EXHIBIT 99.4
[PRICEWATERHOUSECOOPERS LETTERHEAD]
New York, New York
REPORT OF INDEPENDENT ACCOUNTANTS
July 13, 1999, except for Note 12,
as to which the date is July 15, 1999
To the Stockholder and Board of Directors of
Triak Services Corp.
In our opinion, the accompanying statement of financial condition and the
related statements of income, changes in stockholders' equity, changes in
subordinated borrowings and cash flows present fairly, in all material respects,
the financial position of Triak Services Corp. at May 31, 1999, and the results
of its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
Our audit was conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The information contained in Schedules I
and II is presented by management for the purpose of additional analysis and is
not a required part of the basic financial statements, but is supplementary
information required by Rule 17a-5 under the Securities Exchange Act of 1934.
Such information has been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, is fairly stated in
all material respects in relation to the basic financial statements taken as a
whole.
/s/ PRICEWATERHOUSECOOPERS LLP
TRIAK SERVICES CORP.
STATEMENT OF FINANCIAL CONDITION
MAY 31, 1999
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ASSETS
Cash $ 34,916
Receivables
Clearing broker 9,483,301
Other 1,233,142
Securities owned, at market value 12,050
Furniture, fixtures, equipment and leasehold improvements,
net of accumulated depreciation of $6,149,355 8,054,335
Computer software, net of accumulated amortization of $3,006,744 4,788,387
Deferred taxes 220,594
Other assets 948,176
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TOTAL ASSETS $24,774,901
===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Accounts payable and accrued compensation $ 5,414,779
Securities sold, not yet purchased, at market value 4,579
------------
TOTAL LIABILITIES 5,419,358
-----------
Subordinated borrowings 6,000,000
-----------
Commitments and contingencies
Stockholder's equity
Common stock - no par value; 200 shares authorized,
100 shares issued and outstanding 12,577,077
Retained earnings 778,466
-----------
TOTAL STOCKHOLDER'S EQUITY 13,355,543
-----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $24,774,901
===========
The accompanying notes are an integral part of these financial statements.
TRIAK SERVICES CORP.
STATEMENT OF INCOME
FOR THE YEAR ENDED MAY 31, 1999
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Revenues
Commissions $50,457,752
Interest income 6,938,453
Fee income 4,308,393
-----------
61,704,598
-----------
Expenses
Compensation and benefits 12,664,969
Clearance and related brokerage charges 18,814,569
Communications 9,759,323
Depreciation and amortization 4,655,490
Advertising 5,368,547
Repairs and maintenance 1,645,375
Occupancy costs and equipment rental 1,370,322
Professional fees 1,373,023
Interest expense 407,501
Travel and entertainment 288,914
Other 2,786,370
-----------
59,134,403
-----------
INCOME BEFORE PROVISION FOR INCOME TAXES 2,570,195
Provision for income taxes 1,106,880
-----------
NET INCOME $ 1,463,315
===========
The accompanying notes are an integral part of these financial statements.
TRIAK SERVICES CORP.
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEAR ENDED MAY 31, 1999
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(ACCUMULATED
DEFICIT)/
COMMON RETAINED
STOCK EARNINGS TOTAL
----------- ----------- -----------
Balance at June 1, 1998 $12,577,077 $ (684,849) $11,892,228
Net income -- 1,463,315 1,463,315
----------- ----------- -----------
Balance at May 31, 1999 $12,577,077 $ 778,466 $13,355,543
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
TRIAK SERVICES CORP.
STATEMENT OF CHANGES IN SUBORDINATED BORROWINGS
FOR THE YEAR ENDED MAY 31, 1999
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Subordinated borrowings - June 1, 1998 $ 6,000,000
Issuance (repayment) of subordinated borrowings --
-----------
Subordinated borrowings - May 31, 1999 $ 6,000,000
===========
The accompanying notes are an integral part of these financial statements.
TRIAK SERVICES CORP.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MAY 31, 1999
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Cash flows from operating activities
Net income $ 1,463,315
Noncash items included in net income
Depreciation and amortization 4,655,490
Deferred taxes (220,734)
(Increase) decrease in operating assets
Receivable from
Clearing broker (1,826,571)
Other (560,206)
Securities owned 86,902
Other assets 58,750
Increase (decrease) in operating liabilities
Accounts payable and accrued compensation 1,925,909
Payable to affiliates (740,358)
Securities sold, not yet purchased (33,516)
-----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,808,981
-----------
Cash flows from investing activities
Purchases of furniture, fixtures, equipment
and leasehold improvements (1,186,484)
Purchases of computer software (3,678,854)
-----------
NET CASH USED IN INVESTING ACTIVITIES (4,865,338)
-----------
Net decrease in cash (56,357)
Cash at beginning of year 91,273
-----------
Cash at end of year $ 34,916
===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Income taxes $ 1,316,637
===========
Interest $ 407,501
===========
The accompanying notes are an integral part of these financial statements.
