger and neither the stockholders of the Company nor the
shareholders of GBI will recognize any gain or loss in the Merger.
No Appraisal Rights for Dissenters
Under Delaware law, the Company's stockholders will not be entitled to
appraisal rights in connection with the Merger.
Merger Agreement
The description of the Merger Agreement set forth below does not purport to
be complete and is qualified in its entirety by reference to the Merger
Agreement, annexed hereto as Appendix A and incorporated herein by reference.
Stockholders are urged to read the Merger Agreement in its entirety.
17
<PAGE>
General
On November 4, 1998, the Company and Newco entered into the Merger
Agreement with the GBI and the GBI Principal Shareholders pursuant to which
Newco will merge with and into GBI, with GBI changing its name to Research
Partners International, Inc. and becoming a wholly-owned subsidiary of the
Company.
Merger Consideration
Pursuant to the Merger Agreement, the Company will issue (i) 6,000,000
Merger Shares and (ii) Merger Warrants to purchase an aggregate of 2,000,000
shares of Common Stock. Under the terms of the Merger Agreement, each share of
common stock of GBI outstanding immediately prior to the Effective Time, which
are the only outstanding securities of GBI, will be converted into the right to
receive its pro rata portion of the Merger Shares and Merger Warrants. The
Merger Warrants are exercisable at $3.50 per share and become exercisable, if at
all, as follows:
(i) If the retail registered representatives employed by the broker-dealer
subsidiaries of the Company (other than registered representatives who join a
subsidiary as a group from another firm and, as a group generated at least
$10,000,000 of commissions during the 12 full commission months prior to joining
the subsidiary, and who do not relocate to one of the subsidiaries' three
principal offices in New York, NY, Bethpage, NY, or Boca Raton, Florida
("Excluded Commissions")) generate gross commissions of at least $100,000,000
during the first 12 commission months beginning after the three-month
anniversary of the date GBI and the Company commence sharing facilities
("Initial Commission Period"), up to an aggregate of one-half of the total
shares of Common Stock issuable upon the exercise of the Merger Warrants
("Warrant Shares") may be purchased at any time commencing on the first business
day after the last day of the Initial Commission Period and ending on the
six-year anniversary of the last day of the Initial Commission Period;
(ii) If gross commissions (other than Excluded Commissions) of at least
$130,000,000 are generated during the 12 commission months immediately following
the Initial Commission Period ("Second Commission Period"), up to an aggregate
of one-half of the total Warrant Shares may be purchased at any time commencing
on the first business day after the last day of the Second Commission Period and
ending on the five-year anniversary of the last day of the Second Commission
Period; and
(iii) If the threshold gross commissions are not generated in either the
First Commission Period or Second Commission Period, but gross commissions
(other than Excluded Commissions) of at least $230,000,000 are generated in the
combined periods, any Warrant Shares which have not yet become purchasable may
be purchased at any time commencing on the first business day after the last day
of the Second Commission Period and ending on the five-year anniversary of the
last day of the Second Commission Period.
The Merger Warrants have a provision permitting cashless exercise and, if
any portion of the Merger Warrants become exercisable, the Company is obligated
to file a registration statement with the Securities and Exchange Commission
("Commission") to register the resale of the Warrant Shares upon the request of
the holders of the Merger Warrants to purchase at least 1,000,000 Warrant
Shares.
The shareholders of GBI are entitled to appraisal rights pursuant to
Sections 623 and 912 of the New York Business Corporation Law ("BCL"). The
18
<PAGE>
Merger Consideration will be reduced, on a pro rata basis, if any shareholder of
GBI votes against the Merger and seeks appraisal rights since such shareholder
will be paid in cash by GBI. If after the Effective Time such shareholder loses
the right to receive payment pursuant to Section 623 of the BCL (waivable by the
Company), the reduction is eliminated and the common stock of GBI held by such
shareholder will be treated as if it had been converted as of the Effective Time
into the Merger Consideration. It is a condition to the Company's obligation to
consummate the Merger that shareholders of GBI who exercise their appraisal
rights hold, in the aggregate, no more than 3% of the outstanding common stock
of GBI.
Representations and Warranties
The Merger Agreement contains various representations and warranties of GBI
and the GBI Principal Shareholders, on one hand, and the Company and Newco, on
the other hand, relating to, among other things, (i) due organization and
similar corporate matters; (ii) capital structure; (iii) authorization,
execution, delivery, performance and enforceability of the Merger Agreement and
related maters; (iv) absence of any conflict with their respective certificates
of incorporation and by-laws, and material contracts; (v) governmental or
regulatory approvals and consents of third parties required to consummate the
Merger; (vi) their respective financial statements; (vii) the absence of certain
material events and changes since the date of their respective financial
statements; (viii) various matters relating to their respective assets, and the
operations and conduct of the respective businesses; and (ix) with respect to
the GBI Principal Shareholders of GBI, their acquisition of the Company's Common
Stock for their own accounts and not with a view towards distribution thereof
and other matters reflecting compliance with applicable securities laws.
Certain Covenants
Pursuant to the Merger Agreement, GBI and the GBI Principal Shareholders,
on one hand, and the Company and Newco, on the other hand, have agreed that
during the period from the date of the Merger Agreement until the Effective
Time, except as permitted by the Merger Agreement or as consented to in writing
by the other, each will, (i) conduct its business in the ordinary course and in
a manner consistent with current practice; (ii) use their best efforts to keep
available the services of their current employees and preserve the current
relationships with their customers and other persons with which they have
significant business relations; (iii) not dispose or encumber any property or
assets other than the ordinary course of business and in a manner consistent
with past practice; (iv) not amend the respective certificates of incorporation
or by-laws; (v) with certain exceptions, issue any shares of capital stock or
any securities convertible or exercisable into or exchangeable their capital
stock of each company; (vi) declare any dividend or make any distribution in
cash, securities or otherwise or redeem or purchase any shares of capital stock,
other than those which it is required to redeem or repurchase; (vii) advance,
transfer or otherwise distribute to a shareholder or any of their affiliates or
otherwise withdraw cash or cash equivalents in a manner inconsistent with
established cash management practices; (viii) make any general wage or salary
increase or enter into or amend any employment contracts or increase the
compensation payable to any officers or employees, except in certain
circumstances; (ix) make any capital expenditure in excess of $100,000 in the
aggregate; or (x) merge or consolidate with or acquire all or substantially all
of the assets of any other person or entity, except that Company is permitted to
consolidate its wholly-owned subsidiaries. In addition, the Company and GBI each
agreed to provide to each other reasonable access to all of their books,
records, reports and related materials and to use their best efforts to fulfill
the conditions required to be fulfilled by them to the extent within their
control. GBI also has agreed to liquidate and dissolve an affiliated private
investment partnership and to terminate GBI's retirement trust profit sharing
plan.
19
<PAGE>
Conditions to the Merger
The respective obligations of GBI and the GBI Principal Shareholders, on
one hand, and the Company and Newco, on the other hand, to effect the Merger are
subject to a number of conditions, including that (i) the issuance of the Merger
Consideration and the amendment to the Company's Certificate of Incorporation to
change its name shall have been approved by the shareholders of the Company;
(ii) the NASD and any other governmental or self-regulatory agency whose
approval is required shall have approved the Merger (and the Commission shall
not raise any unresolved objection to the Merger); (iii) the board of directors
of the Company, GBI and the other broker-dealer subsidiaries of the Company
shall have been reconstituted as set forth in the section of this Proxy
Statement entitled "The Merger Proposal--Management After the Merger; Employment
Agreements;" and (iv) the absence of any order, decree or injunction of a court
of competent jurisdiction or any regulation promulgated by any governmental
agency that prohibits consummation of the Merger.
In addition, the obligation of GBI and the GBI Principal Shareholders to
consummate the Merger is subject to, among others, the following conditions: (i)
without supplementation after the date of the Merger Agreement, the
representations and warranties of the Company and Newco shall, (A) with respect
to those representations and warranties qualified by a materiality statement, be
true and correct in all respects as of the closing of the Merger, and (B) with
respect to all other representations and warranties, be true and correct as of
the closing in all material respects, (ii) all covenants, agreements and
obligations required by the Merger Agreement to be performed by the Company and
Newco by the closing shall have been performed or fulfilled in all material
respects; (iii) the Company and Newco shall obtain all necessary consents,
approval or waivers; and (iv) the Liquid Net Worth (as defined in the Merger
Agreement) of the Company and its subsidiaries, on a consolidated basis, as of
the close of business (A) on the last day of the month prior to the month
preceding the closing if the closing is prior to the 25th of any month, or (B)
on the last day of the month prior to the closing if the closing is after the
24th of any month, in either case, as determined from the Company's balance
sheet (which balance sheet must be consistent with the FOCUS reports (financial
reports required to be filed by broker-dealers with the NASD) last filed by the
broker-dealer subsidiaries of the Company prior to the closing) shall not be
less than 75% of the Liquid Net Worth of the Company, on a consolidated basis,
at August 31, 1998.
In addition to the conditions set forth in the first paragraph of this
section, the obligation of the Company and Newco to consummate the Merger are
subject to, among other things, the following conditions: (i) without
supplementation after the date of the Merger Agreement, the representations and
warranties of GBI and the GBI Principal Shareholders shall, (A) with respect to
those representations and warranties qualified by a materiality statement, be
true and correct in all respects as of the closing of the Merger, and (B) with
respect to all other representations and warranties, be true and correct as of
the closing in all material respects, (ii) all covenants, agreements and
obligations required by the Merger Agreement to be performed by GBI and the GBI
Principal Shareholders by the closing shall have been performed or fulfilled in
all material respects; (iii) GBI and the GBI Principal Shareholders shall have
obtained all necessary consents, approval or waivers; (iv) the Liquid Net Worth
(as defined in the Merger Agreement) of GBI as determined from GBI's FOCUS
report last filed prior to the closing shall not be less than 75% of the Liquid
Net Worth of GBI at August 31, 1998; (v) the Company's receipt of an opinion
from a recognized investment banking firm reasonably acceptable to the Company
and GBI stating that the terms of the Merger are fair, from a financial point of
view, to the holders of the Common Stock; (vi) the Merger shall have been
approved by shareholders of GBI and the shareholders of GBI who have elected to
exercise their appraisal rights hold, in the aggregate, no more than 3% of the
20
<PAGE>
outstanding common stock of GBI; and (vii) all moneys owed to GBI for the
purchase of its Common Stock reflected as a subscription receivable on the
balance sheet of GBI at August 31, 1998 shall have been paid in full.
Amendment and Waiver
The Merger may be amended or modified by written agreement of Company and
Newco, on one hand, and GBI and the GBI Principal Shareholders, on the other
hand. At any time prior to closing, either side may, (i) extend the time for the
performance of any obligations or other acts of the other side; (ii) waive any
inaccuracies in the representations and warranties contained in the Merger
Agreement or in any document delivered pursuant thereto; or (iii) waive
compliance with any of the agreements or conditions contained therein.
Termination
The transactions contemplated by the Merger may be terminated under the
following limited circumstances: (i) by mutual written consent of the Company
and GBI; (ii) by either the Company or GBI if, without fault of such terminating
party, the Merger is not consummated on or prior to May 31, 1999; (iii) by
either the Company or GBI (if the terminating party is not then in material
breach of its obligations hereunder) if (A) a material default or breach is made
by the other party with respect to the due and timely performance of any of its
obligations contained under the Merger Agreement and such default cannot be
cured within a reasonable period of time, or (B) if any of the other party's
representations and warranties (x) made without any materiality standard, are
not true and correct in all material respects as of the date the Merger
Agreement was executed and as of the closing date or (y) made with any
materiality standard, are not true and correct in all respects as of the date
the Merger Agreement was executed and as of the closing date; or (iv) by either
the Company or GBI if, (A) the Board of Directors of the Company withdraws,
modifies or changes its recommendation so that it is not in favor of the Merger
Agreement or the Merger or resolves to do any of the foregoing or (B) the Board
of Directors of the Company recommends or resolves to recommend to its
shareholders a transaction other than the Merger.
If the Merger Agreement is terminated because there has been a material
default or breach by one of the parties with respect to the due and timely
performance of any of its obligations which cannot be cured within a reasonable
amount of time, or there has been may breach of any representation or warranty
in a material respect, then the non-terminating party shall, within five days of
termination, pay or reimburse the terminating party for all the documented
out-of-pocket reasonable fees and expenses incurred by the terminating party
(including the reasonable fees and expenses of its counsel, accountants,
consultants and advisors) in connection with the Merger Agreement and the
transactions contemplated by the Merger Agreement, together with certain other
enumerated costs. Unless such termination is with respect to a breach of a
representation or warranty deemed to be made at the closing (as opposed to upon
execution of the Merger Agreement) and such breach was caused by factors outside
the control of the non-terminating party, the non-terminating party shall,
within five days of termination, also pay the terminating party a fee of
$300,000. If the Merger Agreement is terminated by either party because the
Board of Directors of the Company withdraws, modifies or changes its
recommendation so that it is not in favor of the Merger Agreement or the Merger
or the Board of Directors recommends or resolves to recommend a transaction
other than the Merger, it will be deemed to be a termination by GBI due to a
breach by the Company of its covenants under the Merger Agreement and the
provisions of the first and second sentences of this paragraph will apply.
21
<PAGE>
Exclusivity
Under the terms of the Merger Agreement, the Company cannot, except in the
limited circumstances described below, (i) solicit, encourage, directly or
indirectly, any inquiries, discussions or proposals for; (ii) continue, propose
or enter into any negotiations or discussions looking toward; or (iii) enter
into any agreement or understanding providing for, any acquisition of any of its
capital stock or assets. The Merger Agreement also provides that the Company
shall not provide any information to any person for the purpose of evaluating or
determining whether to make or pursue any such inquiries or proposals with
respect to any such transaction. However, if the Company receives an unsolicited
proposal for, or indication of interest in, entering into such a transaction,
the Company is entitled to communicate with such party all publicly available
information requested by such party but it cannot give such party any non-public
information about the Company or otherwise negotiate with such party unless (A)
two business days' prior written notice is given to GBI and (B) the Company's
Board of Directors shall have been advised by the Company's outside counsel that
the failure to provide such non-public information would be reasonably likely to
constitute a breach of the fiduciary responsibilities of the Board of Directors
to the Company's shareholders. In addition, the Board of Directors of the
Company is permitted to modify or withdraw any recommendation made in this Proxy
Statement if the Board of Directors, in good faith, after being advised by
outside counsel, determines that to not withdraw such recommendation would be
reasonably likely to constitute a breach of the fiduciary responsibilities of
the Board of Directors to the Company's shareholders.
Under the terms of the Merger Agreement, neither GBI nor the GBI Principal
Shareholders shall (i) solicit, encourage, directly or indirectly, any
inquiries, discussions or proposals for; (ii) continue, propose or enter into
any negotiations or discussions looking toward; or (iii) enter into any
agreement or understanding providing for, any acquisition of any capital stock
of GBI or of any part of its assets, nor shall they provide any information to
any person for the purpose of evaluating or determining whether to make or
pursue any such inquiries or proposals with respect to any such acquisition.
Indemnification
Pursuant to the terms of the Merger Agreement, all of the shareholders of
GBI (severally, in proportion to their ownership of shares of GBI), on the one
hand, and the Company, on the other hand, have agreed to indemnify the other for
breach of their respective representations, warranties and covenants under the
Merger Agreement. Any claim for indemnity must be made by April 30, 2000. Except
in limited circumstances, no indemnity payment shall be made unless, after the
resolution of all claims for indemnity, the aggregate of all amounts for which
indemnity would otherwise be owed by such party, net of any amounts for which
indemnity would otherwise be owed to such party, exceeds $1,250,000, in which
event the amount for which indemnity shall be due shall be calculated from the
first dollar. At its election, a party required to indemnify the other may pay
its indemnity obligations in shares of the Company's Common Stock, valued for
this purpose at the last sale price of the Company's Common Stock on the last
business day prior to the date of the resolution of the last indemnity claim.
The maximum amount that either side shall pay the other is 3,000,000 shares of
Common Stock, or the equivalent monetary value thereof.
22
<PAGE>
Lock-Up Agreements
Concurrently with the execution of the Merger Agreement, David Thalheim,
Joseph Berland, Richard J. Rosenstock, Mark Zeitchick, Vincent Mangone, David M.
Nussbaum, Roger N. Gladstone, Peter R. Kent and Robert H. Gladstone executed
Lock-Up Agreements with the Company whereby they each agreed that, without the
Company's prior written consent, for a period of 24 months from the Effective
Time, they will not offer, sell, give away, pledge, hypothecate or otherwise
dispose of any shares of the Company's Common Stock then owned by them or
hereafter acquired, whether beneficially or of record.
In addition, GBI will cause each shareholder of GBI who will be receiving
Common Stock and the Merger Warrants to execute an agreement with the Company
and GBI pursuant to which such shareholder shall agree not to sell any Common
Stock, Merger Warrants or Warrant Shares for a similar 24-month period.
23
<PAGE>
Management After the Merger; Employment Agreements
As contemplated by the Merger Agreement and the Director Proposal, at the
Effective Time of the Merger, the fourteen persons listed below will become
directors of the Company and will become officers of the Company as set forth in
the right column. The directors of the Surviving Corporation will be Joseph
Berland, Mark Zeitchick, David Nussbaum and Peter Kent. The officers of the
Surviving Corporation will be selected from among and by the directors of the
Surviving Corporation.
<TABLE>
<CAPTION>
Name Age Current Position with the Company or GBI Position After the Merger
- ------------------- ------- ----------------------------------------- -------------------------
<S> <C> <C> <C>
David M. Nussbaum 44 Chairman of the Board, Chief Executive Officer, Co-Chairman of the Board
Director of the Company
Roger N. Gladstone 44 President, Director of the Company Vice Chairman of the Board
Peter R. Kent 45 Executive Vice President, Chief Operating Officer, Chief Executive Officer
Director of the Company
Peter R. McMullin 55 Executive Vice President, Chief Investment Officer, Executive Vice President
Director of the Company
Robert T. McAleer 66 Executive Vice President, Director of the Company Executive Vice President
Richard Y. Roberts 47 Director of the Company Director only
Joseph Berland 58 Chairman of the Board, Chief Executive Officer, Co-Chairman of the Board
Director of GBI
Richard J. Rosenstock 47 President, Director of GBI President
David Thalheim 44 President of Imperial International Group, Inc., Chief Operating Officer
a firm that provides consulting services to GBI
Mark Zeitchick 33 Executive Vice President of GBI Executive Vice President
Vincent Mangone 33 Executive Vice President of GBI Executive Vice President
- ---------------- [---] -- --
- ---------------- [---] -- --
- ---------------- [---] -- --
</TABLE>
The Company has entered into one-year employment agreements with each of
David M. Nussbaum, Roger N. Gladstone and Peter R. Kent for them to serve in the
capacities indicated above commencing at the Effective Time. GKN has entered
into a one-year employment agreement with Robert Gladstone which commences at
the Effective Time, pursuant to which he will continue to serve as GKN's
Executive Vice President. Each of the agreements provides for an annual salary
of $240,000 (their current salary, except for Peter Kent who is receiving a
$40,000 raise). Under their agreements, Messrs. Nussbaum, Gladstone and
Gladstone each receives 20% of the gross brokerage commissions generated in any
of his or each other's customers' accounts (an aggregate 60% payout) and they
are also entitled to bonuses under the Company's 1996 Incentive Compensation
Plan ("IC Plan"), as described below. See also, "Director Proposal--Board and
Committee Information; and --1996 Incentive Compensation Plan." The employment
agreements with all of the foregoing persons provide that the Company shall
offer the employee the right to remain employed as a registered representative
of a broker-dealer subsidiary of the Company at all times during the five-year
period commencing at the Effective Time.
24
<PAGE>
The Company has entered into one-year employment agreements with each of
Joseph Berland, Richard Rosenstock, David Thalheim, Mark Zeitchick and Vincent
Mangone for them to serve in the capacities indicated above commencing at the
Effective Time. Each of the agreements with Messrs. Berland, Rosenstock and
Thalheim provides for an annual salary of $200,000. Messrs. Zeitchick and
Mangone will receive no fixed salary. Each of Messrs. Berland, Rosenstock,
Thalheim, Zeitchick and Mangone receives 50% of the gross brokerage commissions
generated in his customers' accounts plus a percentage ("Override") on the gross
retail commissions generated by the Company of .65%, .65%, .4%, 1.35% and 1.35%,
respectively (provided that the Override payable to Mr. Thalheim is payable only
to the extent the Company has pre-tax income for the fiscal year ended January
31, 2000), and they are also entitled to bonuses under the IC Plan, as described
below. The employment agreements with all of the foregoing persons provide that
the Company shall offer the employee the right to remain employed as a
registered representative of a broker-dealer subsidiary of the Company at all
times during the five-year period commencing at the Effective Time.
Under their agreements, each of Messrs. Nussbaum, Gladstone, Kent and
Gladstone (collectively, the "GKN Executives") and Berland, Rosenstock,
Thalheim, Zeitchick and Mangone (collectively, the "GBI Principal Shareholders")
is entitled to participate in the "Pool," as defined in the IC Plan for the year
ending January 31, 2000. The GKN Executives, as a group, will be paid an
aggregate amount from the Pool for such fiscal year ("2000 Pool") equal to the
"Overrides" payable for such year to Messrs. Berland, Rosenstock and Thalheim,
less 162/3% of all commissions payable to the GKN Executives during such year.
The balance of the 2000 Pool shall be paid 50% to the GKN Executives, as a
group, and 50% to the GBI Executives, as a group. The amount to be paid to each
person in the respective groups shall be determined by the Employee Incentive
Committee of the Company's Board of Directors.
All the foregoing agreements contain non-solicitation provisions, generally
expiring one year after termination of employment.
If the Merger is not consummated, the employment agreements will not become
effective and the GKN Executives will continue to serve the Company in their
current position until the end of their present employment term as set forth
either in their existing employment agreements, or if such agreements expire, as
determined by the Board of Directors.
25
<PAGE>
BUSINESS OF THE COMPANY
The Company, through its subsidiaries, provides institutional research,
investment banking, securities brokerage and trading services. In the fiscal
year ended January 31, 1998, these subsidiaries consisted of GKN, SERP, Shochet
and RPII-AG. The Company also has operations in the merchant banking through its
Dalewood subsidiary.
The Company was incorporated in Delaware in January 1987 and consummated
its initial public offering in July 1996. It began operations through GKN in
October 1987, and has since grown significantly through increasing its sales
force and more recently by acquisition. The Company acquired Shochet in November
1995, commenced operations at RPII-AG in Switzerland in February 1996, acquired
Dalewood in December 1996, and acquired SERP in March 1997. The Company plans to
continue growing both internally and through acquisitions.
The Company derives revenues primarily from brokerage and investment
banking services. These activities generate commission and fee income, as well
as revenues from market making and principal transactions. The following table
indicates the percentage of total revenues represented by each of the Company's
principal activities during the three fiscal years ended January 31 and the six
months ended July 31, 1998:
<TABLE>
<CAPTION>
Six Months Ended Fiscal Year Ended January 31,
July 31, 1998 1998 1997 1996
---------------------- ---- ---- ----
<S> <C> <C> <C> <C>
Commissions 79% 79% 74% 71%
Investment banking 13% 12% 17% 14%
Principal transactions 0% 4% 6% 13%
Interest and other 8% 5% 3% 2%
</TABLE>
The Company intends to merge its three operating domestic broker-dealers,
GKN, SERP and Shochet, into one company. This merger will occur following
receipt of approval from the NASD Regulation, Inc. The three newly merged
broker-dealers will operate under the name of Southeast Research Partners, Inc.
The following discussion describes the various businesses of the Company. The
discussion below describes GKN, SERP, and Shochet as separate corporate
entities. Subsequent to the mailing of this Proxy Statement and prior to the
Stockholders' Meeting, they may be separate divisions of one corporate entity.
Brokerage and Distribution
A significant portion of the Company's revenues are generated from
commissions. The Company charges commissions to its individual and institutional
clients for executing buy and sell orders of securities on national and regional
exchanges and in the over-the-counter (OTC) markets. When the Company receives a
buy or sell order for a security in which it makes a market or has inventory, it
may act as a principal and purchase from, or sell to, its customers the desired
security on a disclosed basis at a price set in accordance with applicable
securities regulations. In fiscal 1998 the Company's brokerage and distribution
activities were performed through its brokerage subsidiaries: GKN, SERP,
Shochet, and RPII- AG. At October 31, 1998, they employed a total of 207
registered representatives and serviced approximately 27,700 active customer
accounts with approximately $1.1 billion in assets. The brokerage subsidiaries
serve a diverse clientele with varying investment characteristics.
