SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): January 6, 2000
Knight/Trimark Group, Inc.
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(Exact Name of Registrant as Specified in Charter)
Delaware 000-14223 22-3689303
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(State or Other (Commission File No.) (IRS Employer
Jurisdiction of Identification No.)
Incorporation)
525 Washington Boulevard, Jersey City, NJ 07310
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(Address of Principal Executive Offices, including Zip Code)
(201) 222-9400
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(Registrant's telephone number, including area code)
N/A
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(Former Name or Former Address, if Changed Since Last Report)
Item 2. Acquisition or Disposition of Assets.
On January 6, 2000 (the "KT Closing Date"), pursuant to the terms
of an Agreement and Plan of Merger (the "Merger Agreement"), dated as of
the 17th day of November, 1999, as amended, by and among KT Holding
Company, a Delaware corporation ("Parent"), KT Acquisition I Corp., a
Delaware corporation ("SubKT"), AH Acquisition I L.L.C., a Delaware limited
liability company ("SubAH"), Knight/Trimark Group, Inc., a Delaware
corporation ("KT"), Arbitrade Holdings LLC, a Delaware limited liability
company ("AH") and Tarmachan Capital Management, Inc., Tarmachan Capital
Co., Deephaven Inc., Gildor Trading, Inc., Irvin Kessler, Efraim Gildor,
Peter Hajas, Merrill Ferguson and Mark Lyons (together, the "Members"), KT
reorganized into a holding company structure as further described below.
Separately, on January 12, 2000 (the "AH Closing Date"), pursuant to the
terms of the Merger Agreement, Parent acquired from the Members all of the
outstanding Class B membership interests of AH (the "AH Membership
Interests").
AH is a technologically advanced options market maker and asset
manager, with operations in the U.S. and Europe.
Parent, a newly formed holding company (which was originally
named KT Holding Company but upon completion of the transactions assumed
the name Knight/Trimark Group, Inc. while KT assumed the name
Knight/Trimark, Inc.), formed two Delaware merger subsidiaries to undertake
two separate transactions. One of such subsidiaries, SubKT, was merged
with and into KT on the KT Closing Date (the "KT Merger"), while the
second, SubAH, was merged with and into AH on the AH Closing Date (the "AH
Merger"), with the result that each of KT and AH became wholly owned
subsidiaries of Parent.
The KT Merger was undertaken in the form of a holding company
reorganization pursuant to the terms of Section 251(g) of the Delaware
General Corporation Law. Such a reorganization did not require stockholder
approval and resulted in the automatic exchange of shares of Class A Common
Stock, par value $.01 per share, of KT for shares of Class A Common Stock,
par value $.01 per share, of Parent, on a one-for-one basis. Following the
closing of the KT Merger, the directors and officers of KT immediately
prior to such closing hold the same offices with Parent. As a result of
the KT Merger, KT is no longer a public company (but is rather a wholly
owned subsidiary of Parent) and Parent replaced KT as the NASDAQ-listed
publicly-owned company.
In accordance with Delaware law, certificates that previously
represented shares of Class A Common Stock of KT are automatically and
without exchange deemed to represent shares of Class A Common Stock of
Parent. The Class A Common Stock of Parent is listed on the Nasdaq
National Market under the symbol "NITE".
Pursuant to the terms of Rule 12g-3(a) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the Class A Common
Stock, par value $.01 per share, of Parent, as successor issuer to KT,
shall be deemed registered under Section 12(g) of the Exchange Act.
Separately, the AH Merger resulted in AH becoming a wholly owned
subsidiary of Parent. The Members received 10,505,001 shares of newly-
issued Class A Common Stock of Parent in exchange for all outstanding Class
B membership interests in AH, such shares of Class A Common Stock
representing approximately 8.6% of the outstanding stock of Parent. The
number of shares received by the Members was calculated based on an
exchange ratio which was determined through arms-length negotiation.
The foregoing description of the Merger Agreement contained in
this Form 8-K is a brief summary of the provisions thereof but does not
purport to be complete. This summary is qualified in its entirety by
reference to the Merger Agreement, a copy of which is attached hereto as an
exhibit and incorporated herein by reference.
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits.
