UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended January 31, 1999
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ________ to ________
Commission file number 0-21105
RESEARCH PARTNERS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3414302
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One State Street Plaza, New York, New York 10004
- ------------------------------------------ ---------
(Address of principal executive offices) (Zip Code)
(212) 208-6500
- ---------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: none
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.0001 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value (based upon the last sale price) of the registrant's
Common Stock held by nonaffiliates on April 29, 1999, was $23,258,000.
On April 29, 1999, 8,540,919 shares of the registrant's Common Stock were
outstanding.
Documents incorporated by reference:
Part III incorporates by reference portions of the definitive proxy statement
for the annual meeting of stockholders to be held June 23, 1999.
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Research Partners International, Inc.
Form 10-K Annual Report
For the fiscal year ended January 31, 1999
Page
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Part I
Item 1. Business 3
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 8. Financial Statements and Supplementary Data 20
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 36
Part III
Item 10. Directors and Executive Officers 36
Item 11. Executive Compensation 36
Item 12. Security Ownership of Certain Beneficial Owners and
Management 36
Item 13. Certain Relationships and Related Transactions 36
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 37
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PART I
ITEM 1. BUSINESS
Our company, through our subsidiaries GKN Securities Corp., Southeast Research
Partners, Inc., Shochet Securities, Inc., Research Partners International, AG
(known as RPI AG) and Dalewood Associates, Inc., provides institutional
research, investment banking, securities brokerage and trading services, with an
emphasis on small and mid-capitalization companies. These services are provided
through five primary divisions:
o A full service retail division
o An institutional and research division
o A discount retail division
o An international division
o A merchant banking and money management division
We were incorporated in Delaware in January 1987, and became a public company in
July 1996. We began operations through our full service retail division in
October 1987, and have since grown significantly through increasing our sales
force and by acquisitions. We acquired our discount retail division in November
1995, commenced operations at our international division in February 1996,
acquired our merchant banking and money management division in December 1996 and
acquired our institutional and research division in March 1997.
We derive 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 our principal activities
during the past three fiscal years ended January 31:
1999 1998 1997
---- ---- ----
Commissions 84% 79% 74%
Investment banking 8% 12% 17%
Market making and principal transactions 1% 4% 6%
Interest and other 7% 5% 3%
The following table illustrates our revenue breakdown by our principal
divisions:
1999 1998 1997
------------- ------------- ---------------
Full service retail $ 29,894,000 $ 35,130,000 $ 60,214,000
Institutional and research 10,266,000 5,464,000 -
Discounted retail 7,831,000 6,607,000 7,561,000
Other (including eliminations) 2,179,000 1,475,000 (25,000)
------------- ------------- -------------
Net revenues $ 50,170,000 $ 48,676,000 $ 67,750,000
============= ============= =============
Brokerage and Distribution
A significant portion of our revenues are generated from commissions. We charge
commissions to our 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 we receive a buy or sell order for a
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security in which we make a market or have inventory, we may act as a principal
and purchase from, or sell to, our customers the desired security on a disclosed
basis at a price set in accordance with applicable securities regulations.
Full Service Retail Division
We provide to our customers and clients a full service securities brokerage and
investment-banking service through GKN, a member of the National Association of
Securities Dealers, Inc. At March 31, 1999, GKN operated four branch offices in
New York City, New York, Stamford, Connecticut, and Boca Raton and Miami,
Florida, with a total of 158 registered representatives. During fiscal 1999, GKN
generated approximately $28 million in commissions primarily from executing
customers' trades. GKN's sales force serves a clientele who primarily consists
of individuals whom invest in OTC equity securities.
Institutional and Research Division
We also provide to our institutional customers and clients a full service
securities brokerage and investment banking and research boutique through our
Southeast subsidiary, which is also a member of the NASD. Southeast's clientele
primarily consists of institutional investors who invest in listed and OTC
equity securities. At March 31, 1999, Southeast operated branch offices in Boca
Raton and Palm Beach, Florida; New York City, New York; and Boston,
Massachusetts, with a total of 16 registered representatives. During fiscal
1999, Southeast generated approximately $5.9 million in commissions primarily
from executing customers' trades.
Discount Retail Division
We provide to our retail customers a full service discount brokerage service
through our Shochet subsidiary, which is also a member of the NASD.
At March 31, 1999, Shochet operated six branch offices in Hallandale, Miami
Beach, South Miami, Miami, Tamarac and Delray Beach, Florida, with a total of 51
registered representatives. During fiscal 1999 Shochet generated approximately
$7.2 million in commissions, primarily from executing customers' 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.
In fiscal 1999, Shochet introduced a new business line, Day Trading, which
operates exclusively out of the Miami Office. This service provides day traders
with access to real time trading information and execution services. 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 us.
During fiscal 2000, Shochet intends to expand the Day Trading business by
offering it over the internet. Our ability to successfully implement and operate
an internet day trading service is subject to the risks associated with the
internet, competition, technology, proper functioning enhancements and many
other risks associated with a new venture.
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International Division
Finally we provide our international customers with access to U.S. markets
through our RPI AG subsidiary, which we opened in Zurich, Switzerland in
February 1996. The primary emphasis of the division is to serve European
institutional money managers and clients investing in small capitalization
equity securities publicly traded in U.S. markets. At March 31, 1999, RPI AG
employed two registered representatives. The revenues and operating profit
generated by RPI AG during fiscal 1999 did not represent a material percentage
of our total revenues or operating loss.
Overall
At March 31, 1999, we collectively employed a total of 227 registered
representatives and serviced in excess of 43,000 customer accounts with activity
during the last two years with approximately $1.4 billion in assets as of March
31, 1999. The brokerage subsidiaries serve a diverse clientele with varying
investment characteristics.
GKN, Southeast, Shochet and RPI AG currently use the services of Schroder & Co.
Incorporated 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 for up to $500,000 per account, of which coverage for
cash balances is limited to $100,000. Additional protection of up to $49.5
million per account is provided by Schroder. 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 our brokerage and distribution activities. Schroder
provides these services to us and our customers at a total cost which is less
than it would cost us to process such transactions on our own.
Schroder lends funds to our 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 March 31, 1999, we had
approximately $77 million of margin credit outstanding to our customers through
Schroder. In fiscal 1999, our losses from the margin credit activity were
insignificant, while net interest earned from margin credit activity totaled
$910,000.
Investment Banking
We provide our investment banking service, which encompasses corporate finance,
advisory and syndication services, through both the full service retail and
institutional and research division.
Corporate Finance
Our 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. Our underwriting activities have historically
focused on public equity underwritings for small capitalization, emerging growth
companies in a variety of industries. Historically, our 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.
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As a result of technical advancements of the internet, we intend to broaden our
underwriting activity by offering internet based underwriting to our clients.
Our planned internet underwriting service is subject to risks associated with
the internet, including development, enhancement and proper functioning of
software, competition, market acceptance, regulatory matters, technology
upgrades and costs, volatility in securities markets, protection of proprietary
technology and intellectual property rights, Year 2000 issues and internet
security matters.
Corporate Advisory
To date, we have not derived significant revenues from corporate advisory
services. Through our relationships with our investment banking clients, we
intend to expand this business with a concentration on mergers and acquisitions,
strategic partnering, fairness opinions and corporate recapitalizations.
Syndicate
Our syndicate department has historically served as an additional source of
product, through its selling group or underwriter participation, for
distribution through our various distribution channels. To date, revenues
generated by our syndicate department have been insignificant. We expect that
the emphasis of this department will expand to increase the participation of
other broker-dealers in the marketing and distribution of our underwritings, as
well our participation in the selling group or as an underwriter in other
investment banks' underwritings.
Principal Transactions
Our principal transaction activity is primarily performed by the full service
retail and institutional and research divisions. Principal transaction activity
consists of market making and investing activities.
Market Making
Our market making activities primarily serve as an accommodation to our
customers. As part of our market making activities, we carry 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 March 31, 1999, GKN made
markets in more than 80 securities and Southeast made markets in more than 20
securities. In the fiscal year ended January 31, 1999, principal transactions
related to securities in which our brokerage subsidiaries made markets,
including realized and unrealized gains and losses, accounted for a loss of $1.1
million.
Investing
In connection with our investment banking activities of raising capital and
providing advisory services for client companies, we may receive warrants, which
entitle us to purchase securities of these client companies. These warrants,
which are held in our 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 March 31, 1999, we owned warrants to purchase securities of 53 companies for
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which we have performed investment-banking services. These warrants had an
underlying market value of $1.8 million as of March 31, 1999, of which we
recognized $1.0 million in value, or 56%. During fiscal 1999, we recognized
total gains of $1.5 million on the investment account warrants, or 3% of our
fiscal 1999 revenues.
Research
Through our institutional and research division, we provide research services as
an integral part of our investment banking and securities brokerage activities.
Our research activities identify attractive investment opportunities in the
securities of independent companies as well as sponsorship and independent
analysis for the securities of companies underwritten by us. Our acquisition of
Southeast during fiscal 1998 enhanced our research capabilities by providing us
with institutional quality research for institutional investors. At March 31,
1999, we employed a total of 12 research analysts at Southeast. The industries
covered by our research include technology, aviation services, healthcare,
energy, financial services, consumer/leisure, building and infrastructure,
pharmaceutical and telecommunications.
Other Services
We entered the money management business in 1995 through the establishment of
GKN Fund Management, Inc., which served as the managing partner of Kaleidoscope
Partners, L.P., a private "fund of funds" investment partnership which invested
its capital in other funds managed by independent money managers. In December
1997, we converted the investment focus of Kaleidoscope into a direct investment
fund. As of March 30, 1998, we transferred the General Partner interest of our
subsidiary to an entity affiliated with the Portfolio Manager of the investment
partnership.
In fiscal 1998, we launched Early Bird Investors AG. 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. On April 1, 1998, we raised 60 million Swiss francs (US $40
million) for Early Bird. Trading of Early Bird began shortly thereafter. In
October 1998, we sold GKN Asset Management AG to Dr. Ernst Muller-Mohl. Prior to
its sale GKN Asset Management AG provided investment management services to
Early Bird.
We 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 March 31,
1999, Dalewood Associates L.P. had total assets of approximately $5.0 million,
of which $4.6 million was invested in 22 companies. We had a $1.5 million
investment in Dalewood Associates LP. at March 31, 1999.
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 SEC and various state agencies and self-regulatory organizations,
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such as the NASD. GKN, Southeast and Shochet are registered as broker-dealers
with the SEC and are member firms of the NASD. Much of the regulation of
broker-dealers has been delegated to self-regulatory organizations, principally
NASD Regulation, Inc., NASDR, the regulatory arm of the NASD, which has been
designated by the SEC as GKN's, Shochet's and Southeast's primary regulator.
