UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K405
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended January 31, 2000
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to ________
Commission file number 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. [ X ]
The aggregate market value (based upon the last sale price) of the registrant's
Common Stock held by nonaffiliates on April 25, 2000, was $16,808,428.
On April 25, 2000, 8,934,914 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 its next annual meeting of stockholders.
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Research Partners International, Inc.
Form 10-K Annual Report
For the fiscal year ended January 31, 2000
Page
Part I
Item 1. Business 3
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 13
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 45
Part III
Item 10. Directors and Executive Officers 45
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial
Owners and Management 45
Item 13. Certain Relationships and Related Transactions 45
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 46
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PART I
ITEM 1. BUSINESS
General
Through our subsidiaries, GKN Securities Corp., EarlyBirdCapital, Inc. (formerly
known as Southeast Research Partners, Inc.), Shochet Securities, Inc., EBCapital
(Europe) AG (formerly known as Research Partners International, AG, referred to
in this report as EBC Europe) and Dalewood Associates, Inc., we provide
investment banking, online investing, merchant banking and asset management,
securities brokerage and trading services, with an emphasis on small-and
mid-capitalization companies and early-stage growth companies. These services
are provided through the following primary divisions:
o Full service retail
o Discount retail brokerage
o International
o Asset management
o Internet investment banking
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. Our Internet investment banking
activities commenced in February 2000, fiscal 2001. We sold our institutional
and research division operations in the summer of 1999. 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:
2000 1999 1998
---- ---- ----
Commissions 71% 89% 78%
Investment banking 5% 5% 13%
Market making and principal
transactions 10% (3)% 4%
Asset management 10% 2% 0%
Interest and other 4% 7% 5%
The following table illustrates our revenue breakdown by our principal
divisions:
2000 1999 1998
-------------- -------------- ----------
Full service retail $ 49,161,000 $ 29,894,000 $ 35,130,000
Institutional and research 4,137,000 10,266,000 5,464,000
Discount retail 8,112,000 7,831,000 6,607,000
Asset management 6,942,000 742,000 83,000
Other (including eliminations) $ 3,568,000 1,437,000 1,392,000
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Net revenues $ 71,920,000 $ 50,170,000 $ 48,676,000
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Recent Developments
Internet Investment Banking and Merchant Banking
We offer investment banking services on the Internet and merchant banking and
asset management through our majority-owned holding company EarlyBirdCapital.com
Inc. EarlyBirdCapital.com Inc. wholly-owns (i) EarlyBirdCapital, Inc., an
Internet investment banking broker-dealer, (ii) EBC Europe, a foreign
broker-dealer and (iii) Dalewood Associates, Inc., the manager and general
partner of a private investment fund. In February 2000, we raised $11,000,000
for EarlyBirdCapital.com Inc. through the sale of its preferred stock. Since its
launch date in February 2000, EarlyBirdCapital.com, through EarlyBirdCapital,
Inc., raised $12,500,000 in gross proceeds in two private placement.
EarlyBirdCapital, Inc. is registered as a broker-dealer with the Securities and
Exchange Commission and is a member of the National Association of Securities
Dealers, Inc. and the Securities Investor Protection Corporation.
EarlyBirdCapital, Inc. owns and operates www.earlybirdcapital.com, an Internet
website designed to provide client-companies with advisory services and access
to capital, and accredited investors with readily accessible investment
opportunities through the Internet. EarlyBirdCapital, Inc. receives brokerage
commissions, investment banking fees and underwriter warrants for its services
offered through the Internet.
Public Offering of Subsidiary; Further Involvement in Internet Market
In November 1999, we transferred all or our shares of Shochet Securities, Inc.,
our then wholly-owned discount brokerage subsidiary, to a newly formed holding
company, Shochet Holding Corp. In January 2000, Shochet Holding Corp. launched
its website, www.shochet.com, which offers online discount brokerage services.
In March 2000, Shochet Holding Corp. completed its initial public offering and
raised gross proceeds of $9,405,000 through the sale of 1,045,000 shares of its
common stock, which are traded on the Nasdaq Smallcap Market under the symbol
"SHOC." We own a majority of the outstanding stock of Shochet Holding Corp.
Sale of Certain Research Related Assets, Focus on Internet
In June 1999, pursuant to an Asset Purchase Agreement, Southeast Research
Partners, Inc., then our wholly-owned subsidiary, sold certain of its assets to
Ryan, Beck & Co., Inc., a wholly-owned subsidiary of BankAtlantic Bancorp, Inc.,
a publicly-held thrift holding company.
The purchase price for the transferred assets was $1,914,200, payable by Ryan
Beck to Southeast Research, $875,000 in cash and 1,039,200 shares of our Series
A Preferred Stock with a stated value of $1,039,200 which we subsequently
retired.
Prior to the sale of the assets, Southeast Research was primarily involved in
the research and institutional brokerage business. Southeast Research changed
its name to EarlyBirdCapital, Inc. and currently serves as our Internet
investment banking subsidiary.
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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 markets. When we receive a buy or sell order for a 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 Securities, a member of the NASD. At
March 31, 2000, GKN Securities operated four branch offices in New York City,
New York, Stamford, Connecticut, and Boca Raton and Miami, Florida, with a total
of 205 registered representatives. During fiscal 2000, GKN Securities generated
approximately $40,244,000 in commissions primarily from executing customers'
trades. GKN Securities' sales force serves a clientele who primarily consists of
individuals whom invest in over-the-counter equity securities.
Institutional and Research Division
We also provide research to our customers. From 1997 through June 1999, we
provided to our institutional customers and clients a full service securities
brokerage and investment banking and research boutique through Southeast
Research Partners which, in June 1999, sold certain of its assets to Ryan Beck,
as discussed above. The terms of the Ryan Beck sale give us the right to access
research of Ryan Beck-Southeast Research through June 2004. We continue to
provide our customers with research produced by our own research analysts, Ryan
Beck-Southeast Research, and our clearing broker Schroder & Co. The industries
covered by our own research include information technology, telecommunications,
e-commerce and Internet infrastructure.
Effective with fiscal 2000, the results of this division were reported as
discontinued operations because of the sale to Ryan Beck.
Discount Retail Division
We provide to our retail customers a full service discount brokerage service
through our Shochet Securities subsidiary, which is also a member of the NASD.
Shochet Securities is a wholly-owned subsidiary of Shochet Holding Corp., our
majority-owned subsidiary. At March 31, 2000, Shochet Securities operated five
branch offices in Hallandale, Miami Beach, South Miami, Tamarac and Delray
Beach, Florida. During fiscal 2000 Shochet generated approximately $7,268,000 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.
On July 31, 1999, Shochet Securities discontinued the operations of the on-site
day trading segment of its business.
In January 2000, Shochet commenced offering online brokerage services through
its website, www.shochet.com. Its ability to successfully implement and operate
an Internet brokerage business 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
We provided our international customers with access to U.S. markets through our
EBC Europe subsidiary from February 1996 when we established EBC Europe in
Zurich, Switzerland until October 1999. From October 1999 until March 31, 2000
our international operations were dormant and resumed operations, effective
April 1, 2000, with the return of our resident director of the international
division. EBC Europe holds a B banking license issued by the Canton of Zurich
and has made application for a SESTA federal (Switzerland) bank license. We plan
for this subsidiary to afford us exposure to international financial markets and
intend to raise capital from international markets for our merchant banking and
asset management business. The revenues and operating profit generated by EBC
Europe during fiscal 2000 did not represent a material percentage of our total
revenues or operating loss.
Internet Investment Banking Division
In February 2000, we commenced operations of our Internet investment banking
division through EarlyBirdCapital, Inc. EarlyBirdCapital, Inc. provides,
client-companies with advisory services and access to capital and, accredited
investors with readily accessible opportunities. EarlyBirdCapital, Inc. engages
in the business of financing early stage, emerging-growth companies through the
sale of their equity securities to investors in public and private offerings
conducted through conventional methods and through the Internet. During fiscal
200, EarlyBirdCapital generated minimal revenues and experienced minimal losses.
EarlyBirdCapital launched its website, www.earlybirdcapital.com, in February
2000, and has since completed two private placements raising gross proceeds of
$12,500,000.
Overall
At March 31, 2000, we collectively employed a total of approximately 250
registered representatives and serviced in excess of 24,800 customer accounts
with activity during the past two years with approximately $1.8 billion in
assets. The brokerage subsidiaries serve a diverse clientele with varying
investment characteristics.
Asset Management Division
We conduct our merchant banking and asset management business through our asset
management division. We entered the merchant banking and asset management
business in 1996 with the acquisition of Dalewood. Dalewood is the managing
partner of Dalewood Associates L.P., a private investment partnership that makes
investments in certain carefully selected companies and provides them with
financing to advance their business to the next stage of their development. At
March 31, 2000, Dalewood Associates L.P. had total assets of approximately $34
million, of which $20 million was invested in 35 companies.
As general partner of Dalewood Associates, LP, Dalewood Associates, Inc., is
entitled to an annual management fee based on the assets of the limited
partnership and an incentive fee based on the performance of the fund each year.
The revenues generated by Dalewood Associates, Inc. for fiscal 2000 were
$6,933,000.
Clearing Broker
We do not hold any funds or securities of our securities brokerage customers.
GKN Securities, EarlyBirdCapital, Shochet Securities and EBC Europe currently
use the services of Schroder & Co. Incorporated as their clearing agent on a
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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. Pursuant
to the terms of our agreement with our clearing broker, we have agreed to
indemnify and hold our clearing broker harmless from certain liabilities and
claims, including claims arising from transactions of our customers. 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 April 14, 2000, we had
approximately $28,251,890 of margin credit outstanding to our customers
through Schroder. In fiscal 2000, our losses from the margin credit activity
were insignificant, while net interest earned from margin credit activity
totaled $1,368,000.
Investment Banking
We provide our investment banking service, which encompasses corporate finance,
advisory and syndication services through the Internet investment banking
division.
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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.
As a result of technical advancements of the Internet, we intend to broaden our
underwriting activity by offering Internet based underwriting and private
placements to our clients. Our planned Internet underwriting service and our
private placement services are 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 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 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 division. Prior to its transition to Internet investment banking in June
2000, principal transaction activity was also conducted by the institutional and
research division. 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, 2000, GKN
Securities made markets in more than 86 securities. In the fiscal year ended
January 31, 2000, principal transactions related to securities in which our
brokerage subsidiaries made markets, including realized and unrealized gains and
losses, accounted for a gain of $197,000.
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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, 2000, we owned warrants to purchase securities of 40 companies for
which we have performed investment-banking services. These warrants had an
underlying market value of $5,197,000 as of March 31, 2000, of which we
recognized $2,691,000 in value, or 52%. During fiscal 2000, we recognized
total gains of $6,196,000 on the investment account warrants, or 9% of our
fiscal 2000 revenues.
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,
such as the NASD. GKN Securities, EarlyBirdCapital, Inc. and Shochet Securities
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 Securities',
EarlyBirdCapital, Inc.'s and Shochet Securities' 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 Securities is registered as a broker-dealer in
all 50 states, the District of Columbia, and Puerto Rico. EarlyBirdCapital, Inc.
is registered as broker-dealers in 46 states and the District of Columbia.
Shochet Securities is registered as a broker-dealer in 38 states and the
District of Columbia.
Broker-dealers are subject to regulations which cover all aspects of the
securities business, including sales methods and supervision, trading practices
among broker-dealers, use and safekeeping of customers' funds and securities,
capital structure of securities firms, record keeping and the conduct of
directors, officers and employees. Additional legislation, changes in rules
promulgated by the SEC and self-regulatory organizations, or changes in the
interpretation or enforcement of existing laws and rules, may directly affect
the mode of operation and profitability of broker-dealers. The SEC,
self-regulatory organizations, and state securities commissions may conduct
administrative proceedings 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.
Broker-dealers are also subject to the SEC's net capital rule. The net capital
rule, which specifies minimum net capital requirements for registered brokers
and dealers, is designated to measure the general financial integrity and
liquidity of a broker-dealer and requires that at least a minimum part of its
assets be kept in relatively liquid form. Net capital is essentially defined as
net worth (assets minimum liabilities), plus qualifying subordinated borrowings
and less certain mandatory deductions that result from excluding assets not
readily convertible into cash and from valuing certain other assets, such as a
firm's positions in securities, conservatively. Among these deductions are
adjustments in the market value of securities to reflect the possibility of a
market decline prior to disposition.
GKN Securities has elected to compute its net capital under the alternative
method permitted by regulatory rules, which requires that it maintain minimum
net capital, as defined, greater than or equal to $250,000. At January 31, 2000,
GKN Securities had net capital and a net capital requirement of $6,343,000 and
$250,000, respectively.
EarlyBirdCapital, Inc. has elected to compute its net capital under the standard
aggregate indebtedness method permitted by regulatory rules, which requires that
the ratio of aggregate indebtedness to net capital, both as defined, shall not
exceed 15-to-1. At January 31, 2000, EarlyBirdCapital, Inc. had net capital of
$93,000, which was $7,000 in deficit of its required net capital of $100,000. In
February 2000, this deficit was corrected.
Shochet Securities has elected to compute its net capital under the standard
aggregate indebtedness method permitted by regulatory rules, which requires that
the ratio of aggregate indebtedness to net capital, both as defined, shall not
exceed 15-to-1. At January 31, 2000, Shochet Securities had net capital and a
net capital requirement of $195,000 and $100,000, respectively.
Failure to maintain the required net capital may subject a firm to suspension or
expulsion by the NASD, the SEC and other regulatory bodies and ultimately may
require its liquidation. The net capital rule also prohibits payments of
dividends, redemption of stock and the prepayment or payment in respect of
principal of subordinated indebtedness if net capital, after giving effect to
the payment, redemption or repayment, would be less than specified percentage of
the minimum net capital requirement. Compliance with the net capital rule could
limit those operations of our brokerage subsidiaries that require the intensive
use of capital, such as underwriting and trading activities, and also could
restrict our ability to withdraw capital from our operating subsidiaries, which
in turn, could limit our ability to pay dividends, repay debt and redeem or
purchase shares of our outstanding capital stock.
Our broker-dealer subsidiaries are subject to federal and state securities laws
which govern the offer and sale of securities and the operation of the
securities markets and broker-dealers. When enacted, there securities laws did
not contemplate the conduct of a securities business through the Internet.
Although the SEC has provided guidance on various issues related to the offer
and sale of securities and the conduct of a securities business through the
Internet, the application of the laws to the conduct of a securities business
through the Internet continues to evolve.
EBC Europe 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. EBC Europe 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 EBC Europe 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, EBC Europe 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, EBC Europe applied to
obtain the necessary securities trader licenses under SESTA. The application was
renewed and refiled in fiscal 2000.
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, Internet companies and
insurance companies offering financial services, and from other investment
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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.
Trademark
The trademark "ShochetOnline!" is registered in the United States. We have also
filed for tradename protection regarding the name EarlyBirdCapital. We have been
advised by the United States Patent and Trademark Office that an unaffiliated
third party also has claimed the name. Although we intend to enforce our rights
to the name EarlyBirdCapital, there is no assurance that we will be successful
in doing so. If we are forced to cease using the name, we will incur additional
expense to change the name and to establish good will with respect to the new
name.