The following financial statements and pro forma financial information are
hereto attached and filed as part of this report:
(a) Consolidated Financial Statements of Business Acquired:
Page
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Consolidated Audited Financial Statements of Arbitrade Holdings
LLC and Subsidiaries for the nine-months ended September 30,
1999 and for the years ended December 31, 1998 and 1997
Report of Independent Auditors . . . . . . . . . . . . . . . . . 6
Consolidated Statements of Financial Condition as of September
30, 1999 and December 31, 1998 . . . . . . . . . . . . . . . . 7
Consolidated Statements of Operations for the nine-months ended
September 30, 1999 and for the years ended December 31, 1998
and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Consolidated Statements of Members' Equity for the nine- months
ended September 30, 1999 and for the years ended December 31,
1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . 9
Consolidated Statements of Cash Flows for the nine-months ended
September 30, 1999 and for the years ended December 31, 1998
and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Notes to Consolidated Financial Statements . . . . . . . . . . . 12
(b) Unaudited Pro Forma Condensed Combined Financial Statement
Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Unaudited Pro Forma Condensed Combined Statement of
Financial Condition as of September 30, 1999 . . . . . . . . . 29
Unaudited Pro Forma Condensed Combined Statement of
Operations for the nine-months ended September 30, 1999 . . . 30
Unaudited Pro Forma Condensed Combined Statement of
Operations for the year ended December 31, 1998 . . . . . . . 31
Unaudited Pro Forma Condensed Combined Statement of
Operations for the year ended December 31, 1997 . . . . . . . 32
Notes to Unaudited Pro Forma Condensed Combined Financial
Statements . . . . . . . . . . . . . . . . . . . . . . . . . . 33
(c) Exhibits
Exhibit No. Description
2.1 Agreement and Plan of Merger, dated as of November 17, 1999,
by and among KT Holding Company, a Delaware corporation, KT
Acquisition I Corp., a Delaware corporation, AH Acquisition
I L.L.C., a Delaware limited liability company,
Knight/Trimark Group, Inc., a Delaware corporation,
Arbitrade Holdings LLC, a Delaware limited liability
company, Tarmachan Capital Management, Inc., Tarmachan
Capital Co., Deephaven Inc., Gildor Trading, Inc., Irvin
Kessler, Efraim Gildor, Peter Hajas, Merrill Ferguson and
Mark Lyons, as amended by Amendment Number One thereto on
December 14, 1999. (without exhibits)
3.1 Amended and Restated Certificate of Incorporation of
Knight/Trimark Group, Inc.
3.2 By-Laws of Knight/Trimark Group, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereto duly authorized.
KNIGHT/TRIMARK GROUP, INC.
(Registrant)
DATE: January 12, 2000 By: /s/ Robert I. Turner
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Name: Robert I. Turner
Title: Director, Executive Vice
President and Chief Financial
Officer
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
Item 7(a). Consolidated Financial Statements of Business Acquired
Report of Independent Auditors
The Members
Arbitrade Holdings LLC
We have audited the accompanying consolidated statements of financial
condition of Arbitrade Holdings LLC and subsidiaries as of September 30,
1999 and December 31, 1998, and the related consolidated statements of
operations, members' equity and cash flows for the nine months ended
September 30, 1999 and the years ended December 31, 1998 and 1997. 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 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Arbitrade
Holdings LLC and subsidiaries at September 30, 1999 and December 31, 1998,
and the consolidated results of their operations and their cash flows for
the nine months ended September 30, 1999 and the years ended December 31,
1998 and 1997, in conformity with generally accepted accounting principles.
December 20, 1999
/s/ Ernst & Young LLP
Arbitrade Holdings LLC and Subsidiaries
Consolidated Statements of Financial Condition
September 30, December 31,
1999 1998
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ASSETS
Cash $ 173,240 $ 323,079
Receivables from clearing brokers 2,794,424 33,732
Other receivables 1,105,089 731,323
Loans receivable from members 9,460,721 -
Securities owned 411,414,083 310,812,032
Investments in private investment funds 21,871,662 6,887,983
Other investments 2,692,634 1,466,504
Exchange memberships, at cost 3,952,513 1,106,003
Property, leasehold improvements and equipment, net 6,925,917 3,205,314
Intangibles, net 6,494,636 -
Other assets 903,434 1,217,469
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$ 467,788,353 $ 325,783,439
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LIABILITIES AND MEMBERS' EQUITY
Short-term borrowings $ 7,267,828 $ 1,016,766
Securities sold, not yet purchased 325,344,324 219,261,420
Securities sold under agreements to repurchase 10,269,533 11,191,000
Payables to clearing brokers 52,846,149 59,780,751
Payables to members 2,927,227 12,101,837
Compensation payable 7,510,163 6,588,550
Accrued expenses and other liabilities 2,221,917 10,090,741
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Total liabilities 408,387,141 320,031,065
Members' equity 59,401,212 5,752,374
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Total liabilities and members' equity $ 467,788,353 $ 325,783,439
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See accompanying notes.