NASDR adopts rules, which are subject to approval by the SEC, 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.
Southeast and Shochet are registered as broker-dealers in 39 states and the
District of Columbia.
Broker-dealers are subject to regulations which cover all aspects of the
securities business, including sales methods and supervision, trading practices
among broker-dealers, use and safekeeping of customers' funds and securities,
capital structure of securities firms, record keeping and the conduct of
directors, officers and employees. Additional legislation, changes in rules
promulgated by the SEC and self-regulatory organizations, or changes in the
interpretation or enforcement of existing laws and rules, may directly affect
the mode of operation and profitability of broker-dealers. The SEC,
self-regulatory organizations, and state securities commissions may conduct
administrative proceedings 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.
RPI 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. RPI 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. Under these
laws RPI 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, RPI AG currently operates under a B-license,
which was granted by the Department of Economy of the Canton of Zurich in July
1996. During fiscal 1999, RPI AG applied to obtain the necessary securities
trader licenses under SESTA.
Competition
We encounter intense competition in all aspects of the securities business and
compete 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. We believe
that the principal factors affecting competition in the securities industry are
the quality and abilities of professional personnel, and the quality, range, and
relative prices of services and products offered.
Employees
At March 31, 1999, we had a total of 361 employees.
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ITEM 2. PROPERTIES
In February 1998, we moved our principal executive offices from 61 Broadway, New
York, New York to One State Street Plaza, New York, New York, a facility with
approximately 48,000 square feet under leases expiring in January 2013. Our
subsidiaries currently lease eleven additional offices in the United States and
one office in Switzerland.
ITEM 3. LEGAL PROCEEDINGS
Our 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
for fraud, unauthorized trading, churning, mismanagement and breach of fiduciary
duty. We do not presently maintain an errors and omissions insurance policy.
In the normal course of our business, we are involved in lawsuits and
arbitrations brought by our customers. It is the opinion of management that the
resolution of all proceedings presently pending will not have a material adverse
effect on our consolidated financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of fiscal 1999.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information
Our 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 our
common stock as reported by Nasdaq, for each quarterly period ending January 31,
1999:
High Low
---- ----
Fiscal 1998
First Quarter $6.25 $5.00
Second Quarter $4.88 $4.50
Third Quarter $5.31 $3.75
Fourth Quarter $4.75 $2.19
Fiscal 1999
First Quarter $3.50 $2.38
Second Quarter $3.63 $2.63
Third Quarter $3.06 $1.75
Fourth Quarter $3.13 $1.63
Holders of Common Stock
On March 31, 1999, there were approximately 80 holders of record of our common
stock. We believe there are in excess of 700 beneficial owners of our common
stock.
Dividends
To date, we have not paid any dividends on our common stock. The payment of
dividends, if any, in the future is within the discretion of the Board of
Directors and will depend upon our earnings, its capital requirements and
financial condition, and other relevant factors. Our ability to pay dividends in
the future also may be restricted by our brokerage subsidiaries' obligations to
comply with the net capital requirements imposed on broker-dealers by the SEC
and the NASD. We do not intend to declare any dividends in the foreseeable
future, but instead intends to retain all earnings for use in our business.
Sales of Unregistered Securities
In fiscal 1999 we granted options to purchase 322,000 shares to various
employees of our firm. The options are exercisable for a period of up to ten
years at prices ranging from $2.63 to $4.50 per share. In October 1998, we sold
300,000 shares of treasury stock to a Swiss investor for $1,050,000 in a private
transaction. These options and shares were issued without registration under the
Securities Act. The exemption claimed for these issuances is Section 4(2) of the
Securities Act.
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ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes five years of consolidated financial data of the
Company (in thousands, except per share amounts and other data):
<TABLE>
<CAPTION>
Year ended January 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Total revenues $ 50,170 $ 48,676 $ 67,750 $ 43,019 $ 32,410
Total expenses $ 59,341 $ 58,632 $ 56,394 $ 36,732 $ 31,516
Pre-tax (loss) income $(9,171) $(9,956) $ 11,356 $ 6,287 $ 894
Net (loss) income $(7,383) $(6,513) $ 6,329 $ 3,469 $ 381
Basic (loss) earnings
per common share $ (0.90) $( 0.80) $ 0.93 $ 0.69 $ 0.08
Diluted (loss) earnings
per common share $ (0.90) $( 0.80) $ 0.88 $ 0.60 $ 0.07
Weighted average shares
outstanding - basic 8,207 8,114 6,824 5,037 5,063
Weighted average shares
outstanding - diluted 8,207 8,114 7,175 5,737 5,695
Balance Sheet Data:
Total assets $ 28,280 $ 36,972 $ 51,633 $ 27,853 $ 16,096
Total liabilities (excluding
subordinated debt) $ 5,918 $ 8,775 $ 15,869 $ 12,143 $ 4,339
Subordinated debt $ 408 $ 576 $ 738 $ 934 -
Stockholders' equity $ 21,954 $ 27,621 $ 35,026 $ 14,776 $ 11,757
Other Data:
Ratio of assets to
stockholders' Equity 1.29 1.34 1.47 1.89 1.37
Return on average equity (29.0%) (19.9%) 25.0% 26.1% 3.3%
Pre-tax return on average
equity (30.4%) (30.4%) 44.9% 47.4% 7.8%
Book value per share $ 2.61 $ 3.41 $ 4.26 $ 3.02 $ 2.30
Registered representatives 227 253 275 224 163
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is an analysis of the consolidated results of operations and
financial condition of our company, including all of our subsidiaries. It should
be read in conjunction with the consolidated financial statements included in
Item 8 of this document.
Business Environment
Our primary business activities, institutional research, investment banking,
securities brokerage and securities trading, with an emphasis on
small-and-mid-capitalization companies, are subject to general economic and
market conditions and volatility of trading markets, specifically the
small-and-mid-capitalization market. The fiscal year ended January 31, 1999
experienced some of the most volatile market conditions in years, with highs
reached in the second quarter, lows reached in the third quarter, and a
significant rebounding in the fourth quarter. The effect of internet related
stocks combined with overseas economic difficulties contributed greatly to U.S.
market volatility. The overseas economic difficulties experienced during the
third quarter resulted in a significant reduction of IPO market activity during
the second half of the year.
During the year, several of our business activities proved to be unprofitable.
In an effort to return to profitability, we closed certain unprofitable business
activities that were no longer part of the long-term strategy. During the year,
these business activities incurred $3,025,000 of developmental costs and costs
associated with shutdowns, and are not expected to recur in the future. Further,
as a result of these losses and our current tax position, we were unable to
recognize $2,440,000 of tax benefits that represents timing differences and net
operating loss carryforwards.
Results of any individual period should not be considered representative of
future profitability. A significant portion of our expenses is fixed and does
not vary with market activity. Substantial fluctuations could occur in our
revenues and net income from period to period.
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Results of Operations
Year Ended January 31, 1999 vs. Year Ended January 31, 1998
Basic and diluted loss per share of common stock for the year ended January 31,
1999, was $0.90 as compared to $0.80 for the year ended January 31, 1998. The
significant loss in the current year was primarily attributable to operations of
several business activities that have subsequently been terminated and we were
unable to recognize certain tax benefits.
Revenues
Total revenues increased by $1,494,000, or 3.1%, to $50,170,000 for the fiscal
year, led by significant increases in commission and other revenues, offset by
decreases in investment banking revenues.
Commission revenues increased by $3,758,000, or 9.8%, to $42,086,000. The
increase was primarily attributable to an increase in the number of trades,
offset by a decrease in average commissions per trade.
Investment banking revenues decreased by $2,051,000, or 34%, to $3,973,000. We
raised $26 million for our clients in fiscal 1999 through 2 public offerings and
2 private placements, a decrease from fiscal 1998, during which we raised $113
million through six public offerings and seven private placements. The decrease
in the current year reflected the general reduction of IPO market activity
during the second half of the year.
Revenues from principal transactions decreased by $1,320,000, or 77%, to
$395,000. This decrease was primarily due to a decline in revenues from the
investment account of $1.2 million.
Interest income decreased by $5,000, or 0.4%, to $1,334,000, primarily due to
lower interest rates.
Other revenues increased by $1,112,000 or 88%, to $2,382,000, primarily as a
result of revenue from merchant banking and asset management activities, as well
as a gain on the sale of GKN Asset Management AG, one of our Swiss subsidiaries.
Expenses
Total expenses for fiscal 1999 were $59,341,000, a 1.2% increase over fiscal
1998. Total expenses as a percentage of revenues decreased to 118% from 120%.
Included in fiscal 1999 expenses were $3,025,000 of business development costs
and costs associated with shutdowns. We do not expect to incur these expenses in
the future. Total operating expenses for fiscal 1999 would have been $56.3
million versus the comparable operating expenses of $53.3 million in fiscal
1998, reflecting a 5.6 % decrease.
Compensation and benefit expense increased by $2,272,000, or 6.5%, to
$37,323,000. These expenses are primarily variable as commissions to brokers are
paid as a percentage of commission revenues generated. The expense increase in
fiscal 1999 is consistent with the increase in commission revenues.
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Communications expenses increased by $308,000, or 6.5%, to $5,079,220. This
increase was primarily a result of our new business ventures and expanded
facilities.
Brokerage clearing and exchange fees increased by $343,000 or 10%, to
$3,783,000. This increase was primarily attributable to the increase in trade
volume for the year.
Occupancy expense increased by $2,323,000, or 66%, to $5,843,000. The increase
was caused by the addition of new branch offices, the move of our headquarters,
and the investment made to upgrade our technological infrastructure.
Business development expense decreased by $89,000, or 4.3%, to $1,983,000. This
decrease was attributable to decreased promotional expenses.
Professional fees increased by $440,000, or 26%, to $2,153,000. This increase
was mainly as a result of costs associated with expanding the firm's business,
complying with regulatory requirements, and supporting the firm's technological
infrastructure.
Investigations and settlement expenses were eliminated as the prior regulatory
investigatory matters have been settled.
Other expenses decreased by $2,628,000, or 45%, to $3,177,000 primarily due to
decreased write-off of recruiting payments to brokers offset by increased
reserve for potential litigation.
Weighed average common shares outstanding
The average numbers of common shares and common stock equivalent used in the
computation of basic and diluted earnings per share were 8,206,652 in fiscal
1999 compared with 8,114,245 in fiscal 1998.