26
<PAGE>
GKN, SERP, Shochet, and RPII-AG currently use the services of Schroder &
Co. Incorporated ("Schroder") as their clearing agent on a fully disclosed
basis. Schroder processes all securities transactions and maintains customer
accounts on a fee basis. Customer accounts are protected through the Securities
Investor Protection Corporation ("SIPC") for up to $500,000, of which coverage
for cash balances is limited to $100,000. Schroder provides protection in excess
of the SIPC protection up to $100 million, of which coverage for cash balances
is limited to $100,000 in cash. The services of Schroder include billing, credit
control, receipt, and custody and delivery of securities. Schroder provides
operational support necessary to process, record, and maintain securities
transactions for the Company's brokerage and distribution activities. Schroder
provides these services to the Company and its customers at a total cost which
is less than it would cost the Company to process such transactions on its own.
Schroder lends funds to the Company's customers through the use of margin
credit. These loans are made to customers on a secured basis, with Schroder
maintaining collateral in the form of saleable securities, cash or cash
equivalents. Under the terms of the clearing agreement, the brokerage
subsidiaries indemnify Schroder for any loss on these credit arrangements. At
October 31, 1998, the Company had approximately $70 million of margin credit
outstanding to its customers through Schroder. In fiscal 1998 and in the nine
months ended October 31, 1998, net interest earned from margin credit activity
totaled $874,000 and $489,000, respectively.
GKN
GKN, a full service securities brokerage and investment banking firm, is a
member of the NASD. At July 31, 1998, GKN operated four branch offices in New
York City, New York; Stamford, Connecticut; and Boca Raton and Miami, Florida,
with a total of 165 registered representatives. During fiscal 1998 and in the
six months ended July 31, 1998, GKN generated approximately $27 million and
$15.2 million, respectively, in commissions from executing customers' secondary
trades. GKN' sales force serves a clientele which primarily consists of
individuals who invest in OTC equity securities.
SERP
The Company acquired SERP on March 13, 1997. SERP, a research and
institutional brokerage boutique, is a member of the NASD. The firm's clientele
primarily consists of institutional investors who invest in listed and OTC
equity securities. At July 31, 1998, SERP operated branch offices in Boca Raton
and Palm Beach, Florida; New York City, New York; Boston, Massachusetts; and San
Francisco, California; with a total of 33 registered representatives. During the
period from March 14, 1997 to January 31, 1998, and in the six months ended July
31, 1998, SERP generated approximately $4.5 million and $3.0 million,
respectively, in commissions from executing customers' secondary trades.
Shochet
Shochet, a full service discount brokerage firm, is a member of the NASD.
At July 31, 1998, Shochet operated branch offices in Hallandale, Miami Beach,
South Miami, Tamarac and Delray Beach, Florida, with a total of 53 registered
representatives. During fiscal 1998, and in the six months ended July 31, 1998,
Shochet generated approximately $6 million and $3.6 million, respectively, in
commissions, primarily from executing customers' secondary trades. The clientele
served by Shochet's registered representatives is generally retired individuals
who invest in exchange-listed equity securities, fixed income securities and
mutual funds. The Company intends to expand Shochet's business through the
27
<PAGE>
recruitment and hiring of additional registered representatives for existing
offices, as well as potentially opening or acquiring additional offices in new
geographic locations.
RPII-AG
The Company opened its first international office in Zurich, Switzerland,
in February 1996, with the commencement of operations of RPII-AG. The primary
emphasis of the office is to serve European institutional money managers and
clients investing in small capitalization equity securities publicly traded in
U.S. markets. At July 31, 1998, RPII-AG employed two registered representatives.
The Company plans to expand its international operations through the recruitment
and hiring of additional registered representatives and potentially opening
additional international offices. The revenues and operating profit generated by
RPII-AG during fiscal 1998 and in the six months ended July 31, 1998 did not
represent a material percentage of the Company's total revenues and operating
loss.
Investment Banking
Corporate Finance
The Company's investment banking revenues are principally derived from
managing or co- managing public offerings of equity securities, although the
private placement of equity or equity-related securities for both private and
publicly-held companies has recently become an increasingly important source of
investment banking revenues. The Company's underwriting activities have
historically focused on public equity underwritings for small capitalization,
emerging growth companies in a variety of industries. The Company believes that
its expertise and proven ability to assist emerging growth companies, which
often have limited access to other sources of capital, have created a
significant source of ongoing and potential new investment banking clients.
Through SERP, the Company now intends to broaden its underwriting activity to
include larger size offerings with an industry specialization focus based upon
the specific industry expertise brought by the research analysts at SERP.
Corporate Advisory
To date, the Company has not derived significant revenues from corporate
advisory services. Through its relationships with its investment banking
clients, the Company intends to expand this business with a concentration on
mergers and acquisitions, strategic partnering, fairness opinions and corporate
recapitalizations.
Syndicate
The Company's syndicate departments have historically served as an
additional source of product, through selling group or underwriter
participation, for distribution through the Company's various distribution
channels. To date, revenues generated by the syndicate departments have been
insignificant. The Company expects that the emphasis of these departments will
expand to increase the participation of other broker-dealers in the marketing
and distribution of the Company's underwritings as well as allowing the Company
to participate in the selling group or as an underwriter in other investment
banks' underwritings.
28
<PAGE>
Principal Transactions
Market Making
The Company's market making activities primarily serve as an accommodation
to its customers. The firm carries inventories of securities to facilitate
brokerage transactions with customers and other dealers. Principal transactions
with customers are effected at prices in accordance with applicable security
regulations. At October 31, 1998, GKN made markets in more than 100 securities,
while SERP made markets in 19 securities. In the fiscal year ended January 31,
1998, and in the six months ended July 31, 1998, principal transactions related
to securities in which the Company's brokerage subsidiaries made markets,
including realized and unrealized gains and losses, accounted for a loss of
$961,000 and $980,000, respectively.
Investment Account
In connection with its investment banking activities of raising capital and
providing advisory services for client companies, the Company may receive
warrants which entitle it to purchase securities of these client companies.
These warrants, which are held in the Company's investment account, vary in
value based upon the market prices of the underlying securities. Warrants are
usually exercisable for four years beginning one year after issuance and are
valued by management based on a significant discount to the current market
values of the underlying securities. At July 31, 1998, the Company owned
warrants to purchase securities of 45 companies for which it has performed
investment banking services. These warrants had an underlying market value of
approximately $1 million, of which the firm recognized $635,000 million in
value, or 62%. During fiscal 1998, and in the six months ended July 31, 1998,
the Company recognized total realized and unrealized gains on its investment
account warrants of $2.7 million, or 5% of the Company's revenues, and $896,000,
or 3.2% of the Company's total revenues, respectively.
Research
SERP provides research services as an integral part of the Company's
investment banking and securities brokerage activities. Research activities
identify attractive investment opportunities in the securities of independent
companies as well as create support, sponsorship, and independent analysis for
the securities of companies underwritten by the Company. The Company's
acquisition of SERP during fiscal 1998 enhances its research capabilities by
providing it with institutional quality research for institutional investors. At
July 31, 1998, the Company employed a total of 13 research analysts at SERP. The
industries covered by the Company's research include technology, healthcare,
energy, financial services, consumer/leisure, building and infrastructure,
pharmaceutical and retail.
Other Services
Day Trading
During the second quarter of fiscal 1999 the Company initiated the
development of a day trading facility, based in Miami, Florida. This facility
allows customers access to online electronic trading equipment and facilities
where they may directly trade securities in the over-the-counter Nasdaq market
or on the listed exchanges. All trades are executed and handled electronically
through the utilization of various third-party software and execution services.
Customers trade with their own capital and no capital is provided by the
Company. The facility operates under the name of "Shochet Day Trading." The
29
<PAGE>
trading facility began full online trading in November 1998. The Company does
not expect to generate significant revenues from this facility during the
current fiscal year.
Fixed Income
The Company, through its operating broker-dealers, Shochet, GKN and SERP,
provides customers with access to fixed income securities. During fiscal 1999
the Company established a "High Yield Debt" department, which facilitates trades
in high yield debt securities for both retail and institutional customers. It is
intended to also service corporate clients for whom it is appropriate to issue
high yield securities. In total, the Company employs seven people to facilitate
its fixed income operations. During the twelve months ended January 31, 1998 and
the six months ended July 31, 1998, the Company generated $860,000 and $416,000,
respectively, in commission revenues related to fixed income securities. The
Company does not expect to generate significant revenues during the current
fiscal year in its High Yield Debt department.
Money Management
The Company entered the money management business in 1995 through the
establishment of GKN Fund Management, Inc., which served as the managing partner
of Kaleidoscope, a "fund of funds" investment partnership which invested its
capital in other funds managed by unaffiliated money managers. In December 1997,
the Company converted Kaleidoscope into Remington Partners, LP, an investment
limited partnership managed by Remington Capital Corp., a subsidiary of the
Company. As of March 30, 1998 the Company terminated its relationship with
Remington Partners, LP and transferred the General Partner interest of Remington
Capital Corp. to an entity affiliated with the portfolio manager of the
investment partnership.
In January 1998, the Company, through its RPII-AG subsidiary, launched
Early Bird Investors AG ("Early Bird"). A subsidiary of the Company, GKN Asset
Management AG, was formed to serve as investment advisor to Early Bird. Early
Bird is a closed-end investment company publicly traded on the Zurich stock
exchange. Early Bird's investment objective is to invest predominantly in U.S.
small- and mid- capitalization equity securities. It was open for investment to
only non-U.S. residents. At April 1, 1998, the initial raise for Early Bird
closed with CHF 60 million (U.S. $40 million). On October 1, 1998, the Company
sold the stock of GKN Asset Management AG to Dr. Ernst Muller-Mohl for Swiss
francs 1 million (U.S. $728,000) See "Certain Transactions."
Merchant Banking
The Company entered the merchant banking business in 1996 with the
acquisition of Dalewood. Dalewood is the managing partner of Dalewood Associates
L.P., an investment partnership which makes equity investments in companies
which are viewed as suitable candidates for future initial public offerings. At
July 31, 1998, Dalewood Associates L.P. had total assets of approximately $6.5
million, of which $5.9 million was invested in 22 companies. The Company had an
approximate $3.4 million investment in Dalewood Associates L.P. (both as a
30
<PAGE>
limited partner and through it ownership of Dalewood) at July 31, 1998. The
Company has advised Dalewood Associates L.P. of its intention to completely
withdraw its investment as a limited partner in Dalewood Associates, L.P.
effective December 31, 1998.
Government Regulation
The securities industry in the United States is subject to extensive and
frequently changing federal and state laws and substantial regulation under such
laws by the Commission and various state agencies and self-regulatory
organizations, such as the NASD. GKN, Shochet, and SERP are registered as
broker-dealers with the Commission and are member firms of the NASD. Much of the
regulation of broker-dealers has been delegated to self-regulatory
organizations, principally NASDR, the regulatory arm of the NASD, which has been
designated by the Commission as the Company's primary regulator. NASDR adopts
rules, which are subject to approval by the Commission, that govern its members
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. GKN is registered as a broker-dealer in
all 50 states, the District of Columbia, and Puerto Rico. Shochet and SERP are
registered as broker-dealers in 40 and 39 states, respectively, including 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 Commission 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
Commission, self-regulatory organizations, and state securities commissions may
conduct administrative proceedings which 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.
RPII-AG is subject to certain Swiss federal and cantonal (state) laws.
Securities trading and brokerage in Switzerland, since February 1997, is
governed by the provisions of federal law. RPII-AG is regulated by the Swiss
Federal Act on Stock Exchanges and Securities Trading (SESTA) and the Ordinance
on Stock Exchanges and Securities Trading, which were both effective February 1,
1997. Until a license according to SESTA is granted to RPII-AG by the Federal
Banking Commission, RPII-AG is also subject to the Law on Professional Trading
of Securities in the Canton of Zurich. Under these laws RPII- AG must maintain
certain equity capital levels. The distribution of equity capital is limited by
the Swiss Code of Obligations. In order to transact security trades in
Switzerland, RPII-AG currently operates under a B-license which was granted by
the Department of Economy of the Canton of Zurich in July 1996. RPII- AG intends
to obtain the required securities trader license under SESTA by the February
1999 deadline.
Competition
The Company encounters intense competition in all aspects of the securities
business and competes directly with other securities firms, a significant number
of which have greater capital and other resources. In addition to competition
from firms currently in the securities business, there has recently been
increasing competition from other sources, such as commercial banks and
insurance companies offering financial services, and from other investment
alternatives. The Company believes 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.
31
<PAGE>
Employees
At October 31, 1998, the Company had a total of 391 employees, including
207 registered representatives.
Properties
In February 1998, the Company's and GKN's principal executive offices moved
from 61 Broadway, New York, New York to One State Street Plaza, New York, New
York where they occupy approximately 48,000 square feet under a lease expiring
in January 2013. The Company's subsidiaries currently lease 14 additional
offices in the United States and one office in Switzerland.
Legal Proceedings
The Company's business involved substantial risks of liability, including
exposure to liability under federal and state securities laws in connection with
the underwriting or distribution of securities and claims by dissatisfied
customers for fraud, unauthorized trading, churning, mismanagement and breach of
fiduciary duty. The Company does not presently maintain an errors and omissions
insurance policy insuring it against these risks. In the normal course of the
Company's business, the Company from time to time is involved in lawsuits and
arbitrations brought by its customers. It is the opinion of management that the
resolution of all proceedings presently pending will not have a material adverse
effect on the consolidated financial condition of the Company.
32
<PAGE>
SELECTED FINANCIAL DATA OF THE COMPANY
Certain of the selected consolidated financial data presented below for
each of the five fiscal years ended January 31, 1998, has been derived from the
Company's consolidated financial statements which were audited by KPMG Peat
Marwick LLP for 1998, 1997, 1996 and 1995, and by Goldstein Golub Kessler &
Company, P.C. for 1994, each independent certified public accountants. Certain
of the selected consolidated financial data presented below for the six months
ended July 31, 1998 and July 31, 1997, has been derived from the Company's
unaudited consolidated financial statements on the same basis as the audited
financial statements and include all adjustments (consisting or normal recurring
adjustments) necessary for a fair presentation of the results of these periods.
This data should be read in conjunction with the Company's Consolidated
Financial Statements, related notes and other financial information included
elsewhere in this Proxy Statement. The information below is in thousands except
for per share amounts and other data.
<TABLE>
<CAPTION>
Six months ended
July 31, Fiscal Year ended January 31,
---------- ------------------------------
1998 1997 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Total revenues $27,794 $23,344 $48,676 $67,750 $43,019 $32,410 $32,956
Total expenses $30,277 $27,457 $58,632 $56,394 $36,732 $31,516 $25,534
Pre-tax (loss) inco $(2,483) $(4,113) $(9,956) $11,356 $6,287 $894 $7,422
Net (loss) income $(1,671) $(2,449) $(6,513) $6,329 $3,469 $381 $4,006
Basic (loss) earnings
per common share $(0.21) $(0.30) $(0.80) $0.93 $0.69 $0.08 $0.81
Diluted (loss) earnings
per common share $(0.21) $(0.30) $(0.80) $0.88 $0.60 $0.07 $0.72
Weighted average shares
outstanding - basic 8,100 8,132 8,114 6,824 5,037 5,063 4,963
Weighted average shares
outstanding - diluted 8,100 8,132 8,114 7,175 5,737 5,695 5,530
Balance Sheet Data
(at end of period):
Total assets $32,380 $47,875 $36,972 $51,633 $27,853 $16,096 $16,123
Total liabilities (excludin
subordinated debt) $5,569 $15,909 $8,775 $15,869 $12,143 $4,339 $4,685
Subordinated debt $498 $567 $576 $738 $934 - -
Convertible subordinated
notes - - - - - - $162
Stockholders' equity $26,313 $31,399 $27,621 $35,026 $14,776 $11,757 $11,276
Other Data:
Ratio of assets to
stockholders' equity 1.23 1.52 1.34 1.47 1.89 1.37 1.43
Return on average equity (6.2%) (7.4%) (19.9%) 25.0% 26.1% 3.3% 43.3%
Pre-tax return on average
equity (9.2%) (12.4%) (30.4%) 44.9% 47.4% 7.8% 80.3%
Book value per share $3.24 $3.88 $3.41 $4.26 $3.02 $2.30 $2.27
Registered representatives 253 316 253 275 224 163 126
</TABLE>
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF THE COMPANY
Business Environment
The Company, through its subsidiaries, is primarily engaged in
institutional research, investment banking, securities brokerage and securities
trading, with an emphasis on small and mid-capitalization companies. This
represents a change during the fiscal year ended January 31, 1998, away from a
focus on emerging growth and micro-cap companies. This reorientation was in part
driven by the acquisition of SERP and by a degradation of the business
fundamentals surrounding the micro-cap marketplace. The Company's profitability
is affected by many factors, including general economic and market conditions
and the volatility of trading markets, specifically the small- and
mid-capitalization market.
The Company acquired SERP on March 13, 1997. SERP brought a proven track
record of institutional quality research and institutional brokerage. The
acquisition of SERP added nine new research analysts to the Company, including
four current or prior Institutional Investor All Stars. See Note 3 of Notes to
Consolidated Financial Statements for descriptions of the Company's
acquisitions.
The securities industry as a whole experienced another year of
record-setting results during calendar year 1997 and the Company's fiscal year
ended January 31, 1998. This happened despite a rapidly deteriorating climate
for micro-cap stocks, where the Company has historically had a strong franchise.
Declining volumes combined with regulatory moves to depress this market.
Regulatory changes by the Commission and NASD relating to underwriting and
trading of micro-cap stocks sought to reduce investors' transaction costs and
widen the distribution of new offerings. Unfortunate and perhaps unintended
consequences of these moves were more volatile after-market and other trading,
as well as declining access to capital for micro-cap issuers. These events
significantly impacted the Company's financial results for the year.
Combining the acquisition of SERP with the macro-economic changes to our
business led the Company to a thorough analysis and self-assessment of the
Company's business structure. As a result, the Company's focus and its mission
now is to evolve into a preeminent relationship-based, research-driven niche
investment bank focusing on small- and mid-capitalization companies -- offering
integrated research, investment banking, institutional and retail brokerage, and
asset management.
Results of any individual period should not be considered representative of
future operations. A significant portion of the Company's expenses are fixed and
do not vary with market activity. As a result, substantial fluctuations could
occur in the Company's revenues and net income from period to period.
34
<PAGE>
Results of Operations
Six Months Ended July 31, 1998 vs. Six Months Ended July 31, 1997
- ------------------------------------------------------------------
Net loss for the six months ended July 31, 1998 was $(1,671,000) as
compared with net loss of $(2,449,000) for the six months ended July 31, 1997.
Loss per share of Common Stock for the six months ended July 31, 1998 was
$(0.21) as compared to $(0.30) for the six months ended July 31, 1997. The
improvement in operating results was primarily the result of increased
commission revenues and other income as well as the elimination of expenses
associated with investigations and settlements.
The results of operations for the six months are not necessarily indicative
of the results which may be expected for the entire fiscal year.
Revenues
Total revenues increased $4,450,000 or 19% to $27,794,000 for the first
half of the Company's fiscal year ended January 31, 1999 ("fiscal 1999"), mainly
as a result of increased commissions revenue and other income. These increases
were partially offset by losses from principal transactions.
Commission revenues increased 24%, or $4,284,000, for the six months ended
July 31, 1998. The Company executed 57% more trades during the period at an
average commission 21% lower as compared to the same period in the prior year.
Investment banking revenues decreased by $179,000. During the first half of
fiscal 1999 the Company raised $23.5 million for corporate clients through two
public offerings and one private placement. In the same period in the fiscal
year ended January 31, 1998 ("fiscal 1998") the Company raised $52.2 million for
its clients through four public offerings and four private placements.
Principal transactions generated losses of $(82,000) in the first six
months of fiscal 1999, as opposed to a $691,000 gain in the same period in
fiscal 1998. Investment account gains totaled $898,000, while market making
activities generated a loss of $(980,000).
Other revenues increased $1,185,000 to $1,640,000, mainly as a result of
the Company's merchant banking and asset management activities.
Expenses
Total expenses for the first half of fiscal 1999 were $30,277,000, a 10%
increase over the same period in fiscal 1998. As a percentage of revenues, these
expenses decreased from 118% in fiscal 1998 to 109% in fiscal 1999.
Fluctuations in the Company's expense categories for the six month period
resulted from the same factors causing fluctuations for the second quarter. The
primary factors resulting in higher expenses were the increase in trading
volume, relocation of corporate headquarters, opening of new branch offices, and
technological upgrades. Primary factors resulting in decreased expenses were the
elimination of the investigations and settlements expenses and decreased
amortization of recruiting payments to brokers.
35
<PAGE>
Weighted average common shares outstanding
The average number of common shares and common share equivalents
outstanding used in the computation of basic and diluted earnings per common
share was 8,100,126 for the first half of fiscal 1999 and 8,132,452 for the
first half of fiscal 1998.
Year Ended January 31, 1998 vs. Year Ended January 31, 1997
Basic earnings (loss) per share of Common Stock for the year ended January
31, 1998, were ($0.80) as compared to $0.93 for the year ended January 31, 1997.
Correspondingly, diluted earnings (loss) per share of Common Stock for the
comparable periods were ($0.80) and $0.88, respectively. The significant loss in
the current year was attributable to the deteriorating climate for micro-cap
stocks, which resulted in substantial decreases in revenue for the Company, as
well as expenses recognized for litigation, severance, and costs related to the
reorientation and restructuring of the Company's business.
Revenues
Total revenues decreased by $19,074,000, or 28%, to $48,676,000 for the
fiscal year, led by significant decreases in commission and investment banking
revenues. Fiscal 1998 revenues include $5,464,000 generated by SERP, which was
not part of the Company in fiscal 1997. Hence, without SERP, revenues would have
decreased by $24,538,000, or 36%.
Commission revenues decreased by $11,825,000, or 24%. The decrease reflects
deteriorating market conditions in the micro-cap marketplace throughout the
year, causing a 28% decrease in the average commission per trade.
Investment banking revenues decreased by $5,367,000, or 47%. The Company
raised $112.6 million for its clients in fiscal 1998 through six public
offerings and seven private placements, a decrease from fiscal 1997, during
which the Company raised $136.3 million through ten public offerings and ten
private placements. The current year reflected the beginning of a transition
from the Company being the sole manager on underwritings to a co-manager on
larger transactions. This transition potentially decreases the average revenue
per transaction that is generated by the Company.
Revenues from principal transactions decreased by $2,562,000, or 60%.
Market-making activities generated $3,770,000 less revenue in fiscal 1998 than
in fiscal 1997. This decrease was partially offset by an increase in revenues
from the investment account of $1,208,000. The decrease in revenues attributable
to market-making was the direct result of regulatory changes mandating smaller
spreads between "bid" and "offer" prices and more restrictive trading rules. A
majority of the revenues generated in the investment account was the result of
profits on positions in one investment.
Interest income decreased by $281,000, or 17%, primarily due to lower cash
balances.
Other revenues increased by $961,000, primarily due to enhanced payment for
order flow on third market trades.
Expenses
36
<PAGE>
Total expenses for fiscal 1998 were $58,632,000, a 4% increase over fiscal
1997. Total expenses as a percentage of revenues increased from 83% to 120%.
Included in fiscal 1998 expenses are $5,295,000 in one-time charges. These
charges are composed of $2,260,000 related to litigation, $2,931,000 related to
the write-off of recruiting payments to brokers and $104,000 related to
severance and other restructuring charges. The litigation-related expenses are
entirely related to the Company's settlement with NASD Regulation, Inc.
("NASDR"), resolving a previously disclosed NASDR investigation concerning
markups on warrants of seven companies GKN underwrote during the period December
1993 through April 1996. Without the one-time expenses, total operating expenses
for fiscal 1998 would have been $53,337,000 versus the comparable operating
expenses of $55,082,000 in fiscal 1997, reflecting a 3% decrease.