Arbitrade Holdings LLC and Subsidiaries
Consolidated Statements of Operations
Nine months ended
September 30, Year ended December 31,
1999 1998 1997
REVENUES
Net trading revenue $53,045,754 $47,207,083 $38,293,902
Asset management and incentive fees 14,909,013 6,134,265 7,389,188
Interest and dividends 3,462,132 3,269,301 2,532,623
Other income 2,759,426 1,519,936 476,577
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Total revenues 74,176,325 58,130,585 48,692,290
Interest and dividend expense 4,647,256 2,872,603 3,131,634
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Net revenues 69,529,069 55,257,982 45,560,656
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OPERATING EXPENSES
Employee compensation and benefits 17,022,084 14,701,359 13,113,807
Exchange, clearing and brokerage fees 4,171,817 2,002,217 1,311,002
Exchange seat lease 2,630,308 3,003,282 1,233,095
Depreciation and amortization 1,400,870 1,383,791 404,221
Communications and data processing 1,012,362 1,104,296 1,033,661
Professional fees 905,547 1,112,158 779,837
Business development 711,027 548,939 269,082
Rent 354,436 300,947 257,366
Other operating expenses 1,928,407 1,371,563 429,672
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Total operating expenses 30,136,858 25,528,552 18,831,743
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Income before income taxes 39,392,211 29,729,430 26,728,913
Foreign income taxes - 500,000 -
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Net income 39,392,211 29,229,430 $26,728,913
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Less: net income allocable to Class A units
of membership interests 17,633,605 12,678,082
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Net income allocable to Class B units of
membership interests $21,758,606 $16,551,348
=============================
See accompanying notes.
Arbitrade Holdings LLC and Subsidiaries
Consolidated Statements of Members' Equity
Nine months ended
September 30, Year ended December 31,
1999 1998 1997
Balance at beginning of period $ 5,752,374 $14,227,231 $ 9,063,566
Member contributions 21,100,568 - 7,472,978
Member redemptions - (8,474,857) (2,894,399)
Receivable for member contributions (6,843,941) - -
Member distributions - (29,229,430) (26,143,827)
Net income 39,392,211 29,229,430 26,728,913
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Balance at end of period $59,401,212 $ 5,752,374 $14,227,231
==================================================
See accompanying notes.
Arbitrade Holdings LLC and Subsidiaries
Consolidated Statements of Cash Flows
Nine months
ended
September 30, Year ended December 31,
1999 1998 1997
OPERATING ACTIVITIES
Net income $39,392,211 $ 29,229,430 $26,728,913
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,400,870 1,383,791 404,221
Equity in net income of private investment funds (1,633,043) (195,062) (364,147)
(Increase) decrease in receivables from clearing
brokers (2,760,692) 5,561,058 4,593,962
Increase in securities owned (67,602,051) (191,580,704) (93,716,976)
Decrease (increase) in other assets 314,035 (687,115) (527,952)
Increase in other receivables (373,766) (119,287) (522,710)
Increase in securities sold, not yet purchased 76,082,904 114,494,942 75,224,212
(Decrease) increase in securities sold under
agreements to repurchase (921,467) 11,191,000 -
(Decrease) increase in payables to clearing brokers (6,934,602) 55,457,025 4,323,726
Increase (decrease) in compensation payable 921,613 (842,738) 6,375,220
(Decrease) increase in accrued expenses and other
liabilities (33,987) 1,391,094 (109,408)
-------------------------------------------
Net cash provided by operating activities 37,852,025 25,283,434 22,409,061
INVESTING ACTIVITIES
Purchases of property, leasehold improvements and
equipment (5,048,500) (2,439,659) (1,719,154)
Investments in private investments funds (13,350,636) (1,572,206) (1,368,699)
Loans to members (18,637,636) (21,569,169) -
Repayments of loans to members 9,176,915 21,569,169 -
Purchases of exchange memberships (2,846,510) - (1,106,003)
(Purchases)/sales of other investments, net (1,226,130) 983,555 (2,046,382)
Acquisition of specialist operations (9,567,609) - -
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Net cash used in investing activities (41,500,106) (3,028,310) (6,240,238)
FINANCING ACTIVITIES
Increase in short-term borrowings, net 6,251,062 1,016,766 -
Member contributions 14,256,627 - 7,472,978
Member redemptions (7,834,837) (2,894,399) -
Member distributions (9,174,610) (20,175,419) (23,611,489)
------------------------------------------
Net cash provided by (used in) financing activities 3,498,242 (22,053,052) (16,138,511)
-------------------------------------------
Net (decrease) increase in cash (149,839) 202,072 30,312
Cash at beginning of period 323,079 121,007 90,695
-------------------------------------------
Cash at end of period $ 173,240 $ 323,079 $ 121,007
============================================
Supplemental disclosure of cash flow information
Cash paid for interest $ 4,701,274 $ 2,535,101 $ 2,719,422
Cash paid for foreign income taxes - - -
See accompanying notes.