Year Ended January 31, 1998 vs. Year Ended January 31, 1997
Basic (loss) earnings 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 (loss) earnings per share of common stock for the
comparable periods were ($0.80) and $0.88, respectively. The significant loss in
the fiscal 1998 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, write-off of recruiting payment
receivables deemed uncollectible and severance to terminated employees.
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 Southeast, which
was not part of our company in fiscal 1997. Hence, without Southeast our
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.
14
<PAGE>
Investment banking revenues decreased by $5,367,000, or 47%. We raised $112.6
million for our clients in fiscal 1998 through six public offerings and seven
private placements, a decrease from fiscal 1997, during which we raised $136.3
million through ten public offerings and ten private placements. The current
year reflected the beginning of a transition from being the sole manager on
underwritings to a co-manager on larger transactions. This transition
potentially decreases the average revenue per transaction.
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
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 is $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
payments to terminated employees. The recruiting payment write-off represents
the write-off of receivables from 98 terminated brokers and a reserve for
receivables deemed uncollectible based on historical loss experience for 55
non-terminated brokers. These receivables would have otherwise been written off
over periods up to 36 months. The litigation-related expenses are entirely
related to our settlement with the 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.
Southeast was not part of our company in fiscal 1997. As a result, no expenses
for Southeast are included in fiscal 1997 results. During fiscal 1998, Southeast
generated $6,041,000 in expenses. As a result, comparable operating expenses
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
Southeast. Additionally, in accordance with our 1996 Incentive Compensation
Plan, a portion of annual incentive awards payable to executive management and
business unit managers are made in restricted shares of our common stock, which
are subject to a minimum three-year vesting period. Such awards are recognized
as compensation expense over the three-year vesting period. There was no such
compensation expense recognized in fiscal 1997, while during fiscal 1998 we
recognized $530,000 of such expenses. No stock awards were made relating to
fiscal 1998 under our 1996 Incentive Compensation Plan.
15
<PAGE>
Communications expenses increased by $925,000, or 24%. This increase was
primarily caused by the addition of Southeast.
Brokerage clearing and exchange fees increased by $1,116,000 or 48%. This
increase was primarily caused by the addition of Southeast.
Occupancy expense increased by 28% to $3,520,000. The increase was caused by the
additional four Southeast locations, one additional and one upgraded location in
Shochet and internal growth at GKN.
Business development expense increased by 37% to $2,072,000. This increase was
attributable to the addition of Southeast 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 GKN'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 Southeast.
Weighed average common shares outstanding
The average numbers of common shares and common stock equivalent 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 earning 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 earning per share calculation were
both attributable to the full-year impact of the 2,875,000 shares of common
stock issued in our public offering in July 1996.
16
<PAGE>
Liquidity and Capital Resources
Approximately 51% of our assets at January 31, 1999 were highly liquid,
consisting primarily of cash and cash equivalents, securities inventories and
receivables from other broker-dealers, all of which fluctuate depending upon the
levels of customer business and trading activity. Receivables from
broker-dealers, which are primarily from our clearing broker, turn over rapidly.
As a securities dealer, we may carry significant levels of securities
inventories to meet customer needs. Our inventory of 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 our total assets are fixed. The 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.
Our brokerage subsidiaries, GKN, Southeast and Shochet, are subject to the net
capital rules of the NASD and SEC. As such, we are subject to certain
restrictions on the use of capital. GKN's net capital position as of January 31,
1999, was $1,220,000, which was $970,000 in excess of its net capital
requirement. Southeast's net capital position as of January 31, 1999, was
$1,302,000 which was $1,202,000 in excess of its net capital requirement.
Shochet's net capital position as of January 31, 1999, was $612,000, which was
$512,000 in excess of its net capital requirement.
In conjunction with our corporate headquarters relocation in New York, we have
significantly upgraded our 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,
we arranged for a standby letter of credit. As collateral for the standby letter
of credit, we have placed $2.4 million in a restricted cash escrow account with
the provider. We intend to use debt and lease financing prudently in the future.
Our overall capital and funding needs are continually reviewed to ensure that
our 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 our capital structure is adequate for current operations and reasonably
foreseeable future needs.
During fiscal 2000, we intend to offer a day trading service over the internet.
This new venture, in addition to others, may require us to raise additional
capital.
Other Matters
Year 2000 Computer Issue
We initiated a firm-wide program to address the "Year 2000 Computer Issue" in
order to prepare our computer systems and applications for properly processing
dates after December 31, 1999. This program consists of a series of steps to
identify all critical & non-critical systems, determine Y2K compliance through
inquiries and testing, and change non-compliant systems. Our program is
proceeding on schedule and it is our expectation that we will have our firm-wide
Year 2000 solution substantially in place by July 1, 1999.
17
<PAGE>
We have completed our identification stage. Third party vendors and service
providers provide all of our computer programs and services. Most of the
programs were purchased after the year 2000 Computer Issue became widely
recognized. We have contacted approximately 75% of our third party vendors and
service providers and have received written confirmation from approximately 50%
of them that the Year 2000 Computer Issue has been appropriately managed.
Schroder, our clearing firm, is our largest and most important computer services
related vendor. Schroder has provided us with assurances that it expects to
appropriately manage the Year 2000 Computer Issue on a timely basis.
The Year 2000 Computer Issue creates a risk for us from unforeseen problems in
our own computer systems, third-party vendors and service providers, and from
third parties with whom we deal worldwide. We are continuing to communicate with
our third-party vendors and service providers to determine the likely extent to
which we may be affected by third parties' Year 2000 plans and target dates. In
this regard, while we do 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 we rely will be remediated on a timely basis, or that a
failure to remediate by another party, would not have a material adverse effect
on us. Such failures could have a material impact on our ability to conduct
business.
We are developing contingency plans in the event that significant external
parties fail to achieve their Year 2000 plans by the targeted dates. We
anticipate that beginning on January 1, 2000, Year 2000 related failures may
result in sporadic disruption of communications, power or other external
infrastructure worldwide that could compromise the timely performance of
specific business functions and/or limit the flow of business opportunities
accross the organization. We intend to have contingency plans and crisis
management teams in place to coordinate our response to those events likely to
present material risks to us. This process is currently underway, but there can
be no assurance that any such contingency plans will fully mitigate the effects
of any third-party failure.
Based on information currently available, we do not expect our Year 2000
expenditures for 1999 to be a material cost to us. To date, we have spent less
than $100,000, and expect that the entire program will not exceed $200,000. The
expected costs of the Year 2000 program are based on management's current
estimates; however, actual results could differ materially from those plans.
Quantitative and Qualitative Disclosures about Market Risk
Our market making, investing and underwriting activities often involve the
purchase, sale or short sale of securities as principal. Such activities subject
our capital to significant risks from markets that may be characterized by
relative illiquidity or may be particularly susceptible to rapid fluctuations in
liquidity. Such market conditions could limit our ability to resell securities
purchased or to purchase securities sold short. These activities subject our
capital to significant risks, including market, credit counterparty and
liquidity risks. Market risk relates to the risk of fluctuating values based on
market prices without action on our part. Our primary credit risk is settlement
or counterparty risk, which relates to whether a counterparty will fulfill its
contractual obligations, such as delivery of securities or payment of funds.
Liquidity risk relates to our iniability to liquidate assets or redirect the
deployment of assets contained in illiquid investments. In addition, our market
and liquidity risks and risks associated with asset revaluation are increased
because these risks for us are concentrated and thus subject us to increased
risks if market conditions.
New Accounting Pronouncements
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. Our
financial statements reflect the implementation of SFAS 130.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 established standards for the way
that public enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information. SFAS 131 is effective for financial statement periods beginning
after December 15, 1997. Our financial statements reflect implementation of SFAS
131.
18
<PAGE>
In February 1998, the FASB issued SFAS 132, "Employers' Disclosures about
Pensions and Other Post-retirement Benefits," which revises and standardizes
pensions and other post-retirement 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 our financial statement disclosures.
In June 1998, the FASB 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 beginning after June 15, 1999. We expect to adopt this standard
when required in fiscal year 2000. The effect of SFAS 133 is not expected to be
material to our financial statement disclosures.
Safe Harbor Cautionary Statement
We occasionally make forward-looking statements such as forecasts and
projections of expected future performance or statements of our plans and
objectives. When used in this annual report and in future filings with the SEC,
in our press releases and in oral statements made with the approval of an
authorized executive officer, the words or phrases "will likely result," "the
Company expects," "we intend or expect," "will continue," "is anticipated,"
"estimated," "project," or "outlook" or similar expressions, including
confirmations by one of our authorized executive officers of any such
expressions made by a third party regarding us with respect to the company are
intended to identify forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. We want to caution you not to
place undue reliance on these forward-looking statements, each of which speaks
only as of the date made. These 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 our results of operations and cause its results to differ from
these statements include:
o the volatility and price level of the securities markets
o the volume, size and timing of securities transactions
o the demand for investment banking services
o the level and volatility of interest rates
o the availability of credit
o legislation affecting the business and financial communities, and
o the economy in general.