TRIAK SERVICES CORP.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1999
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1. ORGANIZATION AND BUSINESS
Triak Services Corp. (the "Company") is a wholly owned subsidiary of National
Discount Brokers Group, Inc. (the "Parent"). The Company is registered as a
broker-dealer with the Securities and Exchange Commission ("SEC") and is a
member of the National Association of Securities Dealers, Inc. ("NASD"). The
Company provides discount brokerage services to individual investors under
the name, National Discount Brokers or NDB.com ("NDB").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company's securities owned and securities sold, not yet purchased are
stated at quoted market value. Management estimates that the fair values of
other financial instruments recognized on the statement of financial
condition (including receivables and accounts payable and accrued
compensation) are approximated by their carrying values, as such financial
instruments are short-term in nature, bear interest at current market rates
or are subject to frequent repricing.
Commissions are recorded on a trade-date basis.
Depreciation on furniture, fixtures, equipment and computer software is
provided on the straight-line method over their estimated useful lives.
Amortization of leasehold improvements is provided on the straight-line
method over the terms of the leases or the estimated useful lives of the
improvements, whichever is less.
Deferred income taxes are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred taxes of a change
in tax rates is recognized in income in the period that includes the
enactment date.
TRIAK SERVICES CORP. 2
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1999
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3. FURNITURE, FIXTURES, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, fixtures, equipment and leasehold improvements at May 31, 1999
consisted of the following:
Furniture, fixtures and equipment $ 12,033,536
Leasehold improvements 2,170,154
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14,203,690
Less accumulated depreciation and amortization (6,149,355)
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$ 8,054,335
==============
4. INCOME TAXES
The Company is included in the consolidated Federal income tax return of the
Parent and combined income taxes for certain states and localities. Separate
tax returns are filed in certain states as required. Under the terms of the
tax sharing agreement with its Parent, the Company is allocated a provision
for income taxes based on the tax that would have been determined on a
separate tax return basis. Benefits to the extent available in the
consolidated tax return are credited to the Company on a pro rata basis.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. At May 31,
1999, the Company had net deferred tax assets, which are primarily due to
differences in the period in which reserves and deferred compensation is
deductible for book and tax purposes. No valuation allowance has been
established with respect to the net deferred tax asset because management of
the Company concluded that it was more likely than not that the benefit would
be realized.
The income tax provision for the year ended May 31, 1999 consists of the
following:
STATE AND
FEDERAL LOCAL TOTAL
Current $ 1,042,845 $ 284,769 $ 1,327,614
Deferred (171,950) (48,784) (220,734)
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Total $ 870,895 $ 235,985 $ 1,106,880
=========== =========== ===========
The effective tax rate differs from the statutory tax rate primarily due to
state and local taxes, net of Federal benefit.
TRIAK SERVICES CORP. 3
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1999
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5. NET CAPITAL AND CUSTOMER RESERVE REQUIREMENTS
The Company is subject to the SEC's Uniform Net Capital Rule 15c3-1, which
requires the maintenance of minimum net capital. The Company computes its net
capital requirement pursuant to the alternative method, which requires that
the Company maintain minimum net capital equal to the greater of $250,000 or
2% of aggregate debit balances arising from customer transactions. Although
net capital and aggregate debit items change from day-to-day, at May 31,
1999, the Company had net capital of $4,104,021, which was $3,854,021 in
excess of its required net capital of $250,000.
The Company meets the exemptive provisions for the computation for
determination of reserve requirements for broker-dealers under subparagraph
(k)(2)(ii) of the SEC Rule 15c3-3.
6. EMPLOYEE BENEFIT PLANS
The Company participates with affiliates in an employee deferred compensation
plan covering substantially all employees, which qualifies under Section
401(k) of the Internal Revenue Code. The Company contributed approximately
$43,000 for the year ended May 31, 1999.
7. TRANSACTIONS WITH RELATED PARTIES
The Company receives fees from an affiliate for introducing transactions. For
the year ended May 31, 1999, the Company received approximately $6,979,000
from its affiliate for such transactions, which is included in commissions in
the statement of income.
Other assets includes net amounts due for certain expenses paid by the
Company on behalf of the Parent offset by the Company's share of the
consolidated tax liability
See Note 11 for additional related party disclosures.
8. COMMITMENTS
The Company has long-term noncancelable operating leases for rental of office
space at its various locations expiring at various dates through 2014. All
leases are subject to escalation for increases in taxes, fuel and other
costs.