Arbitrade Holdings LLC and Subsidiaries
Notes to Consolidated Financial Statements
1. Organization and Basis of Presentation
Arbitrade Holdings LLC ("Holdings"), a holding company formed on January 1,
1998, is a Delaware limited liability company whose principal wholly-owned
subsidiaries include Arbitrade, L.L.C. (formerly "NU Twins LLC"),
Laboratory for Computerized Trading LLC ("LCT"), Arbitrade U.K. Ltd.,
Deephaven Capital Management LLC, Deephaven Capital LLC and Deephaven
Investment Advisers LLC. Arbitrade, L.L.C. operates as a market maker in
options and trader in equities, debt instruments and related exchange-
traded derivatives. Arbitrade, L.L.C. is a registered broker-dealer with
the Securities and Exchange Commission. Arbitrade U.K. Ltd. is a market
maker in options and trader in equities and exchange-traded derivatives,
trading on most major exchanges in Europe. LCT provides the technology
support and development for Arbitrade, L.L.C., Arbitrade U.K. Ltd., and the
Company's asset management business. Deephaven Capital Management LLC,
Deephaven Capital LLC and Deephaven Investment Advisers LLC operate as
investment managers and sponsors for a series of limited partnerships,
offshore corporations and limited liability companies.
As of January 1, 1998, the LLC interests of Arbitrade, L.L.C. and LCT were
exchanged for LLC interests in Holdings. In addition, Deephaven Capital
Management LLC and Deephaven Capital LLC were formed as operating
subsidiaries of Holdings to continue the business previously done through
Tarmachan Capital Management and Tarmachan Capital Co. (collectively, the
"Tarmachan S corporations"), respectively. The assets and liabilities of
the Tarmachan S corporations as of January 1, 1998, including the
agreements to manage the assets of the private investment funds which had a
carrying value of zero, were exchanged for LLC interests in Holdings. All
assets and liabilities contributed in the formation of Holdings retained
their then current carrying values due to the common ownership of the
businesses before and after the formation of Holdings.
Arbitrade U.K. Ltd. began trading operations on February 1, 1998 to carry
on the business previously done by Kessler Asher Derivatives Gmbh ("Gmbh").
As of January 1, 1998, Gmbh and its parent, Kessler Asher International
L.P., were wholly owned by Holdings. The net assets of Gmbh and Kessler
Asher International L.P. as of February 1, 1998 were transferred to
Arbitrade U.K. Ltd. as a capital contribution from Holdings. After the
transfer, Gmbh and Kessler Asher International L.P. were liquidated.
As of February 1, 1998, Deephaven Investment Advisers LLC was formed to
serve as the investment manager and sponsor for a new group of private
investment funds.
The consolidated financial statements as of and for the nine months ended
September 30, 1999 and the year ended December 31, 1998 include the
accounts of Holdings and its wholly-owned subsidiaries (collectively, "the
Company"). The combined financial statements for the year ended December
31, 1997 consist of the following predecessor companies of the Company, all
under common control: NU Twins LLC, LCT, Tarmachan S corporations and Gmbh.
The financial statements for all periods presented are presented in U.S.
dollars. All significant intercompany balances and transactions have been
eliminated. Certain items presented in prior year financial statements have
been reclassified to conform with current year presentation.
2. Summary of Significant Accounting Policies
USE OF ESTIMATES
Generally accepted accounting principles require management 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 periods. Actual results could
differ from those estimates.
SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED
Securities owned and securities sold, not yet purchased are valued at
market value based on quoted market prices. Unrealized gains and losses are
reflected in principal transactions in the consolidated statements of
operations. Securities sold, not yet purchased represent obligations of the
Company to purchase the securities at prevailing market prices. The
ultimate gains or losses realized are dependent upon the prices at which
these securities are purchased to settle the obligation under the sales
commitments. Securities transactions are recorded on the trade date.
Receivables and payables relating to trades pending settlement are included
in receivables from clearing brokers and payables to clearing brokers in
the consolidated statements of financial condition.
INVESTMENTS IN PRIVATE INVESTMENT FUNDS
Investments in a series of limited partnerships, offshore corporations and
limited liability companies (collectively, "private investment funds") are
accounted for using the equity method, under which the Company's share of
net income or loss is reflected in income as earned and distributions
received, if any, are reductions of the investments.
OTHER INVESTMENTS
Other investments consist primarily of securities offered in private
placements. These securities are valued as estimated in good faith by
management in the absence of readily ascertainable market values. In
valuing the investments, management takes into consideration factors such
as the length of time since the investment was made, the financial
condition and operating results of the issuer, recent sales prices of the
issuer's securities, and the proportion of the issuer's securities owned.
Because of the inherent uncertainty of valuation, those estimated values
may differ significantly from the values that would have been used had a
ready market for the investments existed.
FUTURES TRANSACTIONS
Futures and options on futures contracts are valued at market value based
on exchange settlement prices. Unrealized gains and losses on futures and
options on futures contracts are reflected in net trading revenue in the
consolidated statements of operations.