For a more complete discussion of these and other factors, see our registration
statement filed on Form S-1, as amended (No. 333-05273). We have 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 these statements.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
RESEARCH PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
January 31,
1999 1998
-------------- --------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 10,553,000 $ 8,111,000
Receivable from brokers and dealers 2,251,000 896,000
Securities owned, at market value 1,695,000 10,154,000
Securities owned, not readily marketable, at fair value 955,000 1,443,000
Investments 2,035,000 3,640,000
Office furniture, equipment and leasehold improvements, net 2,088,000 1,580,000
Goodwill, net 3,681,000 3,684,000
Loans receivable 1,563,000 1,404,000
Income taxes receivable 1,909,000 3,544,000
Other assets 1,550,000 2,516,000
-------------- --------------
Total assets $ 28,280,000 $ 36,972,000
============== ==============
Liabilities and Stockholders' Equity
Liabilities:
Securities sold, not yet purchased, at market value $ 506,000 $ 2,320,000
Commissions payable 2,658,000 1,441,000
Deferred compensation - 1,796,000
Deferred tax liability 29,000 236,000
Accrued expenses and other liabilities 2,725,000 2,982,000
-------------- --------------
5,918,000 8,775,000
Liability subordinated to the claims of general creditors 408,000 576,000
-------------- --------------
Total liabilities 6,326,000 9,351,000
-------------- --------------
Stockholders' equity:
Series A preferred stock, $.10 par value: 1,200,000
authorized, 1,140,000 shares issued and outstanding 114,000 114,000
Common stock, $.0001 par value; 35,000,000 shares
authorized; 9,209,875 shares issued; 8,410,899 and
8,095,899 shares outstanding 1,000 1,000
Additional paid-in capital 21,022,000 20,710,000
Retained earnings 4,351,000 11,734,000
Accumulated other comprehensive loss (18,000) (36,000)
-------------- --------------
25,470,000 32,523,000
Less treasury stock, at cost; 798,976 and 1,113,976 shares (3,516,000) (4,902,000)
-------------- --------------
Total stockholders' equity 21,954,000 27,621,000
-------------- --------------
Total liabilities and stockholders' equity $ 28,280,000 $ 36,972,000
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended January 31,
------------------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
Commissions $ 42,086,000 $ 38,328,000 $ 50,153,000
Investment banking 3,973,000 6,024,000 11,391,000
Principal transactions 395,000 1,715,000 4,277,000
Interest 1,334,000 1,339,000 1,620,000
Other 2,382,000 1,270,000 309,000
-------------- -------------- --------------
Total revenues 50,170,000 48,676,000 67,750,000
-------------- -------------- --------------
Expenses:
Compensation and benefits 37,323,000 35,051,000 41,187,000
Occupancy and equipment 5,843,000 3,520,000 2,757,000
Communications 5,079,000 4,771,000 3,846,000
Brokerage, clearing and
exchange fees 3,783,000 3,440,000 2,324,000
Professional fees 2,153,000 1,713,000 1,114,000
Business development 1,983,000 2,072,000 1,507,000
Investigations and settlements - 2,260,000 1,312,000
Other 3,177,000 5,805,000 2,347,000
-------------- -------------- --------------
Total expenses 59,341,000 58,632,000 56,394,000
-------------- -------------- --------------
(Loss) income before income taxes (9,171,000) (9,956,000) 11,356,000
Income tax (benefit) expense (1,788,000) (3,443,000) 5,027,000
-------------- -------------- --------------
Net (loss) income $ (7,383,000) $ (6,513,000) $ 6,329,000
============== ============== ==============
Basic (loss) earnings per common share $ (0.90) $ (0.80) $ 0.93
============== ============== ==============
Diluted (loss) earnings per common share $ (0.90) $ (0.80) $ 0.88
============== ============== ==============
Weighted average common
shares outstanding - basic 8,206,652 8,114,245 6,824,156
============== ============== ==============
Weighted average common
shares outstanding - diluted 8,206,652 8,114,245 7,175,267
============== ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Accumulated
Preferred Stock Common Stock Additional Other Treasury Stock
--------------- -------------- Paid-in Retained Comprehensive --------------
Shares Amt. Shares Amt. Capital Earnings Income Shares Amount Total
------------- -------- -------- ----------- ------- ---------- ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 31,1996 - $ - 5,397,875 $1,000 $ 3,487,000 $11,918,000 $ - (512,500) $ (630,000) $14,776,000
Net income - - - - - 6,329,000 - - - 6,329,000
Stock issued - - 3,070,000 - 16,009,000 - - - - 16,009,000
Warrants issued - - - - 1,000 - - - - 1,000
Stock options
granted - - - - 37,000 - - - - 37,000
Notes receivable - - - - (221,000) - - - - (221,000)
Stock options
exercised - - 750,000 - 618,000 - - 31,387 95,000 713,000
Purchase of
treasury stock - - - - - - - (511,250) (2,615,000) (2,615,000)
Translation
adjustment - - - - - - (3,000) - - (3,000)
---------- ------- ----------- ------- ----------- ------------ --------- ---------- --------- -----------
Balance at
January 31, 1997 - - 9,217,875 1,000 19,931,000 18,247,000 (3,000) (992,363) (3,150,000) 35,026,000
Net loss - - - - - (6,513,000) - - - (6,513,000)
Stock issued
for acquisi-
tion 1,140,000 114,000 - - 1,376,000 - - 152,000 482,000 1,972,000
Stock issued -
compensation
plan - - - - (1,193,000) - - 288,944 1,193,000 -
Amortization
of unearned
compensation - - - - 545,000 - - - - 545,000
Stock options
exercised - - - - (45,000) - - 34,443 124,000 79,000
Note receivable
forgiven - - - - 100,000 - - - - 100,000
Retirement of
stock - - (8,000) - - - - 8,000 35,000 35,000
Purchase of
treasury stock - - - - - - - (605,000) (3,586,000) (3,586,000)
Translation
adjustment - - - - - - (33,000) - - (33,000)
Other - - - - (4,000) - - - - (4,000)
---------- ------- ----------- ------- ----------- ------------ --------- ---------- --------- -----------
Balance at
January 31, 1998 1,140,000 114,000 9,209,875 1,000 20,710,000 11,734,000 (36,000) (1,113,976) (4,902,000) 27,621,000
Net loss - - - - - (7,383,000) - - - (7,383,000)
Stock issued -
compensation
plan - - - - (6,000) - - 15,000 66,000 60,000
Stock issued -
sale - - - - (270,000) - - 300,000 1,320,000 1,050,000
Amortization of
unearned
compensation - - - - 588,000 - - - - 588,000
Translation
adjustment - - - - - - 18,000 - - 18,000
---------- ------- ----------- ------- ----------- ------------ --------- ---------- --------- ------------
Balance at
January 31,
1999 1,140,000 $114,000 9,209,875 $ 1,000 $21,022,000 $ 4,351,000 $ (18,000) (789,976) $(3,516,000) $21,954,000
========== ======== =========== ======= =========== ============ ========= ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended January 31,
----------------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Operating activities:
Net (loss) income $ (7,383,000) $ (6,513,000) $ 6,329,000
Adjustments to reconcile net (loss) income to net
cash provided by (used) in operating activities:
Depreciation and amortization 790,000 724,000 578,000
Deferred taxes (207,000) (338,000) (647,000)
Gain on sale of subsidiary (599,000) - -
Translation adjustment 18,000 (33,000) (3,000)
Other 657,000 682,000 40,000
------------- ------------- -------------
(6,724,000) (5,478,000) 6,297,000
(Increase) decrease in operating assets:
Receivable from brokers and dealers (1,355,000) 9,115,000 (4,544,000)
Securities owned, at market value 8,459,000 4,623,000 (6,458,000)
Securities owned, not readily marketable 488,000 (78,000) 379,000
Loans receivable (159,000) 47,000 (16,000)
Income taxes receivable 1,635,000 (3,544,000) -
Other assets 798,000 (662,000) (514,000)
Increase (decrease) in operating liabilities:
Securities sold, not yet purchased (1,814,000) (4,687,000) 2,982,000
Commissions payable 1,217,000 (1,382,000) 194,000
Deferred compensation (1,796,000) 387,000 1,078,000
Income taxes payable - (252,000) (80,000)
Accrued expenses and other liabilities (305,000) (2,246,000) 211,000
------------- ------------- -------------
Net cash provided by (used in) operating activities 444,000 (4,157,000) (471,000)
------------- ------------- -------------
Investing activities:
Purchase of office furniture, equipment
and leasehold improvements (989,000) (731,000) (745,000)
Investment in limited partnerships - (948,000) (2,400,000)
Liquidation of investment in limited partnerships 1,605,000 - -
Acquisition, net of cash acquired - (176,000) -
Sale of subsidiary, net of cash sold 666,000 - -
Goodwill resulting from acquisition (158,000) (36,000) (55,000)
------------- ------------- -------------
Net cash provided by (used in) investing activities 1,124,000 (1,891,000) (3,200,000)
------------- ------------- -------------
Financing activities:
Issuance of common stock - 75,000 16,499,000
Issuance of common stock warrants - - 1,000
Sale (purchase) of treasury stock 1,050,000 (3,586,000) (2,615,000)
Repayment of subordinated debt (176,000) (186,000) (231,000)
------------- ------------- -------------
Net cash provided by (used in) financing activities 874,000 (3,697,000) 13,654,000
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 2,442,000 (9,745,000) 9,983,000
Cash and cash equivalents at beginning of year 8,111,000 17,856,000 7,873,000
------------- ------------- -------------
Cash and cash equivalents at end of year $ 10,553,000 $ 8,111,000 $ 17,856,000
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
23
<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., formerly, GKN Holding Corp., and its subsidiaries
(the "Company"). The Company is primarily engaged in the following segments:
full service retail, institutional and research and discounted retail securities
brokerage. These segments provide the following services: securities brokerage,
research, investment banking, and trading services for individuals, institutions
and corporations through the Company's 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 financial statements conform with generally accepted accounting principles
("GAAP"). The preparation of financial statements in conformity with GAAP
requires the Company to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
2. Summary of Significant Accounting Policies
Fair value of financial instruments
Substantially all of the Company's financial assets and liabilities are carried
at market or fair values or at amounts which approximate current fair value due
to their short-term nature.
Cash and cash equivalents
Cash equivalents are highly liquid securities with maturities of three months or
less when purchased.
Receivable from brokers and dealers
Receivable from brokers and dealers consists primarily of amounts due from the
Company's clearing organization, which provides clearing and depository services
for brokerage transactions on a fully disclosed basis.
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 that 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.
24
<PAGE>
Investments
Investments consist primarily of investments in limited partnerships, which are
accounted for using the equity method.
Depreciation and amortization
Office furniture, equipment and leasehold improvements are stated at cost, net
of accumulated depreciation and amortization of $2,378,000 and $1,897,000 at
January 31, 1999 and 1998, respectively. Office furniture and equipment are
depreciated using either an accelerated method or a straight-line method, where
applicable, over their estimated useful lives. Leasehold improvements are
amortized over the lesser of the life of the lease or estimated useful life of
the improvement.
Goodwill
Goodwill represents the excess of the purchase price 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,
Southeast Research Partners, Inc. ("Southeast") in March 1997 and a small
business acquisition in May 1998. The goodwill is being amortized over 25 years
on a straight line basis. Accumulated amortization was $383,000 and $222,000 at
January 31, 1999 and 1998, 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 SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123"),
based on the fair value-based method are presented in note 11.
Income Taxes
Deferred income taxes are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts and
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using the enacted tax rates. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date.
Investigations and settlements
Investigations and settlements expense is comprised of costs related to the
settlement of regulatory matters.
25
<PAGE>
3. Business Acquisitions and Sales
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.
On October 1, 1998, the Company sold its 60% majority owned ownership
interest in one of its Swiss subsidiaries, GKN Asset Management AG to a Swiss
investor for 1,000,000 Swiss francs, or $728,000. The Company recognized a
gain of $599,000 on the sale, which is included in other income in the
statement of operations.
On December 31, 1998, the Company reduced its investment in Dalewood
Associates, L.P. The reduction resulted in no gain or loss.