SERP was not part of the Company in fiscal 1997. As a result no expenses
for SERP are included in fiscal 1997 results. During fiscal 1998, SERP generated
$6,041,000 in expenses. Hence, comparable operating expenses for the Company
were $47,296,000 in fiscal 1998 versus $55,082,000 in fiscal 1997, representing
a 14% decrease.
Compensation and benefit expense decreased 15% to $35,051,000. These
expenses are primarily variable as commissions to brokers are paid as a
percentage of commission revenues generated. The expense decrease in fiscal 1998
is consistent with the decrease in commission revenues, partially offset by the
addition of SERP. Additionally, in accordance with the Company's 1996 IC Plan, a
portion of annual incentive awards payable to executive management and business
unit managers are made in restricted shares of Common Stock, which are subject
to a minimum three-year vesting period. Such awards are recognized as
compensation expense was over the three-year vesting period. No such
compensation expense was recognized in fiscal 1997. During fiscal 1998 the
Company recognized $530,000 of such expenses. No stock awards were made relating
to fiscal 1998 under the Company's 1996 IC Plan.
Communications expenses increased by $1,084,000, or 28%. This increase was
primarily caused by the addition of SERP.
Brokerage, clearing and exchange fees increased by $957,000, or 41%. This
increase was primarily caused by the addition of SERP.
Occupancy expense increased by 28% to $3,520,000. This increase was caused
by the additional four SERP locations, one additional location and one upgraded
location in Shochet Securities and internal growth at GKN.
Business development expense increased by 37% to $2,072,000. This increase
was attributable to the addition of SERP and increased promotional expenses.
Professional fees increased by $599,000, or 54%, to $1,713,000. This
increase was entirely attributable to increased expenses incurred regarding
litigation and arbitrations.
Investigations and settlements increased by $948,000, or 72%, to $2,260,000
as a result of the Company's settlement of the NASDR investigatory matter
concerning markups.
Other expenses increased by $3,458,000 to $5,805,000 primarily due to the
write-off of broker recruiting payments and the addition of SERP.
37
<PAGE>
Weighted average common shares outstanding
The average number of common shares and common stock equivalents
outstanding used in the computation of earnings per share were 8,114,245 for
basic earnings per share in fiscal 1998, compared with 6,824,156 in fiscal 1997.
Correspondingly, the amounts used for diluted earnings per share were 8,114,245
in fiscal 1998, compared with 7,175,267 in fiscal 1997. The 19% increase in the
outstanding shares utilized in the basic earnings per share calculation and the
13% increase in the outstanding shares utilized in the diluted earnings per
share calculation were both attributable to the full-year impact of the
2,875,000 shares of Common Stock issued in the Company's initial public offering
on July 30, 1996.
Year Ended January 31, 1997 vs. Year Ended January 31, 1996
Basic earnings per share of Common Stock for the year ended January 31,
1997, were $0.93, as compared to $0.69 for the year ended January 31, 1996.
Diluted earnings per share of Common Stock for the comparable periods were $0.88
and $0.60, respectively. The increase in earnings was the result of a strong
investment climate in the first half of fiscal 1997 combined with the Company's
growth, resulting in increased securities brokerage and investment banking
volumes. Earnings for both fiscal 1997 and 1996 have been restated for the
effects of Statement of Financial Accounting Standards No. 128, Earnings Per
Share (see New Accounting Pronouncement).
Revenues
Total revenues increased by $24,731,000, or 57%, to $67,750,000 for the
fiscal year, led by significant increases in commission and investment banking
revenues.
Commission revenues increased by $19,735,000, or 65%. The increase reflects
strong market conditions in the small-capitalization stock sector in the first
five months of fiscal 1997, as well as a 23% increase in the number of
registered representatives employed by the Company. These two factors served to
increase the volume of trades processed by 69%.
Investment banking revenues increased by $5,388,000, or 90%. The Company
raised $136.3 million for its clients in fiscal 1997 through ten public
offerings and ten private placements, an increase from fiscal 1996, during which
the Company raised $72.7 million through five public offerings and five private
placements. The increase in underwriting activity was the result of stronger
market conditions and a more concentrated effort to develop a quality investment
banking clientele.
Revenues from principal transactions decreased by $1,406,000, or 25%.
Market-making activities generated increased revenues of $1,991,000, which were
more than offset by a revenue decrease of $3,397,000 from the Company's
investment account. The market-making revenues, which amounted to $2,809,000 in
fiscal 1997, were generated almost entirely during the strong market conditions
experienced in February through June 1996. Market-making revenues were
negligible in the subsequent periods of market volatility and weakness,
specifically in the small-capitalization stock sector. The high degree of
volatility experienced in the markets during fiscal 1997 adversely impacted the
stock prices of the Company's underwriting clients, which was reflected in the
valuation of underwriter warrants held in the Company's investment account.
Investment account revenues for the year totaled $1,468,000.
38
<PAGE>
Interest income increased by $1,080,000 due to higher cash balances
primarily resulting from the initial public offering proceeds, a greater use of
margin loans by the Company's brokerage customer and a renegotiated interest
sharing arrangement with the Company's clearing broker.
Expenses
Total expenses for fiscal 1997 were $56,394,000, a 54% increase over fiscal
1996. Total expenses as a percentage of revenues decreased to 83% from 85%.
Compensation and benefits expense increased 52% to $41,187,000. These
expenses are primarily variable as commissions to brokers are paid as a
percentage of commission and investment banking revenues. In accordance with the
Company's 1996 IC Plan, a portion of annual incentive awards payable to
executive management and business unit managers are to be made in restricted
shares of Common Stock, which are subject to a minimum three-year vesting
period. In March 1997 the Company awarded $1,782,000 in restricted shares under
this plan. The award will be recognized as compensation expense over the
three-year vesting period ending March 2000.
Communications expense increased by $1,215,000, or 46%, as a result of the
Company's growth and increased level of business activity. The 275 registered
representatives employed by the Company at January 31, 1997, represent a 23%
increase from January 31, 1996. During the same period total employees increased
by 27% to 476.
Brokerage, clearing and exchange fees increased by 72% primarily due to the
69% increase in trade volume in fiscal 1997.
Occupancy and equipment expenses increased by 31% as a result of the
Company's growth through the Shochet acquisition and internal growth at GKN.
Business development expenses increased 73% to $1,507,000 due to additional
promotional activities implemented as a part of the Company's growth strategy.
Professional fees increased by $376,000 primarily due to higher costs
associated with the increase in business activities undertaken by the Company in
fiscal 1997.
Investigations and settlements expenses for fiscal 1997 were $1,312,000, as
compared to no such expenses in the prior fiscal year. These expenses were
entirely related to the Company's settlement with the Commission and NASDR
investigatory matter concerning markups.
Other expenses increased 18% primarily as a result of the Company's growth
through the Shochet acquisition and internal growth at GKN.
Weighted average common shares outstanding
The average number of common shares and common stock equivalents
outstanding used in the computation of basic earnings per common share was
6,824,156 in fiscal 1997, compared with 5,037,019 in fiscal 1996.
Correspondingly, the number of shares outstanding used in the diluted earnings
per share computation was 7,175,267 in fiscal 1997, compared with 5,736,641 in
fiscal 1996. The 35% and 25% increases in the weighted average shares for basic
39
<PAGE>
and diluted shares, respectively, in fiscal 1997 resulted from the 2,875,000
shares of Common Stock issued in the Company's initial public offering on July
30, 1996.
Liquidity and Capital Resources
Approximately 51% of the Company's assets at July 31, 1998 are 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 the Company's clearing broker,
turn over rapidly. As a securities dealer, the Company may carry significant
levels of trading inventories to meet customer needs. The Company's inventory of
market-making 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. Securities owned, but not readily marketable,
represent underwriter warrants and the securities underlying such warrants. The
liquidity of these securities is limited. A relatively small percentage of the
Company's total assets are fixed. The Company's total assets or the individual
components of total assets may vary significantly from period to period because
of changes relating to customer demand, economic and market conditions, and
proprietary trading strategies.
GKN, SERP and Shochet, the Company's domestic operating broker-dealer
subsidiaries, are subject to the net capital rules of the NASD and the
Commission. As such, they and the Company are subject to certain restrictions on
the use of capital and its related liquidity. GKN's, SERP's, and Shochet's
respective net capital positions as of July 31, 1998, were $4,807,000, $690,000,
and $454,000, which were $4,557,000, $527,000 and $354,000, respectively, in
excess of their respective net capital requirements.
In conjunction with the Company's move of its corporate headquarters in New
York City, the Company has significantly upgraded its technological
infrastructure. The combined costs of the move and the technological investment
were financed through a series of operating leases. These leases total $4.8
million. As security for these leases, the Company arranged for a standby letter
of credit. As collateral for the standby letter of credit, the Company has
placed $2.4 million in a restricted cash escrow account with the provider. The
Company intends to use debt and lease financing prudently in the future.
The Company's overall capital and funding needs are continually reviewed to
ensure that its capital base can support the estimated needs of its business
units. These reviews take into account business needs as well as regulatory
capital requirements of the subsidiaries. Based upon these reviews, management
believes that the Company's capital structure is adequate for current operations
and reasonably foreseeable future needs.
Other Matters
Year 2000 Computer Issue
The Company initiated a firm-wide program to address the "Year 2000
Computer Issue" in order to prepare its computer systems and applications for
properly processing dates after December 31, 1999. The Company's program is
proceeding on schedule and it is the Company's expectation that it will have its
firm-wide Year 2000 solution substantially in place by June 30, 1999.
All of the Company's computer programs are provided by third party vendors
and service providers. Most of the programs were purchased after the Year 2000
40
<PAGE>
Computer Issue became widely recognized. The Company has sought, and expects to
receive, written confirmation from its third-party program and service providers
that the Year 2000 Computer Issue has been appropriately managed. Schroder &
Co., the Company's clearing firm, is the Company's largest and most important
computer services related vendor. Schroder & Co. has provided the Company with
assurances that it expects to appropriately manage the Year 2000 Computer Issue
on a timely basis.
The Year 2000 Computer Issue creates risk for the Company from unforeseen
problems in its own computer systems, third-party vendors and service providers,
and from third parties with whom the Company deals worldwide. The Company is
continuing to communicate with its third-party vendors and service providers to
determine the likely extent to which the Company may be affected by third
parties' year 2000 plans and target dates. In this regard, while the Company
does not now expect material financial exposure as a result of the Year 2000
problem, there can be no guarantee that the systems of other entities on which
the Company relies will be remediated on a timely basis, or that a failure to
remediate by another party, would not have a material adverse effect on the
Company. Such failures could have a material impact on the Company's ability to
conduct business.
Based on information currently available, the Company does not expect its
Year 2000 expenditures for 1998 and over the next two years to be a material
cost to the Company. The expected costs of the Year 2000 program are based on
management's current estimates; however, actual results could differ materially
from those plans.
New Accounting Pronouncements
In March 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS
128), effective beginning in the fiscal year ending January 31, 1998. This
statement changes the calculation and presentation of earnings per common share
(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
previous fully diluted EPS. The financial statements reflect the implementation
of SFAS 128.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income (SFAS 130), effective beginning in the
fiscal year ending January 31, 1999. This statement establishes standards for
the reporting and display of comprehensive income and its components. Total
comprehensive income measures all changes in stockholders' equity resulting from
transactions of the period, other than transactions with stockholders. The
financial statements reflect the implementation of SFAS 130.
In February 1998, the FASB issued SFAS 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which revises and standardizes
pensions and other postretirement benefit plan disclosures. The Statement is
effective for fiscal years beginning after December 15, 1997. The effect of SFAS
132 is not expected to be material to the Company's financial statement
disclosures.
In June 1998, the FSAB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes standards for
accounting and reporting of derivative instruments, including certain derivative
instruments embedded in other contracts, and hedging activities. SFAS 133 is
effective for fiscal quarters of fiscal years beginning after June 15, 1999. The
Company expects to adopt this standard when required in fiscal year 2000 and is
currently evaluating the potential impact on the Company's accounting for such
activities. The effect of SFAS 132 is not expected to be material to the
Company's financial statement disclosures.
41
<PAGE>
BUSINESS OF GBI
General
GBI was formed under the laws of New York in September 1983 and provides
investment banking, securities trading and brokerage and research services,
historically with an emphasis primarily on global energy markets and energy
companies and currently with a focus on a variety of industries and companies.
GBI derives revenues primarily from securities brokerage and trading
services. These activities generate commission and trading income. GBI also
engages in investment banking services which results in revenues from
underwriting fees. The following table indicates the percentage of total
revenues represented by each of GBI's principal activities during the three
fiscal years ended August 31:
Fiscal Year
Ended August 31,
1998 1997 1996
---- ---- ----
Commissions 84% 83% 77%
Investment banking 8% 5% 14%
Principal transactions 6% 10% 8%
Interest and other 2% 2% 1%
Brokerage and Distribution
General
Most of GBI's revenues are generated from commissions. GBI charges
commissions to its individual and institutional clients for executing buy and
sell orders of securities on national and regional exchanges and in the OTC
markets. When GBI receives a buy or sell order for a security in which it makes
a market, it may act as a principal and purchase from, or sell to, its customers
the desired security on a disclosed basis at a price set in accordance with
applicable securities regulations. At October 31, 1998, GBI employed a total of
239 registered representatives and serviced 34,755 customer accounts.
Clearing; Margin Credit
GBI currently uses the services of Bear Stearns Securities Corp. ("Bear
Stearns") as its clearing agent on a fully disclosed basis. Bear Stearns
processes all securities transactions and maintains customer accounts on a fee
basis. Customer accounts are protected through the Securities Investor
Protection Corporation for up to $500,000, of which coverage for cash balances
is limited to $100,000. Additional protection is provided by Bear Stearns. The
services of Bear Stearns include billing, credit control, receipt, and custody
and delivery of securities. Bear Stearns provides operational support necessary
to process, record, and maintain securities transactions for GBI's brokerage and
distribution activities. Bear Stearns provides these services to GBI and its
customers at a total cost which is less than it would cost GBI to process such
transactions on its own.
42
<PAGE>
Bear Stearns lends funds to GBI's customers through the use of margin
credit. These loans are made to customers on a secured basis, with Bear Stearns
maintaining collateral in the form of saleable securities, cash or cash
equivalents. Under the terms of the clearing agreement, GBI indemnifies Bear
Stearns for any loss on these credit arrangements. In fiscal 1998, and in the
nine months ended October 31, 1998, net interest earned from margin credit
activity totaled $558,000 and $416,000, respectively.
Trading
In addition to its brokerage business described above, GBI buys and sells
securities for its own account on a daily basis. GBI trades as principal in
domestic equity and equity-related securities both on exchanges and in
over-the-counter markets. GBI also engages for its own account in the arbitrage
of securities. GBI's arbitrage activities involve purchasing securities at
discounts from the value that GBI believes will be realized by those securities.
Investment Banking
Corporate Finance; Syndicate
GBI's investment banking revenues are principally derived from managing or
co-managing public offerings of equity and debt securities. GBI believes that
its expertise and ability to assist companies involved in the energy industry
has provided it with a niche in the market and numerous investment banking
clients. GBI has been active as a syndicate member or selling group member in
over 150 public equity transactions since 1994.
Principal Transactions
Market Making
The firm also facilitates brokerage transactions for its customers and
trades with other dealers on a principal basis. Principal transactions with
customers are effected at prices in accordance with applicable securities
regulations. At October 31, 1998, GBI made markets in more than 171 securities.
Other Services
Research
GBI's research department provides stock market and quantitative research,
economic analysis and commentary, recommends specific action with regard to
equity securities of industries and individual companies (historically, with a
focus on the energy markets and energy companies and currently with respect to
additional markets, industries and companies), and furnishes information for
institutional and retail customers. GBI's research staff follows companies and
prepares reports regarding a number of industries and corporations. GBI also
utilizes the services of Bear Stearns for research and analysts' reports. After
the Merger, these research efforts will be complemented by the research product
of SERP.
Government Regulation
The securities industry in the United States is subject to extensive and
frequently changing federal and state laws and substantial regulation under such
43
<PAGE>
laws by the Commission and various state agencies and self-regulatory
organizations, such as the NASD. GBI is registered as a broker-dealer with the
Commission and is a member firm of the NASD. Much of the regulation of
broker-dealers has been delegated to self-regulatory organizations, principally
NASDR, the regulatory arm of the NASD, which has been designated by the
Commission as GBI's primary regulator. NASDR adopts rules, which are subject to
approval by the Commission, that govern its members 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. GBI is registered as a broker-dealer in every state in the
United States, the District of Columbia and Puerto Rico.
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 Commission 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
Commission, self-regulatory organizations, and state securities commissions may
conduct administrative proceedings which 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.
Competition
GBI encounters intense competition in all aspects of the securities
business and competes directly with other securities firms, a significant number
of which have greater capital and other resources. In addition to competition
from firms currently in the securities business, there has recently been
increasing competition from other sources, such as commercial banks and
insurance companies offering financial services, and from other investment
alternatives. GBI believes 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.
Employees
At October 31, 1998, GBI had a total of 421 employees, including 239
registered representatives.
Properties
GBI's principal executive office is located at 1055 Stewart Avenue,
Bethpage, New York, where they occupy approximately 92,400 square feet under a
lease expiring in May 2007. GBI occupies additional office space for its branch
office in New York City under a lease expiring in February 1999. GBI occupies
space for its branch offices in California and Florida under month-to-month
leases.
Change in Accountants
At the request of RPII, GBI hired Goldstein Golub as its new independent
accountants to audit its financial statements as of August 31, 1998. The report
of Lerner Sipkin on the GBI's financial statements for either of the two fiscal
years ended August 31, 1997 and 1996, respectively, did not contain an adverse
opinion or disclaimer of opinion, nor was it modified or qualified as to
44
<PAGE>
uncertainty, audit scope or accounting principles. The decision to change
accounting firms from Lerner Sipkin to Goldstein Golub was made by the Board of
Directors of GBI. During the two fiscal years ended August 31, 1996 and 1997,
respectively, and through the date of termination (September 25, 1998), there
were no disagreements with Lerner Sipkin on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure.
Legal Proceedings
GBI's business involves substantial risks of liability, including exposure
to liability under federal and state securities laws in connection with the
underwriting or distribution of securities and claims by dissatisfied customers.
GBI does not presently maintain an errors and omissions insurance policy
insuring it against these risks. In the normal course of GBI's business, GBI
from time to time is involved in lawsuits and arbitrations brought by its
customers. It is the opinion of management that the resolution of all
proceedings presently pending should not have a material adverse effect on the
consolidated financial condition of GBI.
45
<PAGE>
SELECTED FINANCIAL DATA OF GBI
Certain of the selected consolidated financial data presented below for
each of the five fiscal years ended August 31, 1998, has been derived from the
Company's consolidated financial statements which were audited by Goldstein
Golub for 1998, Lerner Sipkin for 1997, 1996 and 1995, and by Todman & Co.,
CPAs, P.C. for 1994, each independent certified public accountants. This data
should be read in conjunction with GBI's Financial Statements, related notes and
other financial information included elsewhere in this Proxy Statement. The
information below is in thousands except for per share amounts and other data.
<TABLE>
<CAPTION>
Fiscal Year ended August 31,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Total revenues $57,895 $62,355 $39,944 $22,921 $11,615
Total expenses $57,108 $54,879 $38,896 $22,684 $11,410
Pre-tax income $787 $7,476 $1,048 $237 $25
Net income $352 $4,178 $448 $13 $73
Basic and diluted earnings
per common share $675 $8,423 $988 $31 $209
Weighted average shares
outstanding - basic and
diluted 521 496 454 426 350
Balance Sheet Data
(at end of period):
Total assets $20,053 $20,700 $6,276 $5,550 $5,575
Total liabilities (excluding
subordinated debt) $10,266 $13,986 $4,051 $3,788 $2,812
Subordinated debt $1,000 $1,000 $1,000 $1,000 $2,000
Notes $833 - - - -
Shareholders' equity $8,787 $5,714 $1,225 $762 $763
Other Data:
Ratio of assets to
stockholders' equity 2.28 3.62 5.12 7.28 7.31
Return on average equity 6.5% 120.4% 45.1% 1.7% 10.6%
Pre-tax return on average
equity 14.53% 215.5% 105.5% 31.1% 3.6%
Book value per share $11,237(1) $10,660 $2,687 $1,690 $1,908
Registered representatives 233 270 114 63 54
</TABLE>
- ----------------------------------------
(1) Reflects shareholders equity divided by the number to GBI shares
outstanding at the end of the period. The historical financial statements
have been adjusted to reflect cash received subsequent to the report date
for a material portion of the common stock subscribed for at August 31,
1998.
46
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF GBI
Business Environment
GBI is engaged in the securities brokerage and trading business and
provides investment banking and research services. GBI was incorporated in New
York in August 1983.
The securities industry as a whole experienced another year of
record-setting results during calendar year 1997. This happened despite a
rapidly deteriorating climate for energy companies due to a sharp decline in
energy prices. These events significantly impacted GBI's financial results for
its fiscal year.
Results of any individual period should not be considered representative of
future profitability. A significant portion of the GBI's expenses is fixed and
does not vary with market activity. Substantial fluctuations could occur in the
GBI's revenues and net income from period to period.
Results of Operations
Year Ended August 31, 1998 vs. Year Ended August 31, 1997
Net income for the year ended August 31, 1998, was $352,000 as compared to
$4,178,000 for the year ended August 31, 1997. The significant reduction in
earnings in the current year was attributable to the deteriorating climate for
energy companies, which resulted in substantial decreases in revenue for GBI.
Revenues
Total revenues decreased by $4,460,000, or 7.2%, to $57,895,000 for the
fiscal year, led by decreases in commissions, principal transactions and other
revenues.
Commission revenues decreased by $3,444,000, or 6.6%. The decrease reflects
deteriorating market conditions in the energy marketplace throughout the year,
causing a 27% decrease in the average commission per ticket.
Investment banking revenues increased by $1,514,000, or 46%. GBI acted as
manager or co-manager in offerings for its investment banking clients raising
approximately $141 million through 4 public offerings in fiscal 1998, an
increase from fiscal 1997, during which GBI raised $36 million through 3 public
offerings. The increase in size of the transactions in the current year
reflected the increased activity in the overall market during this period.
Revenues from principal transactions decreased by $2,603,000, or 42%. This
decrease was primarily attributable to the fact that fiscal 1997 included $4.8
million of appreciation on underwriters purchase options. Such revenue was not
present in fiscal 1998. This drop in revenue, however, was partially offset by
an increase of $2,197,000 in market-making activity in fiscal 1998 compared to
fiscal 1997.
Interest income increased by $148,000, or 19%, primarily due to higher cash
balances maintained during fiscal 1998.
47
<PAGE>
Other revenues decreased by $75,000, or 34%, primarily due to decreases in
GBI's consulting activities for which it charges fees.
Expenses
Total expenses for fiscal 1998 were $57,108,000, a 4.1% increase over
fiscal 1997. Total expenses as a percentage of revenues increased from 88% to
99%.
Compensation and benefit expense decreased $762,000 or 1.8%. These expenses
are primarily variable as commissions to brokers are paid as a percentage of
commission revenues generated. The variable expense decrease in fiscal 1998 is
consistent with the decrease in commission revenues.
Occupancy and equipment expense increased by $821,000 or 40%. This increase
was caused by the move to larger space during fiscal 1997.
Communications expense increased by $211,000, or 9.2%. This increase was
primarily caused by services needed for increased institutional trading,
investment banking and research departments during fiscal 1998.
Brokerage, clearing and exchange fees increased by $366,000, or 23%. This
increase was primarily caused by an 18% increase in the number of customer
trades processed.
Business development expense decreased by $18,000, or 1.2%. This decrease
was attributable to a reduction in travel during fiscal 1998 as compared to
fiscal 1997.
Professional fees decreased by $101,000, or 18%. This decrease was a result
of the establishment of in house counsel, which reduced the need for external
counsel.
Other expenses increased by $1,712,000 or 31% primarily due to the
settlement of several arbitrations with customers resulting from losses related
to the general decrease in energy stocks during fiscal 1998 and the addition or
increases to various insurance coverages including director and officer
liability and employment practices liability insurance.
Year Ended August 31, 1997 vs. Year Ended August 31, 1996
Net income for the year ended August 31, 1997, was $4,178,000 as compared
to $448,000 for the year ended August 31, 1996, an increase of $3,730,000 or
$833%. The increase in earnings was the result of a strong investment climate in
fiscal 1997 combined with the GBI's growth, resulting in increased securities
brokerage and principal trading opportunities.