RESALE AND REPURCHASE AGREEMENTS
Securities purchased under agreements to resell ("resale agreements") and
securities sold under agreements to repurchase ("repurchase agreements")
are accounted for as collateralized financing transactions and are recorded
at their contracted resale or repurchase amounts plus accrued interest.
Counterparties are major financial institutions. The Company's policy is to
take possession or control of securities with a market value in excess of
the principal amount loaned, plus accrued interest, in order to
collateralize securities purchased under agreements to resell. The Company
monitors the market value of the underlying securities which collateralize
the related receivable on resale agreements, including accrued interest,
and requests additional collateral when deemed appropriate. Similarly, the
Company is required to provide securities to counterparties in order to
collateralize securities sold under agreements to repurchase.
PROPERTY, LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Property, leasehold improvements and equipment are recorded at cost.
Property and equipment is depreciated over their estimated useful lives
using the straight-line method. Leasehold improvements are amortized over
the respective lease term using the straight-line method. At September 30,
1999 and December 31, 1998, accumulated depreciation totaled $3,453,383 and
$2,125,486, respectively.
INTANGIBLES
Intangibles are being amortized on a straight-line basis over 15 years.
FOREIGN CURRENCIES
Assets and liabilities in foreign currencies are translated into U.S.
dollars using current exchange rates at the date of the consolidated
statements of financial condition. Revenues and expenses are translated at
average rates during the periods. The functional currency of the Company's
wholly-owned foreign subsidiary is the U.S. dollar. The foreign exchange
gains and losses resulting from these transactions are included in other
operating expenses in the consolidated statements of operations.
INCOME TAXES
No provision has been made for U.S. federal and state income taxes as the
taxable income or loss of the Company is included in the respective income
tax returns of the members. A provision has been made for applicable
foreign income taxes.
FAIR VALUE OF FINANCIAL INSTRUMENTS
All of the Company's financial instruments are carried at fair value or
amounts approximating fair value.
COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards
("SFAS")
No. 130, Reporting Comprehensive Income, that requires companies to report
all changes in equity during a period, except those resulting from
investments by owners and distributions to owners. The Company has not
presented a consolidated statement of comprehensive income because it does
not have any items of "other comprehensive income."
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 131, Disclosures about Segments of an Enterprise and Related
Information, effective for fiscal years beginning after December 15, 1997.
SFAS No. 131 requires the disclosure of financial and descriptive
information about reportable operating segments. Operating segments are
components of an enterprise about which financial information is available
and is evaluated regularly in deciding how to allocate resources and assess
performance. SFAS No. 131 also requires the disclosure of profit or loss,
certain specific revenue and expense items, and assets of all operating
segments, with reconciliations of amounts presented in the financial
statements. SFAS No. 131 also requires the disclosure of how the operating
segments were determined, the products and services provided by the
segments, differences between measurements used in reporting segment
information and those used in the financial statements, and changes in the
measurement of segment amounts from period to period. The Company adopted
SFAS No. 131 in 1998.
In March 1998, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). This
statement requires that certain costs of computer software developed or
obtained for internal use be capitalized and amortized over the useful life
of the related software. SOP 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998. The Company adopted SOP 98-
1 as of January 1, 1999. Prior to the Company's adoption of SOP 98-1, the
Company expensed its costs of developing computer software and capitalized
the costs of computer software acquired from third parties. The effect of
adopting SOP 98-1 was to increase net income for the nine months ended
September 30, 1999 by $1,461,000.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The new rules establish standards
requiring that all derivative financial instruments be recognized and
measured at fair value regardless of the purpose or intent for holding
them. SFAS No. 133 also reduces certain previously required quantitative
disclosures relating to derivative financial instruments held or issued for
trading purposes. The Company adopted SFAS No. 133 in 1998 and the adoption
did not have a significant impact on the Company's consolidated financial
statements.
3. Securities Owned and Securities Sold, Not Yet Purchased
Securities owned and securities sold, not yet purchased consisted of the
following:
September 30, December 31,
1999 1998
Securities owned:
Equities $167,902,221 $106,463,740
Options 233,452,944 193,101,352
U.S. government obligations 10,058,918 11,246,940
--------------------------------
$411,414,083 $310,812,032
================================
Securities sold, not yet purchased:
Equities $ 72,506,070 $ 39,214,266
Options 252,838,254 180,047,154
--------------------------------
$325,344,324 $219,261,420
================================
4. Short-Term Borrowings
At September 30, 1999 and December 31, 1998, respectively, the Company had
a $10,000,000 and an $8,000,000, respectively, credit facility with a bank
under which it borrows on a revolving basis. The borrowing is
collateralized with substantially all assets of the Company. Interest is
variable based on prime plus one percent per annum and payable monthly. The
Company pays a one half percent per annum commitment fee on the unused
portion of the facility. The unused portion of the facility and interest
rate at September 30, 1999 were $2,732,172 and 9.25%, respectively, and
$6,983,234 and 8.75% at December 31, 1998, respectively.