Employees
At March 31, 2000, we had a total of 362 full-time employees, including
approximately 250 registered representatives. We consider our relationship with
our employees to be good.
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ITEM 2. PROPERTIES
Our principal executive office is located at 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 nine 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 2000.
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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,
2000 for the last two fiscal years:
High Low
---- ----
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
Fiscal 2000
First Quarter $10.00 $1.63
Second Quarter $4.50 $2.34
Third Quarter $3.50 $2.00
Fourth Quarter $5.88 $2.00
On April 25, 2000, the last sale price of the Common Stock as reported by Nasdaq
was $2.94.
Holders of Common Stock
On April 25, 2000, 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 intend to retain all earnings for use in our business.
Sales of Unregistered Securities
The following unregistered securities were issued by us during fiscal 2000,
which have not been previously reported in our fiscal 2000 reports: (i) options
to purchase 285,251 shares of our common stock to various employees of our firm,
(ii) 16,128 shares issued to former employees of our firm upon conversion of
our preferred stock and (iii) 82,504 shares issued to our employees. The options
are exercisable for a period of up to ten years at prices ranging from $3.13 to
$4.00 per share. 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>
Year ended January 31,
------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Total revenues $67,783 $40,607 $43,212 $ 67,750 $ 43,019
Total expenses $57,039 $47,775 $52,591 $ 56,394 $ 36,732
Income (loss) before income taxes $10,744 $(7,168) $(9,379) $ 11,356 $ 6,287
Income (loss) from continuing
Operations $ 6,822 $(5,889) $(6,117) $ 6,329 $ 3,469
Loss from discontinued
Operations $ (714) $(1,494) $ (396) $ - $ -
Loss from disposal of
Discontinued operations $(1,253) $ - $ - $ - $ -
Net income (loss) $ 4,855 $(7,383) $(6,513) $ 6,329 $ 3,469
Basic earnings (loss)
per common share
From continuing operations $ 0.80 $ (0.72) $ (0.75) $ 0.93 $ 0.69
From discontinued operations $ (0.23) $ (0.18) $ (0.05) $ - $ -
Net earnings (loss) $ 0.57 $ (0.90) $ (0.80) $ 0.93 $ 0.69
Diluted earnings (loss)
per common share
From continuing operations $ 0.79 $ (0.72) $ (0.75) $ 0.88 $ 0.60
From discontinued operations $ (0.23) $ (0.18) $ (0.05) $ - $ -
Net earnings (loss) $ 0.56 $ (0.90) $ (0.80) $ 0.88 $ 0.60
Weighted average shares
outstanding - basic 8,580 8,207 8,114 6,824 5,037
Weighted average shares
outstanding - diluted 8,690 8,207 8,114 7,175 5,737
Balance Sheet Data:
Total assets $42,200 $ 28,280 $36,972 $51,633 $27,853
Total liabilities (excluding
Subordinated debt) $14,935 $ 5,918 $ 8,775 $15,869 $12,143
Subordinated debt $ 314 $ 408 $ 576 $ 738 $ 934
Stockholders' equity $26,951 $ 21,954 $27,621 $35,026 $14,776
Other Data:
Ratio of assets to stockholders'
Equity 1.57 1.29 1.34 1.47 1.89
Return on average equity 19.9% (29.0%) (19.9%) 25.0% 26.1%
Pre-tax return on average equity 43.9% (36.0%) (30.4%) 44.9% 47.4%
Book value per share $ 3.12 $ 2.61 $ 3.41 $ 4.26 $ 3.02
Registered representatives 250 227 253 275 224
</TABLE>
14
<PAGE>
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, investment banking, online brokerage,
securities brokerage, securities trading and merchant banking and asset
management, with an emphasis on emerging-growth companies, are subject to
general economic and market conditions and volatility of trading markets,
specifically the emerging-growth market.
During the year we performed a detailed examination of all of our business
units, with specific emphasis on current and future profitability and
compatibility with our long-term strategy. As a result of this examination we
decided to discontinue our efforts in the On-site Day Trading segment of Shochet
Securities and to sell the primary assets of our Institutional and Research
segment of Southeast Research Partners. During the year, these business
activities incurred $714,000 of operating losses and $1,253,000 of costs
associated with disposal and shutdown. These costs are not expected to recur in
the future.
As part of the implementation of our strategic plan during the last half of the
year we fully committed to the launch of our online brokerage effort, Shochet
Online!, through Shochet Securities, and to the launch of our Internet
investment banking effort, EarlyBirdCapital.com. Each of these business units
launched web enabled business plans during the fourth quarter of fiscal 2000 and
the first quarter of fiscal 2001. In support of each of these new business
efforts, each of these entities separately raised capital during the first
quarter of fiscal 2001. Shochet Holding Corp. raised $9,405,000 of gross
proceeds through an initial public offering, while EarlyBirdCapital.com raised
$11,000,000 of gross proceeds through a private placement.
Certain revenue and expense amounts in prior years have been reclassified to
reflect the impact of the discontinued operations.
Results of any individual period should not be considered representative of
future profitability. A significant portion of our expenses are fixed and do
not vary with market activity. Substantial fluctuations could occur in our
revenues and net income from period to period.
Results of Operations
Year Ended January 31, 2000 vs. Year Ended January 31, 1999
Basic and diluted earnings per share of common stock for the year ended January
31, 2000, were $0.57 and $0.56, respectively, as compared to a loss of $0.90, on
both basic and diluted basis, for the year ended January 31, 1999. Earnings from
continuing operations for the year ended January 31, 2000 were $0.80 on a basic
basis and $0.79 on a diluted basis. For the year ended January 31, 1999 the
comparable amounts were a basic and diluted loss of $0.72. The significant
turnaround and profitability in the current year was primarily attributable to
gains in our investment portfolio and the success of our asset management
division.
15
<PAGE>
Revenues
Total revenues increased by $27,176,000, or 67%, to $67,783,000 for the fiscal
year, led by significant increases in commission revenues, gains on principal
transactions and revenues generated from asset management activities.
Commission revenues increased by $12,098,000, or 34%, to $48,211,000. The
increase was primarily attributable to a 33% increase in the number of trades.
Investment banking revenues increased by $1,189,000, or 59%, to $3,192,000. We
raised $38 million for our clients in fiscal 2000 through one public offering
and five private placements, an increase from fiscal 1999, during which we
raised $26 million through 2 public offerings and 2 private placements. The
increase in the current year reflected a general receptivity to the financing of
early-stage companies, particularly in the private marketplace.
Revenues from principal transactions increased by $7,726,000, from a loss of
$1,144,000 in the prior year to a gain of $6,582,000 in the current year. This
increase was primarily due to a gain of $6,196,000 in the investment account.
Asset management activities generated revenues of $6,933,000, compared to
$741,000 in the prior year, reflecting an 836% increase. This increase was
directly attributable to the investment results of Dalewood Associates LP. We
recognized $3,669,000 of gains in our partnership interest in the partnership
and $3,264,000 in incentive performance and management fees.
Interest income increased by $343,000, or 28%, to $1,588,000, primarily due to
increased customer margin credit balances.
Other revenues decreased by $372,000 or 23%, to $1,277,000, primarily as a
result of a one-time gain on the sale of GKN Asset Management reflected in the
prior year.
Expenses
Total expenses for fiscal 2000 were $57,039,000, a 19% increase over fiscal
1999. Total expenses as a percentage of revenues decreased to 84% from 118%. The
increase in expenses for fiscal 2000 was primarily attributable to an increase
in compensation & benefit expenses and professional fees, partially offset by
decreases in communication, occupancy & equipment, and business development
expenses.
Compensation and benefit expense increased by $8,526,000, or 29%, to
$38,386,000. These expenses are primarily variable as commissions to brokers are
paid as a percentage of commission revenues generated. The expense increase in
fiscal 2000 is consistent with the increase in commission revenues.
Communications expenses decreased by $548,000, or 14%, to $3,470,000. This
decrease was primarily a result of decreased costs of obtaining market data
services.
Brokerage clearing and exchange fees increased by $193,000 or 7%, to $3,032,000.
This increase was primarily attributable to the increase in trade volume for the
year.
Occupancy & equipment expense decreased by $377,000, or 7%, to $4,660,000. The
decrease was caused by lower equipment and repair costs.
16
<PAGE>
Business development expense decreased by $419,000, or 28%, to $1,072,000. This
decrease was attributable to a general decrease in promotional and developmental
activities.
Professional fees increased by $1,248,000, or 65%, to $3,161,000. 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.
Other expenses increased by $641,000, or 24%, to $3,258,000 primarily due to
increased errors caused by more volatile markets and an increase in legal
reserves caused by an increase in the number and size of arbitrations.
Income taxes
For the year ended January 31, 2000, we recognized a total tax provision of
$4,054,000. $3,922,000 was attributable to income generated from continuing
operations, $503,000 was related to the disposal of the Institutional and
Research segment, while a benefit of $371,000 was generated by the loss from the
operations of discontinued operations. This compares to a $1,788,000 tax benefit
recognized in the prior year, of which $1,279,000 was recognized based on losses
from continuing operations and $509,000 was the result of discontinued
operations.
Discontinued operations
During the second quarter of fiscal 2000, management discontinued the operations
of the On-site Day Trading and Institutional and Research segments of our
business. Losses from the discontinuation of these segments were estimated and
recorded at the date of discontinuance or disposal. The loss recognized on the
sale of the Institutional and Research segment was $1,253,000, which includes
income tax expense of $503,000. There were no comparable losses on disposal in
the prior year. Losses from the operations of the discontinued businesses were
$714,000, net of income tax benefit of $371,000, in the current year, compared
to losses of $1,494,000, net of income tax benefit of $509,000, in the prior
year. Management expects that these were one-time losses and that they will not
reoccur.
Weighed average common shares outstanding
The average numbers of common shares and common stock equivalents used in the
computation of basic and diluted earnings per share were 8,579,559 and
8,689,729, respectively, in fiscal 2000, as compared to 8,206,652 for both basic
and diluted computations in fiscal 1999.
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. Per
share loss amounts relating to continuing operations were $0.72, while
discontinued operations generated a loss of $0.18. Comparable amounts in fiscal
1998 were losses of $0.75 and $0.05, respectively. 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.
17
<PAGE>
Revenues
Total revenues decreased by $2,605,000, or 6%, to $40,607,000 for the fiscal
year, led by significant decreases in investment banking revenue and gains from
principal transactions, offset by increases in commissions and other revenues.
Commission revenues increased by $2,247,000, or 7%, to $36,113,000. 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 $3,605,000, or 64%, to $2,003,000. 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 $2,656,000, as we recognized a
loss of $1,144,000 compared to a gain of $1,512,000 in the prior year. This
decrease was primarily due to a decline in revenues from the investment account
of $1,500,000.
Asset management activities generated revenues of $741,000, compared to $83,000
in the prior year, reflecting an 793% increase. This increase was directly
attributable to the investment results of Dalewood Associates LP.
Interest income decreased by $94,000, or 7%, to $1,245,000, primarily due to
lower interest rates.
Other revenues increased by $845,000 or 105%, to $1,649,000, primarily as a
result of a gain on the sale of GKN Asset Management AG, one of our Swiss
subsidiaries.
Expenses
Total expenses for fiscal 1999 were $47,775,000, a 9% decrease over fiscal 1998.
Total expenses as a percentage of revenues decreased to 118% from 122%. The
decrease in expenses was generated by decreases in compensation & benefits,
investigations and settlements, and other expenses, partially offset by an
increase in occupancy & equipment expenses and professional fees.
Compensation and benefit expense decreased by $1,600,000, or 5%, to $29,860,000.
These expenses are primarily variable as commissions to brokers are paid as a
percentage of commission revenues generated. The expense decrease in fiscal 1999
was primarily generated through a concerted effort by us to reduce fixed
compensation costs.
Communications expenses decreased by $86,000, or 2%, to $4,018,000. This
decrease was primarily a result of concerted cost control efforts.
Brokerage clearing and exchange fees increased by $115,000 or 4%, to $2,839,000.
This increase was primarily attributable to the increase in trade volume for the
year.
Occupancy expense increased by $1,875,000, or 59%, to $5,037,000. The increase
was primarily caused by the move of our headquarters and the investment made to
upgrade our technological infrastructure.
18
<PAGE>
Business development expense increased by $128,000, or 9%, to $1,491,000. This
increase was attributable to increased promotional and consulting expenses.
Professional fees increased by $200,000, or 12%, to $1,913,000. 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 $3,188,000, or 55%, to $2,617,000 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 equivalents 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.
Liquidity and Capital Resources
Approximately 54% of our assets at January 31, 2000 were highly liquid,
consisting primarily of cash and cash equivalents, securities inventories and
receivables from other broker-dealers, all of which fluctuate depending upon the
levels of customer business and trading activity. Receivables from
broker-dealers, which are primarily from our clearing broker, turn over rapidly.
As a securities dealer, we may carry significant levels of securities
inventories to meet customer needs. Our inventory of 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. Additionally, approximately 20% of our assets are held in investments
that are primarily an investment in Dalewood Associates LP, which we could
liquidate, if necessary. 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 Securities, EarlyBirdCapital, Inc. and Shochet
Securities, 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 Securities'
net capital position as of January 31, 2000, was $6,343,000, which was
$6,093,000 in excess of its net capital requirement. EarlyBirdCapital, Inc.'s
net capital position as of January 31, 2000, was $93,000, which was $7,000 in
deficit of its net capital requirement. This deficit was covered in February
2000. Shochet Securities' net capital position as of January 31, 2000, was
$195,000, which was $95,000 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 $2.5 million in a restricted cash escrow account with
the provider. We intend to use debt and lease financing prudently in the future.
19
<PAGE>
Our subsidiaries have also raised capital through the sale of their securities.
In February 2000, EarlyBirdCapital, our majority owned subsidiary which
wholly-owns EBCapital (Europe) AG, Dalewood Associates, Inc. and
EarlyBirdCapital, Inc. (the Internet investment bank), raised $11 million
through the sale of its preferred stock to a combination of venture capital
sources and individual investors. In March 2000, Shochet Holding Corp. completed
its initial public offering raising $9,405,000 of gross proceeds.
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.
Other Matters
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 inability to liquidate assets or redirect the
deployment of assets contained in illiquid investments. In addition, our market
and liquidity risks associated with asset revaluation are increased because
these risks associated with asset revaluation are increases because these risks
for us are concentrated and thus subject us to increased risks if market
conditions deteriorate.
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.
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.