Revenues
Total revenues increased by $22,411,000, or 56%, to $62,355,000 for the
fiscal year, led by significant increases in commission and principal
transaction revenues.
Commission revenues increased by $21,184,000 or 69%. The increase reflects
strong market conditions in fiscal 1997, as well as a 46% increase in the number
of registered representatives employed by the GBI.
48
<PAGE>
Investment banking revenues decreased by $2,218,000, or 40%. The Company
raised $36 million for its clients in fiscal 1997 through 3 public offerings and
one private placement, a decrease from fiscal 1996, during which GBI raised $50
million through 5 public offerings and one private placement.
Revenues from principal transactions increased by $3,057,000, or 97%. This
is primarily attributable to $4.8 million of appreciation on underwriters
purchase options in fiscal 1997 partially offset by a $1,700,000 decrease in
revenues from market-making activities.
Interest income increased by $186,000, or 31% due to higher cash balances,
a greater use of margin loans by the Company's brokerage customers and a higher
interest rate during the period.
Other revenues increased by $202,000, or 962%, primarily due to the
increase in consulting activities in fiscal 1997 for which GBI charges fees.
Expenses
Total expenses for fiscal 1997 were $54,879,000, a 41% increase over fiscal
1996. Total expenses as a percentage of revenues decreased to 88% from 97%.
Compensation and benefits expense increased $11,672,000, or 39%. These
expenses are primarily variable as commissions to brokers are paid as a
percentage of commission revenues generated. The expense increase in fiscal 1997
is consistent with the increase in commission revenues.
Occupancy and equipment expense increased by $1,379,000 or 212%. This
increase was caused by the move to larger space during fiscal 1997.
Communications expense increased by $420,000, or 22%, as a result of the
Company's growth and increased level of business activity. The 270 registered
representatives employed by GBI at August 31, 1997 represented a 137% increase
from August 31, 1996.
Brokerage, clearing and exchange fees increased by $299,000, or 23%
primarily due to the corresponding increase in trade volume in fiscal 1997.
Business development expenses increased $265,000, or 21% due to additional
promotional activities implemented as a part of the Company's growth strategy.
Professional fees increased by $245,000, or 76% primarily due to higher
costs associated with the increase in business activities undertaken by the
Company in fiscal 1997.
Other expenses increased $1,703,000, or 44% primarily as a result of GBI's
settlement of several arbitrations with customers and growth through the
addition of investment banking activities.
Liquidity and Capital Resources
Approximately 75% of GBI's assets at August 31, 1998 are highly liquid,
consisting primarily of cash and cash equivalents, securities inventories, and
receivables from its clearing broker, all of which fluctuate depending upon the
levels of customer business and trading activity. Receivables from
broker-dealers, which are primarily from GBI's clearing broker, turn over
49
<PAGE>
rapidly. As a securities dealer, GBI may carry significant levels of trading
inventories to meet customer needs. The Company's inventory of market-making
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. A less significant portion of GBI's total assets are fixed
assets. GBI's total assets or the individual components of total assets may vary
significantly from period to period because of changes relating to customer
demand, economic and market conditions and proprietary trading strategies.
GBI is subject to the net capital rules of the National Association of
Securities Dealers, Inc. and the Securities and Exchange Commission. As such,
GBI is subject to certain restrictions on the use of capital and its related
liquidity. As of August 31, 1998, GBI had net capital of $1,808,000, which was
$1,316,000, in excess of its minimum net capital requirement of $492,000.
GBI's overall capital and funding needs are continually reviewed to ensure
that its capital base can support the estimated needs of its business units.
These reviews take into account business needs as well as regulatory capital
requirements of the subsidiaries. Based upon these reviews, management believes
that GBI's capital structure is adequate for current operations and reasonably
foreseeable future needs.
Other Matters
Year 2000 Computer Issue
GBI initiated a firm-wide program to address the "Year 2000 Computer Issue"
in order to prepare its computer systems and applications for properly
processing dates after December 31, 1999. GBI's program is proceeding on
schedule and it is GBI's expectation that it will have its firm-wide Year 2000
solution substantially in place by March 31, 1999.
All of GBI's computer programs are provided by third party vendors and
service providers. Most of the programs were purchased after the Year 2000
Computer Issue became widely recognized. GBI has sought, and expects to receive
written confirmation from its third-party program and service providers that the
Year 2000 Computer Issue has been appropriately managed. Bear Stearns, GBI's
clearing firm, is GBI's largest and most important computer services related
vendor. Bear Stearns has provided the Company with assurances that it expects to
appropriately manage the Year 2000 Computer issue on a timely basis.
The Year 2000 Computer Issue creates risk for GBI from unforeseen problems
in its own computer systems, third-party vendors and service providers, and from
third parties with whom GBI deals worldwide. GBI is continuing to communicate
with its third-party vendors and service providers to determine the likely
extent to which GBI may be affected by third parties' year 2000 plans and target
dates. In this regard, while GBI does not now expect material financial exposure
as a result of the Year 2000 problem, there can be no guarantee that the systems
of other entities on which GBI relies will be remediated on a timely basis, or
that a failure to remediate by another party, would not have a material adverse
effect on GBI. Such failures could have a material impact on GBI's ability to
conduct business.
Based on information currently available, GBI does not expect its Year 2000
expenditures for 1998 and over the next two years to be a material cost to GBI.
The expected costs of the Year 2000 program are based on management's current
estimates; however, actual results could differ materially from those plans.
50
<PAGE>
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Unaudited Pro forma Condensed Combined Statement of Financial Condition
As of July 31, 1998
<TABLE>
<CAPTION>
Adjustments
RPII GBI to GBI Adjusted GBI Pro forma Pro forma
Historical Historical Historical Historical Adjustments Combined
--------------- ----------- --------------- ------------ ------------ ------------
(See Note B) (See Note C)
<S> <C> <C> <C> <C> <C> <C>
Assets
Cash and cash equivalents $10,169,000 266,000 $ 3,408,000 $ 3,674,000 $ (500,000) $13,343,000
Receivable from brokers and dealers 202,000 11,641,000 - 11,641,000 - 11,843,000
Securities owned, at market value 6,203,000 5,056,000 - 5,056,000 - 11,259,000
Securities owned, not readily marketable
at fair value 635,000 - - - - 635,000
Investments 4,423,000 - - - - 4,423,000
Office furniture, equipment and leasehold
improvements, net 1,291,000 3,021,000 - 3,021,000 - 4,312,000
Goodwill, net 3,763,000 - - - 5,327,000 9,090,000
Loans receivable 1,613,000 641,000 - 641,000 - 2,254,000
Income taxes receivable 498,000 - - - - 498,000
Deferred tax asset 629,000 552,000 - 552,000 - 1,181,000
Other assets 2,954,000 173,000 - 173,000 - 3,127,000
----------- ----------- ----------- ----------- ---------- -----------
Total assets $32,380,000 $21,350,000 $ 3,408,000 $24,758,000 $4,827,000 $61,965,000
=========== =========== =========== =========== ========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Securities sold, not yet purchased,
at market value $ 438,000 $ 5,779,000 - $ 5,779,000 $ - $ 6,217,000
Commissions payable 2,629,000 1,292,000 - 1,292,000 - 3,921,000
Income taxes payable - 2,856,000 - 2,856,000 - 2,856,000
Accrued expenses and other liabilities 2,502,000 5,141,000 - 5,141,000 - 7,643,000
----------- ----------- ----------- ----------- ---------- -----------
5,569,000 15,068,000 - 15,068,000 - 20,637,000
Subordinated liabilities 498,000 1,000,000 - 1,000,000 - 1,498,000
Total liabilities 6,067,000 16,068,000 - 16,068,000 - 22,135,000
----------- ----------- ----------- ----------- ---------- -----------
Stockholders' equity:
Series A preferred stock 114,000 - - - - 114,000
Common stock 1,000 - - - 1,000 2,000
Additional paid-in capital 21,018,000 1,039,000 3,408,000 4,447,000 8,501,000 33,966,000
Retained earnings 10,063,000 5,727,000 - 5,727,000 (5,159,000) 10,631,000
Accumulated other comprehensive income (47,000) - - - - (47,000)
----------- ----------- ----------- ----------- ---------- -----------
31,149,000 6,766,000 3,408,000 10,174,000 3,343,000 44,666,000
Less treasury stock (4,836,000) (1,484,000) - (1,484,000) 1,484,000 (4,836,000)
----------- ----------- ----------- ----------- ---------- -----------
Total stockholders' equity 26,313,000 5,282,000 3,408,000 8,690,000 4,827,000 39,830,000
----------- ----------- ----------- ----------- ---------- -----------
Total liabilities and stockholders' equity $32,380,000 $21,350,000 $ 3,408,000 $24,758,000 $ 4,827,000 $61,965,000
=========== ============ =========== =========== ========== ===========
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
51
<PAGE>
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Unaudited Pro forma Condensed Combined Statement of Operations
For the year ended January 31, 1998
<TABLE>
<CAPTION>
RPII GBI Pro forma Pro forma
Historical Historical Adjustments Combined
(See Note C)
------------ ------------- ------------- -----------
<S> <C> <C> <C> <C>
Revenues:
Commissions $38,328,000 $ 53,702,000 $ - $92,030,000
Principal transactions 1,175,000 9,446,000 - 11,161,000
Investment banking 6,024,000 2,409,000 - 8,433,000
Interest 1,339,000 906,000 - 2,245,000
Other 1,270,000 126,000 - 1,396,000
----------- ------------ ----------- -----------
Total revenues 48,676,000 66,589,000 - 115,265,000
----------- ------------ ----------- -----------
Expenses:
Compensation and benefits 35,051,000 47,314,000 - 82,365,000
Communications 4,930,000 2,693,000 - 7,623,000
Occupancy and equipment 3,520,000 2,586,000 - 6,106,000
Clearing and exchange fees 3,281,000 1,772,000 - 5,053,000
Business development 2,072,000 1,674,000 - 3,746,000
Investigations and settlements 2,260,000 - - 2,260,000
Professional fees 1,713,000 398,000 - 2,111,000
Other 5,805,000 7,146,000 627,000 13,578,000
----------- ------------ ----------- -----------
Total expenses 58,632,000 65,583,000 627,000 122,842,000
----------- ------------ ----------- -----------
(Loss) income before income taxes (9,956,000) 3,006,000 (627,000) (7,577,000)
Income (benefit) tax (3,443,000) 1,484,000 - (1,959,000)
----------- ------------ ----------- -----------
Net (loss) income $(6,513,000) $1,522,000 (627,000) (5,618,000)
=========== ============ =========== ===========
Basic (loss) earnings per share $(0.80) - - $(0.40)
Diluted (loss) earnings per share $(0.80) - - $(0.40)
Wtd. average common shares
outstanding-basic 8,114,245 - - 14,114,245
Wtd. average common shares
outstanding-diluted 8,114,245 - - 14,114,245
</TABLE>
See accompanying notes to unaudited pro forma condensed combined financial
statements.
52
<PAGE>
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Unaudited Pro forma Condensed Combined Statement of Operations
For the six months ended July 31, 1998
<TABLE>
<CAPTION>
RPII GBI Pro forma Pro forma
Historical Historical Adjustments Combined
--------------- --------------- --------------- -----------
(See Note C)
<S> <C> <C> <C> <C>
Revenues:
Commissions $22,018,000 20,354,000 $ - $42,372,000
Principal transactions (82,000) 639,000 - 557,000
Investment banking 3,550,000 3,224,000 - 6,774,000
Interest 668,000 395,000 - 1,063,000
Other 1,640,000 65,000 - 1,705,000
----------- ---------- ---------- ----------
Total revenues 27,794,000 24,677,000 - 52,471,000
----------- ---------- ---------- ----------
Expenses:
Compensation and benefits 19,700,000 15,895,000 - 35,595,000
Communications 2,511,000 1,124,000 - 3,635,000
Occupancy and equipment 2,808,000 1,691,000 - 4,499,000
Clearing and exchange fees 1,855,000 854,000 - 2,709,000
Business development 1,188,000 714,000 - 1,902,000
Professional fees 953,000 314,000 - 1,267,000
Other 1,262,000 3,944,000 313,000 5,519,000
----------- ---------- ---------- ----------
Total expenses 30,277,000 24,536,000 313,000 55,126,000
----------- ---------- ---------- ----------
(Loss) income before income taxes (2,483,000) 141,000 (313,000) (2,655,000)
Income (benefit) tax (812,000) 155,000 - (657,000)
----------- ---------- ---------- ----------
Net (loss) income $(1,671,000) $(14,000) $(313,000) $(1,998,000)
=========== ========== ========= ===========
Basic (loss) earnings per share $(0.21) - - $(0.14)
Diluted (loss) earnings per share $(0.21) - - $(0.14)
Wtd. average common shares
outstanding-basic 8,100,126 - - 14,100,126
Wtd. average common shares
outstanding-diluted 8,100,126 - - 14,100,126
</TABLE>
See accompanying notes to unaudited pro forma condensed combined
financial statements.
53
<PAGE>
Notes to Unaudited Pro forma Condensed Combined Financial Statements
A. The unaudited pro forma condensed combined financial statements include the
activities of the Company and its subsidiaries and GBI (collectively for
purposes of these pro forma condensed combined financial statements, the
"Company") if the individual entities entered into the Merger as discussed
herein as of February 1, 1997. The Merger is accounted for using the
purchase method of accounting.
The unaudited pro forma condensed combined information does not purport to
represent what the Company's financial position or results of operations
actually would have been had the business combination in fact occurred on
the dates indicated, or to project the Company's financial position or
results of operation on any future date or period. The pro forma
adjustments are based on available information and certain assumptions that
the Company currently believes are reasonable in the circumstances. The
unaudited pro forma condensed combined financial information should be read
in conjunction with the historical consolidated financial statements of
Research Partners International, Inc. for the years ended January 31, 1998,
1997 and 1996 and the historical financial statements of GBI, for the years
ended August 31, 1998, 1997 and 1996.
The pro forma adjustments and pro forma combined amounts are provided for
informational purposes only. The Company's financial statements will
reflect the effects of the Merger only from the date such event occurs. The
pro forma adjustments are applied to the historical financial statements,
to among other things, account for the Merger as a purchase. Under purchase
accounting, the total purchase cost for the business combination will be
allocated to the GBI assets and liabilities based on their fair values.
All significant intercompany accounts and transactions are eliminated in
consolidation. Where appropriate, prior year amounts have been reclassified
to conform to the current presentation.
B. GBI's historical financials have been adjusted to account for $3,408,000 of
stock subscribed for in July 31, 1998.
C. The excess of the purchase price over the fair value of the net assets
acquired is recorded as goodwill and was and will be amortized over the
estimated period benefitted. The following pro forma adjustments to
goodwill result from allocation of the purchase price for the Merger based
on the fair value of the underlying net assets acquired:
Value of Merger Shares issued $ 13,500,000
Value of Merger Warrants issued 957,000
Cost of business combination 500,000
-----------
Total purchase price 14,957,000
Less: fair value of net assets acquired (8,690,000)
-----------
Cost of acquired assets in excess of fair value $6,267,000
Less: goodwill amortization through the end
of period (940,000)
-----------
Goodwill as of end of period $5,327,000
===========
The value of the common stock issued is based on the last sale price of the
Nasdaq National Market on November 20, 1998. The value of the Merger Warrants is
based on the Black-Scholes valuation methodology.
54
<PAGE>
PROPOSAL II: DIRECTOR PROPOSAL
The Board of Directors is currently divided into three classes, each of
which generally serves for a term of three years, with only one class of
directors being elected in each year. In connection with the Merger, the
Company's By-laws will be amended to eliminate its classified Board effective
immediately prior to the Closing of the Merger. Pursuant to the Merger
Agreement, all 14 nominees listed below have been nominated as candidates for
election as directors of the Board to serve commencing as of the Closing of the
Merger and until the next annual meeting of stockholders and until their
respective successors have been elected and qualified. If the Merger Proposal is
not approved and the Merger is not consummated, the current directors of the
Company will remain as directors and the Board of Directors will continue to be
classified. All of the nominees have been mutually agreed upon by the Company
and GBI. Pursuant to the Merger Agreement, ____ of the nominees are currently
members of the Company's Board of Directors, four are currently officers and/or
directors of GBI and one is the owner of a consulting firm currently engaged by
GBI.
Unless authority is withheld, the proxies solicited by the Board will be
voted FOR the election of these nominees. In case any of the nominees become
unavailable for election to the Board, an event which is not anticipated, the
persons named as proxies, or their substitutes, shall have full discretion and
authority to vote for any other candidate designated by the Company, GBI or by
their mutual agreement, as the case may be. The 14 nominees for director of the
Company, their current positions with the Company (which are subject to change
upon consummation of the Merger, see "Merger Proposal--Management After the
Merger; Employment Agreements") and their business background are set forth
below.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS
VOTE FOR ALL THE NOMINEES NAMED BELOW FOR ELECTION TO THE BOARD OF DIRECTORS.
Information About the Nominees
David M. Nussbaum, 44 years old, has been Chairman of the Board and Chief
Executive Officer of the Company since September 1990, was Executive Vice
President of the Company from January 1987 until September 1990 and has been a
director of the Company since January 1987. He is also Chairman of the Board and
Chief Executive Officer of GKN. Mr. Nussbaum has also acted as the President of
Newco since its inception on October 30, 1998 and is a director of Shochet. He
has been a director and executive officer of Dalewood since the Company's
acquisition of Dalewood in December 1996 and director and executive officer of
SERP since the Company's acquisition of SERP in March 1997. Mr. Nussbaum serves
on the Board of Arbitrators of the National Association of Securities Dealers,
Inc. He is also a member of the Young Presidents Organization and a member of
the Board of Directors of the Sid Jacobson Jewish Community Center in Roslyn,
New York. From 1984 through 1986, Mr. Nussbaum was engaged primarily in the
acquisition, management, syndication and operation of real estate projects. From
1980 through 1984, Mr. Nussbaum was engaged in the private practice of law at
the firm of Rosenman Colin Freund Lewis & Cohen in New York. Mr. Nussbaum
graduated from the University of Michigan, magna cum laude. He received his law
degree (cum laude; Order of the Coif) from New York University School of Law. In
August 1997, Mr. Nussbaum concluded a settlement with the NASDR resolving an
NASDR investigation, discussed below.
Roger N. Gladstone, 44 years old, has been President and a director of the
Company since January 1987. He is also President and a director of GKN. He is
also a director and executive officer of Shochet and Dalewood. Mr. Gladstone
serves on the Board of Arbitrators of the National Association of Securities
Dealers, Inc. He is also a member of the Young Presidents Organization and an
honorary member of the Board of Directors of the Sid Jacobson Jewish 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
55
<PAGE>
estate projects. From 1980 through 1984, Mr. Gladstone was engaged in the
private practice of law in New York. Mr. Gladstone graduated from Stanford
University, received Master of Business Administration from New York University
and received his law degree from the Benjamin N. Cardozo School of Law, Yeshiva
University. In August 1997, Mr. Gladstone concluded a settlement with the NASDR
resolving an NASDR investigation, discussed below.
Peter R. Kent, 45 years old, has been Chief Operating Officer of the
Company and GKN since February 1996, a director of the Company and GKN since May
1996 and Executive Vice President of the Company and GKN since June 4, 1998. He
served as Chief Financial Officer of the Company and GKN from July 1995 through
October 4, 1998. He has also served as a director and Executive Vice President
of Newco since its inception on October 30, 1998. He has served as Chief
Financial Officer and director of Shochet since its acquisition by the Company
in November 1995, as an executive officer and director of Dalewood since its
acquisition by the Company in December 1996 and as an executive officer and
director of SERP since its acquisition by the Company in March 1997. He was
elected a director of RPII- AG in January 1998. From September 1991 through
February 1995, Mr. Kent served initially as Chief Financial Officer, and
subsequently as President, Chairman of the Board, and Chief Executive Officer,
of Consolidated Waste Services of America, Inc., a solid waste management and
recycling company. From 1988 until 1991, Mr. Kent was employed by the securities
firm of Wessels, Arnold & Henderson, where he served as a member of the
Corporate Finance Department in charge of its Environmental Services Group. From
1984 to 1988, Mr. Kent was employed by Henry Ansbacher, Inc., a firm involved in
the field of media mergers and acquisitions, initially as Chief Financial
Officer and subsequently as its President and Chief Operating Officer. Previous
to 1984, Mr. Kent had been employed by Sutro & Co. Incorporated, Wells Fargo
Bank, and Arthur Andersen & Co. Mr. Kent is a Certified Public Accountant. Mr.
Kent graduated from the University of California at Berkeley, where he also
received his Masters in Business Administration.
Peter R. McMullin, 55 years old, has been a director of the Company since
May 1997 and Executive Vice President of the Company and Chief Investment
Officer since June 1998. He is a co- founder of SERP and has served as SERP's
Executive Vice President and a director of SERP since its inception in June
1990. Previously, Mr. McMullin served as a Research Director for various firms,
including Gulfstream Financial, Inc., Alan Bush Brokerage Company, Inc. and
Dominion Securities Limited. Mr. McMullin received a Bachelor of Science and a
Master of Business Administration from the University of Toronto. Mr. McMullin
is a Chartered Financial Analyst.
Robert T. McAleer, 66 years old, has been Executive Vice President and a
director of the Company since June 1998. He is a co-founder of SERP and has
served as SERP's President and a director since its inception in June 1990.
Prior to founding SERP, Mr. McAleer served as Executive Vice President of
Gulfstream Financial, Inc. and was previously employed by Prescott Ball Turben,
Inc. He graduated from Bucknell University and received a Bachelor of Science.
Richard Y. Roberts, 47 years old, was elected a director of the Company in
December 1997. Mr. Roberts has been affiliated with Reid & Priest LLP since
January 1997, as counsel, where he participates in their 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., a venture capital securities consulting firm. From
October 1990 to July 1995, Mr. Roberts served as a Commissioner of the United
States Securities and Exchange Commission. Prior to his term as Commissioner,
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 National Association of Securities Dealers,
Inc., 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 earned a Bachelor of Science in Electrical Engineering. He
56
<PAGE>
received his Juris Doctorate 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.
Joseph Berland, 58 years old, is the co-founder of GBI. He has served as
Chairman of the Board and Chief Executive Officer of GBI since October 1983.
Since January 1994, Mr. Berland has also served as the Secretary of GBI. Mr.
Berland graduated from Brown University in 1962 and received a Masters in
Business Administration from Columbia Business School.
Richard Rosenstock, 47 years old, joined GBI in 1986. He has served as a
director of GBI since January 1994. He served as Executive Vice President of GBI
from January 1994 and in May 1998 became President of GBI. He has served as
Managing Director from September 1996 until August 1997 and since August 1997
has served as Senior Managing Partner of GBI. Mr. Rosenstock graduated from
Northeastern University with a Bachelor of Science.
David Thalheim, 44 years old, is the President of Imperial International
Group, Inc. since January 1991, which has rendered consulting services to GBI
since 1993. From 1977 through 1990, Mr. Thalheim served as Vice President and
then President of Thalheim Expositions, Inc., one of the largest independent
trade show and exposition management companies in the United States. Mr.
Thalheim graduated from Stanford University with a Bachelor of Arts, with
Honors, in Economics.
Mark Zeitchick, 33 years old, joined GBI as a registered representative in
October 1993. He co-founded GBI's Retail Sales Department. From September 1995
until August 1997, Mr. Zeitchick has served as Executive Vice President of GBI.
Since November 1993, Mr. Zeitchick served as Executive Managing Partner of GBI.
He graduated from Hofstra University with a Bachelor of Arts in Business.
Vincent Mangone, 33 years old, joined GBI as a registered representative in
October 1993. He co-founded GBI's Retail Sales Department. From September 1995,
until August 1997, Mr. Mangone has served as Executive Vice President of GBI.
Since November 1993, Mr. Mangone served as Executive Managing Partner of GBI. He
graduated from St. John's University with a Bachelor of Science in Finance.
[Insert Names and Respective Biographical Information of Additional Three
Directors after selection and information is furnished.]