4. Related Party Transactions
Loans receivable from officers and employees of the Company are included in
loans receivable at January 31, 1999 and 1998. Loans receivable from officers
were $169,000 in 1999 and $94,000 in 1998. Receivables representing advances
to brokers in anticipation of their continued employment and generating
commission revenue in accordance with loan agreements were $1,065,000 in 1999
and $916,000 in 1998. 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, 1999. Receivables from current employees were $307,000 and
$382,000 at January 31, 1999 and 1998, respectively. An allowance for losses
is established for those receivables whose collection is considered doubtful.
This allowance totaled $209,000 and $47,000 at January 31, 1999 and 1998,
respectively. For the year ended January 31, 1998, the Company wrote off
$2,900,000 of loans receivable, included in other expenses. Amounts written
off in fiscal 1999 and 1997 were not significant.
5. Segment and Geographic Area Data
The Company has adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which establishes standards for the
reporting and display of information about operating segments. In fiscal 1999
and prior years, the Company operated in three principal segments: Full
Service Retail, Institutional and Discounted Retail Brokerage. Each segment
is managed separately based on types of products and services offered and the
related client bases. The Company evaluates the performance of its segments
based primarily on income before income taxes.
o Full Service Retail - provides full service securities brokerage and
trading services, through GKN Securities Corp. ("GKN"), to a clientele
which primarily consists of individuals who invest in OTC equity
securities.
o Institutional and Research - provides securities brokerage, research
and investment banking services, through Southeast, to a clientele
primarily consisting of institutional investors and corporations who
invest in listed and OTC equity securities.
26
<PAGE>
o Discounted Retail - provides full service discount brokerage services,
through Shochet, to a clientele consisting primarily of retired
individuals who invest in exchange-listed equity securities, fixed
income securities and mutual funds.
The Company allocates certain revenues to its operating segments based on
services provided by one segment to another. The Company also allocates to
segments, certain overhead expenses based upon specified agreed-upon amounts.
Certain of the segments incur interest expense on subordinated debt payable
to the Company at contract rates. All such amounts are eliminated in
consolidation. All other accounting policies of the segments are the same as
those described in the summary of significant accounting policies.
<TABLE>
<CAPTION>
Full Service Institutional Discounted Eliminations
Retail and Research Retail and all other Total
------------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
January 31, 1999:
Revenues from external sources $ 28,864,000 $9,559,000 $ 7,223,000 $ 3,190,000 $48,836,000
Intersegment revenues 523,000 624,000 - (1,147,000) -
Interest revenue 507,000 83,000 608,000 136,000 1,334,000
Depreciation and amortization 329,000 218,000 212,000 31,000 790,000
(Loss) income before income taxes (9,263,000) (1,194,000) (434,000) 1,720,000 (9,171,000)
Segment assets $ 11,427,000 $6,260,000 $ 3,915,000 $ 6,678,000 $28,280,000
Expenditures for long-lived
assets $ 337,000 $ 208,000 $ 572,000 $ 30,000 $ 1,147,000
January 31, 1998:
Revenues from external sources $ 34,342,000 $5,135,000 $ 6,023,000 $ 1,837,000 $47,337,000
Intersegment revenues 318,000 238,000 - (556,000) -
Interest revenue 470,000 91,000 584,000 194,000 1,339,000
Depreciation and amortization 369,000 173,000 172,000 10,000 724,000
(Loss) income before income taxes (9,891,000) (577,000) 122,000 390,000 (9,956,000)
Segment assets $ 21,405,000 $5,555,000 $ 3,422,000 $ 6,590,000 $36,972,000
Expenditures for long-lived assets $ 89,000 $ 60,000 $ 40,000 $ 578,000 $ 767,000
January 31, 1997:
Revenues from external sources $ 59,431,000 $ - $ 7,047,000 $ (348,000) $66,130,000
Intersegment revenues - - - - -
Interest revenue 783,000 - 514,000 323,000 1,620,000
Depreciation and amortization 409,000 - 155,000 14,000 578,000
Income (loss) before income taxes 11,056,000 - 450,000 (150,000) 11,356,000
Segment assets $ 35,535,000 $ - $ 3,371,000 $12,727,000 $51,633,000
Expenditures for long-lived assets $ 355,000 $ - $ 384,000 $ 61,000 $ 800,000
</TABLE>
27
<PAGE>
The following is a reconciliation of the Company's reported segment revenues,
(loss) income before provision for income taxes and segment assets to the
Company's consolidated totals:
<TABLE>
<CAPTION>
For the year ended January 31,
----------------------------------------------
1999 1998 1997
--------------- ---------- -----------
<S> <C> <C> <C>
Revenues
Total net revenues for reported segments $ 47,991,000 $ 47,201,000 $67,775,000
All other revenues 4,207,000 2,190,000 2,038,000
Consolidation/elimination (2,028,000) (715,000) (2,063,000)
-------------- -------------- ------------
Total consolidated net revenues $ 50,170,000 $ 48,676,000 $67,750,000
============== ============== ===========
(Loss) income before provision for income taxes:
Total (loss) income for reported segments $ (10,891,000) $ (10,346,000) $11,506,000
All other income 2,106,000 249,000 362,000
Consolidation/elimination (386,000) 141,000 (512,000)
-------------- -------------- ------------
Total (loss) income before provision for
income taxes $ (9,171,000) $ (9,956,000) $11,356,000
============== ============== ===========
Segment assets:
Total assets for reported segments $ 21,602,000 $ 30,382,000 $38,906,000
All other assets 12,479,000 14,458,000 15,348,000
Consolidation/elimination (5,801,000) (7,868,000) (2,621,000)
-------------- -------------- ------------
Total segment assets $ 28,280,000 $ 36,972,000 $51,633,000
============== ============== ===========
</TABLE>
The Company's principal operations are located in the United States. The
Company maintains an office in Europe. Gross revenues from operations in
Europe represent less than 4% of the Company's overall revenues.
6. 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, 1999, future
minimum rental commitments under such leases were as follows for the fiscal
years ending January 31:
2000 $3,493,000
2001 3,411,000
2002 3,099,000
2003 2,942,000
2004 2,095,000
Thereafter 14,411,000
----------
$29,451,000
===========
Total rent expense was $3,082,000, $2,211,000, and $1,672,000 in fiscal years
1999, 1998, and 1997, 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.
28
<PAGE>
7. 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
$170,000, $79,000, and $116,000 for fiscal years 1999, 1998, and 1997,
respectively.
8. Income Taxes
The components of income tax (benefit) expense were as follows for the fiscal
years ended January 31,:
1999 1998 1997
------------- ------------- ------------
Current:
Federal $(1,693,000) $ (3,323,000) $3,905,000
State and local 112,000 218,000 1,769,000
------------- ------------- ------------
(1,581,000) (3,105,000) 5,674,000
Deferred (207,000) (338,000) (647,000)
------------- ------------- ------------
$(1,788,000) $ (3,443,000) $5,027,000
============= ============= ============
The effective tax rates reflected in the consolidated financial statements
differ from the statutory federal income tax rate as follows:
1999 1998 1997
----- ---- -------
Statutory tax rate 34.0% 34.0% 35.0%
State and local taxes, n
net of federal tax benefit 1.8 1.4 9.0
Change in valuation allowance (26.6) (4.5) -
Other 10.3 3.7 0.3
---- --- ---
Effective tax rate 19.5% 34.6% 44.3%
===== ===== =====
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, 1999 and 1998 are comprised
as follows:
1999 1998
---- ------
Gross deferred tax asset:
Net operating loss carryforwards $ 1,640,000 $ 933,000
Depreciation and amortization 331,000 284,000
Reserve for contingencies 247,000 234,000
Unrealized losses on securities 431,000 -
Bonus stock awards and other 448,000 140,000
--------- -------
Total gross deferred tax asset 3,097,000 1,591,000
Less: valuation allowance (2,887,000) (447,000)
---------- --------
Net deferred tax asset 210,000 1,144,000
---------- ---------
Gross deferred tax liability:
Unrealized gains on securities - (1,109,000)
Other (239,000) (271,000)
-------- --------
Total gross deferred tax liability (239,000) (1,380,000)
-------- ----------
Net deferred tax liability $ (29,000) $ (236,000)
========= ==========
29
<PAGE>
For the year ended January 31, 1999, as a result of the Company's tax
position, the Company provided for a valuation allowance of $2,440,000.
Management believes that the valuation allowance at January 31, 1999 is
adequate as timing differences will reverse in the carryforward period.
Reserve for contingencies represents the tax effect of litigation reserves
not deductible for tax purposes in the current period.
The Company files consolidated federal and combined New York State and New
York City income tax returns.
9. 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 served as a co-manager of the offering. GKN 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.
In October 1998, the Company sold 300,000 shares of treasury stock to a Swiss
investor in a private transaction.
10. Comprehensive Income
The Company has adopted SFAS No. 130, Reporting Comprehensive Income, which
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 components of comprehensive income are as follows for
the years ended January 31,
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net (loss) income $ (7,383,000) $(6,513,000) $6,329,000
Other comprehensive income (loss):
Foreign currency translation adjustments 18,000 (33,000) (3,000)
------ ------- ------
Total comprehensive (loss) income $ (7,365,000) $(6,546,000) $ 6,326,000
============= =========== ===========
</TABLE>
30
<PAGE>
11. Stock Compensation Plans
At January 31, 1999, 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 the
following net (loss) income and earnings per share ("EPS"):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C> <C>
Net (loss) income As reported $(7,383,000) $(6,513,000) $6,329,000
Pro forma $(7,788,000) $(6,729,000) $6,268,000
Basic EPS As reported $ (0.90) $ (0.80) $ 0.93
Pro forma $ (0.95) $ (0.83) $ 0.92
Diluted EPS As reported $ (0.90) $ (0.80) $ 0.88
Pro forma $ (0.95) $ (0.83) $ 0.87
</TABLE>
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.
In April 1998, the Company offered employees holding certain options having
an exercise price of $4.50 to $6.00 the opportunity to convert their options
into options for a fewer number of shares, but with a lower exercise price.
Options for 181,000 shares were canceled and new options for 103,000 shares
were granted in the conversion.
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, 1999, options to purchase a total of 30,000 shares
of common stock were outstanding.