20
<PAGE>
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. 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 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 the
considerations set forth in Exhibit 99 attached hereto. 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.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
RESEARCH PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Financial Condition
<TABLE>
January 31,
----------------------------------
Assets 2000 1999
--------------- ---------------
<S> <C> <C>
Cash and cash equivalents $ 7,747,000 10,553,000
Receivable from brokers and dealers 12,216,000 2,251,000
Securities owned, at market value 2,918,000 1,695,000
Securities owned, not readily marketable, at fair value 2,355,000 955,000
Investment in affiliate 5,248,000 1,627,000
Investment fees receivable 3,253,000 453,000
Office furniture, equipment and leasehold improvements, net 2,529,000 2,088,000
Goodwill, net 1,592,000 3,681,000
Loans receivable 987,000 1,563,000
Income taxes receivable 576,000 1,909,000
Other assets 2,779,000 1,505,000
--------------- ---------------
Total assets $ 42,200,000 28,280,000
=============== ===============
Liabilities and Stockholders' Equity
Liabilities:
Securities sold, not yet purchased, at market value $ 1,677,000 506,000
Commissions payable 3,045,000 2,658,000
Income taxes payable 1,028,000 --
Deferred tax liability 3,145,000 29,000
Accrued expenses and other liabilities 6,040,000 2,725,000
--------------- ---------------
14,935,000 5,918,000
Liability subordinated to the claims for general creditors 314,000 408,000
--------------- ---------------
Total liabilities 15,249,000 6,326,000
--------------- ---------------
Stockholders' equity:
Series A preferred stock, $.10 par value; 1,200,000 authorized;
0 and 1,140,000 shares issued and outstanding, respectively -- 114,000
Common stock, $.0001 par value; 35,000,000 shares authorized;
9,209,875 shares issued; 8,629,213 and 8,410,899 shares
outstanding, respectively 1,000 1,000
Additional paid-in capital 20,342,000 21,022,000
Retained earnings 9,206,000 4,351,000
Accumulated other comprehensive loss (51,000) (18,000)
--------------- ---------------
29,498,000 25,470,000
Less treasury stock, at cost: 580,662 and 798,796 shares respectively (2,547,000) (3,516,000)
--------------- ---------------
Total stockholders' equity 26,951,000 21,954,000
--------------- ---------------
Total liabilities and stockholders' equity $ 42,200,000 28,280,000
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
Year ended January 31,
--------------------------------------------
2000 1999 1998
------------- ------------- --------------
<S> <C> <C> <C>
Revenues:
Commissions $ 48,211,000 36,113,000 33,866,000
Investment banking 3,192,000 2,003,000 5,608,000
Principal transactions 6,582,000 (1,144,000) 1,512,000
Equity in earnings of unconsolidated affiliates 3,669,000 288,000 45,000
Asset management fees 3,264,000 453,000 38,000
Interest 1,588,000 1,245,000 1,339,000
Other 1,277,000 1,649,000 804,000
------------- ------------- --------------
Total revenues 67,783,000 40,607,000 43,212,000
------------- ------------- --------------
Expenses:
Compensation benefits 38,386,000 29,860,000 31,460,000
Communication 3,470,000 4,018,000 4,104,000
Brokerage, clearing and exchange fees 3,032,000 2,839,000 2,724,000
Occupancy and equipment 4,660,000 5,037,000 3,162,000
Business development 1,072,000 1,491,000 1,363,000
Professional fees 3,161,000 1,913,000 1,713,000
Investigations and settlements -- -- 2,260,000
Other 3,258,000 2,617,000 5,805,000
------------- ------------- --------------
Total expenses 57,039,000 47,775,000 52,591,000
------------- ------------- --------------
Income (loss) before income taxes 10,744,000 (7,168,000) (9,379,000)
Income tax expense (benefit) 3,922,000 (1,279,000) (3,262,000)
------------- ------------- --------------
Income (loss) from continuing operations 6,822,000 (5,889,000) (6,117,000)
------------- ------------- --------------
Discontinued operations:
Loss from operations of the discontinued Institutional and
Research segment and On-site Day Trading segment, net of
income tax benefit of $371,000, $509,000, and $181,000, respectively (714,000) (1,494,000) (396,000)
Loss from disposal of the Institutional and Research segment,
net of income tax expense of $503,000 (1,253,000) -- --
------------- ------------- --------------
Net income (loss) $ 4,855,000 (7,383,000) (6,513,000)
============= ============= ==============
Basic (loss) earnings per common share:
Earnings (loss) from continuing operations $ 0.80 (0.72) (0.75)
============= ============= ==============
(Loss) from discontinued operations $ (0.23) (0.18) (0.05)
============= ============= ==============
Net earnings (loss) $ 0.57 (0.90) (0.80)
============= ============= ==============
Diluted (loss) earnings per common share:
Earnings (loss) from continuing operations $ 0.79 (0.72) (0.75)
============= ============= ==============
(Loss) from discontinued operations $ (0.23) (0.18) (0.05)
============= ============= ==============
Net earnings (loss) $ 0.56 (0.90) (0.80)
============= ============= ==============
Weighted average common shares outstanding - basic 8,579,559 8,206,652 8,114,245
============= ============= ==============
Weighted average common shares outstanding - diluted 8,689,729 8,206,652 8,114,425
============= ============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years ended January 31, 2000, 1999 and 1998
<TABLE>
Accumulated
Preferred stock Common stock Additional other Treasury stock
--------------- ------------------ paid-in Retained comprehensive -------------------
Shares Amount Shares Amount capital earnings income Shares Amount Total
------ ------- --------- -------- ----------- ---------- ----------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
acquisition 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) (798,976) (3,516,000) 21,954,000
Net income -- -- -- -- -- 4,855,000 -- -- -- 4,855,000
Starting bonuses
awarded -- -- -- -- (147,000) -- -- 79,746 351,000 204,000
Stock options
exercised -- -- -- -- (109,000) -- -- 66,631 294,000 185,000
Forfeitures of
stocks issued -
compensation plan -- -- -- -- 112,000 -- -- (27,046) (112,000) --
Stock issued -
deferred
compensation plan -- -- -- -- (93,000) -- -- 34,676 153,000 60,000
Stock issued -
401(k) plan -- -- -- -- (131,000) -- -- 48,179 212,000 81,000
Preferred stock
conversion (100,800) (10,000) -- -- (61,000) -- -- 16,128 71,000 --
Cancellation of
preferred stock (1,039,200) (104,000) -- -- (894,000) -- -- -- -- (998,000)
Note receivable
paid -- -- -- -- 121,000 -- -- -- -- 121,000
Amortization of
unearned
compensation -- -- -- -- 522,000 -- -- -- -- 522,000
Translation
adjustment -- -- -- -- -- --(33,000) -- -- (33,000)
--------- -------- ----------- ------ ----------- ---------- -------- ----------- ------------- -------------
Balance at
January 31, 2000 -- $ -- 9,209,875 $ 1,000 20,342,000 9,206,000(51,000) (580,662) $ (2,547,000) 26,951,000
========= ======== =========== ======= ===================== ======== ========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
Years ended January 31,
------------------------------------------------
2000 1999 1998
-------------- --------------- ---------------
<S> <C> <C> <C>
Operating activities:
Net (loss) income $ 4,855,000 (7,383,000) (6,513,000)
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization 590,000 790,000 724,000
Equity in earnings of unconsolidated affiliates (3,669,000) (288,000) (45,000)
Deferred taxes -- (207,000) (338,000)
Loss (gain) on sale of subsidiaries 750,000 (599,000) --
Translation of adjustment (33,000) 18,000 (33,000)
Other -- 657,000 682,000
-------------- --------------- ---------------
2,493,000 (7,012,000) (5,523,000)
(Increase) decrease in operating assets:
Investment management fees receivable (2,800,000) (453,000) (38,000)
Receivable from brokers and dealers (9,965,000) (1,355,000) 9,115,000
Securities owned, at market value (1,223,000) 8,459,000 4,623,000
Securities owned, not readily marketable (1,400,000) 488,000 (78,000)
Loans receivable 432,000 (159,000) 47,000
Income taxes receivable 1,333,000 1,635,000 (3,544,000)
Other assets (1,347,000) 843,000 (624,000)
Increase (decrease) in operating liabilities:
Securities sold, not yet purchased 1,171,000 (1,814,000) (4,687,000)
Commissions payable 387,000 1,217,000 (1,382,000)
Income taxes payable 1,028,000 (1,796,000) 387,000
Deferred tax liability 3,116,000 -- (252,000)
Accrued expenses and other liabilities 3,315,000 (305,000) (2,246,000)
-------------- --------------- ---------------
Net cash provided by (used in)
operating activities (3,460,000) (252,000) (4,202,000)
-------------- --------------- ---------------
Investing activities:
Purchase of office furniture, equipment and
leasehold improvements (1,134,000) (989,000) (731,000)
Investment in limited partnership -- -- (903,000)
Liquidation of investment in limited partnership 48,000 2,301,000 --
Acquisition, net of cash acquired -- -- (176,000)
Sale of subsidiary, net of cash sold 875,000 666,000 --
Goodwill resulting from acquisition -- (158,000) (36,000)
-------------- --------------- ---------------
Net cash provided by (used in)
investing activities (211,000) 1,820,000 (1,846,000)
-------------- --------------- ---------------
Financing activities:
Issuance of common stock for preferred stock
conversion (10,000) -- 75,000
Sale (purchase) of treasury stock 969,000 1,050,000 (3,586,000)
Repayment of subordinated debt (94,000) (176,000) (186,000)
-------------- --------------- ---------------
Net cash provided by (used in)
financing activities 865,000 874,000 (3,697,000)
-------------- --------------- ---------------
Net increase (decrease) in cash and
cash equivalents (2,806,000) 2,442,000 (9,745,000)
Cash and cash equivalents at beginning of year 10,553,000 8,111,000 17,856,000
-------------- --------------- ---------------
Cash and cash equivalents at end of year $ 7,747,000 10,553,000 8,111,000
============== =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 2000, 1999 and 1998
(1) Organization
The consolidated financial statements include the activities of Research
Partners International, Inc., and its subsidiaries (the "Company"). The
Company is primarily engaged in the following segments: full service
retail, discounted retail securities brokerage and asset management
services. These segments provide the following services: securities
brokerage, research, investment banking, trading services for individuals,
institutions and corporations, and asset management services through the
Company's wholly owned subsidiaries. During fiscal 2000, the Company
discontinued its Institutional and Research business segment.
All significant intercompany accounts and transactions are eliminated in
consolidation. Where appropriate, prior year amounts have been reclassified
to conform to the current year 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.
Receivables from Brokers and Dealers
Receivables from brokers and dealers consist primarily of amounts due from
the Company's clearing organization, which provides clearing and depository
services for brokerage transactions on a fully disclosed basis.
26
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 2000, 1999 and 1998
(2) Summary of Significant Accounting Policies--(Continued)
Securities
Securities transactions and the related revenues and expenses, including
commission revenues and expenses, are recorded on a trade-date basis.
Securities owned and securities sold, not yet purchased, consist primarily
of equities and are stated at quoted market values. Securities owned, not
readily marketable, consist primarily of warrants and are stated at
management's estimate of fair value based on a percentage of the underlying
securities. Unrealized gains and losses are included in revenues from
principal transactions.
Investments in affiliates
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 $2,671,000 and
$2,378,000 at January 31, 2000 and 1999, respectively. Office furniture and
equipment are depreciated using either an accelerated method or a
straight-line method, where applicable, over the 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 $295,000 and $383,000 at January 31, 2000 and 1999, respectively.
Management reviews goodwill for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable.
Investment Banking Fees
Investment banking management and underwriting fee revenues are recognized
when the deal is complete and the income is reasonably determinable.
27
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 2000, 1999 and 1998
(2) Summary of Significant Accounting Policies--(Continued)
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.
(3) Business Acquisitions, Divestitures and Discontinued Operations
On March 13, 1997, the Company acquired all of the outstanding stock of
Southeast for $499,000 in 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 accompanying consolidated statement of operations for the
year ended January 31, 1999.
On December 31, 1998, the Company reduced its investment in Dalewood
Associates, LP. The reduction resulted in no gain or loss.
28
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 2000, 1999 and 1998
(3) Business Acquisitions, Divestitures and Discontinued
Operations--(Continued)
On June 25, 1999, the Company discontinued the operations of its
Institutional and Research segment and sold certain assets, including the
name "Southeast Research Partners, Inc.," of the discontinued segment, to
Ryan Beck & Co., Inc., a subsidiary of BankAtlantic Bancorp., Inc., a
publicly held thrift holding company for $1,914,000. Proceeds from the sale
consist of $875,000 in cash and 1,039,200 shares of Series A Preferred
Stock with a stated value of $1,039,200. The Company recognized a loss of
$750,000 and $1,253,000 before and after tax, respectively. Southeast was
then renamed EarlyBirdCapital.com, Inc. ("EarlyBird").
During the quarter ended July 31, 1999, the Company discontinued the
operations of the On-site Day Trading segment, which had previously been
included in the results of the Discounted Retail segment. The segment had
$153,000 and $78,000 in gross revenues for the years ended January 31, 2000
and 1999, respectively.
(4) Related Party Transactions
Loans receivable from officers and employees of the Company were included
in loans receivable at January 31, 2000 and 1999, respectively. Loans
receivable from officers were $82,000 and $169,000 in 2000, and 1999,
respectively. Receivables representing advances to brokers in anticipation
of their continued employment and generation of commission revenue in
accordance with loan agreements were $940,000 in 2000 and $1,065,000 in
1999. 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, 2000 and 1999, respectively. Receivables from current employees were
$169,000 and $307,000 at January 31, 2000 and 1999, respectively.
An allowance for losses is established for those receivables whose
collection is considered doubtful. At January 31, 2000 and 1999, this
allowance totaled $531,000 and $209,000, respectively.
29
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 2000, 1999 and 1998
(5) Segment and Geographic Area Data and Discontinued Operations
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 prior
years, the Company operated in three principal segments: Full Service
Retail, Institutional and Research and Discounted Retail Brokerage. In
fiscal 2000, the Company sold its Institutional and Research segment; hence
for fiscal 2000, that segment is no longer applicable. Additionally, in the
current year, the Company's Asset Management business became significant,
thereby requiring disclosure as a segment in fiscal 2000. 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.
|X| Full Service Retail - provides full service securities brokerage and
trading services, through GKN Securities Corp. ("GKN"), to clientele
which primarily consists of individuals who invest in OTC equity
securities.
|X| Discount 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.
|X| Asset Management - provides asset management services to investors
through Dalewood Associates, Inc., the general partner of Dalewood
Associates, L.P. Dalewood Associates, L.P. is a private partnership
which invests primarily in venture stage, pre-IPO companies.
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.