_______________________________________________
_______________________________________________
_______________________________________________
_______________________________________________
57
<PAGE>
Information About the Current Classified Board and Other Current Directors Who
Are Not Nominees and Other Current Executive Officers
As discussed above, the Board is currently divided into three classes, each
of which generally serves for a term of three years, with only one class of
directors being elected in each year. If the Merger is not consummated, the term
of office of the first class of directors, consisting of David M. Nussbaum,
Roger N. Gladstone, Richard Y. Roberts and Robert T. McAleer, will expire in
1999 or until their respective successors are elected and qualified; the term of
the second class of directors, consisting of Lester Rosenkrantz, James I. Krantz
and Arnold B. Pollard, will expire in 2000 or until their respective successors
are elected and qualified; and the term of the third class of directors,
consisting of Peter R. Kent, John P. Margaritis and Peter R. McMullin, will
expire in 2001 or until their respective successors are elected and qualified.
Messrs. Rosenkrantz, Krantz, [Pollard and Margaritis] will resign their
directorships effective as of the Closing of the Merger if it is consummated.
Certain information concerning these current directors not nominated for
election and the Company's current other executive officers are as follows:
Richard Feldman, 37 years old, has served as Senior Vice President and
Chief Financial Officer since joining the Company in October 1998. From August
1992 to October 1998, Mr. Feldman had served in similar capacities at several
broker dealers, including Waterhouse Securities, Inc. and Muriel Siebert & Co.,
Inc., two national broker dealers. From 1982 through July 1992, Mr. Feldman was
employed by Deloitte & Touche, LLP, an international accounting firm. Mr.
Feldman is a Certified Public Accountant, and a member of the New York State
Society of CPAs, the American Institute of CPAs and the Security Industry
Association. Mr. Feldman graduated from the University of Massachusetts and
received a B.A. in Business Administration.
Lester Rosenkrantz, 57 years old, has been a director and Executive Vice
President of the Company and GKN since February 1994. Mr. Rosenkrantz has been a
director of SERP since the Company's acquisition of SERP in March 1997. Mr.
Rosenkrantz was Vice Chairman and Director of Corporate Finance of Reich & Co.,
Inc. (formerly Vantage Securities), a member of the New York Stock Exchange
("NYSE"), from November 1990 until January 1994. He has also served in various
management positions at Rosenkrantz, Lyon and Ross, Incorporated, a NYSE member
firm from 1973 to 1990, serving as Vice Chairman at the end of his tenure. Mr.
Rosenkrantz was employed by Andresen & Company from 1963 to 1973, lastly as a
General Partner and head of institutional and retail sales. Mr. Rosenkrantz
graduated from Pennsylvania State University.
James I. Krantz, 43 years old, has been a director of the Company 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. Mr. Krantz is currently President and Chief Executive Officer of
York International Agency, Inc., a full service insurance agency located in
Westchester, New York. Mr. Krantz graduated from Syracuse University. He
received his Chartered Property Casualty Underwriter (CPCU) designation in 1989.
John P. Margaritis, 49 years old, has been a director of the Company since
August 1996. Since September 1998, Mr. Margaritis has been serving as President
and Chief Executive Officer at the Hawthorne 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 & Mather, Public Relations. Mr. Margaritis is a director of
the Arthur Ashe Institution for Urban Health and Research America, a non-profit
organization to promote government's support of medical research. Mr. Margaritis
58
<PAGE>
is 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 graduated from Washington and Jefferson College and received his
masters degree in media from the New School for Social Research.
Arnold B. Pollard, 55 years old, has been a director of the Company since
August 1996. Since June 1993, he has been the President and Chief Executive
Officer of Chief Executive Group, which publishes "Chief Executive" magazine.
For nearly 20 years, he has been President of Decision Associates, a management
consulting firm specializing in organizational strategy and structure. Mr.
Pollard was a founding member of the Strategic Decision Analysis Group of SRI, a
company engaged in management consulting and contract research. Since October
1996, Mr. Pollard has served as a director and a member of the compensation
committee of Delta Financial Corp., a public company engaged in the business of
mortgage financing, of Sonic Foundry, a public company which develops audio
software, and International Management Education Foundation, a non-profit
educational organization. From 1989 to 1991, Mr. Pollard served as Chairman and
Chief Executive Officer of Biopool International, a biodiagnostic public company
focusing on blood related testing. From 1970 to 1973, Mr. Pollard served as
adjunct professor at the Columbia Graduate School of Business. Mr. Pollard
graduated from Cornell University (Tau Beta Pi) and holds a doctorate in
Management Science from Stanford University.
Robert H. Gladstone, 40 years old, has been Executive Vice President of the
Company since November 1993 and a director of the Company from January 1992 to
May 1996. He has also been an executive officer of GKN since January 1990. In
January 1997, Mr. Gladstone concluded a settlement with the Commission resolving
an Commission investigation and in August 1997, he concluded a settlement with
the NASDR resolving a NASDR investigation, both of which are discussed below.
Roger N. Gladstone is the brother of Robert H. Gladstone and the
brother-in-law of David M. Nussbaum. No other family relationships exist between
any of the executive officers or directors of the Company or its subsidiaries.
In January 1997, GKN and Robert H. Gladstone concluded a settlement with
the Commission resolving an Commission investigation arising out of customer
complaints against certain brokers and alleged related supervisory failures
during 1991 and 1992. The settlement was entered into without admitting or
denying the SEC's findings. Under the terms of the settlement, GKN paid a
penalty of $100,000, engaged an independent consultant to review the firm's
supervisory and compliance policies and procedures and agreed to implement the
recommendations of the independent consultant. Robert H. Gladstone agreed to pay
a penalty of $50,000 and agreed to a suspension from all association in any
capacity with any broker, dealer, investment advisor, investment company or
municipal securities dealer for a period of 30 days, and agreed not be
associated in a supervisory capacity for 11 months thereafter. In August 1997,
GKN and certain of its executive officers, senior managers or former and present
brokers (including David M. Nussbaum, Roger N. Gladstone and Robert H.
Gladstone) reached settlements with the NASDR resolving an NASDR investigation
concerning alleged excessive markups on warrants of several companies GKN
underwrote and for which it made a market during the period 1993 through 1996.
The settlement was entered into without admitting or denying the NASDR's
allegations. Under the settlement, GKN consented to sanctions including censure,
the payment of restitution, interest and fines of $1,723,000 and engaged an
independent consultant to review GKN' policies, practices and procedures
relating to the fair pricing and commissions charged to customers and to related
supervisory and compliance policies and structure and agreed to implement the
recommendations of the independent consultant. Each of David M. Nussbaum and
Roger N. Gladstone consented to censure, a fine of $50,000 and a suspension from
association in any capacity with any member of the NASD for 30 days. Robert H.
Gladstone consented to a censure, a fine of $100,000, a suspension from
association in any capacity with any member of the NASD for a period of 30 days
and a suspension from association, with any member in a principal or supervisory
capacity for a period of three months. In addition, he agreed to requalify by
examination as a General Securities Principal if he decided to become associated
as a principal or supervisor following the termination of this suspension.
59
<PAGE>
Board and Committee Information
During fiscal 1998, the Board held five meetings and acted by unanimous
written consent on four occasions. To date in fiscal 1999, the Board has held
six board meetings and acted by unanimous written consent on three occasions.
The standing committees of the Board are the Audit Committee, the Compensation
Committee, Employee Incentive Committee and the Executive Committee. The Company
does not have a Nominating Committee. The Audit Committee, whose current members
are Roger N. Gladstone, John P. Margaritis, Arnold B. Pollard and Richard Y.
Roberts reviews the scope of accounting audits, reviews with the independent
auditors the corporate accounting practices and policies and recommends to whom
reports should be submitted within the Company, reviews with the independent
auditors their final report, reviews with internal and independent auditors
overall accounting and financial controls and is available to the independent
auditors during the year for consultation purposes. The Compensation Committee,
whose current members are David M. Nussbaum, John P. Margaritis and Arnold B.
Pollard, reviews and makes recommendations to the Board regarding salaries,
compensation benefits (other than with respect to the Company's 1991 Employee
Incentive Plan ("1991 Plan") and the Company's IC Plan) of executive officers
and key employees of the Company, and will review any related party transactions
on an ongoing basis for potential conflicts of interest. The Employee Incentive
Committee, whose current members are John P. Margaritis and Arnold B. Pollard,
administers and makes all decisions with respect to the grant of awards under
the 1991 Plan and IC Plan. The Executive Committee, whose current members are
David M. Nussbaum, Roger N. Gladstone and Peter R. Kent, may address all matters
handled by the Board of Directors, with specified limitations. Following the
Merger, the Executive Committee will be reconstituted to consist of David
Nussbaum, Peter R. Kent, David Thalheim and Roger N. Gladstone and either of
Richard Rosenstock or Joseph Berland and either of Mark Zeitchick and Vincent
Mangone at their discretion. The members of the other committees will be changed
following the Merger although at the present time, such members have not been
selected. Each of the committees was established in August 1997, other than the
Executive Committee, which was established in September 1997. During Fiscal
1998, each of the Compensation Committee and the Employee Incentive Committee
met one time, the Audit Committee met two times and the Executive Committee
acted by unanimous written consent on one occasion. To date in fiscal 1999, each
of the Employee Incentive Committee and Audit Committee has met once and, the
Compensation Committee has met two times.
The directors of the Company who are employed by the Company are not
compensated for their services as directors of the Company nor for any committee
participation. Directors who are not employed by the Company are paid $2,500 per
quarter.
60
<PAGE>
EXECUTIVE COMPENSATION
The following table shows the compensation paid by the Company and its
subsidiaries, as well as certain other compensation paid or accrued, during the
fiscal years ended January 31, 1998, 1997 and 1996, to the Chief Executive
Officer of the Company and to the other four most highly compensated executive
officers of the Company whose compensation was $100,000 or greater during fiscal
1998 (collectively "Named Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
---------------------------
Fiscal Securities All
Year Annual Compensation Restricted Underlying Other
Ended --------------------- Stock Options/ Compen-
January Salary Bonus Awards SARS sation (2)
Name and Principal Position 31, ($) ($) ($) (#) ($)
- ----------------------------------------- -------- -------- -------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
David M. Nussbaum 1998 240,000 -0- -0- -0- 453,987(3)
Chairman of the Board and Chief 1997 240,000 252,986 337,986 -0- 1,314,090
Executive Officer of the Company and GKN 1996 240,000 250,000 -0- 20,000 521,000
- ----------------------------------------- -------- -------- -------- ------------ ---------- ------------
1998 240,000 -0- -0- -0- 703,736(3)
Roger N. Gladstone 1997 240,000 252,986 252,986 -0- 1,337,000
President of the Company and GKN 1996 240,000 250,000 -0- 20,000 534,000
- ----------------------------------------- -------- -------- -------- ------------ ---------- ------------
Peter R. Kent
Executive Vice President, 1998 200,000 -0- -0- -0- -0-
Chief Operating Officer of the 1997 200,000 444,210 270,523 -0- -0-
Company and GKN 1996 92,000 85,000 -0- 70,000 -0-
- ----------------------------------------- -------- -------- -------- ------------ ---------- ------------
Robert H. Gladstone 1998 240,000 -0- -0- -0- 415,008(3)
Executive Vice President of the 1997 240,000 252,986 337,986 6,666 1,301,359
Company and GKN 1996 240,000 250,000 -0- 20,000 549,000
- ----------------------------------------- -------- -------- -------- ------------ ---------- ------------
Lester Rosenkrantz 1998 175,000 -0- -0- -0- 23,323(3)
Executive Vice President of the 1997 157,500 140,746 98,582 -0- 86,164
Company 1996 150,000 20,000 -0- -0- 19,000
- ----------------------------------------- -------- -------- -------- ------------ ---------- ------------
</TABLE>
(1) Represents dollar values of restricted shares issued pursuant to the IC
Plan based on the closing price of Common Stock on the date of grant. The
IC Shares reported in the Summary Compensation Table vest, in whole, on the
third year anniversary from the date of grant. The holders of the IC Shares
have the right to vote such shares and to receive dividends paid with
respect to such shares. See "Compensation Arrangements--1996 Incentive
Compensation Plan."
(2) Primarily commissions paid on the brokerage of securities.
(3) Includes a payment from the proceeds of the sale of options to purchase
securities in various companies of $147,911, $375,711, $92,703 and $7,811,
to David M. Nussbaum, Roger N. Gladstone, Robert H. Gladstone and Lester
Rosenkrantz, respectively.
61
<PAGE>
Option Grants in Last Fiscal Year
No stock options were granted to the Named Officers during fiscal 1998.
Option Exercises and Holdings
The following table sets forth information concerning the number and value
of unexercised options held by each of the Named Officers as of January 31,
1998.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options/SARs at In-The-Money Options/SARs
Shares Fiscal Year-End (#)(1) at Fiscal Year-End ($)(2)
Acquired Value ---------------------- --------------------------
on Exercise Realized
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
------- --- --- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David M. Nussbaum -0- -0- 13,333 6,667 -0- -0-
Roger N. Gladstone -0- -0- 13,333 6,667 -0- -0-
Peter R. Kent -0- -0- 70,000 -0- -0- -0-
Lester Rosenkrantz -0- -0- 8,333 16,667 -0- -0-
Robert H. Gladstone -0- -0- 4,444 2,222 -0- -0-
- -------------------------- ---------------- ------------- --------------- ----------------- ------------------ -------------
</TABLE>
(1) Represents shares issuable upon exercise of options granted under the 1991
Plan.
(2) Based on the difference between the closing sale price of the Common Stock
on January 31, 1998 ($2 11/16) and the exercise price of the option
multiplied by the number of shares of Common Stock subject to the option.
62
<PAGE>
Stock Price Performance Graph
The Stock Price Performance Graph below compares cumulative total return of
the Company, the Nasdaq Stock Market - U.S. Index and a peer group index
selected by the Company.* The graph plots the growth in value of an initial $100
investment over the indicated time periods, with dividends reinvested. The stock
price performance shown on the graph below is not necessarily indicative of
future price performance.
(Graph comparing 18 month cumulative total return among GKN Holding Corp., The
Nasdaq Stock Market (U.S.) Index and a peer group index selected by the Company)
* The peer group index is selected by the Company and is comprised of the
following companies engaged in the same business as the Company, each with
a market capitalization within $50,000,000 of the Company's market
capitalization: Advest Group, Inc., First Albany Companies Inc., Hoenig
Group Inc., Interstate/Johnson Lane, Inc., JW Charles Financial Services,
Inc., Kinnard Investments, Inc., Ryan Beck & Company, Inc., Scott &
Stringfellow Financial, Inc., Stifel Financial Corp., and Ziegler
Companies, Inc.
63
<PAGE>
Compensation Arrangements
Current Employment Agreements Regarding Named Officers
The Company has employment agreements with each of David M. Nussbaum, Roger
N. Gladstone and Robert H. Gladstone which expire on April 30, 1999. Each
agreement provides for an annual salary of $240,000 and the issuance of up to
15% of any underwriter warrants issuable to the Company in connection with its
corporate finance and investment banking activities. Messrs. Nussbaum, Gladstone
and Gladstone each receive payments of 20% of the gross brokerage commissions
generated under any of his or each other's customer accounts (an aggregate 60%
pay-out) and they are also entitled to bonuses under the IC Plan discussed
below. The Company also has an employment agreement with Peter R. Kent which
expires on April 30, 1999 and provides for an annual salary of $200,000. Mr.
Kent is also entitled to bonuses under the IC Plan. The agreements with David M.
Nussbaum, Roger N. Gladstone, Robert H. Gladstone and Peter R. Kent contain
non-compete provisions, expiring one year after termination of employment, which
prohibit these persons from competing with the Company without the prior written
consent of the Company. The Board of Directors approved the annual salary of
Lester Rosenkrantz as $175,000 for fiscal 1999. Mr. Rosenkrantz is also entitled
to commissions on his brokerage business and bonuses under the IC Plan, if any,
for fiscal 1999.
Positions and Employment Agreements Regarding Named Officers Effective Upon
the Merger
Concurrently with the execution of the Merger Agreement, each of David M.
Nussbaum, Roger N. Gladstone and Peter R. Kent, entered into a one-year
employment agreement with the Company, to commence at the Effective Time.
Additionally, Mr. Robert H. Gladstone, currently Executive Vice President of the
Company and GKN, entered into an employment agreement with GKN for his continued
employment with GKN, for the one-year period commencing at the Effective Time.
The employment agreements with all of the foregoing persons provide that the
Company shall offer the employee the right to remain employed as a registered
representative of a broker-dealer subsidiary of the Company at all times during
the five-year period commencing at the Effective Time. For a more detailed
discussion of the employment agreements, see "Merger Proposal--Management After
the Merger; Employment Agreements." If the Merger is not effected, the
employment agreements will not be effective and the persons described in this
Management section will continue to serve the Company in their respective
current positions until the end of their employment term, as set forth either in
their employment agreements or if no such agreement, as resolved by the Board.
1991 Employee Incentive Plan
In June 1991, the Company adopted and its stockholders approved the 1991
Plan which, as amended, provides for the issuance of stock, stock options and
other stock purchase rights to executive officers and other key employees and
consultants who render significant services to the Company and its subsidiaries.
The 1991 Plan was adopted to provide the Board of Directors with sufficient
flexibility regarding the forms of incentive compensation which the Company will
have at its disposal to reward these persons. Under the 1991 Plan, both options
intended to qualify as incentive stock options under Section 422 of the Internal
Revenue Code of 1986, as amended, and non-qualified options may be granted. The
Board of Directors has designated the Employee Incentive Committee to administer
and determine the distribution and terms of awards granted under the 1991 Plan,
pursuant to guidelines set forth in the 1991 Plan. A total of 5,000,000 shares
of Common Stock are authorized for issuance pursuant to the 1991 Plan, of which
3,786,295 shares of Common Stock are currently reserved for issuance upon
exercise of options issued under the 1991 Plan. A total of 815,830 shares of
Common Stock have been issued upon exercise of options granted pursuant to the
1991 Plan.
64
<PAGE>
1996 Incentive Compensation Plan
In July 1996, the Company adopted and its stockholders approved the IC Plan
which, as amended, establishes an incentive compensation pool equal to 25% of
all pre-tax, pre-incentive compensation profits, once a 10% pre-tax,
pre-incentive return on beginning equity has been achieved. If the Company's
pre-tax, pre-incentive compensation profits are sufficient to establish a bonus
pool, such bonus pool would then be distributed to management and business unit
managers, in majority part, based upon a pre-fixed percentage determined in the
beginning of the fiscal year in question and, to a lesser extent, based upon the
discretion of the Employee Incentive Committee after such fiscal year has ended.
In the discretion of the Employee Incentive Committee, up to 50% of the value of
any award may be paid in restricted shares of Common Stock, and up to 100% may
be paid in restricted shares with the consent of the recipient. The holders of
the restricted shares issued under the IC Plan have the power to vote and the
right to receive dividends with respect to such shares but the IC Shares do not
vest until March 2000 and may not be transferred prior to that date. A total of
1,000,000 restricted shares are authorized for issuance pursuant to the IC Plan.
As of October 31, 1998, a total of 297,063 restricted stock awards have been
issued, and a total of 702,937 shares of Common Stock is currently reserved for
issuance under the IC Plan.
65
<PAGE>
Committee Report on Executive Compensation
The Compensation Committee of the Company is charged with the
responsibilities of establishing and administering the policies and plans which
govern compensation for executive officers, reviewing and recommending to the
Board the level of compensation of the executive officers and key employees of
the Company (other than with respect to the 1991 Plan and the IC Plan) and
reviewing related party transactions on an ongoing basis for potential conflicts
of interest. For Fiscal 1998, the Compensation Committee consisted of David M.
Nussbaum, John P. Margaritis and Arnold B. Pollard. The Employee Incentive
Committee of the Company is responsible for administering and making all
decisions with respect to the grant of bonus awards under the 1991 Plan and IC
Plan. For Fiscal 1998, the Employee Incentive Committee consisted of John P.
Margaritis and Arnold B. Pollard, each a non-employee director of the Company.
Prior to the establishment of the Compensation Committee in August 1996,
the Company entered into employment agreements, dated as of May 1, 1996, with
each of David M. Nussbaum, Roger N. Gladstone, Peter R. Kent and Robert H.
Gladstone, expiring in April 30, 1999, which fixes the salaries of such persons.
Accordingly, the salaries of such persons for fiscal 1998 were not reviewed by
the Compensation Committee. Management recommended an annual salary of $175,000
for Mr. Rosenkrantz for Fiscal 1998 and determined that he was entitled to
commissions on his brokerage business and eligible to receive bonuses under the
IC Plan. Management additionally recommended that Mr. Rosenkrantz's salary
remain at $175,000 for fiscal 1999. The Compensation Committee supported such
recommendations based upon the following factors: The Committee analyzed
competitive salaries of positions similar to Mr. Rosenkrantz's position;
evaluated his level of responsibility in the investment banking department and
within the Company; and reviewed the Company's performance for fiscal 1998. The
Compensation Committee reaffirmed that Mr. Rosenkrantz is also entitled to
commissions on his brokerage business and bonuses under the IC Plan, if any, for
fiscal 1999.
Bonuses for executive management, including the Named Officers (David M.
Nussbaum, Roger N. Gladstone, Peter R. Kent, Lester Rosenkrantz and Robert H.
Gladstone), are established in accordance with the terms of the IC Plan.
Pursuant to the IC Plan, a bonus pool is determined annually equal to 25% of all
pre-tax, pre-incentive compensation profits of the Company once a 10% pre-tax,
pre-incentive compensation return on beginning equity has been achieved.
Accordingly, unless the Company has a specified minimum of pre-tax,
pre-incentive compensation profits, no bonuses are awarded under the IC Plan.
This reflects the policy of the Company to have the bonuses of executive
management, including the Named Officers, directly related to the performance of
the Company. The Company did not achieve a bonus pool in fiscal 1998.
Accordingly, the Company did not grant any bonuses to the Named Officers for
fiscal 1998.
The Committee discussed the relationship of the Company's performance to
the amount of David M. Nussbaum's compensation for fiscal 1998. Insofar as Mr.
Nussbaum's salary is fixed pursuant to an agreement dated prior to the
establishment of the Compensation Committee and he did not receive any
discretionary compensation for fiscal 1998, the Committee neither recommended
nor determined Mr. Nussbaum's compensation for fiscal 1998.
COMPENSATION COMMITTEE
David M. Nussbaum
John P. Margaritis
Arnold B. Pollard
66
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers, directors and persons who beneficially own more than ten
percent of the Company's Common Stock to file reports of ownership and changes
in ownership with the Securities and Exchange Commission. These reporting
persons also are required to furnish the Company with copies of all Section
16(a) forms they file. To the Company's knowledge, based solely on its review of
the copies of such forms furnished to it and representations that no other
reports were required, all Section 16(a) reporting requirements were complied
with during Fiscal 1998, except that two monthly reports, each reporting one
acquisition of the Common Stock by James I. Krantz were filed late, and one
report disclosing the election of Peter R. McMullin as a director of the Company
and reporting his beneficial ownership was filed late.
CERTAIN TRANSACTIONS
In connection with its corporate finance and investment banking activities,
GKN is often issued warrants to purchase securities of the issuer for whom its
services are rendered ("Underwriter Warrants"). Generally, less than half of the
aggregate number of Underwriter Warrants issuable to GKN are issued to its
executive officers and other personnel involved in the transaction (collectively
the "Individual Holders"). GKN has, in the past, and may, in the future,
purchase Underwriter Warrants from the Individual Holders at a price equal to
the market price of the underlying securities less the exercise price of the
Underwriter Warrants. Additionally, GKN has, in the past, and may, in the
future, lend to the Individual Holders funds to pay the exercise price of the
Underwriter Warrants, which loans are repaid, without interest, within a period
of no more than two weeks.
The Company has purchased and continues to purchase insurance using York
International Agency, Inc. ("York") and York Financial Concepts, Inc. ("York
Financial") as agent of the Company. James I. Krantz, a Director of the Company,
is President and Chief Executive Officer, a director and a stockholder of York
and a majority shareholder of York Financial. In fiscal 1998, the Company paid
York and York Financial, respectively, premiums of $83,298 and $197,311 for
insurance policies purchased through York and York Financial, respectively (a
portion of which amounts are paid by the insurer to York and York Financial).
From February 1, 1998, through November 30, 1998, the Company paid York and York
Financial, respectively, premiums of $167,396 and $110,607 for insurance (a
portion of which amounts are paid by the insurer to York and York Financial).