5. Investments in Private Investment Funds
Deephaven Capital Management LLC, Deephaven Capital LLC and
Deephaven Investment Advisers LLC are the investment managers and sponsors
of private investment funds that engage in various trading strategies
involving equities, debt instruments and derivatives. The Company owns
interests in these private investment funds. Several members of Holdings
also own interests in these private investment funds. Summary financial
information for these private investment funds at September 30, 1999 and
December 31, 1998, and for the nine and twelve months then ended,
respectively, was as follows:
1999 1998
---------------------------------
Total assets $1,562,814,952 $1,490,887,848
Total liabilities 1,214,703,275 1,162,742,176
Total capital 348,111,677 328,145,672
Net income 66,929,404 11,713,888
Company's carrying value 21,871,662 6,887,983
Company's pro rata share of net income 1,633,043 195,062
The Company's pro rata share of net income from the above private
investment funds for the year ended December 31, 1997 was $364,147. These
amounts are included in other income in the consolidated statements of
operations.
The Company earns income from these private investment funds consisting of
management and incentive fees, as provided for in each respective
investment fund agreement. The Company earned fees of $14,909,013 for the
nine months ended September 30, 1999, $6,134,265, for the year ended
December 31, 1998 and $7,389,188 for the year ended December 31, 1997.
6. Acquisition of Specialist Operations
Effective July 21, 1999, the Company acquired the partnership interests of
Gargoyle Specialists L.P. ("Gargoyle") for an aggregate purchase price of
$9,567,609. Gargoyle was a member of the American Stock Exchange and
operated as a specialist in options on this exchange. The excess purchase
price over fair value of net assets acquired of $6,567,609 has been
reflected as intangibles in the consolidated statements of financial
condition. The operations of Gargoyle are conducted in Arbitrade, L.L.C.
and Gargoyle was dissolved as of the date of acquisition.
The following unaudited pro forma operating results of the Company assume
that the Gargoyle acquisition had occurred at the beginning of each period
presented. In addition to combining the historical results of operations
of the two companies, the unaudited pro forma results include adjustments
for the estimated effect of purchase accounting on the Company's results.
Nine months ended Year ended December 31
(in millions) September 30, 1999 1998 1997
- ----------------------------------------------------------------------------
Net revenues $ 70.8 $ 63.8 $ 50.3
Net income 40.0 35.9 29.1
The unaudited pro forma information may not be indicative of the results
that actually would have occurred if the combination had been in effect on
the dates indicated or which may be obtained in the future.
7. Related Party Transactions
Members of Holdings may receive loans from Holdings. These loans, which are
payable on demand, are charged interest based on 6% per annum of the loan
amount. Interest income on these loans is included in other income in the
consolidated statements of operations and amounted to $638,865 for the nine
months ended September 30, 1999, $527,827 for the year ended December 31,
1998 and $0 for the year ended December 31, 1997.
Certain personnel and administrative expenses incurred by the investment
managers of the private investment funds are charged to the funds. Such
expenses totaled $1,160,313 for the nine months ended September 30, 1999,
and $2,450,702 and $1,633,765 for the years ended December 31, 1998 and
1997, respectively.
8. Regulatory Matters
Arbitrade, L.L.C. is subject to the Securities and Exchange Commission's
("SEC") Uniform Net Capital Rule ("Rule 15c3-1"), which requires the
maintenance of minimum net capital. Arbitrade, L.L.C. has elected to
compute net capital using the alternative method, permitted by the Rule,
which requires that Arbitrade, L.L.C. maintain minimum net capital, as
defined, equal to $250,000. At September 30, 1999, Arbitrade, L.L.C. had
net capital and net capital requirements of approximately $9,529,000 and
$250,000, respectively.
Arbitrade U.K. Ltd. is also subject to capital adequacy requirements of the
Securities and Futures Authority Limited in the United Kingdom. As of
September 30, 1999, Arbitrade U.K. Ltd. was in compliance with its capital
adequacy requirements.
Advances, dividend payments and other equity distributions from regulated
subsidiaries may be restricted by the regulations of various regulatory
agencies. These restrictions may limit the amounts that these subsidiaries
pay as dividends or advances to Holdings.
9. Commitments and Contingencies
The Company rents office space under leases containing operating expense
escalation clauses. The Company's principal lease is cancelable upon 90
days' written notice. At September 30, 1999, future non-cancelable minimum
commitments under leases with remaining terms exceeding one year were as
follows:
Three months ended December 31, 1999 $ 168,761
2000 664,727
2001 453,726
2002 374,935
2003 323,557
2004 307,539
Thereafter 396,359
-----------
$2,689,604
===========
Rent expense for the nine months ended September 30, 1999 was $354,436 and
for the years ended December 31, 1998 and 1997 was $300,947 and $257,366,
respectively.