30
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 2000, 1999 and 1998
<TABLE>
GKN Sec. Full Discounted Asset Eliminations
Service Retail Retail Management and all other Total
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
January 31, 2000:
Revenues from external sources $ 48,012,000 7,337,000 6,942,000 3,904,000 66,195,000
Net intersegment revenues 488,000 - - (488,000) -
Net interest revenue 661,000 775,000 - 152,000 1,588,000
Depreciation and amortization 217,000 118,000 - 255,000 590,000
Income (loss) before income taxes 2,039,000 (244,000) 6,632,000 2,317,000 10,744,000
Segment assets $ 21,274,000 4,321,000 8,123,000 8,482,000 42,200,000
============== ============ ============= ============== ==============
Expenditures for long-lived asset$ 271,000 160,000 - 703,000 1,134,000
============== ============ ============= ============== ==============
January 31, 1999:
Revenues from external sources $ 28,864,000 7,151,000 742,000 2,605,000 39,362,000
Net intersegment revenues 523,000 - - (523,000) -
Net interest revenue 507,000 602,000 - 136,000 1,245,000
Depreciation and amortization 329,000 212,000 - 31,000 572,000
Income (loss) before income taxes (9,263,000) 100,000 740,000 1,255,000 (7,168,000)
Segment assets $ 11,427,000 3,915,000 1,518,000 11,420,000 28,280,000
============== ============ ============= ============== ==============
Expenditures for long-lived asset$ 337,000 572,000 - 238,000 1,147,000
============== ============ ============= ============== ==============
January 31, 1998:
Revenues from external sources $ 34,342,000 6,023,000 83,000 1,516,000 41,964,000
Net intersegment revenues 318,000 - - (318,000) -
Net interest revenue 470,000 584,000 - 194,000 1,248,000
Depreciation and amortization 369,000 172,000 - 10,000 551,000
Income (loss) before income taxes (9,891,000) 122,000 82,000 308,000 (9,379,000)
Segment assets $ 21,405,000 3,422,000 861,000 11,284,000 36,972,000
============== ============ ============= ============== ==============
Expenditures for long-lived asset$ 89,000 40,000 - 638,000 767,000
============== ============ ============= ============== ==============
</TABLE>
31
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 2000, 1999 and 1998
(5) Segment and Geographic Area Data and Discontinued Operations--(Continued)
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>
For the year ended January 31,
----------------- -- ----------------- -- -----------------
2000 1999 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Revenues:
Total net revenues for reported
segments $ 57,273,000 37,647,000 41,737,000
All other revenues 15,567,000 4,207,000 2,190,000
Consolidation (elimination) (5,057,000) (1,247,000) (715,000)
----------------- ----------------- -----------------
Total consolidated net
revenues $ 67,783,000 40,607,000 43,212,000
================= ================= =================
Income (loss) before provision for
income taxes:
Total income (loss) for reported
segments $ 1,795,000 (9,163,000) (9,769,000)
All other income 14,004,000 2,106,000 249,000
Consolidation (elimination) (5,055,000) (111,000) 141,000
----------------- ----------------- -----------------
Total (loss) income before
provision for income taxes $ 10,744,000 (7,168,000) (9,379,000)
================= ================= =================
Segment assets:
Total assets for reported segments $ 25,595,000 15,342,000 24,827,000
All other assets 17,943,000 18,739,000 20,013,000
Consolidation (elimination) (1,338,000) (5,801,000) (7,868,000)
----------------- ----------------- -----------------
Total segment assets $ 42,200,000 28,280,000 36,972,000
================= ================= =================
</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.
32
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 2000, 1999 and 1998
(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, 2000, future
minimum rental commitments under such leases were as follows for the fiscal
years ending January 31st:
Year ending
January 31, Amount
------------------------- -------------
2001 $ 3,281,000
2002 3,004,000
2003 2,912,000
2004 2,240,000
2005 2,005,000
Thereafter 12,651,000
--------------
Total $ 26,093,000
==============
Total rent expense was $2,455,000, $3,082,000 and $2,211,000 in fiscal
years 2000, 1999 and 1998, 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.
(7) Employee Benefits
The Company has a defined contribution plan (the "Defined 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 Defined Plan
annually, which amounted to $153,000, $170,000 and $79,000 for fiscal years
2000, 1999 and 1998, respectively.
33
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 2000, 1999 and 1998
(8) Income Taxes
The components of income tax (benefit) expense were as follows for the
fiscal years ended January 31st:
<TABLE>
2000 1999 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Current
Federal $ 373,000 (1,184,000) (3,142,000)
State and local 433,000 112,000 218,000
----------------- ----------------- -----------------
806,000 (1,072,000) (2,924,000)
Deferred 3,116,000 (207,000) (338,000)
----------------- ----------------- -----------------
$ 3,922,000 (1,279,000) (3,262,000)
================= ================= =================
</TABLE>
The effective tax rates reflected in the consolidated financial statements
differ from the statutory federal income tax rate as follows:
<TABLE>
2000 1999 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Statutory tax rate 34.0% 34.0% 34.0%
State and local taxes, net of federal tax
benefit 10.2 1.8 1.4
Change in valuation allowance -- (26.6) (4.5)
Other (7.8) 8.6 3.9
----------------- ----------------- -----------------
Effective tax rate 36.4% 17.8% 34.8%
================= ================= =================
</TABLE>
Deferred income taxes reflect temporary differences in the basis of the
Company's assets and liabilities for income tax purposes and for financial
reporting purposes, using current tax rates. These temporary differences
result in taxable or deductible amounts in future years.
34
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 2000, 1999 and 1998
(8) Income Taxes--(Continued)
The net deferred tax liabilities at January 31, 2000 and 1999 are comprised
as follows:
<TABLE>
2000 1999
---------------- ----------------
<S> <C> <C>
Gross deferred tax asset:
Net operating loss carryforwards $ 1,609,000 1,640,000
Depreciation and amortization 339,000 331,000
Reserve for contingencies 305,000 247,000
Unrealized losses on securities -- 431,000
Bonus stock awards and other 1,017,000 448,000
---------------- ----------------
Total gross deferred tax asset 3,270,000 3,097,000
Less: valuation allowance (2,233,000) (2,887,000)
---------------- ----------------
Net deferred tax asset 1,037,000 210,000
---------------- ----------------
Gross deferred tax liability:
Unrealized gains on securities (4,102,000) --
Other (80,000) (239,000)
---------------- ----------------
Total gross deferred tax liability (4,182,000) (239,000)
---------------- ----------------
Net deferred tax liability $ (3,145,000) (29,000)
================ ================
</TABLE>
For the year ended January 31, 2000, as a result of the Company's tax
position, the Company provided for a valuation allowance of $2,233,000.
Management believes that the valuation allowance at January 31, 2000 is
adequate as timing differences will reverse in the carryforward period.
The Company files consolidated federal and combined New York State and New
York City income tax returns.
35
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 2000, 1999 and 1998
(9) Stockholders' Equity
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 (the "Preferred
Stock"), of which 1,140,000 were issued for the purchase of Southeast. The
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.
In April 1999, the Company issued 34,676 shares of common stock for its
deferred compensation plan and 48,179 shares for its 401(k) plan.
In June 1999, pursuant to the sale of certain assets of Southeast, the
Company received and subsequently canceled 1,039,200 shares of its
Preferred Stock and converted 100,800 shares of Preferred Stock to 16,128
shares of Common Stock. In addition, the Company vested and issued 79,746
shares of Common Stock to former employees of Southeast.
(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 charges
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, 2000, 1999 and 1998:
<TABLE>
2000 1999 1998
----------------- ----------------- ----------------
<S> <C> <C> <C>
Net income (loss) $ 4,855,000 (7,383,000) (6,513,000)
Other comprehensive income (loss):
Foreign currency translation
adjustments (33,000) 18,000 (33,000)
----------------- ----------------- ----------------
Total comprehensive income (loss) $ 4,822,000 (7,365,000) (6,546,000)
================= ================= ================
</TABLE>
36
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 2000, 1999 and 1998
(11) Stock Compensation Plans
At January 31, 2000, the Company has two stocked-based compensation plans,
which are described below. The Company has also granted stock options
outside of the plans.
1991 Employee Incentive Plan
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, (the "Code"), 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. Under the Code, 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 nonqualified 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 10 years and nonqualified
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>
2000 1999 1998
--------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net (loss) income As reported $ 4,855,000 (7,383,000) (6,513,000)
Pro forma 4,015,000 (7,788,000) (6,729,000)
Basic EPS As reported $ 0.57 (0.90) (0.80)
Pro forma 0.47 (0.95) (0.83)
Diluted EPS As reported $ 0.56 (0.90) (0.80)
Pro forma 0.46 (0.95) (0.83)
</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 cancelled and new options for 165,000 shares were
granted in the conversion.
37
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 2000, 1999 and 1998
(11) Stock Compensation Plans--(Continued)
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 new 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, 2000, options to purchase a total of 61,000
shares of common stock were outstanding.
A summary of the status of the Company's 1991 Plan and other options
granted outside of the 1991 Plan as of January 31, 2000, 1999 and 1998, and
changes during the fiscal years then ended is presented below:
<TABLE>
2000 1999 1998
--------------------------------------- ---------------- ----------------
Weighted-
Shares average Shares Shares
Stock options (000) exercise price (000) (000)
--------------------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of year 1,070 $ 4.54 1,196 1,045
Granted 960 3.67 322 289
Exercised (55) 2.83 -- (35)
Forfeited (146) 3.61 (267) (103)
Vested and expired (94) 3.52
Swapped (35) 4.37 (181) --
---------------- ---------------- ----------------
Outstanding at end of year 1,700 $ 4.24 1,070 1,196
================ ================ ================
Options exercisable at
year-end 691
================
Weighted-average fair
value of options
granted during the
year $ 2.35
================
</TABLE>
38
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 2000, 1999 and 1998
(11) Stock Compensation Plans--(Continued)
The following table summarizes information about stock options outstanding
at January 31, 2000:
<TABLE>
Weighted
average Weighted Weighted
Number remaining average Number average
Range of outstanding contractual exercise exercisable exercise
exercise prices at 1/31/00 life price at 1/31/00 price
---------------------- -------------- ------------- ------------- ------------- -------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
$2.21 to $3.50 224 5.22 2.68 151 2.62
$3.56 to $4.06 806 9.50 3.75 68 4.00
$4.50 to $5.00 319 4.50 4.58 257 4.61
$6.00 to $6.13 351 5.07 6.00 215 6.00
-------------- -------------
1,700 691
============== =============
</TABLE>
1996 Incentive Compensation 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, 2000, approximately 262,000 shares had been awarded. The
Company recognized $522,000 and $523,000 of compensation expense for stock
awards under this plan for the fiscal years ended January 31, 2000 and
1999, 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 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 options were outstanding at January 31, 2000.
39
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 2000, 1999 and 1998
(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>
2000 1999 1998
----------------- ----------------- ----------------
<S> <C> <C> <C>
Numerator for basic and diluted EPS:
Income (loss) from continuing
operations $ 6,822,000 (5,889,000) (6,117,000)
================= ================= ================
(Loss) from discontinued operations $ (1,967,000) (1,494,000) (396,000)
================= ================= ================
Net income (loss) $ 4,855,000 (7,383,000) (6,513,000)
================= ================= ================
Denominator for basic EPS:
Weighted-average common shares 8,579,559 8,206,652 8,114,245
Dilutive stock options 110,170 -- --
----------------- ----------------- ----------------
Denominator for diluted EPS 8,689,729 8,206,652 8,114,245
================= ================= ================
Basic EPS:
Earnings (loss) from continuing
operations $ 0.80 (0.72) (0.75)
================= ================= ================
(Loss) from discontinued operations $ (0.23) (0.18) (0.05)
================= ================= ================
Net earnings (loss) $ 0.57 (0.90) (0.80)
================= ================= ================
Diluted EPS:
Earnings (loss) from continuing
operations $ 0.79 (0.72) (0.75)
================= ================= ================
(Loss) from discontinued operations $ (0.23) (0.18) (0.05)
================= ================= ================
Net earnings (loss) $ 0.56 (0.90) (0.80)
================= ================= ================
</TABLE>
40
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 2000, 1999 and 1998
(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, EarlyBird, and Shochet, all wholly owned subsidiaries of the Company,
are registered broker-dealers with the Securities and Exchange Commission
(the "SEC") and member firms of the National Association of Securities
Dealers ("NASD"). As such, GKN, EarlyBird, and Shochet are subject to the
SEC's Uniform Net Capital Rule (SEC rule 15c3-1), 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, 2000, GKN had
net capital of $6,343,000.
EarlyBird computes net capital under the standard aggregate indebtedness
method permitted by the net capital rule, which requires that the ratio of
aggregate indebtedness to net capital, both as defined, shall not exceed 15
to 1. At January 31, 2000, EarlyBird had net capital of $93,000, which was
$7,000 in deficit of its required net capital of $100,000. EarlyBird's
ratio of aggregate indebtedness to net capital was 3.10 to 1.
Shochet computes net capital under the standard aggregate indebtedness
method permitted by the net capital rule. At January 31, 2000, Shochet had
net capital of $195,000, which was $95,000 in excess of its required net
capital of $100,000. Shochet's ratio of aggregate indebtedness to net
capital was 5.43 to 1.
41
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 2000, 1999 and 1998
(15) Subsequent Events
In February 2000, Research Partners International, Inc. ("Research
Partners") loaned Shochet Holdings Corp. ("Shochet Holdings"), the Parent
company of Shochet Securities, Inc., and a wholly owned subsidiary of
Research Partners, $1.5 million. In turn, $500,000 was contributed to
Shochet Securities as additional paid in capital. In March, the remaining
$1 million was loaned to Shochet as a "Temporary Subordinated Loan," as
defined by the NASD. In April, Shochet Holdings repaid the $1.5 million
loan to Research Partners International Inc.
In March 2000, Shochet Holdings, through a SEC Form SB-2, registered and
sold 1,045,000 shares of its common stock to the public in an initial
public offering. The offering, priced at $9 per share, raised $8.0 million
in net proceeds for Shochet Holdings.
Following the closing of the offering of common stock, Shochet Holdings
contributed $3 million to Shochet Securities as additional paid-in capital.
Upon the effectiveness of the offering, Shochet Holdings granted 108,000
incentive stock options to employees of the Shochet. These options vest
over three years, have a ten-year life, and have an exercise price of $9
per share.
In February 2000, EarlyBirdCapital.com, Inc. changed its name to
EarlyBirdCapital, Inc. ("EarlyBirdCapital"). At the same time, Research
Partners contributed its 100% ownership of the EarlyBird to a new holding
company, EarlyBirdCapital.com, Inc. ("EarlyBirdCapital.com, Inc.") in
exchange for a 100% ownership in the new holding company.
Subsequently, EarlyBirdCapital.com, Inc. sold 2,200,000 shares of its
Series A Convertible Preferred Stock to a combination of institutional and
individual investors. Net proceeds of the sale to EarlyBirdCapital.com,
Inc. were approximately $10.3 million.
Following the closing of the sale of the preferred stock
EarlyBirdCapital.com, Inc. contributed $5 million to EarlyBirdCapital as
additional paid in capital.
As part of the offering, EarlyBirdCapital.com, Inc. issued stock options to
employees and advisors for 1,809,000 shares of stock. These options vest
over three years and have a ten-year life and an exercise price of $5 per
share.