In the fiscal year ended January 31, 1995, the Company loaned Mr. Lester
Rosenkrantz, Executive Vice President and a Director of the Company, an
aggregate of $99,000. An additional $25,000 loan was made in the fiscal year
ended January 31, 1996. Mr. Rosenkrantz repaid $10,000 in December 1995 and
$20,000 in March 1996, leaving an aggregate outstanding principal balance as of
January 31, 1998 of $94,000. In February 1998, the Company loaned Mr.
Rosenkrantz an additional $50,000. These loans are payable without interest and
are collateralized through the pledge by Mr. Rosenkrantz of his interest in
certain Underwriter Warrants.
Effective December 31, 1997, trusts established by each of Richard
Rosenstock and David Thalheim, director nominees of the Company, withdrew their
entire investment in Kalaidoscope. See "Merger Proposal--Material Contracts
Between the Company and GBI."
In July 1993, David Thalheim invested $250,000 as a limited partner in
Dalewood Associates, L.P., see "Business of the Company--Merchant Banking." In
July 1993, Jay Thalheim, the father of David Thalheim, invested $200,000 as a
limited partner in Dalewood Associates, L.P. Effective December 31, 1997, each
of David and Jay Thalheim withdrew his investment in Dalewood Associates, L.P.
67
<PAGE>
Effective October 1, 1998, the Company sold to Dr. Ernst Muller-Mohl, a
person who beneficially ownes more than 5% of the outstanding stock of the
Company, all of the outstanding stock owned by the Company in GKN Asset
Management AG, for Swiss francs 1 million (U.S. $728,000). GKN Asset Management
AG serves as an investment advisor to Early Bird, an investment company listed
on the Swiss stock exchange. See "Business of the Company--Money Management."
Also effective October 1, 1998, Dr. Ernst Muller-Mohl purchased 300,000 shares
of Common Stock from the Company for $1,050,000. See "Principal Stockholders of
the Company." In connection with this purchase, Dr. Muller-Mohl agreed not to
sell any shares of Common Stock owned by him until September 30, 1999 without
the consent of the Company and agreed not to purchase any additional shares of
Common Stock until January 31, 2001 without the consent of the Company.
Messrs. Oscar Sonkin and Richard Sonkin, each a registered representative
of GBI, and the father-in-law and brother-in-law, respectively, of Richard
Rosenstock, a director nominee of the Company, will continue to serve as
registered representatives of the Surviving Corporation and will supervise
various of the registered representatives of the Surviving Corporation's Florida
offices and Long Island office, respectively. Each will be paid commission on
their personal production and will receive an override on the gross net
commission generated by certain brokers they supervise in an amount to be
determined by management of the Company, but which the Company believes will
exceed $60,000. Mr. Richard Berland, the administrative office manager of GBI's
California office, and the brother of Joseph Berland, a director nominee of the
Company, will continue to manage the California office after the Effective Time.
Richard Berland will receive commissions on his personal production and will be
paid a salary, the amount of which will be in excess of $60,000.
David Thalheim, a director nominee of the Company, made a subordinated loan
to GBI in the principal amount of $1,000,000 which bears interest at a rate of 7
7/8% per annum. The loan matures on July 22, 1999. The Surviving Corporation, a
wholly-owned subsidiary of the Company, will continue to service this loan after
the Merger.
68
<PAGE>
PRINCIPAL STOCKHOLDERS OF THE COMPANY
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of November 30, 1998, before and
after giving effect to the Merger, assuming the issuance of 6,000,000 Merger
Shares, by (i) those persons or groups known to the Company to beneficially own
more than 5% of the Company's voting securities, (ii) each director and director
nominee, (iii) the Chief Executive Officer of the Company and the other four
most highly compensated executive officers of the Company whose compensation was
$100,000 or greater during Fiscal 1998 ("Named Officers") and (iv) all current
directors and executive officers as a group. The information is determined in
accordance with Rule 13d-3 promulgated under the Securities Exchange Act of
1934, based upon information furnished by the persons listed or contained in
filings made by them with the Securities and Exchange Commission. Accordingly,
all shares of Common Stock that an individual or group has a right to acquire
within 60 days are deemed to be currently owned and outstanding for purposes of
computing the percentage ownership of such individual or group, but are not
deemed to be outstanding for the purpose of computing the percentage ownership
of any other person shown in the table. Except as indicated in the footnotes to
the table, the security holders listed possess sole voting and investment power
with respect to their securities, subject to community property laws where
applicable. As of November 30, 1998, the Company had issued and outstanding
8,410,899 shares of Common Stock and 1,140,000 Preferred Shares. As of November
30, 1998, each Preferred Share was convertible into 0.16 shares of Common Stock
or 182,400 shares of Common Stock, in the aggregate. As of November 30, 1998,
the outstanding Common Stock and Preferred Shares collectively had voting power
equivalent to 8,593,299 shares of Common Stock, which is reflected in the
information set forth below in the table.
<TABLE>
<CAPTION>
Beneficial Ownership of Beneficial Ownership of
Company's Common Stock Company's Common Stock
Prior to Merger After the Merger
------------------------------- ----------------------------
Number of Number of
Name of Beneficial Owner Shares Percent Shares Percent
- ------------------------------- ---------------- ------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
David M. Nussbaum(1) . . . . . . . . . . . . . . 1,202,442 (2) 14.0% 1,202,442 (2) 8.2%
Roger N. Gladstone(1) . . . . . . . . . . . . . . 1,188,275 (3) 13.8 1,188,275 (3) 8.1
Peter R. Kent . . . . . . . . . . . . . . 115,087 (4) 1.3 115,087 (4) *
Lester Rosenkrantz . . . . . . . . . . . . . . 41,430 (5) * 41,430 (5) *
Robert H. Gladstone(1) . . . . . . . . . . . . . . 498,275 (6) 5.8 498,275 (6) 3.4
James I. Krantz . . . . . . . . . . . . . . 171,875 (7) 2.0 171,875 (7) 1.2
Peter R. McMullin . . . . . . . . . . . . . . 100,112 (8) 1.2 100,112 (8) *
Robert T. McAleer . . . . . . . . . . . . . . 90,112 (8) 1.0 90,112 (8) *
John P. Margaritis . . . . . . . . . . . . . . 10,000 (9) * 10,000 (9) *
Arnold B. Pollard . . . . . . . . . . . . . . 10,000 (9) * 10,000 (9) *
Richard Y. Roberts . . . . . . . . . . . . . . 10,000 (9) * 10,000 (9) *
Dr. Ernst Muller-Mohl(10). . . . . . . . . . . . . . 1,150,000 13.4 1,150,000 7.9
Joseph Berland+ . . . . . . . . . . . . . . 11,776 (11) * 1,409,921 (12) 9.7
Richard Rosenstock+ . . . . . . . . . . . . . . 11,776 (11) * 1,409,921 (12) 9.7
David Thalheim+ . . . . . . . . . . . . . . 0 * 540,470 (13) 3.7
Mark Zeitchick+ . . . . . . . . . . . . . . 0 * 540,470 (13) 3.7
Vincent Mangone+ . . . . . . . . . . . . . . 0 * 540,470 (13) 3.7
________________+ . . . . . . . . . . . . . . *
________________+ . . . . . . . . . . . . . . *
________________+ . . . . . . . . . . . . . . *
All Current Executive Officers
and Directors as a group (11 persons). . . . . . . . 3,437,608 (14) 39.1% -- --
All Post-Merger Executive Officers
and Directors as a group (14 persons). . . . . . . . -- -- [__] [__]%
</TABLE>
- ------------------------------
* Less than 1%
+ Director Nominee
69
<PAGE>
(1) The business address of David M. Nussbaum and Robert H. Gladstone is c/o
Research Partners International, Inc., One State Street Plaza, New York,
New York 10004. The business address of Roger N. Gladstone is c/o Research
Partners International, Inc., 433 Plaza Real, Boca Raton, Florida 33432.
(2) Includes 20,000 shares issuable upon exercise of options and 56,331
restricted shares issued to Mr. Nussbaum under the Company's IC Plan. The
holders of the restricted shares issued under the IC Plan ("IC Shares")
have the power to vote and the right to receive dividends with respect to
such shares but the IC Shares do not vest until March 2000 and may not be
transferred prior to that date. Does not include 65,000 shares held by The
Nussbaum Family Foundation, Inc., one of whose directors is the spouse of
Mr. Nussbaum. Mr. Nussbaum disclaims beneficial ownership of the shares
held by such foundation.
(3) Includes 20,000 shares issuable upon exercise of options and 42,164 IC
Shares. Does not include 65,000 shares held by The Lisa and Roger Gladstone
Foundation, one of whose directors is the spouse of Roger Gladstone. Roger
Gladstone disclaims beneficial ownership of the shares held by such
foundation.
(4) Represents 45,087 IC Shares and 70,000 shares issuable upon exercise of
options.
(5) Represents 16,430 IC Shares, and 25,000 shares issuable upon exercise of
options.
(6) Includes (i) 56,331 IC Shares, (ii) 52,500 shares issuable upon exercise of
options which are held by Robert Gladstone's spouse, and (iii) 6,666 shares
issuable upon exercise of options. Does not include 15,000 shares held by
The Robert Gladstone Family Foundation, one of whose directors is the
spouse of Robert Gladstone. Mr. Gladstone disclaims beneficial ownership of
the shares held by such foundation.
(7) Includes 3,125 shares held by Mr. Krantz's spouse and 10,000 shares
issuable upon exercise of options. Does not include 1,000 shares issuable
upon exercise of options which become exercisable in February 2000.
(8) Includes 49,152 shares of Common Stock which are issuable upon conversion
of 307,200 Preferred Shares.
(9) Represents 10,000 shares issuable upon exercise of options.
(10) Dr. Muller-Mohl's address is Ramistr.18, Zurich 8001, Switzerland. The
information regarding Dr. Muller- Mohl is derived from a Schedule 13G,
dated October 6, 1998, filed by him with the Securities and Exchange
Commission.
(11) Represents 11,776 shares of Common Stock owned by GBI, the principal
shareholders of which are Joseph Berland and Richard Rosenstock, the
Chairman and President, respectively, of GBI. At the Effective Time, these
shares will become treasury shares of the Company.
(12) Represents such stockholder's pro rata portion of the Merger Shares to be
issued in the Merger. Does not include (i) the 11,726 shares of Common
Stock referenced in footnote 11 above, which will be retired at the
Effective Time and (ii) the Merger Warrants to purchase 469,974 shares of
Common Stock to be issued to such stockholder in connection with the
Merger, which do not become exercisable, if at all, within 60 days of
December 31, 1998.
(13) Represents such stockholder's pro rata portion of the Merger Shares to be
issued in the Merger. Does not include Merger Warrants to purchase 180,157
shares of Common Stock which shall be issued to such stockholder in
connection with the Merger, but which do not become exercisable, if at all,
within 60 days of December 31, 1998.
(14) Includes the shares issuable upon exercise of options and included in the
table, as described in the above footnotes, and 98,304 shares of Common
Stock, in the aggregate, issuable upon conversion of Messrs. McMullin's and
McAleer's Preferred Shares, and excludes those shares subject to options or
Merger Warrants as indicated in the above footnotes as being excluded from
the table.
70
<PAGE>
MARKET AND DIVIDEND INFORMATION
Market Information
The Company's Common Stock is traded on the Nasdaq National Market System
under the symbol RPII. The following table sets forth the high and low sales
prices for the Company's Common Stock, as reported by Nasdaq, for each quarterly
period ending October 31, 1998 following the Company's July 30, 1996, initial
public offering, through the most recent date:
<TABLE>
<CAPTION>
High Low
----- -----
<S> <C> <C> <C>
Fiscal 1997
Quarter ended July 31, 1996 $6.50 $6.13
Quarter ended October 31, 1996 $6.63 $6.00
Quarter ended January 31, 1997 $6.38 $6.00
Fiscal 1998
Quarter ended April 30, 1997 $6.25 $5.00
Quarter ended July 31, 1997 $4.88 $4.50
Quarter ended October 31, 1997 $5.31 $3.75
Quarter ended January 31, 1998 $4.75 $2.19
Fiscal 1999
Quarter ended April 30, 1998 $3.50 $2.38
Quarter ended July 31, 1998 $3.63 $2.63
Quarter ended October 31, 1998 $3.19 $1.75
Fourth Quarter through November 30, 1998 $3.63 $1.75
</TABLE>
On November 3, 1998, the last full trading day for which last sale
information is available prior to the public announcement of the execution and
delivery of Merger Agreement, the high and low sales prices of the Company's
Common Stock as reported on the Nasdaq National Market was $2.00 and $1 3/4,
respectively. On ________, 199_, the most recent date for which it was
practicable to obtain market price information prior to the printing of this
Proxy Statement, such sale prices were $____ and $____, respectively.
The quotations set out above represent prices between dealers and do not
include retail mark-up, mark-down commission. These quotations have been
supplied by Nasdaq.
There is no public trading market for the capital stock of GBI.
71
<PAGE>
Holders of Common Stock
On December 31, 1998, there were __ holders of record of the Common Stock.
The Company believes there are approximately 700 beneficial owners of the Common
Stock based upon its transfer agent's records.
Dividends
To date, the Company has not paid any dividends on its Common Stock. The
payment of dividends, if any, in the future is within the discretion of the
Board of Directors and will depend upon the Company's earnings, its capital
requirements and financial condition, and other relevant factors. The Company's
ability to pay dividends in the future also may be restricted by its brokerage
subsidiaries' obligations to comply with the net capital requirements imposed on
broker-dealers by the Commission and the NASD. The Company does not intend to
declare any dividends in the foreseeable future, but instead intends to retain
all earnings for use in the Company's business.
72
<PAGE>
DESCRIPTION OF THE COMPANY'S CAPITAL STOCK
The authorized capital stock of the Company consists of 35,000,000 shares
of Common Stock, par value $.0001 per share, and 5,000,000 shares of Preferred
Stock, par value $.10 per share.
Common Stock
There are currently 8,410,899 shares of Common Stock issued and outstanding
(excluding 798,976 shares held in the Company treasury), held of record by 82
stockholders.
Holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Stockholders do not
have cumulative voting rights. Subject to preferences that may be applicable to
any then outstanding Preferred Stock, holders of Common Stock are entitled to
receive ratably such dividends as may be declared from time to time by the Board
of Directors out of funds legally available therefor. In the event of a
dissolution, liquidation or winding-up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any then outstanding Preferred
Stock. Holders of Common Stock have no right to convert their Common Stock into
any other securities. The Common Stock has no preemptive or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
Common Stock. All outstanding shares of Common Stock are, and the Common Stock
to be outstanding upon completion of the Merger will be, duly authorized,
validly issued, fully paid and nonassessable.
Preferred Stock
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 5,000,000 shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences and the number of shares constituting any
series or the designation of such series. The issuance of Preferred Stock could
adversely affect the voting power of holders of Common Stock and could have the
effect of delaying, deferring or preventing a change in control of the Company.
The only series of Preferred Stock presently outstanding is the Preferred
Shares, of which 1,140,000 shares are authorized and outstanding. All of the
Preferred Shares were issued to the former shareholders of SERP in the merger by
which SERP became a subsidiary of the Company. The Preferred Shares is not
entitled to any dividends. Its holders, acting as a single series by vote of
holders of a majority thereof, are entitled (i) to nominate one person for
election as a director of the Company at all meetings of stockholders at which
directors are elected, and (ii) to nominate another person who may be an
observer at all meetings of the Company's Board of Directors. On all matters
presented to the holders of the Common Stock for a vote or consent, including
the election of directors, each holder of the Preferred Shares is entitled to
cast a number of votes equal to the number of shares of Common Stock issuable
upon conversion of the Preferred Shares on the record date for determination of
stockholders entitled to vote thereon. As of the Record Date for this Meeting,
each Preferred Share was convertible into 0.16 shares of Common Stock. The
holders of the Preferred Shares are entitled to a liquidation preference of
$0.50 per share before any liquidating distribution may be made to the holders
of any junior stock (which includes the Common Stock). At any time after March
13, 2002, the Company may redeem all, but not less than all, of the Preferred
Shares at a redemption price of $0.50 per share. The holders of the Preferred
Shares may, at any time prior to March 13, 2002, convert the Preferred Shares of
Common Stock at the rate of 0.16 shares of Common Stock for each share of
Preferred Shares, subject to adjustment in certain circumstances. The Preferred
Shares shall rank junior with respect to the distribution of assets of the
Company to all series of Preferred Stock or similar stock that specifically
provided that they shall rank senior or prior to the Preferred Shares.
73
<PAGE>
Delaware Law and Certain Charter Provisions
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. In general, this statute prohibits a publicly-held
Delaware corporation from engaging, under certain circumstances, in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person becomes an interested
stockholder, unless either (i) prior to the date at which the stockholder became
an interested stockholder the Board of Directors approved either the business
combination or the transaction in which the person becomes an interested
stockholder, (ii) the stockholder acquires more than 85% of the outstanding
voting stock of the corporation (excluding shares held by directors who are
officers or held in certain employee stock plans) upon consummation of the
transaction in which the stockholder becomes an interested stockholder or (iii)
the business combination is approved by the Board of Directors and by two-thirds
of the outstanding voting stock of the corporation (excluding shares held by the
interested stockholder) at a meeting of stockholders (and not by written
consent) held on or subsequent to the date of the business combination. An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or at any time within the prior three years did own) 15% or
more of the corporation's voting stock. Section 203 defines a "business
combination" to include, without limitation, mergers, consolidations, stock
sales and asset based transactions and other transactions resulting in a
financial benefit to the interested stockholder.
The Company's Amended and Restated Certificate of Incorporation and its
By-Laws also contain provisions relating to corporate governance and to the
rights of stockholders. Certain of these provisions may be deemed to have a
potential "anti-takeover" effect, in that such provisions may delay, defer or
prevent a change of control of the Company. These provisions include the
authority of the Board of Directors to issue series of Preferred Stock with such
voting rights and other powers as the Board of Directors may determine, a
staggered board of directors consisting of three classes (which will be
eliminated immediately prior to the Effective Time of the Merger).
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is Continental Stock
Transfer & Trust Company, New York, New York.
74
<PAGE>
PROPOSAL III: THE NAME CHANGE PROPOSAL
It is a condition to the Company's obligations to consummate the Merger
Agreement that the Company's name be changed to Research Partners International
Group Ltd. Consequently, unless such condition is waived by GBI, even if the
Merger Proposal is approved, the Merger will not be consummated if the Name
Change Proposal is not approved at the Meeting. Similarly, if the Name Change
Proposal is approved but either of the Merger Proposal or the Director Proposal
is not, the Company's name will not be changed.
Pursuant to the Merger Agreement the Surviving Corporation will assume the
name of its parent, the Company. Accordingly, the Company will be required to
change its name and believes that its new name should reflect that it is the
owner of a group of companies operated under the Research Partners International
umbrella. Accordingly, the Company determined that the name "Research Partners
International Group Ltd.," would best accomplish that goal.
If the proposal is approved and the Merger is consummated, a Certificate of
Amendment amending the Company's Amended and Restated Certificate of
Incorporation will be filed with the Department of State of the State of New
York as promptly as practicable thereafter and the name change will then become
effective.
The Board of Directors unanimously recommends to the Company's stockholders
that the Company's Amended and Restated Certificate of Incorporation be amended
to change the name of the Company from Research Partners International, Inc. to
Research Partners International Group Ltd.
INDEPENDENT ACCOUNTANTS
The Company has selected the independent accounting firm of KPMG Peat
Marwick LLP as the auditors of the Company for the current fiscal year ending
January 31, 1999. A representative of KPMG Peat Marwick LLP is expected to be
present at the Meeting. The representative will have the opportunity to make a
statement and will be available to respond to appropriate questions from
stockholders.
FISCAL 1999 STOCKHOLDER PROPOSALS
If the Merger is consummated and the 14 nominees for directors are elected
and assume their directorships upon the closing of the Merger, the Company does
not intend to hold an Annual Meeting of the Company's stockholders in 1999. If
the Merger is not consummated, then the Company intends to hold an Annual
Meeting in 1999 and stockholder proposals in order to be included in the
Company's proxy statement must be received by the Company at a reasonable time
before the 1999 Annual Meeting of Stockholders. If the Merger is not
consummated, the Company will advise its stockholders in its first subsequent
public report, of the date of its next stockholders meeting and the date that
stockholder proposals must be submitted to the Company in order to be included
in the proxy statement.
75
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended ("Exchange Act"), and accordingly, files
reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information filed with the Commission are
available for inspection and copying at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the SEC's Regional Offices located at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and at Seven World Trade Center, New York, New York 10048. Please
call the Commission at 1-800-SEC-0330 for further information on the public
reference rooms. The Company's public filings are also available to the public
from commercial document retrieval services and at the Internet World Wide Web
site maintained by the Commission at "http:// www.sec.gov."
THE COMPANY'S ANNUAL REPORT ON FORM 10-K
The Company will furnish without charge to each holder of Voting Securities
whose proxy is being solicited, upon the written request of such holder, a copy
of the Company's annual report on Form 10-K, as amended, for the fiscal year
ended January 31, 1998, including the financial statements and schedules
thereto, but excluding exhibits. Requests for copies of such report should be
directed to the Company, One State Street Plaza, 24th Floor, New York, New York,
10004, Attention: General Counsel.
OTHER MATTERS
The Board of Directors knows of no matter which will be presented for
consideration at the Meeting other than the matters referred to in this Proxy
Statement. Should any other matter properly come before the Meeting, it is the
intention of the persons named in the accompanying proxy to vote such proxy in
accordance with their best judgment.
Herbert Sontz, Secretary
New York, New York
January 8, 1999
76
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
<TABLE>
Pages
-----
<S> <C>
Consolidated Statements of Financial Condition as of January 31, 1998 and 1997,
and as of July 31, 1998 (Unaudited)................................................F-2
Consolidated Statements of Operations for the years ended January 31, 1998, 1997
and 1996, and the six months ended July 31, 1998 and 1997 (Unaudited)..............F-3
Consolidated Statements of Changes in Stockholders' Equity for the years ended
January 31, 1998, 1997 and 1996, and the six months ended July 31,
1998 (Unaudited)...................................................................F-4
Consolidated Statements of Cash Flows for the years ended January 31, 1998, 1997
and 1996 and the six months ended July 31, 1998 and 1997 (Unaudited)...............F-6
Notes to Consolidated Financial Statements..................................................F-7
Independent Auditors' Report (KPMG Peat Marwick LLP)........................................F-15
</TABLE>
GAINES, BERLAND INC.