31
<PAGE>
A summary of the status of the Company's 1991 Plan and other options granted
outside of the 1991 Plan as of January 31, 1999, 1998, and 1997, and changes
during the fiscal years then ended is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------- ---- ----
Shares Weighted-Average Shares Shares
Stock Options (000) Exercise Price (000) (000)
------------- ---------------------------- ----- -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,196 $ 5.56 1,045 1,897
Granted 322 3.18 289 422
Exercised - - (35) (781)
Forfeited (267) 4.68 (103) (61)
Swapped (181) 5.53 - (432)
------ ------- ------
Outstanding at end of year 1,070 4.54 1,196 1,045
====== ======= =======
Options exercisable at year-end 636
Weighted-average fair value of
options granted during the year $1.63
</TABLE>
The following table summarizes information about stock options outstanding at
January 31, 1999:
<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 1/31/99 Life Price at 1/31/99 Price
- -------------------- ------------- ------------ ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
$2.20 to $3.31 321,000 6.3 years $ 2.83 107,000 $ 2.21
$4.00 to $5.00 376,000 5.7 4.56 282,000 4.58
$6.00 to $6.13 373,000 5.8 6.00 247,000 6.00
----------- -------
1,070,000 636,000
=========== =======
</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, 1999, approximately 268,000 shares had been awarded. The Company
recognized $523,000 and $530,000 of compensation expense for stock awards
under this plan for the fiscal years ended January 31, 1999 and 1998,
respectively.
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, 1999.
32
<PAGE>
12. Earnings per Common Share
In March 1997, the FASB issued SFAS No. 128, Earnings per Share ("SFAS 128").
This statement changes the calculation and presentation of EPS. The new
presentation consists of basic EPS, which includes no dilution and is
computed by dividing net income by the weighted-average number of common
shares outstanding for the period, and diluted EPS, which is similar to the
previously disclosed fully diluted EPS. SFAS 128 will result in basic EPS
results higher than EPS as calculated under the previous method. All earnings
per share amounts for all periods have been presented, and where appropriate,
restated to conform to the SFAS 128 requirements. For the fiscal years ended
January 31, 1999 and 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 each year.
The following table sets forth the computation of basic and diluted EPS:
<TABLE>
Year ended January 31,
-------------------------------------------
1999 1998 1997
--------------- ----------- ----------
<S> <C> <C> <C>
Numerator for basic and diluted EPS:
Net (loss) income $ (7,383,000) $(6,513,000) $ 6,329,000
============== ============ ===========
Denominator for basic EPS:
Weighted-average common shares 8,206,652 8,114,245 6,824,156
Dilutive stock options - - 351,111
------------ ---------- -----------
Denominator for diluted EPS 8,205,652 8,114,245 7,175,267
============ =========== ===========
Basic EPS $ (0.90) $ (0.80) $ 0.93
============ =========== ===========
Diluted EPS $ (0.90) $ (0.80) $ 0.88
============ =========== ===========
</TABLE>
13. 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.
14. Net Capital Requirements
GKN, Southeast, and Shochet, all wholly-owned subsidiaries of the Company,
are registered broker-dealers with the Securities and Exchange Commission
33
<PAGE>
(the "SEC") and member firms of the National Association of Securities
Dealers, Inc. 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, greater than or equal to $250,000. At January 31, 1999, GKN had net
capital of $1,220,000.
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, 1999, Southeast had net capital of $1,302,000 and a net
capital requirement of $100,000. Southeast's ratio of aggregate indebtedness
to net capital was 0.84 to 1.
Shochet computes net capital under the standard aggregate indebtedness method
permitted by the net capital rule. At January 31, 1999, Shochet had net
capital of $612,000 and a net capital requirement of $100,000. Shochet's
ratio of aggregate indebtedness to net capital was 1.07 to 1.
15. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Year ended January 31,
--------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash paid for:
Income taxes $ 230,000 $ 372,000 $ 5,763,000
============== ============== ===========
Interest $ 9,000 $ 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 $ -
============== ============= ========
Non-cash financing transaction:
Treasury stock issued for Incentive
Compensation Plan $ 60,000 $ 1,734,000 $ -
============== ============= ========
</TABLE>
34
<PAGE>
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. and subsidiaries (the
Company) as of January 31, 1999 and 1998, 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, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Company as of January 31, 1999 and 1998, and the results of its operations
and its cash flows for each of the years in the three-year period ended
January 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
April 13, 1999
35
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference to the
information to be included in our proxy statement for our 1999 annual meeting of
stockholders under the caption Election of Directors.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the
information to be included in our proxy statement for our 1999 annual meeting of
stockholders under the caption Executive Compensation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required by this item is incorporated herein by reference to the
information to be included in our proxy statement for our 1999 annual meeting of
stockholders under the caption Voting Securities.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to the
information to be included in our proxy statement for our 1999 annual meeting of
stockholders under the caption Certain Transactions.
36
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
3. Exhibits:
(a) Exhibit No. Description
3.1 Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-1, File No. 333-05273 (Registration
Statement)
3.1(a) Amendment, effective as of May 31, 1994, to the Restated
Certificate of Incorporation (incorporated by reference
to Exhibit 3.1(a) to the Registration Statement)
3.1(b) Certificate of Elimination of Series A Preferred Stock
dated January 14, 1997 (old) (incorporated by reference
to Exhibit 3.1(b) to the Company's Form 10-Q for the
quarterly period ended April 30, 1997 ("April 1997 10-Q")
3.1(c) Certificate of Designation of Series A Preferred Stock
dated March 4, 1997 (new) (incorporated by reference to
Exhibit 3.1(c) to the April 1997 10-Q)
3.2 By-laws (incorporated by reference to Exhibit 3.2 to the
Registration Statement)
4.1 Form of Common Stock Certificate (incorporated by
reference to Exhibit 4.1 to the Registration Statement)
10.1(a) Lease for One State Street Plaza, New York, New York
10004 (incorporated by reference to Exhibit 10.1(a)
of the Company's Form 10-K for the fiscal year ended
January 31, 1998)
10.2 Agreement between GKN Securities Corp. and managers of
Miami, Florida branch office (incorporated by reference
to Exhibit 10.8 to the Registration Statement)
10.3 Employment Agreement between the Company and David M.
Nussbaum (incorporated by reference to Exhibit 10.10 to
the Registration Statement)
10.4 Employment Agreement between the Company and Roger N.
Gladstone (incorporated by reference to Exhibit 10.11 to
the Registration Statement)
10.5 Employment Agreement between the Company and Robert H.
Gladstone (incorporated by reference to Exhibit 10.12 to
the Registration Statement)
10.6 Employment Agreement between the Company and Peter R.
Kent (incorporated by reference to Exhibit 10.13 to the
Registration Statement)
10.7 Warrant Agreement with Joachim Stahler (incorporated by
reference to Exhibit 10.14 to the Registration Statement)
10.8 Stock Purchase Agreement with Marvin and Sally Shochet,
including form of Option Agreement (incorporated by
reference to Exhibit 10.15 to the Registration Statement)
37
<PAGE>
10.9 Stock Option Agreement with Arnold B. Pollard
(incorporated by reference to Exhibit 4.2 to the
Company's Form S-8 filed on January 23, 1997, File No.
333-20273)
10.10 Stock Option Agreement with John P. Margaritis
(incorporated by reference to Exhibit 4.3 to the
Company's Form S-8 filed on January 23, 1997, File No.
333-20273)
10.11 1991 Employee Incentive Plan (incorporated by reference
to Exhibit 10.17 to the Registration Statement)
10.12 1996 Incentive Compensation Plan (incorporated by
reference to Exhibit 10.20 to the Registration Statement)
10.13 Amendment, effective as of December 19, 1996, to the 1996
Employee Incentive Plan (incorporated by reference to
Exhibit 10.13 to the Company's Form 10-K for the fiscal
year ended January 31, 1997)
10.14 Clearing Agent Agreement with Wertheim Schroder & Co.
Incorporated (incorporated by reference to Exhibit 10.18
to the Registration Statement)
10.15 Form of Stock Option Agreement (incorporated by reference
to Exhibit 10.19 to the Registration Statement)
10.16 Form of Indemnification Agreement (incorporated by
reference to Exhibit 10.21 to the Registration Statement)
10.17 Stock Option Agreement with Richard Y. Roberts
(incorporated by reference to Exhibit 10.17 to the
Form 10-K for the fiscal year ended January 31, 1998)
10.18 Deferred Compensation Plan
10.21 Subsidiaries of the Company
23.1 Consent of KPMG LLP
27.1 Financial Data Schedule BD (1/31/99)
(b) Reports on Form 8-K:
We filed a Current Report on Form 8-K on November 13, 1998 announcing a proposed
merger between one of our subsidiaries and a third party which was subsequently
terminated).
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Research Partners International, Inc.
By: /s/ Richard M. Feldman
--------------------------
Richard M. Feldman
Senior Vice President and
Chief Financial Officer
Date: April 30, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on April 30, 1999.
/s/ David M. Nussbaum Chairman of the Board and
- --------------------- Chief Executive Officer (Principal
David M. Nussbaum Executive Officer)
/s/ Roger N. Gladstone President and Director
- ---------------------
Roger N. Gladstone
/s/ Peter R. Kent Executive Vice President and
- ------------------- Chief Operating Officer and Director
Peter R. Kent
/s/ Lester Rosenkrantz Executive Vice President, Director
- ----------------------
Lester Rosenkrantz
/s/ Richard M. Feldman Senior Vice President and
- --------------------- Chief Financial Officer (Principal
Richard M. Feldman Accounting and Financial Officer)
/s/ James I. Krantz Director
- ----------------------
James I. Krantz
/s/ John P. Margaritis Director
- ------------------------
John P. Margaritis
/s/ Arnold B. Pollard Director
- ------------------------
Arnold B. Pollard
/s/ Peter McMullin Executive Vice President, Chief
- ------------------------ Investment Officer and Director
Peter McMullin
/s/ Robert T. McAleer Executive Vice President and Director
- ------------------------
Robert T. McAleer
/s/ Richard Y. Roberts Director
- ------------------------
Richard Y. Roberts
39
<PAGE>
GKN SECURITIES CORP.
DEFERRED COMPENSATION PLAN
THIS PLAN, executed this day of 1998, sponsored by GKN Securities Corp.
(the "Employer"), primarily for the purpose of providing deferred compensation
for a select group of management or highly compensated employees (collectively,
the "Executive");
W I T N E S S E T H
WHEREAS, the Executive is employed as a management level employee or a
highly compensated employee by the Employer arid the services of the Executive
and the Executive's experience and knowledge of the business affairs of the
Employer are extremely valuable to the Employer;
WHEREAS, the Employer desires that the Executive remain in its employ,
wishes to continue to receive the benefit of the Executive's knowledge and
experience, and wishes to offer the Executive an incentive in the form of
deferred compensation, the amount of which is determined on a year-to-year basis
by the Employer based upon the Executive's compensation while the Executive is
employed by the Employer;
NOW, THEREFORE, in consideration of the foregoing, the Employer intends
to provide deferred compensation for the Executive as follows:
ARTICLE I
DEFINITIONS
1.1 "Board" means the members of the Board of Directors of GKN
Securities Corp.