42
<PAGE>
RESEARCH PARTNERS INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
January 31, 2000, 1999 and 1998
(16) Supplemental Cash Flow Information
<TABLE>
Year ended January 31,
----------------------------------------------------------
2000 1999 1998
----------------- ----------------- ----------------
<S> <C> <C> <C>
Cash paid for:
Income taxes $ 37,400 230,000 372,000
================= ================= ================
Interest $ 9,000 9,000 424,000
================= ================= ================
Noncash investing and financing
transactions relating to the
company's purchase acquisition
that are not reflected in the consoli-
dated 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
================= ================= ================
Noncash financing transaction:
Treasury stock issued for Incentive
Compensation Plan $ 204,000 60,000 1,734,000
================
================= =================
Treasury stock issued for 401(k)
Plan $ 81,000 -- --
================= ================= ================
Treasury stock issued for Deferred
Compensation Plan $ 60,000 -- --
================= ================= ================
</TABLE>
43
<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, 2000 and 1999, 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, 2000. 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 respected, the financial position of the Company as of
January 31, 2000 and 1999, and the results of its operations and its cash flows
for each of the years in the three-year period ended January 31, 2000, in
conformity with generally accepted accounting principles.
New York, New York
April 14, 2000
44
<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 2000 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 2000 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 2000 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 2000 annual meeting of
stockholders under the caption Certain Transactions.
45
<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)
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)
46
<PAGE>
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 Annual
Report on Form 10-K for the fiscal year ended January 31,
1998)
10.18 Intercompany Services Agreement between Research Partners
International, Inc. and EarlyBirdCapital.com Inc. dated
February 1, 2000
10.19 Intercompany Services Agreement between Research Partners
International Inc. and Shochet Holding Corp., dated March
14, 2000 (incorporated by reference to Exhibit 10.5 to
Amendment No. 1 to Form SB-2 Registration Statement filed by
Shochet Holding Corp. with the SEC (File No. 333-92307))
10.20 Asset Purchase Agreement with schedules, dated as of June
28, 1999, among Southeast Research Partners, Inc., Research
Partners International, Inc. and Ryan, Beck & Co., Inc.
(incorporated by reference to Exhibit 2.1 to the Form 8-K
dated July 6, 1999 ("Serp 8-K")).
10.21 Research Agreement with schedules, dated as of June 28,
1999, between Ryan Beck and Research Partners International,
Inc. (incorporated by reference to Exhibit 10.1 to the Serp
8-K).
10.22 Cessation Agreement with schedules, dated as of June 28,
1999, among Research Partners International Inc., certain
former Research Partners International Inc. Series A
Preferred Stockholders and certain former employees of Ryan
Beck, with Exhibits, including the resignations of Robert
McAleer and Peter McMullin from us and Southeast Research
Partners (incorporated by reference to Exhibit 10.2 to the
Serp 8-K).
10.23 Employment Agreement between the Company and John P.
Margaritis dated December 15, 1999 21.0 Subsidiaries of the
Company
23.1 Consent of KPMG LLP
27.1 Financial Data Schedule BD (1/31/00)
99 Risk Factors
(b) Reports on Form 8-K: None.
47
<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.
Date: May 1, 2000 Research Partners International, Inc.
/s/ Peter R. Kent
By:___________________________________
Peter R. Kent
Chief Operating Officer and Interim
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on May 1, 2000.
/s/ David M. Nussbaum
- --------------------------------------- Chairman of the Board
David M. Nussbaum
/s/ John P. Margaritis President, Chief Executive
- -------------------------------------- Officer (Principal
John P. Margaritis Executive Officer) and Director
/s/ Roger N. Gladstone
- ------------------------------------- Director
Roger N. Gladstone
/s/ Peter R. Kent
- -------------------------------------- Interim Chief Financial
Peter R. Kent Officer (Principal Accounting
And Financial Officer)
and Director
/s/ Lester Rosenkrantz
- ------------------------------------- Director
Lester Rosenkrantz
/s/ James I. Krantz
- ------------------------------------- Director
James I. Krantz
- ------------------------------------- Director
Arnold B. Pollard
/s/ Richard Y. Roberts
- ------------------------------------- Director
Richard Y. Roberts
- ------------------------------------- Director
Roswitha Mueller
48
<PAGE>
Exhibit Index
Exhibit No. Document
- ----------- ---------
10.18 Intercompany Services Agreement between Research Partners
International, Inc. and EarlyBirdCapital.com Inc. dated
February 1, 2000
10.23 Employment Agreement between the Company and John Margaritis
dated December 15, 1999
21 Subsidiaries of the Company
23.1 Consent of KPMG LLP
27.1 Financial Data Schedule BD (1/31/00)
99 Risk Factors
Exhibit 10.18
INTERCOMPANY SERVICES AGREEMENT
This Intercompany Services Agreement ("Agreement"), dated as of February 1,
2000, by and between Research Partners International, Inc., a Delaware
corporation ("RPII") and EarlyBirdCapital.com Inc., a New York corporation
("EarlyBirdCapital").
WHEREAS, EarlyBirdCapital through its subsidiaries provides Internet
investment banking, research, securities brokerage and trading services; and
WHEREAS, EarlyBirdCapital is a wholly-owned subsidiary of RPII. Upon
consummation of an intended private placement offering of EarlyBirdCapital RPII
will no longer be the sole shareholder of EBC but will retain its majority
position therein.
WHEREAS, EarlyBird desires RPII to continue to provide services to
EarlyBirdCapital and RPII is willing to continue to provide services to EBC on a
cost reimbursement basis in accordance with the terms and conditions herein
provided.
NOW, THEREFORE, in consideration of the mutual premises contained herein,
the parties to this Agreement agree as follows:
1. Services by RPII. As requested by EarlyBirdCapital, RPII will provide
services to EarlyBirdCapital in connection with the operation of
EarlyBirdCapital's business, including rendering services regarding: accounting
and bookkeeping, financial planning and financial reporting, internal audit,
records management, payroll management, purchasing assistance, regulatory
compliance, human resources management, compliance assistance, tax reporting and
tax filing, financial analysis and office services. These services may be
changed from time to time upon mutual consent. Services may be provided by RPII
or any of its affiliates, as determined by RPII. In addition, EarlyBirdCapital
will be permitted to use office space of RPII at One State Street Plaza, New
York, New York as mutually agreed upon by RPII and EarlyBirdCapital.
2. Reimbursement by EarlyBirdCapital. In compensation for RPII's services,
EarlyBirdCapital will pay to RPII its direct and reasonable costs related to
performing such services, including all of RPII's overhead and related expenses
attributable to performing the services. The office space of RPII used by
EarlyBirdCapital will be compensated for on the basis of allocable square
footage used by EarlyBirdCapital at the rate RPII is required to pay under its
lease. This obligation will extend to reimbursement for the cost of services
performed prior to the effective date of this Agreement which have been accrued,
but not paid. All invoices will be due and payable within 10 days of receipt.
RPII, unless otherwise agreed, will not be obligated to advance funds for the
costs or expenses of EarlyBirdCapital's operations or obligations.
3. Services by EarlyBirdCapital. EarlyBirdCapital will provide services to
RPII within EarlyBirdCapital's then ordinary scope of business, from time to
time, as requested by RPII.
4. Reimbursement by RPII. In compensation for EarlyBirdCapital's services,
RPII will pay to EarlyBirdCapital its direct and reasonable costs related to
performing such services including all of its overhead and related expenses
attributable to performing the services. All invoices will be due and payable
<PAGE>
within 10 days of receipt. EarlyBirdCapital, unless otherwise agreed, will not
be obligated to advance funds for the costs or expenses of RPII operations or
obligations.
5. Third-Party Services for EarlyBirdCapital. Using commercially reasonable
efforts, RPII will arrange for certain services of independent third-parties to
provide certain of the services, which are referenced in subsection 1 above, to
EarlyBirdCapital. Third-party services may include, but not be limited to,
suppliers of goods and services, bank services, clearing services, warehouse
charges for centralized records storage, delivery charges, and tax preparation
and payment. The costs that are incurred by EarlyBirdCapital to third-party
suppliers of services or products will be reimbursed promptly (at actual cost)
to RPII or paid directly to the third-party suppliers. RPII will submit to
EarlyBirdCapital all bills or other supporting documentation relating to
third-party suppliers. To the extent third-party services are incurred for the
benefit of all affiliates of RPII, these costs will be reimbursed by
EarlyBirdCapital on an allocated basis, provided that the allocation will be
applied consistently among all the affiliates based on the use of the services
supplied by the third-party. Payment to third-party suppliers as among RPII,
EarlyBirdCapital and affiliates of RPII will be on terms at least as favorable
as EarlyBirdCapital could obtain them from third-party suppliers on an
independent basis.
6. Standard of Care. RPII and EarlyBirdCapital will provide the services
described herein during the term of this Agreement in accordance with the terms
and conditions set forth herein. Each of RPII and EarlyBirdCapital will perform
its responsibilities hereunder in a diligent, careful and vigilant manner. The
services are to be of a scope and quality not less than those generally
performed by the RPII or EarlyBirdCapital employees for the benefit of their
respective employers. Each of RPII and EarlyBirdCapital will make available to
the other the full benefit of the judgement, experience and advice of the
employees performing services for the other.
7. Personnel. In performances of the services hereunder, each of RPII and
EarlyBirdCapital may use their personnel or the personnel of their affiliates as
may be necessary to perform the obligations required by this Agreement at their
expense. The cost of the services performed by such employee, however, shall be
reimbursed by the party on whose behalf the services were performed in
accordance with Sections 2 or 4 hereof, as the case may be.
8. Term. The term of this Agreement will commence on the date the
registration statement filed by EarlyBirdCapital Holding with the Securities and
Exchange Commission ("SEC") is declared effective by the SEC and will end on the
earlier of (i) the date that RPII no longer owns 50% of the outstanding capital
stock of EarlyBirdCapital Holding having the right to cast a majority of the
votes entitled to vote on all matters on which the holders of the common stock
of EarlyBirdCapital are entitled to vote, or (ii) the third anniversary of the
date of this Agreement.
EarlyBirdCapital will have the right to terminate this Agreement
immediately: (i) if RPII is in material breach of any of its obligations
hereunder, which breach is not cured within 20 days of receipt of written notice
from EarlyBirdCapital of the breach, (ii) if RPII is the subject of a voluntary
petition in bankruptcy or any voluntary proceeding relating to insolvency,
receivership, liquidation, or composition for the benefit of creditors, if such
petition or proceeding is not dismissed within 60 days of filing, or becomes the
subject of any involuntary petition in bankruptcy or any involuntary proceeding
relating to insolvency, receivership, liquidation, or composition for the
benefit of creditors, if such petition or proceeding is not dismissed within 60
days of filing, (iii) if the business of RPII is liquidated or otherwise
terminated for insolvency or any other basis, or (iv) if RPII becomes insolvent
or unable to pay its debts as they mature or makes an assignment for the benefit
of its creditors.
ii
<PAGE>
RPII will have the right to terminate this Agreement immediately: (i) if
EarlyBirdCapital is in material breach of any of its obligations hereunder,
which breach is not cured within 20 days of receipt of written notice from RPII
of the breach, (ii) if EarlyBirdCapital is the subject of a voluntary petition
in bankruptcy or any voluntary proceeding relating to insolvency, receivership,
liquidation, or composition for the benefit of creditors, if such petition or
proceeding is not dismissed within 60 days of filing, or becomes the subject of
any involuntary petition in bankruptcy or any involuntary proceeding relating to
insolvency, receivership, liquidation, or composition for the benefit of
creditors, if such petition or proceeding is not dismissed within 60 days of
filing, (iii) if the business of EarlyBirdCapital is liquidated or otherwise
terminated for insolvency or any other basis, or (iv) if EarlyBirdCapital
becomes insolvent or unable to pay its debts as they mature or makes an
assignment for the benefit of its creditors.
Either RPII or EarlyBirdCapital may terminate this Agreement upon not less
than 60 days notice to the other, which notice will state the date on which
termination will be effective, provided notice of termination given by either
RPII or EarlyBirdCapital shall be approved by a majority of the directors who
are not employees, directors or officers of RPII.
No exercise by a party of its right to terminate this Agreement will limit
its remedies by reason of the other party's default, the party's right to
exercise any other rights under this section or any of that party's other
rights.
9. Directors and Officers Duties. Nothing in this Agreement will limit or
restrict the right of any of the RPII directors, officers or employees to engage
in any other business or devote their time and attention in part to the
management or other aspects of any other business, whether of a similar nature,
or to limit or restrict the right of RPII to engage in any other business or to
render services of any kind to any corporation, firm, individual, trust or
association.
10. Independent Contractors. Each of RPII and EarlyBirdCapital is an
independent contractor and when its employees act under the terms of this
Agreement, they will be deemed at all times to be under the supervision and
responsibility of their employer; and no person employed by RPII or
EarlyBirdCapital and acting under the terms of this Agreement will be deemed to
be acting as agent or employee of the other for any purpose whatsoever.
11. Other Agreements. From time to time one party may find it necessary or
desirable either to enter into agreements covering services of the type
contemplated by this Agreement to be provided by persons other than RPII or
EarlyBirdCapital, as the case may be. Nothing in this Agreement will be deemed
to limit in any way the right of RPII or EarlyBirdCapital to acquire services
from others or to enter into other agreements.
12. No Waiver. No failure or delay on the part of any party in exercising
any right, power or privilege hereunder will operate as a waiver thereof, nor
will any single or partial exercise thereof preclude any other or future
exercise thereof or the exercise of any other right, power or privilege.
13. Successors and Assigns. This Agreement will inure to the benefit of,
and be binding upon, the successors, assigns, heirs, executors and
administrators of the parties hereto, provided however, that neither party may
assign its rights or obligations hereunder without the consent of the other
party hereto, except that RPII may assign its rights and obligations hereunder
to any affiliate of RPII other than EarlyBirdCapital without obtaining the
consent of EarlyBirdCapital. Any assignment will not relieve RPII of its rights
or obligations hereunder.
14. Amendments. Any amendment, supplement or modification of or to any
provision of this Agreement, any waiver of any provision of this Agreement, and
any consent to any departure from the terms of any provisions to this Agreement
iii
<PAGE>
will be made in writing, signed by the parties hereto, and will be effective
only in the specific instance and for the specific purpose for which it is made
or given.
15. Notices. Unless otherwise specifically provided, all notices, demands,
statements and communications required hereunder will be in writing and will be
sent by registered or certified mail, if intended for RPII addressed thereto at
Research Partners International, Inc.
One State Street Plaza
New York, New York 10004
Attention: Mr. John P. Margaritis
and if intended for EarlyBirdCapital addressed thereto at
EarlyBirdCapital.com Inc.
One State Street Plaza
New York, New York 10004
Attention: Mr. Peter Kent
16. Captions. The captions of this Agreement are inserted only for the
purpose of convenient reference and do not define, limit or prescribe the scope
or intent of this Agreement or any part hereof.
17. Governing Law. This Agreement will be governed by, and construed under,
the laws of the State of New York without regard to the principles of conflicts
of law thereof.