In 1999, the Company purchased Class A and Class B membership units in the
International Securities Exchange LLC (ISE) for an aggregate purchase price
of $22,500,000. The Company has paid $375,000, with the balance to be paid
based on and contingent upon trades executed on the ISE. The ISE is not
currently operational and there is no definitive date set for the
commencement of its operations.
Although the Company is a defendant in legal proceedings arising out of the
normal course of business, there are no legal proceedings which, in the
opinion of management and counsel, would have a material impact on the
Company's consolidated financial statements.
10. Employee Benefit Plan
The Company sponsors a 401(k) profit sharing plan (the "Plan") in which
substantially all of its employees are eligible to participate. Under the
terms of the Plan, the Company is required to make annual contributions to
the Plan equal to 50% of the contributions made by its employees, up to
certain limitations. The total expense with respect to the Plan for the
nine months ended September 30, 1999 and the years ended December 31, 1998
and 1997 was $150,000, $71,000 and $0, respectively.
11. Members' Equity
At September 30, 1999, December 31, 1998 and January 1, 1998 there were
1,000 Class A units of membership interests ("working interests")
outstanding. At September 30, 1999, December 31, 1998 and January 1, 1998
there were 55,000,000, 33,899,432 and 42,374,289 Class B units of
membership interests ("capital interests") outstanding, respectively. Both
classes have voting rights and share in the allocation of net income or
loss of the Company, as defined in the LLC Operating Agreement. Only Class
B units represent ownership in the equity of the Company.
As of December 31, 1998, one member terminated his interest in the Company
and redeemed his Class B capital interests. This redemption, totaling
$8,474,857, is included in accrued expenses and other liabilities at
December 31, 1998 in the consolidated statements of financial condition.
Effective January 1, 1999, a total of 15,950,000 Class B units of
membership interests were issued to three new members and an additional
5,150,568 Class B units of membership interests were issued to two existing
members. At September 30, 1999, a receivable from one new member and two
existing members for $6,843,941 to purchase Class B units of membership
interests has been netted in members' equity in the consolidated statements
of financial condition. As of December 20, 1999, $279,474 of the receivable
remained unpaid.
12. Derivative Financial Instruments
Derivative contracts are financial instruments whose value is based upon an
underlying asset, index, reference rate or a combination of these factors.
The Company uses derivative financial instruments as part of its market-
making and trading business and its overall risk management process. These
financial instruments, which generally include exchange-traded options,
options on futures and futures contracts, expose the Company to varying
degrees of market and credit risk. The Company records its derivative
trading activities at market value and unrealized gains and losses are
recognized currently.
13. Agreements with Clearing Brokers
The Company has clearing agreements with three clearing brokers. The
Company earns interest income and/or incurs interest expense on
substantially all balances due from/to these clearing brokers. At September
30, 1999 and December 31, 1998, substantially all of the Company's
securities owned, securities sold, not yet purchased and
receivables/payables from/to clearing brokers are amounts held by or due
from/to these clearing brokers.
14. Business Segment and Geographic Information
The Company has two reportable segments: market making and trading, and
asset management. The market making and trading segment includes the
operations of Arbitrade, L.L.C., Arbitrade U.K Ltd. and Gmbh, and includes
market making in options and trading in equities, debt instruments and
related exchange-traded derivatives. The asset management segment includes
the operations of Deephaven Capital Management LLC, Deephaven Capital LLC
and Deephaven Investment Advisers LLC (or its predecessor entities) and
consists of investment management operations and sponsorships for a series
of private investment funds.
The Company evaluates performance and allocates resources based on profit
from operations before income taxes. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies. The Company's revenues, net revenues,
income (loss) before income taxes and assets by segment are summarized
below.
MARKET MAKING ASSET CONSOLIDATED
AND TRADING MANAGEMENT OTHER(1) TOTAL
----------------------------------------------------------------
Nine months ended September 30, 1999:
Revenues $ 56,507,887 $16,542,056 $ 1,126,382 $ 74,176,325
Net revenues 51,860,630 16,542,056 1,126,383 69,529,069
Income (loss) before income taxes 30,764,601 13,181,573 (4,553,963) 39,392,211
Assets 429,372,255 26,040,785 12,375,313 467,788,353
Year ended December 31, 1998:
Revenues $ 50,476,384 $ 6,329,327 $ 1,324,874 $ 58,130,585
Net revenues 47,603,781 6,329,327 1,324,874 55,257,982
Income (loss) before income taxes 30,702,840 2,415,851 (3,889,261) 29,229,430
Assets 314,226,041 9,424,514 2,132,884 325,783,439
Year ended December 31, 1997:
Revenues $ 40,938,955 $ 7,753,335 $ - $ 48,692,290
Net revenues 37,807,321 7,753,335 - 45,560,656
Income (loss) before income taxes 23,084,874 5,616,779 (1,972,740) 26,728,913
Assets 129,319,003 6,110,517 1,486,218 136,915,738
(1) Other revenues consists principally of other income and interest
income not attributable to either segment. Other assets
principally reflects total assets of LCT and loans receivable
from members. These items are not separately identifiable to
either segment.