1.2 "Committee" means the Savings Plan Committee of the Board, the
members of which are made up of certain members of the Board.
1.3 "Employer" means GKN Securities Corp. and its successors.
1.4 "Fiscal Year" or "Years" (unless otherwise specified) means the
Employer's fiscal year as now constituted or as it may be changed hereafter from
time to time.
<PAGE>
ARTICLE II
ESTABLISHMENT
2.1 Establishment of Plan. The Employer hereby establishes the GKN
Securities Corp. Deferred Compensation Plan (the "Plan"), effective as of April
1, 1998, which is designed to assure supplemental retirement benefits for the
Executive following the completion of each applicable three-year vesting period
or death, in addition to those to which the Executive is otherwise entitled as
the Employer's employee.
2.2 Tax Consequences of Creation of Plan. The Plan is intended to be an
unfunded, top-hat benefit plan within the meaning of the Employee Retirement
Income Security Act of 1974 ("ERISA"). It is also intended that the Employer's
contributions under the Plan will be deductible to the Employer when benefits
are received by the Executive under Section 404(a) (5) of the Internal Revenue
Code of 1986 (the "Code"), and the Executive (or the Executive's designated
beneficiary) shall be taxed on the benefits upon actual receipt of payments or
the right to be fully-vested under Section 61 of the Code.
2.3 Effective Date. This Plan shall be effective as of April 1, 1998,
notwithstanding that it may have been signed subsequent thereto.
2.4 "Participant" means an employee employed as a registered
representative with the Employer, and as designated by the Committee for
participation in the benefits of the Plan, or whose beneficiaries obtain
benefits under the Plan in accordance with its terms.
2.5 "Plan" means the GKN Securities Corp. Deferred Compensation Plan,
as the same may be amended from time to time.
2.6 "Total Fund" for any year means the total amount of dollars which
shall have been fixed for any such year by the Board.
ARTICLE III
DESIGNATION OF PARTICIPANTS AND ALLOCATION OF TOTAL FUND
3.1 The Committee shall meet and specify the following:
(a) The name of each employee who shall be entitled to
participate in the Plan; and
(b) The method by which the amount to be allocated for the
benefit of each Participant from the total fund available for allocation shall
be determined. In establishing said method and the liabilities under the Plan
and contributions thereto, the Employer will use such methods and assumptions
that will reasonably reflect the allocation of any contribution to which the
Employer may, in its sole discretion, make for each Plan year. Such calculation
of contributions shall be based on a percentage of the payout compensation of
each Participant. The maximum deferral percentage shall be determined in
accordance with the table set forth in Section 3.2 herein that considers a
Participant's (i) level of annual production for the prior year, (ii) the number
2
<PAGE>
of years of employment with the Employer, and (iii) the maximum percentage of
deferral by certain Participants. The actual contribution percentage by the
Employer shall be the same percentage used to determine a Participant's actual
deferral percentage as a percentage of the Participant's payout compensation for
the current year as limited by the Maximum Deferral Table.
3.2 A Participant may elect to defer a certain percentage of his or her
payout compensation for the year. The maximum deferral percentage is based upon
the Participant's prior year annual production and his or her years of
employment with the Employer. The maximum deferral percentages table is, as
follows:
(a) Annual production in excess of $1,000,000 and minimum of
five years of employment with the Employer 7% deferral;
(b) Annual production in excess of $1,000,000 and three to
five years of employment with the Employer 4% deferral;
(c) Annual production in excess of $1,000,000, and less than
three years of employment with the Employer 1% deferral;
(d) Annual production between $500,000 and $1,000,000, and
minimum of five years of employment with the Employer 5% deferral;
(e) Annual production between $500,000 and $1,000,000, and
three to five years of employment with the Employer 2.5%;
(f) Annual production between $500,000 and $1,000,000, and
less than three years of employment with the Employer 1% deferral;
(g) Annual production between $250,000 and $500,000, and
minimum of five years of employment with the Employer 4% deferral;
(h) Annual production between $250,000 and $500,000, and three
to five years of employment with the Employer 2% deferral;
(i) Annual production between $250,000 and $500,000, and less
than three years of employment with the Employer 1% deferral; and
(j) Annual production less than $250,000, employee is not
eligible to participate in this Plan .0% deferral.
Once the Participant has made the election to defer a certain percentage of his
or her payout compensation, the percentage cannot be changed for that year.
However, in certain hardship cases, as specified below, the Participant may
elect to discontinue the deferral of the Participant's payout compensation for
the remainder of the Plan year. The applicable hardship purposes which authorize
a discontinuance of deferral of payout compensation are, as follows:
3
<PAGE>
(1) Extra-ordinary and medical care described "Code")
Section 213(d) Participant, his spouse, defined in Code Section persons
to obtain medical non-reimbursable expenses for in Internal Revenue
Code (the previously incurred by the or any of his dependents (as 152)
or necessary for these care;
(2) Extra-ordinary costs directly related to the
purchase of a principal residence for the Participant (excluding
mortgage payments);
(3) Payment of tuition, related educational fees, and
room and board expenses for the next twelve (12) months of
post-secondary education for the Participant, his spouse, children, or
dependents; or
(4) Payments necessary to prevent the eviction of the
Participant from his principal residence or foreclosure on the mortgage
of the Participant's principal residence.
3.3 Based upon the actual deferral percentage by the Participant, the
Employer will match the dollar amount of such deferral with a like amount of
dollar value of shares of common stock of the Employer. The common stock shall
either be issued from the Employer's treasury or purchased in the open market.
The Employer's matching contribution shall be made within 90 days of the end of
the applicable deferral year.
3.4 Vested means the nonforfeitable portion of any account maintained
on behalf of a Participant. Both the Participant's salary reduction contribution
deferrals and the related Employer matching contributions of Employer stock have
a three-year vesting period commencing at the end of the applicable deferral
year. Therefore, if a Participant leaves the employ of the Employer prior to the
end of the three year vesting period, the Participant losses both the Employer
matching contribution and the actual dollar amount of salary reduction
contributions deferred by the Participant and the related earnings thereon.
3.5 Payment of the amount allocated to a Participant shall be deferred
until the completion of the three-year vesting period for each individual year
that the annual salary reduction contribution is deferred by a Participant along
with the related Employer matching contribution. However, upon the death of a
Participant before the completion of the current three-year vesting period, all
amounts credited to his or her account which relate to the current three-year
vesting period shall become fully vested as of his or her date of death.
ARTICLE IV
CONTINGENT FUTURE PAYMENTS, INVESTMENTS AND FORFEITURES
4.1 The Committee shall cause a deferred account to be kept on behalf
of each Participant and each beneficiary of a deceased Participant which shall
reflect the value of the deferred salary reduction contributions, the earnings
thereon and the related Employer matching contributions, and any costs
associated with maintaining the deferred account, or, in the event the Committee
has acted under Section 4.6(b), the value of any vested deferred account
balance, payable to such Participant or beneficiary under the Plan.
4
<PAGE>
4.2 Until and except to the extent that deferred account balances
hereunder are distributed to or vested in the Participants or beneficiaries from
time to time in accordance with orders of the Committee, the interest of each
Participant and beneficiary therein is contingent only and is subject to
forfeiture as provided in Section 4.6. Title to, and beneficial ownership of,
any assets, whether cash or investments, which the Employer may set aside or
earmark to meet its deferred account balances obligation hereunder, shall not
remain with the Employer but shall be collected by the Trustee. No Participant
or beneficiary shall under any circumstances acquire any property interest in
any specific assets of the Employer until the time of distribution.
4.3 (a) In order to meet its deferred account balances obligation
hereunder, the Employer may, in its sole discretion, each year set aside or
earmark funds in an amount equal to the total salary reduction contribution
amounts deferred by the Participants for such year under Article 3.
(b) Funds set aside or earmarked to meet the Employer's
deferred account balance obligation hereunder may be kept in cash, or invested
and reinvested with investment direction from the appropriate Participants, in
the sole discretion of the Committee.
(c) Except as provided in paragraph (e), investments of funds
set aside or earmarked to meet the Employer's deferred account balance
obligation hereunder may only be invested in individual contracts selected by
the Employer. In the exercise of the foregoing discretionary investment powers,
the Committee may engage investment counsel, and, if it so desires, may delegate
to such counsel full or limited authority to select the securities in which the
funds are to be invested, or follow the investment directions of the
Participants. The cost of any such service shall be charged as an expense of
administering the Plan and paid as provided in Section 5.1.
(d) The income and gains and losses, both realized and
unrealized, from investments made pursuant to subparagraph (c), shall be net of
any expenses properly chargeable thereto and net of the Employer's current or
future income tax liability, if any, or savings attributable at the close of the
Year. Amounts so maintained shall increase or decrease the deferred account
balances receivable of the Participants or their beneficiaries.
(e) In the event of vesting at the completion of the
applicable three-year vesting period, or upon the resignation, or death of a
Participant, an amount equal to the value, determined as of the date of such
event and in the manner provided in paragraph (d) above, of the deferred account
balance payable to such Participant or his beneficiary shall be determined. The
total amount payable to the Participant shall be appropriately adjusted by an
amount equal to the net income or loss on such funds, determined in accordance
with the principles of paragraph (d) except that no expenses other than income
taxes and employment taxes shall be taken into account. In addition, such amount
in the event of resignation by a Participant shall be reduced by any amounts
which are non-vested due to the Participant's incompletion of the applicable
three-year vesting period.
4.4 The Committee shall from time to time determine the time and manner
of making distributions of deferred account balances in case of resignation,
death of a Participant, or completion of the applicable three-year vesting
period by such methods as it shall find appropriate providing incentive to
Participants for their continued service for the Employer. Commencement of
distribution in the form of a lump sum in each case may not be deferred by any
5
<PAGE>
Participant beyond the completion of the annual valuation at the end of the
three-year vesting period. In case of a Participant's death before distribution
is completed, the balance shall be distributed in a lump sum payment to the
Participant's beneficiary.
4.5 Each participant shall have the right to designate beneficiaries
who are to succeed to his contingent right to receive future payments hereunder
in the event of his death. In case of a failure of designation or the death of a
designated beneficiary without a designated successor, distribution shall be
made to the Participant's estate. No designation of beneficiaries shall be valid
unless in writing signed by the Participant, dated, and filed with the
Committee. Beneficiaries may be changed without the consent of any prior
beneficiaries.