18. Severability. In case any one or more of the provisions contained in
this Agreement should be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
19. Entire Agreement. This Agreement integrates all the terms and
conditions mentioned herein or incidental hereto and supersedes all oral
negotiations and prior writings in respect to the subject matter hereof. In the
event of any conflict between the terms, conditions and provisions of this
Agreement and any other agreement, document or instrument to which the parties
hereto are bound, the terms, conditions and provisions of this Agreement shall
prevail.
iv
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written.
EARLYBIRDCAPITAL.COM INC.
By: /s/ Peter R. Kent
-----------------
Name: Peter Kent
Title: President
RESEARCH PARTNERS INTERNATIONAL, INC.
By: /s/ John P. Margaritis
-----------------------
Name: John P. Margaritis
Title: Chief Executive Officer
Exhibit 10.23
EMPLOYMENT AGREEMENT
AGREEMENT dated as of December 15, 1999 between JOHN P. MARGARITIS,
residing at 38 Hidden Ledge Road, Englewood, New Jersey 07631 ("Executive"), and
RESEARCH PARTNERS INTERNATIONAL, INC., a Delaware corporation having its
principal office at One State Street Plaza, New York, New York 10004
("Company").
WHEREAS, the Company is engaged through its subsidiary corporations in the
business of operating and managing investment banking and securities brokerage
firms, as well as other enterprises; and
WHEREAS, the Company desires to employ Executive for the purpose of
securing for the Company the experience, ability and services of Executive; and
WHEREAS, Executive desires to be employed by the Company, pursuant to the
terms and conditions herein set forth;
IT IS AGREED:
1. Employment, Duties and Acceptance.
1.1 The Company hereby employs Executive as its Chief Executive
Officer ("CEO") and President ("President"). As long as Executive remains CEO
and President of the Company, the Company shall use its best efforts to cause
the Company's Board of Directors ("Board") to nominate Executive as a member of
the Company's Board of Directors ("Board"). All of Executive's powers and
authority in any capacity shall at all times be subject to the direction and
control of the Board. Executive shall report directly to the Board.
1.2 The Board may assign to Executive such general management and
supervisory responsibilities and executive duties for the Company or any
subsidiary of the Company, including serving as an executive officer and/or
director of any subsidiary, as are consistent with Executive's status as CEO and
President. The Company and Executive acknowledge that Executive's primary
functions and duties as CEO and President shall be (i) to establish policies and
strategies for the Company's overall business and operations, including plans
for growth and strategic partnerships, and (ii) to oversee and supervise
(subject to the employees of the Company who report to Executive remaining
primarily responsible for supervision of their designated divisions and
functions) the operations of the Company and its subsidiaries and divisions.
<PAGE>
1.3 Executive accepts such employment and agrees to devote
substantially all of his business time, energies and attention to the
performance of his duties hereunder. Nothing herein shall be construed as
preventing Executive from making and supervising personal investments, provided
they will not interfere with the performance of Executive's duties hereunder or
violate the provisions of paragraph 5.4 hereof. In addition, notwithstanding
anything herein to the contrary, Executive may also perform outside consulting
services to a limited extent so long as they do not conflict with his duties
hereunder and they are not on behalf of a Competitive Business (as defined in
Section 5.4 hereof).
1.4 Executive shall be based in the New York Metropolitan area, and
shall undertake such occasional travel, within or without the United States, as
is reasonably necessary in the interests of the Company.
2. Compensation and Benefits.
2.1 The Company shall pay to Executive a salary at the minimum annual
rate of $220,000 for each twelve-month period during the term hereof.
Executive's compensation shall be paid in equal, periodic installments in
accordance with the Company's normal payroll procedures.
2.2 The Company shall also pay to Executive such bonuses as may be
determined from time to time by the Board. In determining the amount of bonus,
if any, the Board shall take into consideration the performance of the Company,
the achievement of the Company's and Executive's expectations and plans and the
Executive's performance. In addition, Executive shall receive a bonus in an
amount to be determined by the Board, for the realization of investment banking
revenues which result from business referred to the Company by Executive. The
Executive shall also be eligible to participate in the Company's 1996 Incentive
Compensation Plan, in a manner to be determined by the Committee administering
such plan.
2.3 Executive shall be entitled to such medical, life, disability and
other benefits as are generally afforded to other senior executives of the
Company, including comprehensive healthcare insurance, dental, life insurance
and long term disability, subject to applicable waiting periods and other
conditions.
2.4 Executive shall be entitled to four weeks of vacation in each
calendar year and to a reasonable number of other days off for religious
and personal reasons.
2.5 The Company will pay or reimburse Executive for all
transportation, hotel and other expenses reasonably incurred by Executive on
business trips and for all other ordinary and reasonable out-of-pocket expenses
ii
<PAGE>
actually incurred by him in the conduct of the business of the Company against
itemized vouchers submitted with respect to any such expenses and approved in
accordance with customary procedures.
2.6 The Company shall pay a non-accountable expense allowance in the
aggregate monthly amount of $2,500 for the term of this Agreement. Such amount
shall be paid to Margaritis & Associates, Inc. or to whomever is designated in
writing by Executive.
3. Term and Termination.
3.1 The term of this Agreement commences as of December 15, 1999 and
shall continue until December 31, 2001, unless sooner terminated as herein
provided.
3.2 If Executive dies during the term of this Agreement, this
Agreement shall thereupon terminate, except that the Company shall pay to the
legal representative of Executive's estate (i) the base salary due Executive
pursuant to paragraph 2.1 hereof through the date of Executive's death, (ii) all
earned and previously approved but unpaid bonuses, (iii) all valid expense
reimbursements through the date of the termination of this Agreement and (iv)
all accrued but unused vacation pay.
3.3 The Company, by notice to Executive, may terminate this Agreement
if Executive shall fail because of illness or incapacity to render, for six
consecutive months, services of the character contemplated by this Agreement.
Notwithstanding such termination, the Company shall pay to Executive (i) the
base salary due Executive pursuant to paragraph 2.1 hereof through the date of
such notice, less any amount Executive receives for such period from any
Company-sponsored or Company-paid source of insurance, disability compensation
or government program, (ii) all earned and previously approved but unpaid
bonuses, (iii) all valid expense reimbursements through the date of the
termination of this Agreement and (iv) all accrued but unused vacation pay.
3.4 The Company, by notice to Executive, may terminate this Agreement
for cause. As used herein, "Cause" shall mean: (a) the refusal or failure by
Executive to carry out specific directions of the Board which are of a material
nature, are not illegal and are consistent with his status as CEO and President,
or the refusal or failure by Executive to perform a material part of Executive's
duties hereunder; (b) the commission by Executive of a material breach of any of
the provisions of this Agreement; (c) fraud or dishonest action by Executive in
his relations with the Company or any of its subsidiaries or affiliates
("dishonest" for these purposes shall mean Executive's knowingly or recklessly
making of a material misstatement or omission for his personal benefit); or (d)
the conviction of Executive of any crime involving an act of moral turpitude, or
the imposition against Executive of a permanent bar from association with a
securities firm by any Federal, State or Regulatory Agency or self-regulatory
body after the exhaustion of all judicial and administrative appeals therefrom.
Notwithstanding the foregoing, no "Cause" for termination shall be deemed to
exist with respect to Executive's acts described in clauses (a) or (b) above,
unless the Company shall have given written notice to Executive specifying the
iii
<PAGE>
"Cause" with reasonable particularity and, within thirty calendar days after
such notice, Executive shall not have cured or eliminated the problem or thing
giving rise to such "Cause;" provided, however, that a repeated breach after
notice and cure of any provision of clauses (a) or (b) above involving the same
or substantially similar actions or conduct, shall be grounds for termination
for "Cause" without any additional notice from the Company. In addition,
notwithstanding the foregoing, no "Cause" for termination shall be deemed to
exist with respect to Executive's acts described in clause (c) above, unless
fraud or dishonest action on the part of Executive is determined by an
arbitrator in New York City pursuant to applicable American Arbitration
association rules.
3.5 If Executive's employment hereunder is terminated for any reason,
then Executive shall, at the Company's request, resign as a director of the
Company and all of its subsidiaries, effective upon the occurrence of such
termination.
3.6 The Executive, by notice to the Company, may terminate this
Agreement if a "Good Reason" exists. For purposes of this Agreement, "Good
Reason" shall mean the occurrence of any of the following circumstances without
the Executive's prior express written consent: (a) a material adverse change in
the nature of Executive's title, duties or responsibilities with the Company
that represents a demotion from his title, duties or responsibilities as in
effect immediately prior to such change; (b) a material breach of this Agreement
by the Company; (c) a failure by the Company to make any payment to Executive
when due, unless the payment is not material and is being contested by the
Company, in good faith; (d) (i) any person or entity other than the Company
and/or any officers or directors of the Company as of the date of this Agreement
acquires securities of the Company (in one or more transactions) having 25% or
more of the total voting power of all the Company's securities then outstanding
and (ii) the Board of Directors of the Company does not authorize or otherwise
approve such acquisition; or (e) a liquidation, bankruptcy or receivership of
the Company. Notwithstanding the foregoing, no Good Reason shall be deemed to
exist with respect to the Company's acts described in clauses (a), (b) or (c)
above, unless Executive shall have given written notice to the Company
specifying the Good Reason with reasonable particularity and, within thirty
calendar days after such notice, the Company shall not have cured or eliminated
the problem or thing giving rise to such Good Reason; provided, however, that a
repeated breach after notice and cure of any provision of clauses (a), (b) or
(c) above involving the same or substantially similar actions or conduct, shall
be grounds for termination for Good Reason without any additional notice from
Executive.
3.7 In the event that Executive terminates this Agreement for Good
Reason, pursuant to the provisions of paragraph 3.6, or the Company terminates
this Agreement without "Cause," as defined in paragraph 3.4, the Company shall
continue to pay to Executive (or in the case of his death, the legal
representative of Executive's estate or such other person or persons as
Executive shall have designated by written notice to the Company), all payments,
compensation and benefits required under paragraph 2 hereof through the term of
this Agreement; provided, however, that (i) a minimum bonus of no less than
$220,000 per annum shall be paid; (ii) Executive's insurance coverage shall
iv
<PAGE>
terminate upon the Executive becoming covered under a similar program by reason
of employment elsewhere; and (iii) Executive shall use reasonable efforts to
obtain employment elsewhere as an employee or consultant and all compensation
for services paid or earned and deferred in connection therewith shall be a
reduction against the Company's then future obligations hereunder.
4. Executive Indemnity
4.1 The Company agrees to indemnify Executive and hold Executive
harmless against all costs, expenses (including, without limitation, reasonable
attorneys' fees) and liabilities (other than settlements to which the Company
does not consent, which consent shall not be unreasonably withheld)
(collectively, "Losses") reasonably incurred by Executive in connection with any
claim, action, proceeding or investigation commenced by someone other than the
Company or any of its Subsidiaries brought against or involving Executive with
respect to, arising out of or in any way relating to Executive's employment with
the Company or Executive's service as a director of the Company; provided,
however, that the Company shall not be required to indemnify Executive for
Losses incurred as a result of Executive's intentional misconduct or gross
negligence (other than matters where Executive acted in good faith and in a
manner he reasonably believed to be in and not opposed to the Company's best
interests). Executive shall promptly notify the Company of any claim, action,
proceeding or investigation under this paragraph and the Company shall be
entitled to participate in the defense of any such claim, action, proceeding or
investigation and, if it so chooses, to assume the defense with counsel selected
by the Company; provided that Executive shall have the right to employ counsel
to represent him (at the Company's expense) if Company counsel would have a
"conflict of interest" in representing both the Company and Executive. The
Company shall not settle or compromise any claim, action, proceeding or
investigation without Executive's consent, which consent shall not be
unreasonably withheld; provided, however, that such consent shall not be
required if the settlement entails only the payment of money and the Company
fully indemnifies Executive in connection therewith. The Company further agrees
to advance any and all expenses (including, without limitation, the fees and
expenses of counsel) reasonably incurred by the Executive in connection with any
such claim, action, proceeding or investigation, provided Executive first enters
into an appropriate agreement for repayment of such advances if indemnification
is found not to have been available.
v
<PAGE>
5. Protection of Confidential Information; Non-Competition.
5.1 Executive acknowledges that:
(a) As a result of his current and prior employment with the
Company, Executive has obtained and will obtain secret and confidential
information concerning the business of the Company and its subsidiaries and
affiliates (referred to collectively in this paragraph 5 as the "Company"),
including, without limitation, financial information, proprietary rights, trade
secrets and "know-how," strategic plans and partners, customers and sources
("Confidential Information").
(b) The Company will suffer substantial damage which will be
difficult to compute if, during the period of his employment with the Company or
thereafter, Executive should enter a business competitive with the Company or
divulge Confidential Information.
(c) The provisions of this Agreement are reasonable and necessary
for the protection of the business of the Company.
5.2 Executive agrees that he will not at any time, either during
the term of this Agreement or thereafter, divulge to any person or entity any
Confidential Information obtained or learned by him as a result of his
employment with the Company, except (i) in the course of performing his duties
hereunder, (ii) with the Company's express written consent; (iii) to the extent
that any such information is in the public domain other than as a result of
Executive's breach of any of his obligations hereunder; or (iv) where required
to be disclosed by court order, subpoena or other government process. If
Executive shall be required to make disclosure pursuant to the provisions of
clause (iv) of the preceding sentence, Executive promptly, but in no event more
than 72 hours after learning of such subpoena, court order, or other government
process, shall notify, by personal delivery or by electronic means, confirmed by
mail, the Company and, at the Company's expense, Executive shall: (a) take all
reasonably necessary and lawful steps required by the Company to defend against
the enforcement of such subpoena, court order or other government process, and
(b) permit the Company to intervene and participate with counsel of its choice
in any proceeding relating to the enforcement thereof.
5.3 Upon termination of his employment with the Company, Executive
will promptly deliver to the Company all memoranda, notes, records, reports,
manuals, drawings, blueprints and other documents (and all copies thereof)
relating to the business of the Company and all property associated therewith,
which he may then possess or have under his control; provided, however, that
Executive shall be entitled to retain copies of such documents reasonably
necessary to document his financial relationship with the Company.
5.4 During the period commencing on the date hereof and ending on the
one-year anniversary of the date Executive's employment hereunder is terminated
(and, if Executive is terminated with "Cause" or Executive terminates this
vi
<PAGE>
Agreement without "Good Reason," until December 31, 2002), Executive, without
the prior written permission of the Company, shall not, anywhere within 100
miles of any office of the Company or any subsidiary at the time of termination,
(i) be employed by, or render any services to, any person, firm or corporation
engaged in any business which is directly in competition with the Company or any
of its subsidiaries ("Competitive Business"); (ii) engage in any Competitive
Business for his own account; (iii) be associated with or interested in any
Competitive Business as an individual, partner, shareholder, creditor, director,
officer, principal, agent, employee, trustee, consultant, advisor or in any
other relationship or capacity; (iv) employ or retain, or have or cause any
other person or entity to employ or retain, any person who was employed or
retained by the Company while Executive was employed by the Company; or (v)
solicit, interfere with, or endeavor to entice away from the Company, for the
benefit of a Competitive Business, any of its customers or other persons with
whom the Company has a contractual relationship. Notwithstanding the foregoing,
nothing in this Agreement shall preclude Executive from investing his personal
assets in any manner he chooses, provided, however, that Executive may not,
during the period referred to in this Section 5.4, own more than 4.9% of the
equity securities of any Competitive Business.