Index to Financial Statements
<TABLE>
Pages
-----
<S> <C>
Statements of Financial Condition as of August 31, 1998 and 1997....................... ....F-16
Statements of Income for the fiscal years ended August 31, 1998, 1997 and 1996..............F-17
Statements of Changes in Stockholders' Equity for the fiscal years ended
August 31, 1998, 1997 and 1996.....................................................F-18
Statements of Cash Flows for the fiscal years ended August 31, 1998, 1997 and
1996...............................................................................F-19
Notes to Financial Statements...............................................................F-20
Independent Auditor's Report (Goldstein Golub Kessler LLP)..................................F-24
Independent Auditor's Reports (Lerner, Sipkin & Co., CPAs)..................................F-25
</TABLE>
F-1
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
January 31, July 31,
1998 1997 1998
------------- ------------- ------------
(Unaudited)
<S> <C> <C> <C>
Assets
Cash and cash equivalents $ 8,111,000 $ 17,856,000 $ 10,169,000
Receivable from brokers and dealers 896,000 9,357,000 202,000
Securities owned, at market value 10,154,000 14,610,000 6,203,000
Securities owned, not readily marketable, at fair value 1,443,000 1,365,000 635,000
Investments 3,640,000 2,692,000 4,423,000
Office furniture, equipment and leasehold improvements, net 1,043,000 1,251,000 1,291,000
Goodwill, net 3,684,000 1,619,000 3,763,000
Loans receivable 1,404,000 1,451,000 1,613,000
Income taxes receivable 3,544,000 - 498,000
Deferred tax asset - - 629,000
Other assets 3,053,000 1,432,000 2,954,000
------------- ------------- -------------
Total assets $ 36,972,000 $ 51,633,000 $ 32,380,000
============= ============= =============
Liabilities and Stockholders' Equity
Liabilities:
Securities sold, not yet purchased, at market value $ 2,320,000 $ 6,997,000 $ 438,000
Commissions payable 1,441,000 2,186,000 2,629,000
Deferred compensation 1,796,000 1,409,000 11,000
Income taxes payable - 238,000 -
Deferred tax liability 236,000 636,000 -
Accrued expenses and other liabilities 2,982,000 4,403,000 2,491,000
------------- ------------- -------------
8,775,000 15,869,000 5,569,000
Liability subordinated to the claims of general creditors 576,000 738,000 498,000
------------- ------------- -------------
Total liabilities 9,351,000 16,607,000 6,067,000
------------- ------------- -------------
Stockholders' equity:
Series A preferred stock, $.10 par value: 1,200,000, 0, and
1,200,000 authorized, respectively; 1,140,000, 0, and
1,140,000 shares issued and outstanding, respectively 114,000 - 114,000
Common stock, $.0001 par value; 35,000,000 shares
authorized; 9,209,875, 9,217,875, and 9,209,875
shares issued, respectively; 8,095,899, 8,225,512,
and 8,110,899 shares outstanding, respectively 1,000 1,000 1,000
Additional paid-in capital 20,710,000 19,931,000 21,018,000
Retained earnings 11,734,000 18,247,000 10,063,000
Accumulated other comprehensive income (36,000) (3,000) (47,000)
-------------- -------------- --------------
32,523,000 38,176,000 31,149,000
Less treasury stock, at cost; 1,113,976, 992,363, and
1,098,976 shares, respectively (4,902,000) (3,150,000) (4,836,000)
------------- ------------- --------------
Total stockholders' equity 27,621,000 35,026,000 26,313,000
------------- ------------- -------------
Total liabilities and stockholders' equity $ 36,972,000 $ 51,633,000 $ 32,380,000
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Six months ended
Year ended January 31, July 31,
-------------------------------------------- ----------------------------
1998 1997 1996 1998 1997
------------- ------------- -------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Commissions $38,328,000 $ 50,153,000 $ 30,418,000 $ 22,018,000 $ 17,734,000
Investment banking 6,024,000 11,391,000 6,003,000 3,550,000 3,729,000
Principal transactions 1,715,000 4,277,000 5,683,000 (82,000) 691,000
Interest 1,339,000 1,620,000 540,000 668,000 735,000
Other 1,270,000 309,000 375,000 1,640,000 455,000
------------- ------------- -------------- ------------- -------------
Total revenues 48,676,000 67,750,000 43,019,000 27,794,000 23,344,000
------------- ------------- -------------- ------------- ----------
Expenses:
Compensation and benefits 35,051,000 41,187,000 27,038,000 19,700,000 16,378,000
Communications 4,930,000 3,846,000 2,631,000 2,511,000 2,370,000
Brokerage, clearing and
exchange fees 3,281,000 2,324,000 1,350,000 1,855,000 1,568,000
Occupancy and equipment 3,520,000 2,757,000 2,112,000 2,808,000 1,509,000
Business development 2,072,000 1,507,000 869,000 1,188,000 1,176,000
Professional fees 1,713,000 1,114,000 738,000 953,000 495,000
Investigations and settlements 2,260,000 1,312,000 - - 1,988,000
Other 5,805,000 2,347,000 1,994,000 1,262,000 1,973,000
------------- ------------- -------------- ------------- -------------
Total expenses 58,632,000 56,394,000 36,732,000 30,277,000 27,457,000
------------- ------------- -------------- ------------- -------------
(Loss) income before
income taxes (9,956,000) 11,356,000 6,287,000 (2,483,000) (4,113,000)
Income (benefit) tax (3,443,000) 5,027,000 2,818,000 (812,000) (1,664,000)
-------------- ------------- -------------- -------------- -----------
Net (loss) income $ (6,513,000) $ 6,329,000 $ 3,469,000 $ (1,671,000) $ (2,449,000)
============== ============= ============== ============== ==============
Basic (loss) earnings
per share $ (0.80) $ 0.93 $ 0.69 $ (0.21) $ (0.30)
============== ============= ============== ============== ==============
Diluted (loss) earnings
per share $ (0.80) $ 0.88 $ 0.60 $ (0.21) $ (0.30)
============== ============= ============== ============== ==============
Weighted average common
shares outstanding - basic 8,114,245 6,824,156 5,037,019 8,100,126 8,132,452
============= ============= ============== ============= =============
Weighted average common
shares outstanding - diluted 8,114,245 7,175,267 5,736,641 8,100,126 8,132,452
============= ============= ============== ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
For the Year Ended January 31, 1996, 1997, and 1998
and the Six Months Ended July 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
Accumulated
Preferred Additional Other
Common Stock Stock Paid-in Retained Comprehensive
------------------- -----------------------
Shares Amt. Shares Amt. Capital Earnings Income
--------- ------- ---------- ---------- ------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 31, 1995 5,397,875 $ 1,000 1,000 $ - $ 3,487,000 $ 8,449,000 $ -
Net income - - - - - 3,469,000
Expiration of preferred stock - - (1,000) - - - -
Purchase of treasury stock - - - - - - -
--------- ------- ---------- ---------- ------------- -------------- ----------
Balance at
January 31, 1996 5,397,875 1,000 - - 3,487,000 11,918,000
Net income - - - - - 6,329,000
Stock issued 3,070,000 - - - 16,011,000 -
Warrants issued - - - - 1,000 -
Stock options granted - - - - 36,000 -
Notes receivable - - - - (221,000) -
Stock options exercised 750,000 - - - 617,000 -
Translation adjustment - - - - - - (3,000)
Purchase of treasury stock - - - - - - -
--------- ------- ---------- ---------- ------------- -------------- ----------
Balance at
January 31, 1997 9,217,875 $ 1,000 - $ - $ 19,931,000 $ 18,247,000 $ (3,000)
Net loss - - - - - (6,513,000)
Stock issued - acquisition - - 1,140,000 114,000 1,376,000 -
Stock issued - compensation plan - - - - (1,193,000) -
Amortization of unearned
compensation - - - - 545,000 -
Stock options exercised - - - - (45,000) -
Note receivable forgiven - - - - 100,000 -
Retirement of stock (8,000) - - - - -
Purchase of treasury stock - - - - - -
Translation adjustment - - - - - - (33,000)
Other - - - - (4,000) -
--------- ------- ---------- ---------- -------------- -------------- ----------
Balance at
January 31, 1998 9,209,875 1,000 1,140,000 114,000 20,710,000 11,734,000 (36,000)
Net loss - - - - - (1,671,000)
Stock issued - compensation plan - - - - (6,000) -
Amortization of unearned
compensation - - - - 314,000 -
Translation adjustment - - - - - - (11,000)
--------- ------- ---------- ---------- ------------- -------------- -----------
Balance at
July 31, 1998 9,209,875 $ 1,000 1,140,000 $ 114,000 $ 21,018,000 $ 10,063,000 $ (47,000)
========= ======= ========== ========== ============= ============== ==========
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
Treasury Stock
----------------------------
Shares Amount Total
----------- -------------- --------------
<S> <C> <C> <C>
Balance at
January 31, 1995 (287,500) $ (180,000) $ 11,757,000
Net income - - 3,469,000
Expiration of preferred stock - - -
Purchase of treasury stock (225,000) (450,000) (450,000)
------------ --------------- --------------
Balance at
January 31, 1996 (512,500) (630,000) 14,776,000
Net income - - 6,329,000
Stock issued - - 16,011,000
Warrants issued - - 1,000
Stock options granted - - 36,000
Notes receivable - - (221,000)
Stock options exercised 31,387 95,000 712,000
Translation adjustment - - (3,000)
Purchase of treasury stock (511,250) (2,615,000) (2,615,000)
------------ --------------- -------------
Balance at
January 31, 1997 (992,363) $ (3,150,000) $ 35,026,000
Net loss - - (6,513,000)
Stock issued - acquisition 152,000 482,000 1,972,000
Stock issued - compensation plan 288,944 1,193,000 -
Amortization of unearned
compensation - - 545,000
Stock options exercised 34,443 124,000 79,000
Note receivable forgiven - - 100,000
Retirement of stock 8,000 35,000 35,000
Purchase of treasury stock (605,000) (3,586,000) (3,586,000)
Translation adjustment - - (33,000)
Other (4,000)
----------- -------------- -------------
Balance at
January 31, 1998 (1,113,976) (4,902,000) 27,621,000
Net loss - - (1,671,000)
Stock issued - compensation plan 15,000 66,000 60,000
Amortization of unearned
compensation - - 314,000
Translation adjustment (11,000)
----------- -------------- -------------
Balance at
July 31, 1998 (1,098,976) $ (4,836,000) $ 26,313,000
=========== ============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended January 31, Six months ended July 31,
------------------------------ -------------------------
1998 1997 1996 1998 1997
---- ---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net (loss) income $(6,513,000) $ 6,329,000 $ 3,469,000 $(1,671,000) $(2,449,000)
Adjustments to reconcile net (loss)
income to net cash (used in)
provided by operating activities:
Depreciation and amortization 724,000 578,000 442,000 360,000 354,000
Deferred taxes and other 344,000 (607,000) 1,206,000 (484,000) 169,000
----------- ----------- ----------- --------- -------
(5,445,000) 6,300,000 5,117,000 (1,795,000) (1,926,000)
(Increase) decrease in operating assets:
Receivable from brokers and dealers 9,115,000 (4,544,000) (1,556,000) 694,000 4,673,000
Securities owned, at market value 4,623,000 (6,458,000) (2,711,000) 3,951,000 515,000
Securities owned, not readily marketable (78,000) 379,000 (1,271,000) 808,000 239,000
Loans receivable 47,000 (16,000) 130,000 (209,000) (2,182,000)
Income taxes receivable (3,544,000) - 427,000 3,046,000 (2,017,000)
Other assets (1,199,000) (514,000) (405,000) 18,000 (308,000)
Increase (decrease) in operating
liabilities:
Securities sold, not yet purchased (4,687,000) 2,982,000 2,221,000 (1,882,000) (1,229,000)
Commissions payable (1,382,000) 194,000 788,000 1,188,000 (1,106,000)
Deferred compensation 387,000 1,078,000 187,000 (1,785,000) (516,000)
Income taxes payable (252,000) (80,000) 426,000 - (229,000)
Accrued expenses and other liabilities (2,246,000) 211,000 2,997,000 (491,000) 1,794,000
Translation adjustment (33,000) (3,000) - (11,000) (19,000)
------------ ----------- ---------- ------------ -----------
Net cash (used in) provided by
operating activities (4,694,000) (471,000) 6,350,000 3,532,000 (2,311,000)
------------ ----------- ---------- ------------ -----------
Investing activities:
Purchase of office furniture, equipment
and leasehold improvements (194,000) (745,000) (187,000) (448,000) (117,000)
Limited partnerships (948,000) (2,400,000) (292,000) (783,000) (372,000)
Acquisition, net of cash acquired (176,000) - - - (197,000)
Goodwill resulting from acquisition (36,000) (55,000) (1,605,000) (159,000) 9,000
----------- ----------- ----------- ------------ -----------
Net cash used in investing activities (1,354,000) (3,200,000) (2,084,000) (1,390,000) (677,000)
----------- ----------- ----------- ------------ ------------
Financing activities:
Issuance of common stock 75,000 16,499,000 - - 75,000
Issuance of common stock warrants - 1,000 - - -
Purchase of treasury stock (3,586,000) (2,615,000) (450,000) - (3,586,000)
Issuance of subordinated debt - - 934,000 - -
Repayment of subordinated debt (186,000) (231,000) - (84,000) (186,000)
----------- ----------- ----------- ------------ ------------
Net cash (used in) provided by
financing activities (3,697,000) 13,654,000 484,000 (84,000) (3,697,000)
----------- ----------- ----------- ------------ ------------
Net (decrease) increase in cash and
cash equivalents (9,745,000) 9,983,000 4,750,000 2,058,000 (6,685,000)
Cash and cash equivalents at beginning
of year 17,856,000 7,873,000 3,123,000 8,111,000 17,856,000
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of year $ 8,111,000 $17,856,000 $ 7,873,000 $10,169,000 $11,171,000
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Basis of Presentation
The consolidated financial statements include the activities of Research
Partners International, Inc. and its subsidiaries (the Company). The Company is
primarily engaged in providing securities brokerage, investment banking, and
trading services for individuals, institutions and corporations. These services
are provided through its principal broker-dealer subsidiary, GKN Securities
Corp. (GKN Securities), and other wholly owned subsidiaries.
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 preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the 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.
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. Securities owned, not readily marketable,
consist primarily of warrants and are stated at management's estimate of fair
value based on a percentage of the market value of the underlying securities.
Unrealized gains and losses are included in revenues from principal
transactions.
Investments
Investments consist primarily of investments in limited partnerships, which are
accounted for using the equity method.
F-7
<PAGE>
Depreciation and amortization
Office furniture, equipment and leasehold improvements are stated at cost, net
of accumulated depreciation and amortization of $1,897,000 and $1,449,000, at
January 31, 1998 and 1997, respectively. Office furniture and equipment are
depreciated using an accelerated method 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 over the net assets
acquired upon the Company's acquisition of Shochet Securities, Inc. (Shochet) in
November 1995, Dalewood Associates, Inc. (Dalewood) in December 1996, and
Southeast Research Partners, Inc. (Southeast) in March 1997. The goodwill is
being amortized over 25 years on a straight line basis. Accumulated amortization
was $222,000 and $77,000 at January 31, 1998 and 1997, respectively. Management
reviews goodwill for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable.
Deferred compensation
Deferred compensation represents amounts due to certain employees of the Company
upon the sale of certain equity securities held by the Company. Employment
agreements for the employees provide them with a percentage of the proceeds from
the sale of the securities, which were issued to the Company in connection with
investment banking transactions.
Investment banking fees
Investment banking management and underwriting fee revenues are recognized when
the deal is complete and the income is reasonably determinable.
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 Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123), based on the fair value-based method are
presented in note 9.
Investigations and settlements
Investigations and settlements expense is comprised of costs related to the
settlement of regulatory matters.
3. Business Acquisitions
On November 30, 1995, the Company acquired Shochet, a broker-dealer, for
approximately $2,135,000, including a three-year, 7% $1,000,000 subordinated
note. The acquisition was accounted for under the purchase method of accounting.
Accordingly, Shochet's results of operations have been included from the
acquisition date.
On December 31, 1996, the Company acquired Dalewood, the general manager of an
investment partnership which makes equity investments in companies which are
viewed as suitable candidates for future initial public offerings. The
acquisition, which is not material to the Company's results of operations and
financial position, was accounted for under the purchase method.
F-8
<PAGE>
On March 13, 1997, the Company acquired all of the outstanding stock of
Southeast for $499,000 cash, 152,000 shares of common stock, and 1,140,000
shares of Series A Preferred Stock. This preferred stock was authorized by the
Company's Board of Directors on March 3, 1997. Southeast is a research and
institutional brokerage boutique, located in Boca Raton, Florida, which
maintains research coverage primarily focused on small and mid capitalization
companies located in the Southeastern United States.
4. Related Party Transactions
Loans receivable from officers and employees of the Company are included in
loans receivable at January 31, 1997 and 1996. Loans receivable from officers
were $94,000 in 1998 and $94,000 in 1997. Receivables representing advances to
brokers in anticipation of their continued employment and generating commission
revenue in accordance with loan agreements were $916,000 in 1998 and $1,062,000
in 1997. The brokers are liable to the Company for the advances until the
minimum employment period is completed and the specified commission revenue is
generated. The advances are not collateralized and do not bear interest. The
advances are amortized to compensation expense over the life of the loan
agreements, which ranged from periods of one to five years at January 31, 1998.
Receivables from current employees were $382,000 and $326,000 at January 31,
1998 and 1997, respectively.
Included in other assets are receivables from limited partnerships that are
managed by wholly owned subsidiaries of the Company totalling $180,000 and
$28,000 at January 31, 1998 and 1997, respectively.
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, 1998, future minimum rental
commitments under such leases were as follows for the fiscal years ending in
January:
1999 $ 2,505,000
2000 2,430,000
2001 2,430,000
2002 2,276,000
2003 2,139,000
Thereafter 16,202,000
---------------
$ 27,982,000
===============
Total rent expense was $2,211,000, $1,672,000, and $1,218,000 in fiscal years
1998, 1997, and 1996, respectively.
The Company's broker-dealer subsidiaries are 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.
6. Employee Benefits
The Company has a defined contribution 401(k) plan covering substantially all
employees meeting certain eligibility requirements. Prior to May 1, 1996,
Shochet employees were covered by a separate 401(k) plan. The Company makes
discretionary matching contributions to the plan annually, which amounted to
$79,000, $116,000, and $62,000 for fiscal years 1998, 1997, and 1996,
respectively.
F-9
<PAGE>
7. Income Taxes
The components of income tax (benefit) expense were as follows for the fiscal
years ended January 31,:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Current:
Federal $ (3,323,000) $ 3,905,000 $1,110,000
State and local 218,000 1,769,000 502,000
-------------- --------------- -------------
(3,105,000) 5,674,000 1,612,000
Deferred (338,000) (647,000) 1,206,000
--------------- --------------- -------------
$ (3,443,000) $ 5,027,000 $ 2,818,000
============== =============== =============
</TABLE>
The effective tax rates reflected in the consolidated financial statements
differ from the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- ---------
<S> <C> <C> <C>
Statutory tax rate 34.0% 35.0% 34.0%
State and local taxes, net of federal tax benefit 1.3 9.0 5.2
Other (0.7) 0.3 5.6
------- ------- --------
Effective tax rate 34.6% 44.3% 44.8%
======= ======= ========
</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.
The net deferred tax liabilities at January 31, 1998 and 1997 are comprised as
follows:
<TABLE>
<CAPTION>
1998 1997
------------- --------------
<S> <C> <C>
Gross deferred tax asset:
Net operating loss carryforwards $ (933,000) $ -
Depreciation and amortization (284,000) (614,000)
Reserve for contingencies (234,000) (8,000)
Other (140,000) (45,000)
------------- -------------
Total gross deferred tax asset (1,591,000) (667,000)
Less: valuation allowance 447,000 -
------------- -------------
Net deferred tax asset (1,144,000) (667,000)
------------- -------------
Gross deferred tax liability:
Unrealized gains on securities 1,109,000 1,026,000
Other 271,000 277,000
------------- -------------
Total gross deferred tax liability 1,380,000 1,303,000
------------- -------------
Net deferred tax liability $ 236,000 $ 636,000
============= =============
</TABLE>
Management believes that the valuation allowance at January 31, 1998 is adequate
as it is more likely than not that the results of future operations will
generate sufficient taxable income to realize the deferred tax benefit.
The Company files consolidated federal and combined New York State and New York
City income tax returns.
F-10
<PAGE>
8. Stockholders' Equity
In July 1996 the Company sold 2,875,000 shares of its common stock in an initial
public offering at a price of $6.00 per share. The proceeds from the public
offering were $16,375,000 after underwriting discounts and commissions, and
$15,264,000 after other expenses of the offering totaling $1,111,000. GKN
Securities served as a co-manager of the offering. GKN Securities received
underwriting discounts and commissions of $850,000, which were eliminated in
consolidation. The Company has used the net proceeds principally to expand its
existing business and also for working capital and general corporate purposes.
During the fiscal year ended January 31, 1998 the Company repurchased a total of
597,000 shares of its common stock. The stock repurchases were authorized in
order to provide for future issuances of stock bonuses to employees and for the
purchase of Southeast. In March 1997, the Company authorized 1,200,000 shares of
Series A preferred stock, of which 1,140,000 were issued for the purchase of
Southeast. The Series A preferred stock is convertible into shares of the
Company's common stock at a rate of 0.16 shares of common stock for each share
of preferred stock at any time prior to March 13, 2002.
9. Stock Compensation Plans
At January 31, 1998, the Company has two stock-based compensation plans, which
are described below. The Company has also granted stock options outside of the
plans.
Fixed stock option plan and other fixed stock option awards
The Company's 1991 Employee Incentive Plan (the 1991 Plan) provides for the
issuance of stock, stock options and other stock purchase rights to executive
officers, other key employees and consultants of the Company and its
subsidiaries. The Company may grant options for up to five million shares of
common stock under the 1991 Plan. The options may qualify as incentive stock
options under Section 422 of the Internal Revenue Code of 1986, as amended. The
exercise price of each option granted under the 1991 Plan is determined by the
Company's Board of Directors at the time of grant. The exercise price of
incentive stock options must be at least equal to the fair market value of the
Company's 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 the Company's
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 ten years and
non-qualified options have maximum terms of 13 years.
The Company has adopted the disclosure-only provisions of SFAS 123. Accordingly,
no compensation cost has been recognized for stock options granted under or
outside of the 1991 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 an additional $330,000 of
compensation expense for the fiscal year ended January 31, 1998. Net of taxes of
$114,000, this additional compensation would have resulted in an overall basic
EPS of $(0.83) for the Company, a variance of $(0.03) from EPS, as reported in
the statement of operations, of $(0.80) for the fiscal year ended January 31,
1998. The compensation cost resulting from recognition of the stock option
awards in the fiscal years ended January 31, 1997 and 1996 would have had no
material effect on the Company's net earnings.
In May 1996 the Company offered employees holding certain options issued in
December 1992 through February 1995 under the 1991 Plan the opportunity to
convert their options into options for a fewer number of shares, but with lower
exercise prices and/or shorter vesting periods. Options for 432,000 shares were
canceled and new options for 165,000 shares were granted in the conversion.
F-11
<PAGE>
The Company has also granted stock options outside of the 1991 Plan. The stock
options are authorized under specific agreements when the Company enters into
employment agreements or when a director joins the Board of Directors. The
number of shares subject to options, the exercise price, vesting, termination
and other provisions of such awards are determined by the Board of Directors and
specified in each individual stock option agreement. At January 31, 1998, the
Company has entered into four agreements awarding options for a total of 110,000
shares of common stock.
A summary of the status of the Company's 1991 Plan and other options granted
outside of the 1991 Plan as of January 31, 1998, 1997, and 1996, and changes
during the fiscal years then ended is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------- --------- ---------
Shares Weighted-Average Shares Shares
Stock Options (000) Exercise Price (000) (000)
- ------------- --------------------------------- --------- --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,045 $4.84 1,897 1,662
Granted 289 5.93 422 369
Exercised (35) 2.30 (781) -
Forfeited (103) 5.68 (493) (134)
------ ------- ------
Outstanding at end of year 1,196 5.56 1,045 1,897
====== ======= ======
Options exercisable at year-end 549
Weighted-average fair value of
options granted during the year $3.09
</TABLE>
The following table summarizes information about stock options outstanding at
January 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- -----------------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 1/31/98 Life Price at 1/31/98 Price
- --------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$2.20 105,000 3.9 years $2.20 105,000 $2.20
$4.00 to $5.00 464,000 6.0 4.55 279,000 4.56
$6.00 to $6.125 627,000 7.5 6.00 165,000 6.00
----------- -------
1,196,000 6.6 5.10 549,000 4.54
=========== =======
</TABLE>
Stock award plan
The Company's 1996 Incentive Compensation Plan provides for a portion of annual
incentive awards payable to executive management and business unit managers to
be made in restricted shares of the Company's 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, 1998,
approximately 289,000 shares had been awarded. The Company recognized $530,000
of compensation expense for stock awards under this plan for the fiscal year
ended January 31, 1998.
F-12
<PAGE>
Non-employee stock compensation
The Company granted stock options to purchase 25,000 shares to the seller of
Shochet on the date of the Company's initial public offering in accordance with
the Shochet purchase agreement. The fair value of the options, which was
recorded as an adjustment to the Shochet 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, 1998.
10. Earnings per Common Share
In March 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share (SFAS 128). This
statement changes the calculation and presentation of earnings per common share
(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. For the fiscal year ended
January 31, 1998, common stock equivalents, consisting of stock options and
warrants, were not included in the computation of diluted EPS, as the inclusion
of such shares would be anti-dilutive due to the Company's net loss for the
year.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Year ended January 31, 1998
-----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Numerator for basic and diluted EPS:
Net (loss) income $(6,513,000) $6,329,000 $3,469,000
Denominator for basic EPS:
Weighted-average common shares 8,114,245 6,824,156 5,037,019
Dilutive stock options - 351,111 699,622
Denominator for diluted EPS: 8,114,245 7,175,267 5,736,641
Basic EPS $(0.80) $0.93 $0.69
Diluted EPS $(0.80) $0.88 $0.60
</TABLE>
11. Concentration of Credit Risk and Off-Balance Sheet Risk
In the normal course of business, the Company's broker-dealer subsidiaries
execute 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.