4.6 (a) The contingent right of a participant or beneficiary to receive
future payments hereunder shall be forfeited upon the occurrence of any one or
more of the following events:
(1) if the Participant is discharged from employment
by the Company or a subsidiary for acts which, in the opinion of the
Committee, constitute an embezzlement of corporate funds; or
(2) if the Participant shall enter into a business or
employment which the Committee determines to be (i) detrimentally
competitive with the business of the Employer or a subsidiary, and (ii)
substantially injurious to the Employer's financial interest; or
(3) if the Participant terminates employment from the
Employer by reasons other than death, prior to completing the
three-year vesting period for an applicable deferred annual salary
reduction contribution.
(b) The Committee may at any time and from time to time order
all or any part of the value of the contingent right of a Participant or
beneficiary to receive future payments to be vested and no longer subject to
forfeiture, and may order payment of the amounts so vested on dates specified in
such orders, if it finds such action appropriate in the circumstances.
4.7 Nothing contained herein shall be deemed to create a trust of any
kind or create any fiduciary relationship. A Rabbi Trust shall contemporaneously
be established to hold the deferred salary reduction contributions of the
Participants and the related Employer matching contributions in shares of common
stock of the Employer. Funds invested hereunder shall be a part of the general
funds of the Employer upon the Employer's Insolvency, and no person other than
the Employer shall, by virtue of the provisions of this Plan, have any interest
in such funds. To the extent that any person acquires a right to receive
payments from the Employer under this Plan, such right shall be no greater than
the right of any unsecured general creditor of the Employer.
4.8 The Plan does not constitute a contract on the part of the Employer
to employ the Executive until age sixty-five (65) or to continue his employment
for any given period of time, either fixed or contingent. Moreover, the
Executive does not, by participating in the Plan, agree to continue in the
employment of the Employer for any specified interval of time. The employment
relationship, therefore, shall continue for so long as, but only for so long as,
such employment is mutually satisfactory to both parties. The Employer does not
6
<PAGE>
promise that Executive's employment will be continued for such interval as to
enable the Executive to obtain all or part of the benefits under the Plan.
ARTICLE V
BENEFITS
5.1 Deferred Benefits. Upon the Executive's completion of the
applicable three-year vesting period, the Employer shall pay to the Executive
the amount of his contingent future benefit determined by the Trustee, which
will be no less than 100% of the deferred amount, in a lump sum payment.
5.2 Resignation Benefits. Upon the Executive's resignation (as
determined by the Employer), the Employer shall pay to the Executive the amount
of his vested contingent future benefit in a lump sum payment, as it shall be
determined.
5.3 Death Benefits. If the Executive dies before his or her completion
of the applicable three-year vesting period, the Employer, in its sole
discretion, shall, within a reasonable time period after the Participant's
death, fully vest his or her account balance and pay to the designated
beneficiary the amount of this contingent future benefit determined by the
Trustee, which will be no less than 100% of the deferred amount, in a lump sum
payment.
ARTICLE VI
ADMINISTRATION
6.1 The books and records to be maintained for the purpose of the Plan
shall be maintained by the officers and employees of the Employer at its expense
and subject to the supervision and control of the Committee. All expenses of
administering the Plan, shall be paid by the Employer either from funds set
aside or earmarked under the Plan or from other funds.
6.2 To the extent permitted by law, the right of any Participant or any
beneficiary in any benefit or to any payment hereunder shall not be subject in
any manner to attachment or other legal process for the debts of such
Participant or beneficiary; and for the current year as limited by the Maximum
Deferral Percentage any such benefit or payment shall not be subject to
anticipation, alienation, sale, transfer, assignment or encumbrance.
6.3 No member of the Board or of the Committee and no officer or
employee of the Employer shall be liable to any person for any action taken or
omitted in connection with the administration of this Plan unless attributable
to his own fraud or willful misconduct; nor shall the Employer be liable to any
person for any such action unless attributable to fraud or willful misconduct on
the part of a director, officer or employee of the Employer.
7
<PAGE>
6.4 If a court shall determine that any provision of this Plan or any
portion of a provision is void or unenforceable, only such provision or portion
shall be rendered void or unenforceable. The remainder of this Plan shall
continue in full force and effect.
6.5 This Plan has been made and entered into the State of New York, and
the laws of such state shall govern the validity, interpretation and performance
of this Plan.
ARTICLE VII
AMENDMENT AND TERMINATION OF PLAN
7.1 The Plan may be amended in whole or in part from time to time by
the Board. The Plan may be terminated at any time by the Board.
7.2 Notice to every such amendment or of termination shall be given in
writing to each Participant and beneficiary of a deceased Participant.
IN WITNESS WHEREOF, the Employer has executed this Plan as of the date
first above written.
GKN SECURITIES CORP.
8
<PAGE>
GKN SECURITIES CORP.
DEFERRED COMPENSATION PLAN
INSTRUMENT OF AMENDMENT
WHEREAS, GKN Securities Corp. (the "Company") has adopted the GKN
Securities Corp. Deferred Compensation Plan (the "Plan"), effective as of April
1, 1998, to provide retirement benefits for certain of its employees and their
beneficiaries; and
WHEREAS, the Company reserved the right to amend the Plan upon the terms
and conditions provided therein and now desires to amend the Plan to modify,
effective December 31, 1998, the provisions of the Plan to provide that
contributions in employer securities shall be made in shares of common stock of
Research Partners International, Inc.;
NOW, THEREFORE, the Plan is amended, effective as of December 31, 1998, as
follows:
(1) Section 3.3 of the Plan is amended by its deletion in its entirety and
the substitution of the following Section 3.3 in lieu thereof:
"3.3 Based upon the actual deferral percentage by the
Participant, the Employer shall match the dollar amount of
such deferral with a like value of shares of common stock of
Research Partners International, Inc. Such shares of common
stock shall either be issued from the treasury of Research
Partners International, Inc. or purchased
<PAGE>
in the open market. The Employer's matching
contribution of shares of common stock of Research
Partners International, Inc. shall be made within
90 days of the end of the applicable deferral
year."
(2) Sections 3.4 of the Plan is amended by the deletion of the second
sentence therein and the substitution of the following sentence in lieu
thereof:
"Both the Participant's salary reduction contribution
deferrals and the related Employer Matching contributions of
shares of common stock of Research Partners International,
Inc. have a three-year vesting period commencing at the end of
the applicable deferral year."
(3) Section 4.7 of the Plan is amended by the deletion of the second
sentence therein and the substitution of the following sentence in lieu
thereof:
"A Rabbi Trust shall contemporaneously be established to hold
the deferred salary reduction contributions of the
Participants and the related Employer matching contributions
of shares of Common Stock of Research Partners International,
Inc."
IN WITNESS WHEREOF, the Company has caused this Instrument of Amendment
to be executed this day of , 1999.
GKN SECURITIES CORP.
<PAGE>
GKN SECURITIES CORP.
DEFERRED COMPENSATION PLAN TRUST
INSTRUMENT OF AMENDMENT
WHEREAS, GKN Securities Corp. (the "Company") has established the GKN
Securities Corp. Deferred Compensation Plan Trust Agreement (the "Trust"),
effective as of April 1, 1998, to provide retirement benefits for certain of its
employees and their beneficiaries; and
WHEREAS, the Company reserved the right to amend the Trust upon the terms
and conditions provided therein and now desires to amend the Trust to modify,
effective December 31, 1998, the provisions of the Trust to provide that
contributions in employer securities shall be made in shares of common stock of
Research Partners International, Inc.;
NOW, THEREFORE, the trust is amended, effective as of December 31,
1998, as follows:
(1) Section 1(e) of the Trust is amended by the deletion of the first
sentence therein and the substitution of the following sentence in lieu
thereof:
"The Company, in its sole discretion, may at any time, or from
time to time, make deposits of cash or other property
including shares of common stock of Research Partners
International, Inc. in satisfaction of the Company's matching
contribution obligation in trust with the Trustee to augment
the principal held, administered and disposed of by the
Trustee as provided in this Trust Agreement."
<PAGE>
(2) Section 5(a) of the Trust is amended by the deletion of the first
sentence therein and the substitution of the following sentence in lieu
thereof:
"The Trustee may invest in securities including shares of
common stock issued by Research Partners International, Inc.,
and shall receive shares of common stock of Research Partners
International, Inc. from the Company in satisfaction of the
Company's obligation to make Employer matching contributions."
IN WITNESS WHEREOF, the Company has caused this Instrument
of Amendment to be executed this day of ,
1999.
GKN SECURITIES CORP.
<PAGE>
Exhibit 21
LIST OF SUBSIDIARIES
Research Partners International, Inc.
Name of Subsidiary Jurisdiction of Incorporation
- ------------------ -----------------------------
GKN Securities Corp. New York
Southeast Research Partners, Inc. Delaware
Shochet Securities, Inc. Florida
Research Partners International AG Switzerland
Dalewood Associates, Inc. New York
GKN Capital Management Corp. New York
GKN Property Management, Inc. New Jersey
GKN Realty Corp. New Jersey
RPII Acquisition Corporation New York
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Research Partners International, Inc.
We consent to the incorporation by reference in Registration Statement No.
33-20273 on Form S-8 of Research Partners International, Inc. of our report
dated April 13, 1999, relating to the consolidated statements of financial
condition of Research Partners International, Inc. and subsidiaries as of
January 31, 1999, and 1998, 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, 1999, which report appears in
the January 31, 1999 Annual Report on Form 10-K of Research Partners
International, Inc.
/s/ KPMG LLP
KPMG LLP
New York, New York
April 30, 1999
<PAGE>
<TABLE> <S> <C>
<ARTICLE> BD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-END> JAN-31-1999
<CASH> 10,553,000
<RECEIVABLES> 2,251,000
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 2,650,000
<PP&E> 2,088,000
<TOTAL-ASSETS> 28,280,000
<SHORT-TERM> 0
<PAYABLES> 0
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 506,000
<LONG-TERM> 408,000
0
114,000
<COMMON> 1,000
<OTHER-SE> 21,839,000
<TOTAL-LIABILITY-AND-EQUITY> 28,280,000
<TRADING-REVENUE> 395,000
<INTEREST-DIVIDENDS> 1,334,000
<COMMISSIONS> 42,086,000
<INVESTMENT-BANKING-REVENUES> 3,973,000
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 49,000
<COMPENSATION> 37,323,000
<INCOME-PRETAX> (9,171,000)
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,383,000)
<EPS-PRIMARY> (0.90)
<EPS-DILUTED> (0.90)
</TABLE>