TRIAK SERVICES CORP. 4
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1999
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Commitments for minimum lease payments under noncancelable operating leases
as of May 31, 1999 are as follows, exclusive of escalation charges:
Fiscal year ending May 31,
2000 $ 2,233,000
2001 3,718,000
2002 3,584,000
2003 3,584,000
2004 3,585,000
Thereafter 34,550,000
-----------
$51,254,000
===========
Rent expense for the year ended May 31, 1999 was approximately $740,000.
9. CONTINGENCIES
The Company has been named as a defendant in lawsuits and arbitration
proceedings and is involved in investigations that relate to, among other
things, possible violations of Federal and state securities laws and
regulations, and other laws. Although there can be no assurance that such
lawsuits, arbitrations, proceedings and investigations involving the Company
are not likely to have a material adverse effect on the operations of the
Company in any future period, depending in part on the results for such
period, based upon information currently available, management of the
Company believes that any such lawsuits, arbitrations, proceedings and
investigations are not likely to have a material adverse effect on the
financial condition and results of operations or liquidity of the Company.
10. OFF-BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK
In the normal course of business, the Company clears securities transactions
through an unaffiliated clearing broker on a fully disclosed basis. Pursuant
to the terms of the agreement between the Company and its clearing broker,
the clearing broker has the right to recover losses resulting from a
counterparty's failure to fulfill its contractual obligations. The Company
seeks to control the risk associated with its customer activities by making
credit inquiries when establishing customer relationships and by monitoring
customer trading activity.
Credit exposure also may result in the event that the Company's clearing
broker is unable to fulfill its contractual obligations. The subsequent
settlement of open positions at May 31, 1999 had no material adverse effect
on the financial position of the Company.
During the normal course of business, the Company may sell securities which
have not yet been purchased, which represent obligations of the Company to
deliver the specified security at a later date, thereby creating a liability
to purchase the security in the market at prevailing prices. Such
transactions result in off-balance sheet market risk as the Company's
ultimate obligation to satisfy the sale of securities sold, but not yet
purchased, may exceed the amount recorded on the consolidated
TRIAK SERVICES CORP. 5
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1999
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statement of financial condition. The Company seeks to control such market
risk through the use of internal monitoring guidelines.
The Company does not engage in any derivative activities.
11. SUBORDINATED BORROWINGS
On December 31, 1996, the Company entered into a subordination agreement
with the Parent in the amount of $3,000,000. The loan matures on December
31, 2000 and has a stated interest equal to the broker call rate.
Subsequently, on March 31, 1997, the Company entered into a second
subordination agreement with the Parent in the amount of $3,000,000. This
loan, also with a stated interest equal to the broker call rate, matures on
March 31, 2001. The weighted average broker call rate was 6.79% for the
year. Interest expense on these subordinated borrowings amounted to
approximately $408,000 for the year ended May 31, 1999.
The subordinated borrowings have been approved by the NASD and are therefore
included in the computation of net capital under the SEC's uniform net
capital rule. These loans may be repaid only if, after giving effect to such
repayments, the Company meets the SEC's net capital requirements.
12. SUBSEQUENT EVENTS
On July 15, 1999, the Company received an additional capital contribution of
$10,000,000 from the Parent.
TRIAK SERVICES CORP.
COMPUTATION OF NET CAPITAL PURSUANT TO SEC RULE 15c3-1
MAY 31, 1999 SCHEDULE I
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<Table>
Computation of net capital
Total stockholder's equity qualified for net capital $13,355,543
Subordinated loan 6,000,000 $ 19,355,543
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Deductions and/or charges
Nonallowable assets
Furniture, fixtures, equipment, computer software
and leasehold improvements, net 12,842,722
Other assets and receivables 2,406,758 15,249,480
------------ -----------
Net capital before haircuts on firm securities 4,106,063
Haircuts on firm securities 2,042
-----------
Net capital 4,104,021
===========
Computation of alternative net capital requirements
Minimum net capital requirement 250,000
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Excess net capital $ 3,854,021
===========
Net capital in excess of 5% of aggregate
debit items or 120% of minimum net capital
requirement, whichever is greater $ 3,804,021
===========
</Table>
The above computation does not differ materially from the Company's
computation of net capital filed with FOCUS Form X-17A-5 Part IIA on June
11, 1999 with the National Association of Securities Dealers, Inc.
TRIAK SERVICES CORP.
EXEMPTION FROM THE RESERVE REQUIREMENT
FOR BROKERS AND DEALERS PURSUANT TO SEC RULE 15c3-3
MAY 31, 1999 SCHEDULE II
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The Company qualifies for exemption from the provisions of Rule 15c3-3 under
subparagraph (k)(2)(ii). The Company was in compliance with conditions of this
exemption for the period from June 1, 1998 to May 31, 1999.