F-13
<PAGE>
12. Net Capital Requirements
GKN Securities Corp. ("GKN"), Southeast, and Shochet Securities, Inc. (Shochet),
all wholly-owned subsidiaries of the Company, are registered broker-dealers with
the Securities and Exchange Commission (the SEC) and member firms of the
National Association of Securities Dealers, Inc. (NASD). As such, GKN,
Southeast, and Shochet are subject to the SEC's net capital rule, which requires
the maintenance of minimum net capital.
GKN computes net capital using the alternative method permitted by the net
capital rule, which requires that it maintain minimum net capital, as defined,
to be greater than or equal to $250,000. At January 31, 1998, GKN had net
capital of $5,035,000.
Southeast 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, 1998, Southeast had net capital of $1,294,000 and a net capital
requirement of $100,000. Southeast's net capital ratio at January 31, 1998, was
0.70 to 1.
Shochet computes net capital under the standard aggregate indebtedness method
permitted by the net capital rule. At January 31, 1998, Shochet had net capital
of $760,000 and a net capital requirement of $100,000. Shochet's net capital
ratio at January 31, 1998, was 0.62 to 1.
13. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Year ended January 31,
-----------------------------------------------------
1998 1997 1996
------------- ------------- --------------
<S> <C> <C> <C>
Cash paid for:
Income taxes $ 372,000 $ 5,763,000 $ 900,000
============= ============= =============
Interest $ 424,000 $ 48,000 $ -
============= ============= =============
Non-cash investing and financing transactions
relating to the Company's purchase
acquisition that are not reflected in the
consolidated statement of cash flows
Fair value of assets acquired $ 2,156,000 $ - $ -
Goodwill acquired 2,177,000 - -
Liabilities assumed (1,474,000)
Preferred stock issued (1,094,000) - -
Treasury stock issued (912,000) - -
------------- ------------- -------------
Cash paid 853,000 - -
Less: cash acquired (677,000) - -
------------- ------------- -------------
Net cash paid for acquisition $ 176,000 $ - $ -
============= ============= =============
</TABLE>
F-14
<PAGE>
KPMG Peat Marwick LLP
345 Park Avenue
New York, NY 10154
Independent Auditors' Report
To the Board of Directors and
Stockholders of Research Partners International, Inc.:
We have audited the accompanying consolidated statements of financial condition
of Research Partners International, Inc. (formerly GKN Holding Corp.) and
subsidiaries (the Company) as of January 31, 1998 and 1997, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended January 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
January 31, 1998 and 1997, and the results of the its operations and its cash
flows for each of the years in the three-year period ended January 31, 1998, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
March 20, 1998
F-15
<PAGE>
GAINES, BERLAND INC.
Statements of Financial Condition
<TABLE>
<CAPTION>
August 31,
---------------------------------
1998 1997
------------- ---------------
<S> <C> <C>
Assets
Cash $ 513,000 $ 227,000
Receivable from clearing broker 9,433,000 9,580,000
Securities owned, at market value 2,537,000 7,305,000
Stock subscriptions receivable 3,408,000 -
Loans receivable 359,000 378,000
Office furniture, equipment and leasehold improvements, net 3,039,000 2,990,000
Deferred tax asset 550,000 -
Other assets 214,000 220,000
------------- ---------------
Total assets $ 20,053,000 $ 20,700,000
============= ===============
Liabilities and Stockholders' Equity
Liabilities:
Securities sold, not yet purchased, at market value $ 2,886,000 $ 6,198,000
Commissions payable 900,000 3,000,000
Income taxes payable 2,334,000 2,725,000
Note payable 833,000 -
Accrued expenses and other liabilities 3,313,000 2,063,000
------------- ---------------
10,266,000 13,986,000
Liability subordinated to the claims of general creditors 1,000,000 1,000,000
------------- ---------------
Total liabilities 11,266,000 14,986,000
------------- ---------------
Stockholders' equity:
Common stock, $.01 stated value; 1,000 shares
authorized; 782 and 664 shares issued;
782 and 536 shares outstanding - -
Additional paid-in capital 3,510,000 1,012,000
Retained earnings 5,277,000 4,925,000
Less treasury stock - (213,000)
------------- ---------------
Total stockholders' equity 8,787,000 5,714,000
------------- ---------------
Total liabilities and stockholders' equity $ 20,053,000 $ 20,700,000
============= ===============
</TABLE>
See accompanying notes to financial statements.
F-16
<PAGE>
GAINES, BERLAND INC.
Statements of Income
<TABLE>
<CAPTION>
Year ended August 31,
--------------------------------------------
1998 1997 1996
------------- -------------- -------------
<S> <C> <C> <C>
Revenues:
Commissions $48,407,000 $ 51,851,000 $ 30,667,000
Investment banking 4,795,000 3,281,000 5,499,000
Principal transactions 3,618,000 6,221,000 3,164,000
Interest and dividends 927,000 779,000 593,000
Other 148,000 223,000 21,000
------------ -------------- -------------
Total revenues 57,895,000 62,355,000 39,944,000
------------ -------------- -------------
Expenses:
Compensation and benefits 40,559,000 41,321,000 29,649,000
Occupancy and equipment 2,852,000 2,031,000 652,000
Communications 2,506,000 2,295,000 1,875,000
Brokerage, clearing and exchange fees 1,948,000 1,582,000 1,283,000
Business development 1,505,000 1,523,000 1,258,000
Professional fees 465,000 566,000 321,000
Other 7,273,000 5,561,000 3,858,000
------------- -------------- -------------
Total expenses 57,108,000 54,879,000 38,896,000
------------- -------------- -------------
Income before provision for income taxes 787,000 7,476,000 1,048,000
Provision for income taxes 435,000 3,298,000 600,000
------------- -------------- -------------
Net income $ 352,000 $ 4,178,000 $ 448,000
============= ============== =============
</TABLE>
See accompanying notes to financial statements.
F-17
<PAGE>
GAINES, BERLAND INC.
Statements of Changes in Stockholders' Equity
For the Three Years Ended August 31, 1998
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock
--------------------- Paid-in Retained ---------------------------
Shares Amount Capital Earnings Shares Amount
--------- --------- ------------ -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at August 31, 1995 579 $ - $ 676,000 $ 299,000 (128) (213,000)
Net income - - - 448,000 - -
Sale of stock 5 - 15,000 - - -
--------- --------- ------------- ---------- ---------- ---------
Balance at August 31, 1996 584 - 691,000 747,000 (128) (213,000)
Net income - - - 4,178,000 - -
Purchase and retirement of stock (10) - (37,000) - - -
Sale of stock 90 - 348,000 - - -
--------- --------- ------------ ------------ --------- --------------
Balance at August 31, 1997 664 - 1,002,000 4,925,000 (128) (213,000)
Net income - - - 352,000 - -
Purchase of treasury stock - - - - (104) (1,234,000)
Sale of stock 118 - 2,508,000 - 232 1,447,000
--------- --------- ------------ ------------ --------- --------------
Balance at August 31, 1998 782 $ 8 $ 3,510,000 $ 5,277,000 - -
========= ========= ============ ============ ========== ==============
</TABLE>
Total
-----------
Balance at August 31, 1995 $ 762,000
Net income 448,000
Sale of stock 15,000
------------
Balance at August 31, 1996 1,225,000
Net income 4,178,000
Purchase and retirement of stock (37,000)
Sale of stock 348,000
-------------
Balance at August 31, 1997 5,714,000
Net income 352,000
Purchase of treasury stock (1,234,000)
Sale of stock 3,955,000
------------
Balance at August 31, 1998 $ 8,787,000
============
See accompanying notes to financial statements.
F-18
<PAGE>
GAINES, BERLAND INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended August 31,
-----------------------------------------------------
1998 1997 1996
------------ --------------- -----------
<S> <C> <C> <C>
Operating activities:
Net income $ 352,000 $ 4,178,000 $ 448,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 553,000 588,000 110,000
Deferred income taxes (2,512,000) - -
------------- ------------- ------------
(1,607,000) 4,766,000 558,000
Decrease (increase) in operating assets:
Receivable from brokers and dealers 147,000 (5,055,000) (355,000)
Securities owned, at market value 4,768,000 (6,753,000) 286,000
Loans receivable 19,000 175,000 286,000
Other assets 6,000 (462,000) (441,000)
(Decrease) increase in operating liabilities:
Securities sold, not yet purchased (3,312,000) 6,022,000 (1,067,000)
Commissions payable (2,100,000) 55,000 1,983,000
Income taxes payable 1,571,000 2,396,000 329,000
Accrued expenses and other liabilities 1,250,000 1,462,000 (910,000)
------------ -------------- -------------
Net cash provided by operating activities 742,000 2,606,000 669,000
------------ -------------- ---- -------
Investing activities:
Purchase of office furniture, equipment
and leasehold improvements (602,000) (2,814,000) (511,000)
------------- -------------- ------------
Net cash used in investing activities (602,000) (2,814,000) (511,000)
------------ -------------- ------------
Financing activities:
Issuance of common stock 547,000 348,000 15,000
Purchase of treasury stock (401,000) (37,000) -
------------- --------------- ------------
Net cash provided by financing activities 146,000 311,000 15,000
------------ -------------- ------------
Net increase in cash 286,000 103,000 173,000
Cash at beginning of year 227,000 124,000 (49,000)
------------ -------------- -------------
Cash at end of year $ 513,000 $ 227,000 $ 124,000
============ ============== ============
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 1,706,000 $ 150,000 $ 120,000
Income Taxes $ 1,366,000 $ 907,000 $ 420,000
Supplemental schedule of noncash financing activity (Note 5)
</TABLE>
See accompanying notes to financial statements.
F-19
<PAGE>
GAINES, BERLAND INC.
Notes to Financial Statements
1. Organization and Principal Business Activity
Gaines, Berland Inc. (the "Company") is a registered broker-dealer under the
Securities and Exchange Commission (the "SEC") and is a member of the National
Association of Securities Dealers, Inc. (the "NASD"). The Company is engaged in
the securities, brokerage and trading business and provide investment banking
and research services with an emphasis primarily on global energy markets and
energy companies..
2. Significant Accounting Policies
The Company records transactions in securities and related revenue and expenses
on a trade-date basis.
The financial statements have been prepared in conformity with generally
accepted accounting principles which require the use of estimates by management.
Office furniture, equipment and leasehold improvements are stated at cost, net
of accumulated depreciation and amortization of $1,341,000 and $788,000 at
August 31, 1998 and 1997, respectively. Depreciation on office furniture and
equipment is provided on a straight-line or cost-recovery basis using estimated
useful lives of 3 to 10 years. Leasehold improvements are amortized over the
lesser of the economic useful life of the improvement or the term of the lease.
3. Securities Owned and Securities Sold, Not Yet Purchased
Securities owned and securities sold, not yet purchased, at August 31, 1998 and
1997 consist of:
<TABLE>
<CAPTION>
1998 1997
---- ----
Securities Owned Securities Sold, Not Securities Owned Securities Sold, Not
Yet Purchased Yet Purchased
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equities $ 685,000 $2,852,000 $5,522,000 $6,047,000
Warrants 1,852,000 34,000 1,783,000 151,000
--------- ------ --------- -------
$2,537,000 $2,886,000 $7,305,000 $6,198,000
========== ========== ========== ==========
</TABLE>
Securities owned, traded on a national exchange are valued at the bid price.
Securities sold, not yet purchased, traded on a national exchange are valued at
the ask price. The resulting unrealized gains and losses are reflected in
revenue.
Subsequent market fluctuations may require purchasing the securities sold, not
yet purchased, at prices that differ from the market value reflected on the
statement of financial condition.
Warrants received by the Company as a part of its underwriting activities do not
have a readily available public market and have been valued at fair value using
methods determined in good faith by management after consideration of all
pertinent information. Because of inherent uncertainty of valuation of these
warrants, management's estimate of fair value may differ from the values that
would have been used had a ready market existed, and the differences could be
material.
F-20
<PAGE>
4. Receivable from Clearing Broker and Concentration of Credit Risk
The clearing and depository operations for the Company's and customers'
securities transactions are provided by one broker pursuant to a clearance
agreement.
At August 31, 1998, all of the securities owned and securities sold, not yet
purchased, and the amount receivable from clearing broker reflected on the
statement of financial condition are security positions with and amounts due
from this clearing broker.
The Company does not carry accounts for customers or perform custodial functions
related to customers' securities. The Company introduces all of its customer
transactions, which are not reflected in these financial statements, to its
clearing broker, which maintains the customers' accounts and clears such
transactions.
The Company has agreed to indemnify its clearing broker for losses that it may
sustain from the customer accounts introduced by the Company. As of August 31,
1998, there were no unsecured amounts owed to the clearing broker by these
customers in connection with normal margin, cash and delivery against payment
transactions.
The Company maintains cash in bank deposit accounts which, at times, may exceed
federally insured limits. The Company has not experienced any losses in such
accounts and believes it is not exposed to any significant credit risk on cash.
5. Note Payable
As a part of a buy-out agreement with one of the Company's stockholders, the
Company signed a promissory note in the amount of $1,000,000 maturing June 30,
1999. The promissory note is payable in 12 equal monthly installments and bears
no interest.
Because of its short-term nature, the fair value of the note payable
approximates its carrying amount.
6. Income Taxes
Deferred income tax benefits result from the net effect of unrealized
appreciation on securities positions and the accrual of settlements.
The provision (benefit) for income taxes for the years ended August 31, 1998,
1997 and 1996 consists of:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- --------------
<S> <C> <C> <C>
Current:
Federal $2,195,000 $969,000 $412,000
State and local 752,000 367,000 188,000
--------------- --------------- --------------
Total current 2,947,000 1,336,000 600,000
--------------- --------------- --------------
Deferred:
Federal (1,804,000) 1,400,000 -
State and local (708,000) 562,000 -
--------------- --------------- --------------
Total deferred (2,512,000) 1,962,000 -
--------------- --------------- --------------
$435,000 $3,298,000 $600,000
=============== =============== ==============
</TABLE>
The provision for income taxes differs from the amount computed using the
federal statutory rate of 34% due to state income taxes, permanent differences
and prior-year underaccruals.
F-21
<PAGE>
The net deferred tax assets and liabilities at January 31, 1998 and 1997 are
comprised as follows:
1998 1997
-------------- -------------
Unrealized gains on securities (30,000) $(1,962,000)
Temporary Differences 580,000 -
-------------- -------------
Total deferred tax (liability) asset $ 550,000 $(1,962,000)
============== =============
7. Net Capital Requirement
As a registered broker-dealer, the Company is subject to the SEC's Uniform Net
Capital Rule 15c3-1, which requires the maintenance of minimum net capital. The
Company computes its net capital under the aggregate indebtedness method
permitted by rule 15c3-1, which requires that the Company maintain minimum net
capital, as defined, of 6-2/3% of aggregate indebtedness, as defined, or
$100,000, or an amount determinable based on the market price and number of
securities in which the Company is a market-maker, not to exceed $1,000,000.
At August 31, 1998 and 1997, the Company had net capital, as defined, of
$1,808,000 and $3,739,000, which exceeded its minimum net capital requirements
of $492,000 and $389,000 by $1,316,000 and $3,350,000, respectively.
8. Profit-Sharing Plan
The Company is a sponsor of a defined contribution profit-sharing plan for its
eligible employees. Contributions to the plan, if any, are determined by the
employer and come out of its current accumulated profits not to exceed the
amount permitted under the Internal Revenue Code as a deductible expense. The
Company made no contribution to the plan for the years ended August 31, 1998,
1997 or 1996.
9. Subordinated Borrowing
The subordinated borrowing has been approved by the NASD for inclusion in
computing the Company's net capital pursuant to the SEC's uniform net capital
rule. This loan, which matures on July 22, 1999, has been established with a
stockholder of the Company and bears interest at a rate of 7-7/8% per annum,
resulting in interest expense of $80,000 for each of the years ended August 31,
1998, 1997 and 1996.
Based on borrowing rates currently available to the Company for loans with
similar terms and average maturities, the fair value of the subordinated
borrowing approximates the carrying amount.
10. Commitments and Contingencies
The Company leases office space at several locations including Bethpage, NY,
which is leased for a period of ten years expiring May 30, 2007. The Company
occupies additional office space for its branches in California and Florida
under month-to-month leases. The minimum annual rent payments for these leases
are as follows:
Year Ending August 31,
1999 $ 1,357,000
2000 1,270,000
2001 1,302,000
2002 1,335,000
2003 1,368,000
Thereafter 5,439,000
------------
$ 12,071,000
============
The leases contain provisions for escalations based on increases in certain
costs incurred by the lessor. The Company has the option to renew one of these
leases for an additional three-year period. Rent expense was $1,998,000,
$1,444,000 and $542,000 for the years ended August 31, 1998, 1997 and 1996,
respectively.
F-22
<PAGE>
The Company has entered into an employment contract with an officer of the
Company. The contract provides for an annual salary, bonus and certain other
benefits in the amount of $550,000. The agreement is scheduled to expire August
31, 1999, but can be extended indefinitely for successive one-month periods.
The Company has been named as defendant in certain legal actions in the ordinary
course of business. At August 31, 1998 and 1997, the Company had accrued
$1,400,000 and $650,000 respectively, for settlement of such legal proceedings.
11. Financial Instruments
The Company's activities include the purchase and sale of warrants. Warrants
give the buyer the right to purchase securities at a specific price until a
specified expiration date. These financial instruments are used to conduct
trading activities and manage market risk.
The Company may receive warrants as part of its underwriting activities for
initial public offerings (see Note 3).
Such transactions may result in credit exposure in the event the counterparty to
the transaction is unable to fulfill its contractual obligations. Substantially
all of the warrants are traded on national exchanges, which can be subject to
market risk in the form of price fluctuations.
The following summarizes warrants held at August 31, 1998:
<TABLE>
<CAPTION>
Notional Amount Market Value Average Market Value for
the Year
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C>
Assets $33,620,000 $1,852,000 $2,988,000
Liabilities 218,000 34,000 6,000
- ----------------------------- ----------------------------- ---------------------------- ----------------------------
</TABLE>
Net revenue from principal transactions consists of equity activities.
12. Earnings per Common Share
In March 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share (SFAS 128). This
statement changes the calculation and presentation of earnings per common share
(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 earnings per
share:
<TABLE>
<CAPTION>
Year ended August 31, 1998
--------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Numerator for basic and diluted EPS:
Net income $352,000 $4,178,000 $448,000
Denominator for basic and diluted EPS:
Weighted-average common shares 521 496 454
Basic and diluted EPS $675 $8,423 $987
</TABLE>
F-23
<PAGE>
GOLDSTEIN GOLUB KESSLER LLP
Certified Public Accountants and Consultants
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Gaines, Berland Inc.
We have audited the accompanying statement of financial condition of Gaines,
Berland Inc. as of August 31, 1998, and the related statements of income,
changes in stockholders' equity, changes in subordinated borrowing, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gaines, Berland Inc. as of
August 31, 1998, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
GOLDSTEIN GOLUB KESSLER LLP
October 7, 1998
1185 Avenue of the Americas Suite 500 New York, NY 10036-2602
TEL 212 372 1800 FAX 212 372 1801 www.ggk.com
F-24
<PAGE>
Lerner, Sipkin & Company
Certified Public Accountants
40 Rector Street, Suite 1620
New York, NY 10006
Telephone (212) 571-0064 Facsimile (212) 571-0074
INDEPENDENT AUDITORS' REPORT
To the Officers and Directors of
Gaines, Berland Inc.
6900 Jericho Turnpike
Syosset, NY 11791
Gentlemen:
We have audited the accompanying statement of financial condition of Gaines,
Berland Inc. as of August 31, 1997, and the related statements of income (loss),
changes in stockholders' equity,and cash flows for the year then ended and the
year ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gaines, Berland Inc. as of
August 31, 1997, and the results of its operations and its cash flows for the
year then ended and the year then ended in conformity with generally accepted
accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The information contained in the accompanying
schedules is presented for purposes of additional analysis and is not a required
part of the basic financial statements, but is supplementary information
required by Rule 17a-5 of the Securities and Exchange Commission. Such
information has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, the information is fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.
/s/ Lerner, Sipkin & Co., CPAs
------------------------------
Lerner, Sipkin & Co., CPAs
Certified Public Accountants (NY)
New York, NY
October 25, 1997
F-25
<PAGE>
Lerner, Sipkin & Company
Certified Public Accountants
40 Rector Street, Suite 1620
New York, NY 10006
Telephone (212) 571-0064 Facsimile (212) 571-0074
INDEPENDENT AUDITORS' REPORT
To the Officers and Directors of
Gaines, Berland Inc.
6900 Jericho Turnpike
Syosset, NY 11791
Gentlemen:
We have audited the accompanying statement of financial condition of Gaines,
Berland Inc. as of August 31, 1997, and the related statements of income (loss),
changes in stockholders' equity,and cash flows for the year then ended and the
year ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gaines, Berland Inc. as of
August 31, 1997, and the results of its operations and its cash flows for the
year then ended and the year then ended in conformity with generally accepted
accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The information contained in the accompanying
schedules is presented for purposes of additional analysis and is not a required
part of the basic financial statements, but is supplementary information
required by Rule 17a-5 of the Securities and Exchange Commission. Such
information has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, the information is fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.
/s/ Lerner, Sipkin & Co., CPAs
------------------------------
Lerner, Sipkin & Co., CPAs
Certified Public Accountants (NY)
New York, NY
October 28, 1997
F-26
<PAGE>
Preliminary Copies
RESEARCH PARTNERS INTERNATIONAL, INC. -- PROXY
Solicited by the Board of Directors
for Special Meeting to be held on January 29, 1999
P The undersigned Securityholder(s) of RESEARCH PARTNERS INTERNATIONAL, INC.,
a Delaware corporation ("Company"), hereby appoints David M. Nussbaum,
Roger N. Gladstone and Peter R. Kent, or either of them, with full power of
substitution and to act without the other, as the agents, attorneys and
proxies of the undersigned, to vote the securities standing in the name of
the undersigned at the Special Meeting of Stockholders of the Company to be
R held on January 29, 1999 and at all adjournments thereof. This proxy will
be voted in accordance with the instructions given below. If no
instructions are given, this proxy will be voted FOR all of the following
proposals.
O 1. To approve the issuance of (a) 6,000,000 shares of common stock, par
value $.0001 per share of the Company ("Common Stock") and (b)
warrants to purchase an aggregate of 2,000,000 shares of Common Stock,
pursuant to a Merger Agreement, dated as of November 4, 1998, by and
X among the Company, RPII Acquisition Corporation, a New York
corporation and a wholly-owned subsidiary of the Company, Gaines,
Berland Inc., a New York company and the principal shareholders of
Gaines, Berland Inc., which provides for the merger of RPII
Y Acquisition Corporation with and into Gaines, Berland Inc.
FOR |_| AGAINST |_| ABSTAIN |_|
2. To amend the Certificate of Incorporation of the Company to change the
name of the Company from Research Partners International, Inc. to
Research Partners International Group Ltd.
FOR |_| AGAINST |_| ABSTAIN |_|
3. Election of the following Directors:
FOR all nominees listed below, except WITHHOLD AUTHORITY to vote
as marked to the contrary below |_| for all nominees listed below
David M. Nussbaum, Roger N. Gladstone, Peter R. Kent, Peter R. McMullin,
Robert T. McAleer, Richard Y. Roberts, Joseph Berland, Richard Rosenstock,
David Thalheim, Mark Zeitchick, Vincent Mangone, _____________,
_____________ and ______________
INSTRUCTIONS: To withhold authority to vote for any individual
nominee, write that nominee's name in the space below.
---------------------------------------------------------------------
4. In their discretion, the proxies are authorized to vote upon such
other business as may come before the meeting or any adjournment
thereof.
Date ____________________________________
________________________________________
Signature
_________________________________________
Signature if held jointly
Please sign exactly as name appears above. When shares are
held by joint tenants, both should sign. When signing as
attorney, executor, administrator, trustee or guardian,
please give full title as such. If a corporation, please
sign in full corporate name by President or other authorized
officer. If a partnership, please sign in partnership name
by authorized person.