5.5 If Executive commits a breach, or threatens to commit a breach, of
any of the provisions of Sections 5.2 or 5.4, the Company shall have the
right and remedy:
(a) to have the provisions of this Agreement specifically
enforced by any court having equity jurisdiction, it being acknowledged and
agreed by Executive that the services being rendered hereunder to the Company
are of a special, unique and extraordinary character and that any such breach or
threatened breach will cause irreparable injury to the Company and that money
damages will not provide an adequate remedy to the Company; and
(b) to require Executive to account for and pay over to the
Company all monetary damages suffered by the Company as the result of any
transactions constituting a breach of any of the provisions of Sections 5.2 or
5.4, and Executive hereby agrees to account for and pay over such damages to the
Company.
Each of the rights and remedies enumerated in this Section 5.5 shall
be independent of the other, and shall be severally enforceable, and such rights
and remedies shall be in addition to, and not in lieu of, any other rights and
remedies available to the Company under law or equity.
In connection with any legal action or proceeding arising out of or
relating to this Agreement, the prevailing party in such action or proceeding
shall be entitled to be reimbursed by the other party for the reasonable
attorneys' fees and costs incurred by the prevailing party.
vii
<PAGE>
5.6 If any provision of Sections 5.2 or 5.4 is held to be
unenforceable because of the scope, duration or area of its applicability, the
tribunal making such determination shall have the power to modify such scope,
duration, or area, or all of them, and such provision or provisions shall then
be applicable in such modified form.
5.7 The provisions of this paragraph 5 shall survive the termination
of this Agreement for any reason, except in the event Executive is terminated by
the Company without "Cause" in breach of this Agreement, or if Executive
terminates this Agreement with "Good Reason," in either of which events, this
paragraph 5 shall be null and void and of no further force or effect.
6. Miscellaneous Provisions.
6.1 All notices provided for in this Agreement shall be in writing,
and shall be deemed to have been duly given when (i) delivered personally to the
party to receive the same, or (ii) when mailed first class postage prepaid, by
certified mail, return receipt requested, addressed to the party to receive the
same at his or its address set forth below, or such other address as the party
to receive the same shall have specified by written notice given in the manner
provided for in this Section 6.1. All notices shall be deemed to have been given
as of the date of personal delivery or mailing thereof.
If to Executive:
John Margaritis
38 Hidden Ledge Road
Englewood, New Jersey 07631
If to the Company:
Research Partners International, Inc.
One State Street Plaza
New York, New York 10004
Attn: Legal Department
With a copy in either case to:
David Alan Miller, Esq.
Graubard Mollen & Miller
600 Third Avenue
New York, New York 10016
6.2. This Agreement sets forth the entire agreement of the parties
relating to the employment of Executive and is intended to supersede all prior
negotiations, understandings and agreements. No provisions of this Agreement,
may be waived or changed except by a writing by the party against whom such
viii
<PAGE>
waiver or change is sought to be enforced. The failure of any party to require
performance of any provision hereof or thereof shall in no manner affect the
right at a later time to enforce such provision.
6.3 All questions with respect to the construction of this Agreement,
and the rights and obligations of the parties hereunder, shall be determined in
accordance with the law of the State of New York applicable to agreements made
and to be performed entirely in New York.
6.4 This Agreement shall inure to the benefit of and be binding upon
the successors and assigns of the Company. This Agreement shall not be
assignable by Executive, but shall inure to the benefit of and be binding upon
Executive's heirs and legal representatives.
6.5 Should any provision of this Agreement become legally
unenforceable, no other provision of this Agreement shall be affected, and this
Agreement shall continue as if the Agreement had been executed absent the
unenforceable provision.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
EXECUTIVE
/s/ John P. Margaritis
------------------------
John P. Margaritis
RESEARCH PARTNERS INTERNATIONAL, INC.
ix
Exhibit 21
LIST OF SUBSIDIARIES
Research Partners International, Inc.
Jurisdiction
Name of Subsidiary Percentage Ownership of Incorporation
- ------------------ -------------------- ------------------------
GKN Securities Corp. 100% New York
EarlyBirdCapital.com Inc. 100%(1) New York
EarlyBirdCapital, Inc. (2) Delaware
EBCapital (Europe) AG (2) Switzerland
Dalewood Associates, Inc. (2) New York
Shochet Holding Corp. 53% Delaware
Shochet Securities, Inc. (3) Florida
GKN Property Management, Inc. 100% New Jersey
GKN Realty Corp. 100% New Jersey
- -----------------------------------------
(1) In February 2000, EarlyBirdCapital.com Inc. sold 2,200,000 of its preferred
shares. The preferred shares may be converted at any time into common stock
of EarlyBirdCapital.com Inc. in an amount equal to the quotient derived by
dividing the aggregate started value of the preferred stock to be
converted, by $5.00, as adjusted in certain circumstances.
(2) Wholly-owned by EarlyBirdCapital.com Inc.
(3) Wholly-owned by Shochet Holding Corp.
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 14, 2000, relating to the consolidated statements of financial
condition of Research Partners International, Inc. and subsidiaries as of
January 31, 2000, and 1999, 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, 2000, which report appears in
the January 31, 2000 Annual Report on Form 10-K of Research Partners
International, Inc.
/s/ KPMG LLP
KPMG LLP
New York, New York
May 1, 2000
<TABLE> <S> <C>
<ARTICLE> BD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-END> JAN-31-2000
<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-BASIC> (0.90)
<EPS-DILUTED> (0.90)
</TABLE>
Exhibit 99
RISK FACTORS
You should consider carefully the following risks below before you decide to
invest in our company. The risks below are not the only ones facing us.
Additional risks not presently known to us or that we currently believe are
immaterial may also impair our business operations. Our business, financial
condition or results of operation could be materially adversely affected by any
of these risks. Any of these risks could cause the trading price of our common
stock to decline, and you could lose all or part of your investment in our
company. We are a holding company which operates through its subsidiaries.
References to we below means the operations of our wholly-owned and
majority-owned subsidiaries.
Industry factors beyond our control could adversely affect us.
The securities business is, by its nature, subject to various risks,
particularly in volatile or illiquid markets, including the risk of losses
resulting from the underwriting or ownership of securities, customer fraud,
employee errors and misconduct, failures in connection with the processing of
securities transactions and litigation. Our business and profitability are
affected by many factors, including the volatility and price level of the
securities markets; the volume, size and timing of securities transactions; the
demand for investment banking services; the level and volatility of interest
rates; the availability of credit; changes in the methods of the brokerage
business, legislation affecting the business and financial communities; and the
economy in general. Markets characterized by low trading volumes and depressed
prices generally result in reduced commissions and investment banking revenues
as well as losses from declines in the market value of securities positions.
If there is a market downturn, our revenues are likely to decline and, if unable
to reduce expenses at the same pace, our results of operations would
deteriorate. For example:
o A market downturn could lead to a decline in the volume of
transactions that we execute for our customers and would reduce the
revenues we receive from commissions and spreads.
o A market downturn could reduce the number and size of transactions for
which we provide underwriting or placement agent services.
Our business involves small- and mid- capitalization companies which are subject
to higher degree of risk and therefore could adversely affect our business.
Our business is focused on the underwriting, advising, investing in, conducting
private placements, brokerage and trading of securities of small- and mid-
capitalization companies. The small- and mid-capitalization segment of the
securities industry may be subject to greater risks than the securities industry
as a whole and, consequently, may be marketable to only a limited segment of the
investing public and may subject our financial performance to a higher degree of
risk.
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Our business is subject to risks of losses from underwriting activities.
Our business is subject to risks of losses from underwriting activities. As an
underwriter, we commit to purchasing securities from an issuer and assume the
risk that we may not be able to resell such securities to our customers. When we
serve as manager or co-manager of public offerings of securities, we make
commitments of our capital for this purpose and thus expose our capital to the
risk that the securities may not be resold. Further, we may increase our
commitment of capital for the purpose of making a market in these securities
following an offering. The increased concentration of our capital in securities
of issuers we finance increases our exposure to trading risks regarding these
securities.
Under applicable law, as an underwriter we are subject to substantial potential
liability for misstatements or omissions of material facts in prospectuses and
other communications with respect to such offerings and we may not be able to
obtain indemnification from the issuers of these securities for this liability.
Our business is subject to risks of losses from trading activities.
Our proprietary trading activities involve the purchase, sale or short sale of
securities as principal. As a market maker, we use our capital to maintain
substantial inventories of long positions (securities we own) and short
positions (securities we have sold but do not yet own). We face the risk of
changes in the market prices of those securities and the risk of a decrease in
the liquidity of markets for those securities, which could limit our ability to
resell securities purchased or to repurchase securities sold in principal
transactions. Our trading department maintains inventories of equity and debt
securities on both a long and short basis. If we have any long positions, a
downturn in the market could reduce the value of our positions and result in
losses. Conversely, if we have short positions, an upturn in the market could
expose us to unlimited losses as we attempt to cover our short position by
acquiring securities in a rising market.
The value of our investment account fluctuates due to factors beyond our control
and may adversely affect our business.
We maintain an investment account in which securities are held for potential
long-term appreciation. Securities in this account consist principally of common
stock and warrants and rights to purchase common stock and warrants, most of
which are not freely tradable for varying periods of time or lack a public
market in which to trade. Values of the securities in the investment account are
volatile. Fluctuations due to general market conditions, the industry of the
issuer of such securities, or otherwise, may have a material effect on our
earnings.
Our merchant banking and proprietary trading investments may cause our operating
results to fluctuate widely regardless of whether we have liquidated our
investments and actually realized gain or loss.
We must value our merchant banking and proprietary trading investments on a
quarterly basis at a price related to the current market prices of such
securities. Accordingly, a large fluctuation in the market prices of these
securities, regardless of whether we have liquidated them and actually realized
gain or loss, can have a significant impact upon our results of operation for
that quarter.
Performance is not predictable regarding our asset management business;
Unsuccessful investments will result in diminished returns on our investments
and lower performance fees.
We are a limited partner in Dalewood Associate, L.P., which makes long term
merchant banking investments in early-stage companies that are usually
speculative and involve a high degree of risk. Our majority owned subsidiary,
Dalewood Associates, Inc., manages Dalewood Associates, L.P.
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If those investments do not perform well, the value of our investment in
Dalewood Associates L.P. will decline and our performance fees, if any, will be
adversely affected. There is no assurance that we will manage Dalewood's capital
successfully and generate positive returns. The long term nature of these
investments also increases our exposure to market risks. Since these investments
are sometimes illiquid, we may be unable to realize gains or reduce losses
during periods of fluctuating values of these investments.
Risks of overseas business operations could adversely affect our business.
EBCapital (Europe) AG, and perhaps our other subsidiaries, will derive revenues
from providing services to customers in overseas locations. Such operations are
subject to certain risks such as changes in the legal and regulatory policies of
the foreign jurisdiction, local political and economic developments, currency
fluctuations, exchange controls, royalty and tax increases, retroactive tax
claims, expropriation and other laws and policies of the United States affecting
foreign trade, investment and taxation. In addition, in the event of any dispute
arising from foreign operations, we may be subject to the exclusive jurisdiction
of foreign courts. Our Swiss office is also subject to local rules and
regulations which can substantially affect the profitability or ability of us to
operate internationally. These statutes and regulations could have the effect of
delaying the introduction of new services or products to European customers, and
increase the cost of our operations in Europe.
We operate in a very competitive industry.
The market for investment banking, brokerage services, online securities
services and asset management is rapidly evolving and intensely competitive and
we expect such competition to intensify in the future.
We encounter intense competition in all aspects of our securities business and
compete directly with other securities firms, a significant number of which have
greater capital and other resources than us. In addition to competition from
firms currently in the securities business, recently there has been increasing
competition from other sources, such as commercial banks and insurance companies
offering financial services, and from other investment alternatives.
There can be no assurance that we will be able to compete effectively with
current or future competitors.
Our expansion may not be successful.
We have recently broadened our business and commenced offering securities
services through the Internet. There can be no assurance, that our expansion
will be successful, or if not successful, that our traditional brokerage
business will adequately sustain itself in this technology-oriented market.
Additionally, the expansion into conducting business through the Internet will
materially increase our operating expenses and could adversely affect our
profits.
We may seek to additionally expand our operations by acquiring other
broker-dealers, research and/or trading firms Internet companies or other
complementary businesses, or by establishing or acquiring additional branch
offices. There can be no assurance that we will successfully effect any
acquisitions or that we will be able to successfully integrate any acquired
business or branch office.
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Failure of our systems could harm our ability to execute transactions or process
orders which may result in losses for our clients and harm to our business.
Our success depends on our ability to provide efficient and uninterrupted
high-quality services. Our systems and operations are vulnerable to damage or
interruption from events beyond our control, such as system failures by our
clearing broker, our telephone company and other third party providers. System
failures or service interruptions also could be caused by a breakdown of our own
internal systems, which, for example, could be caused by high levels of client
use. Any significant failure of our systems could create transaction delays for
our customers because we may not be able to process the resulting volume of
telephone or Internet orders. Systems failures or service interruptions could
result in:
o client inability to effect a securities transaction or satisfy margin
obligations;
o substantial losses for our clients;
o loss of client accounts;
o decreased commission revenues; or
o harm to our reputation.
Our inability to obtain accurate information, including real-time quotes, trade
information and other financial information will harm our business.
We rely upon information suppliers to provide accurate data on a real-time
basis. We cannot assure you that any of these providers will be able to continue
to provide these services in an efficient, cost-effective manner or that they
will be able to expand their services to meet our needs adequately. Failure by
an information supplier to supply necessary information could cause service
interruptions, harm to our reputation and loss of clients. In addition, we could
be sued by clients if they rely upon inaccurate information transmitted to us
from our vendors to claims for negligence or copyright or trademark infringement
based on the nature and content of information downloaded by clients from our
systems and subsequently distributed to others. We do not maintain insurance to
cover most of these types of liabilities. Any liability imposed on us or costs
incurred in defending claims not covered by or in excess of our insurance
coverage could materially adversely affect our business, financial condition and
operating results.
Failure to comply with securities laws and regulations could cause us to face
penalties or other sanctions which could adversely affect our business.
We are subject to broad regulation at the state and federal levels. If we fail
to comply with an applicable law or regulation or government orders we could be
subject to censures, fines, civil penalties (including treble damages in the
case of insider trading violations), the issuance of cease-and-desist orders,
the loss of our status as a broker-dealer, the suspension or disqualification of
our license or the license of our officers or employees or other adverse
consequences. The imposition of any material penalties or orders on us could
have a material adverse effect on our reputation, business, operating results
and financial condition.
The advent of Internet-based securities operations has created uncertainty on
the regulatory landscape. When enacted, the Securities Act of 1933, which
governs the offer and sale of securities, and the Securities Exchange Act of
1934, which governs, among other things, the operation of the securities markets
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and broker-dealers, did not contemplate the conduct of a securities business
through the Internet. Uncertainty regarding the application of these laws could
have a chilling effect on the growth of our Internet-based business. Further, we
cannot anticipate the timing, scope and effect on the securities industry in
general and us in particular of new securities rules and regulations which may
be implemented on the state or federal level in response to the Internet. New
rules or regulations imposed from time to time with respect to the securities
industry in general and Internet-based securities firms in particular may limit
our ability to participate in certain areas of the securities industry or
require us to incur significant expense in order to come into compliance with
such rules and regulations.
Our operations would be interrupted if the services of our clearing broker are
terminated.
We are dependent on the operational capacity and the ability of our clearing
broker, Schroder & Co., for the orderly processing of transactions. Our clearing
agreement may be terminated by either party, upon 60 days' written notice. Under
this agreement, Schroder processes all securities transactions for our account
and the accounts of our clients. Termination or material interruptions of
services provided by Schroder would have a material adverse effect on our
operations.
Our clearing firm extends credit to our clients and we are liable if our clients
do not pay.
We permit our clients to purchase securities on a margin basis or sell
securities short, which means that our clearing firm extends credit to the
client secured by cash and securities in the clients' account. During periods of
volatile markets the value of the collateral held by Schroder in a client's
account could fall below the amount borrowed by the client. If the margin
requirement is not sufficient to cover losses and Schroder sells or buys
securities at prevailing market prices, it may incur losses to satisfy client
obligations. We have agreed to indemnify Schroder for losses it incurs while
extending credit to our clients. Also, if customers fail to pay for their
purchases of securities effected through our brokerage subsidiaries, to supply
the securities that they have sold, or to repay funds they have borrowed, and
the clearing agent satisfies those customers obligations, our brokerage
subsidiaries would be obligated to indemnify our clearing agent for any
resulting losses.
Losses due to customer fraud could have an adverse effect on our business.
We are exposed to potential losses resulting from fraud and other misconduct by
customers, such as fraudulent trading (including access to legitimate customer
accounts, or the use of a false identity to open an account) or the use of
forged or counterfeit checks for payment. These types of fraud may be difficult
to prevent or detect. We may not be able to recover the losses caused by these
activities. Any of these losses could have a material adverse effect on our
business, financial condition and operating results.
Employee misconduct is difficult to detect and could harm our business.
We run the risk that employee misconduct could occur, including binding us to
transactions that exceed authorized limits or present unacceptable risks, or
hiding unauthorized or unsuccessful activities. This type of misconduct could
result in unknown losses. Employee misconduct could also involve the improper
use of confidential information, which could result in regulatory sanctions and
harm to our reputation. An action or omission by an employee, such as a broker,
can create criminal and civil liabilities for both the employee and us, which
could have a material adverse effect on our business, financial condition and
legal authority to operate in one or more areas of the securities industry. We
may not be able to detect, deter or prevent any of these types of employee
misconduct.
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Ineffective risk management methods could harm our business.
Our policies and procedures to identify, monitor and manage our risks may not be
fully effective. Some of our methods to manage risk are based on historical
market behavior and cannot necessarily accurately predict future risk exposure,
which could be greater than the historical measures and correlations indicate.
Failure to comply with net capital requirements could result in termination of
our business.
Securities broker-dealers are subject to stringent rules with respect to the
maintenance of specific levels of net capital. Net capital is the net worth
(assets minus liabilities) less deductions for some types of assets. If any of
our broker-dealers fail to maintain required net capital levels, they may be
subject to suspension or revocation of their license, which would reduce our
revenues. If the net capital rules are changed or expanded, or if any of our
broker-dealers incur an unusually large charge against their net capital, they
might be required to limit or discontinue those portions of their business which
requires the intensive use of capital. A large operating loss or charge against
the net capital of any of our broker-dealers could adversely affect our ability
to expand or even maintain our present levels of business.
We are dependent upon our ability to recruit and retain key personnel.
Our business requires us to hire and retain highly skilled personnel. The
recruitment and retention of experienced investment-banking professionals and
proficient technologists are particularly important to our performance and
success. We do not have "key person" life insurance policies on any of our
officers or associates. The loss of the services of any of our key personnel or
the inability to recruit and retain experienced investment banking professionals
and proficient technologists in the future could have a material adverse effect
on our business, financial condition and operating results.
Competition for talented personnel is intense. Our continued ability to compete
effectively in our business depends on our ability to attract and retain the
quality personnel our operations and development require.
We have only a limited operating history in the online services business upon
which you can evaluate us.
Our online services business has a limited operating history. Accordingly, there
are limited financial results upon which you can evaluate this business segment
and its prospects. An investor in our company must consider the risks, expenses
and difficulties frequently encountered by an early stage business in this new
and rapidly evolving market of online securities services. These risks include:
o the failure to develop brand name recognition and reputation;
o the failure to achieve market acceptance of our services;
o a slow down in general consumer acceptance of the Internet as a
vehicle for commerce; and
o an inability to grow and adapt our business and technology to evolving
consumer demand.
We may not be successful in addressing these risks or the other risks set forth
herein.
We may not successfully grow our online business which could adversely affect
our business.
We may not be able to grow our online business. We intend to introduce new
and/or enhanced products, content and services to retain the current users of
our online services and to attract new users. If we introduce a new or enhanced
product, content, or service that is not favorably received or fail to introduce
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certain new or enhanced products, content, or services, our current users may
choose a competitive service instead of our service. The development and
enhancement of services and products entails significant risks, including:
o the inability to adapt effectively new technologies to our business;
o the failure to conform our services and products to evolving industry
standards;
o the inability to develop, introduce and market service and product
enhancements or new services and products on a timely basis; and
o the nonacceptance by the market of such new service and products.
Our business could be materially adversely affected if we experience
difficulties and/or delays in introducing new products, content or services or
if these new products, content or services are not favorably received by our
users.
Increased traffic on our web sites may be difficult to service which could harm
our business.
Increased traffic to our web sites may strain our systems and impair our online
services business. Our web sites may experience slower response times than usual
or other problems for a variety of reasons. These occurrences could cause our
users to perceive our web sites as not functioning properly and, therefore,
cause them to pursue other methods to effect trades, seek capital or seek
investment opportunities. In such a case, our business, results of operations,
and financial condition could be materially adversely affected.
We expect to spend a large amount of money in advance of profits as we develop
our online services businesses and expect to seek to raise additional capital
through equity and/or debt offerings.
Our EarlyBirdCapital.com website is the portal through which our investment
banking and brokerage services are offered. We also conduct online discount
brokerage services through our Shochet Securities web site. We expect to incur
significant operating expenses and make relatively large capital expenditures
including to pay for advertising as we roll out our online business and expand
our investment banking, brokerage, research, sales and marketing capabilities.
Both EarlyBirdCapital, Inc. (through its parent EarlyBirdCapital.com Inc.) and
Shochet Securities (through its parent Shochet Holding Corp.) raised money
through the sale of securities of their respective parent companies to fund a
majority portion of the expenditures necessary to commence their respective
online businesses. There is no assurance, however, that such proceeds will be
sufficient to adequately develop the online businesses and if not sufficient,
that operating income will be sufficient to finance the material capital we
expect to expend to further develop those businesses. Operating expenses and
capital expenditures for our online businesses initially will outpace revenues
resulting from our online businesses. Although we expect revenues to increase as
we market our online businesses, we do not expect to achieve profitability for
these online business segments for an extended period of time. Furthermore,
there is no assurance that they will ever achieve or maintain profitability.
We anticipate that our online businesses will require further capital for the
full implementation of our online business plans. If capital is not available on
terms we deem acceptable, we will be required to curtail or reduce our online
business activities which could affect our operations.
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Dependence upon third-party suppliers for key services.
Our online businesses are dependent upon our clearing firm for trade clearance
and trade execution. In this regard, our communication and information systems
are coordinated with the clearing information systems of our clearing firm.
Additionally, our clearing firm furnishes our online businesses with information
necessary to run our online businesses, including transaction summaries, data
for compliance and risk management, trade execution reports, and trade
confirmations. Accordingly, an interruption or the cessation of service by our
clearing firm as a result of systems limitations or failures could have a
material adverse effect on our online businesses and our financial condition.
In addition to our clearing firm, our online businesses rely on a number of
other third parties to process transactions and provide us with information. The
key components of our online businesses' electronic investment banking
technology (which links customer interface programs to our brokerage back-office
systems) are provided by third parties. The inability of those providers to
support our online businesses would put at risk the ongoing viability and
improvement of our online businesses. An interruption in or cessation of service
by any third-party service provider as a result of systems failures or capacity
constraints or for any other reason, and our inability to make alternative
arrangements in a timely manner, or at all, would have a material adverse effect
on the performance of our online businesses and could adversely affect our
business and financial condition.
Disruption in any element of our technology backbone could harm our business or
limit our growth.
We are highly dependent on our systems to process, on a daily basis, a large and
growing number of transactions across numerous and diverse markets. We, and our
clearing firm, rely heavily on our respective financial, accounting and other
data processing systems, as well as our telecommunications systems. If any of
these systems do not operate properly or are unavailable due to problems with
our physical infrastructure, we could suffer disruptions of our business,
liabilities to clients, regulatory interventions or damage to our reputation and
the development of our brand name, any and all of which could have a material
adverse effect on our business and limit our ability to grow.
We also must ensure that users do not experience significant or frequent
disruptions in the access to our web sites. Our web sites could become
inaccessible for numerous reasons, including as a result of failure by our
servers and/or software glitches. Web site failures could result in loss of
existing customers and missed opportunities to garner additional customers.
Accordingly, any failure to have adequate systems in place to ensure the
constant monitoring and maintenance of, and accessibility to, our web sites
could have a material adverse effect on our business and financial results.
Access to our web sites is also directly dependent on the operating condition of
the Internet. The success of our online businesses, therefore, will depend in
part upon the development and maintenance of the Internet's infrastructure to
cope with increased user traffic, none of which we control. This will require a
reliable network backbone possessing the necessary bandwidth, and the timely
development of complementary products, such as high-speed modems, for providing
reliable Internet access and services to users. The Internet has experienced a
variety of outages and other delays as a result of damage to portions of its
infrastructure and could face similar outages and delays in the future, which
could have a material adverse effect on our business and financial condition.
We may not be able to develop and maintain marketing relationships with other
Internet companies.
Our strategy for expanding brand recognition through online advertising depends
to some extent on our relationship with other Internet companies. We plan to
enter into marketing agreements with these companies that will permit us to
advertise our products and services on their web site. There can be no assurance
that we will be able to negotiate these agreements on favorable terms or at all.
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Additionally, other online brokers, which advertise on popular web sites, may
have exclusive advertising relationships with such sites or may otherwise object
to our attempts to enter into marketing agreements or relationships with such
sites. If we cannot secure or maintain these marketing agreements on favorable
terms, our business prospects could be substantially harmed.
We cannot be certain that the market will accept our Internet-based services.
Further, the success of our Internet investment banking and brokerage business
will depend on continued growth of Internet commerce in general.
The markets for investment banking and brokerage services through the Internet
are at an early stage of development and are rapidly evolving. Because the
markets for our online services are new and evolving, it is difficult to predict
the future growth (if any) and the future size of these markets. We cannot
assure you that the markets for our online services will continue to develop or
become sustainable. Sales of many of our services and products will depend upon
the acceptance of the Internet as a widely used medium for commerce and
communication. A number of factors could prevent such acceptance, including the
following:
o Electronic commerce is at an early stage and buyers may be unwilling
to shift their purchasing from traditional vendors to online vendors;
o The necessary network infrastructure for substantial growth in usage
of the Internet may not be adequately developed;
o Increased government regulation or taxation may adversely affect the
viability of electronic commerce;
o Insufficient availability of telecommunication services or changes in
telecommunication services could result in slower response times or
increased costs; and
o Adverse publicity and consumer concern about the security of
electronic commerce transactions could discourage its acceptance and
growth.
Conducting investment-banking operations through the Internet is a relatively
new approach to the securities business. We anticipate undertaking intensive
marketing and sales efforts to educate prospective clients on the uses and
benefits of our services and products in order to generate demand. There is a
risk, however, that, corporate issuers may be reluctant to accept our online
underwriting capabilities.
We cannot be certain that our network security systems won't be circumvented.
The need to securely transmit confidential information over the Internet has
been a significant barrier to electronic commerce and communications. We are
potentially vulnerable to attempts by unauthorized computer users to penetrate
our network security. If successful, those individuals could misappropriate
proprietary information or cause interruptions in our services. We may be
required to expend significant capital and resources to protect against the
threat of such security breaches or to alleviate resulting problems. In addition
to security breaches, inadvertent transmission of computer viruses could expose
us to the risk of disruption of our business, loss and possible liability.
Continued concerns over the security of Internet transactions and the privacy of
its users may also inhibit the growth of the Internet generally as a means of
conducting commercial transactions.
We rely upon encryption and authentication technology, including public key
cryptography technology licensed from third parties, to provide the security and
authentication necessary to effect secure transmission of confidential
information over the Internet. Advances in computer capabilities, new
discoveries in the field of cryptography or other developments could result in a
compromise or breach of the procedures we use to protect customer transaction
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data. If any such compromise of our security occurs, our business, financial
condition and operating results could be materially adversely affected.
Our tradenames may not be protected.
EarlyBirdCapital has filed for tradename protection regarding the name
EarlyBirdCapital. We have been advised by the United States Patent and Trademark
Office that an unaffiliated third party also has claimed the name. Although
EarlyBirdCapital intends to enforce its rights to the name EarlyBirdCapital,
there is no assurance that it will be successful in doing so. If it is forced to
cease using the name, we will incur additional expense to change the name and to
establish good will with respect to the new name. Shochet Online! has been
registered in the United States Patent and Trademark Office. This is no
assurance, however, that others will not infringe on our federal trademark
protection.
Discretionary issuance of preferred stock could harm the interests of our common
stockholders.
Our certificate of incorporation, as amended, authorizes the issuance of "blank
check" preferred stock with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered, without stockholder approval, to issue preferred
stock with dividend, liquidation, conversion, voting or other rights that could
adversely affect the voting power or other rights of the holders of our common
stock In the event of issuance, the preferred stock could be utilized, under
certain circumstances, as a method of discouraging, delaying or preventing a
change in control of our company, which could have the effect of discouraging
bids for us and thereby prevent stockholders from receiving the maximum value
for their shares. Although we have no present intention to issue any shares of
our preferred stock, there can be no assurance that we will not do so the
future.
We have not paid dividends and do not expect to pay dividends.
To date, we have not paid any cash dividends on our common stock and do not
expect to declare or pay any cash dividends in the foreseeable future. We intend
to retain all earnings in the foreseeable future for our continued growth.
Moreover, our ability to pay dividends in the future may be restricted by our
brokerage subsidiaries' obligations to comply with the net capital rules
applicable to broker-dealers.
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