The Company's net revenues by geographic area are summarized below. Amounts
are determined principally by the respective legal jurisdiction of the
Company's subsidiaries.
Nine months ended
September 30, Year ended December 31,
1999 1998 1997
-------------------------------------------------------
United States $ 68,088,422 $ 51,289,777 $ 42,908,195
Europe 1,440,647 3,968,205 2,652,461
-------------------------------------------------------
Total $ 69,529,069 $ 55,257,982 $ 45,560,656
=======================================================
Income (loss) before income taxes included $(534,728) and $1,148,334 of
earnings attributable to Arbitrade U.K. Ltd. for the nine months ended
September 30, 1999 and the year ended December 31, 1998, respectively.
Income before income taxes included $1,595,023 of earnings attributable to
Gmbh for the year ended December 31, 1997.
15. Subsequent Events
On November 17, 1999, the Company signed a definitive agreement to merge
with Knight/Trimark Group, Inc. The transaction is subject to regulatory
approval and is expected to close in early 2000.
16. Year 2000 Readiness Disclosure (Unaudited)
Like other financial and business organizations worldwide, the Company
could be adversely affected if computer systems on which the Company
relies, which primarily include those used by the Company and its service
providers, are unable to correctly process date-related information on and
after January 1, 2000. This risk is commonly called the Year 2000 Issue.
Failure to successfully address the Year 2000 Issue could result in
interruptions to, and other material adverse effects on, the Company's
business and operations. The Company has commenced a review of the Year
2000 Issue as it may affect its business and is taking steps it believes
are reasonably designed to address the Year 2000 Issue, although there can
be no assurances that these steps will be sufficient. In addition, there
can be no assurances that the Year 2000 Issue will not have an adverse
effect on the companies whose securities are held by the Company or on
global markets or economies generally.
Item 7(b). Unaudited Pro Forma Condensed Combined Financial Statement
Information
The following unaudited Pro Forma Condensed Combined Statement of
Financial Condition and unaudited Pro Forma Condensed Combined Statements
of Operations ("Pro Forma Condensed Combined Financial Statement
Information") are based upon the historical consolidated financial
statements of Knight/Trimark Group, Inc. ("Knight/Trimark") and Arbitrade
Holdings LLC ("Arbitrade").
The historical information for Knight/Trimark included in the Unaudited
Pro Forma Condensed Combined Statement of Financial Condition as of
September 30, 1999 and the Unaudited Pro Forma Condensed Combined Statement
of Operations for the nine months ended September 30, 1999 is derived from
the unaudited consolidated financial statements of Knight/Trimark which, in
the opinion of management, have been prepared on the same basis as the
audited consolidated financial statements of Knight/Trimark for the years
ended December 31, 1998 and 1997, and contain all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of
the results of operations for such period. The historical information for
Knight/Trimark included in the Unaudited Pro Forma Condensed Combined
Statements of Operations for the years ended December 31, 1998 and 1997
have been derived from the audited consolidated financial statements of
Knight/Trimark for the years ended December 31, 1998 and 1997, which
statements are not included in this Form 8-K.
The historical information for Arbitrade included in the Unaudited Pro
Forma Condensed Combined Statement of Financial Condition as of September
30, 1999 and the Unaudited Pro Forma Condensed Combined Statements of
Operations for the nine months ended September 30, 1999 and for the years
ended December 31, 1998 and 1997 have been derived from the audited
consolidated financial statements of Arbitrade for such periods, which
statements are included elsewhere in this Form 8-K.
The unaudited Pro Forma Condensed Combined Statement of Financial
Condition as of September 30, 1999 gives pro forma effect to the merger of
a wholly owned subsidiary of Knight/Trimark with and into Arbitrade (the
"Merger") and the issuance of 10,505,001 shares of Knight/Trimark class A
common stock to the holders of the outstanding class B membership interests
of Arbitrade as if such transactions occurred as of September 30, 1999.
The Merger will be accounted for as a pooling of interests.
The unaudited Pro Forma Condensed Combined Statements of Operations for
the nine months ended September 30, 1999 and for the years ended December
31, 1998 and 1997 give pro forma effect to the Merger as if it occurred as
of January 1, 1997.
The unaudited Pro Forma Condensed Combined Financial Statement
Information and accompanying notes should be read in conjunction with the
historical consolidated financial statements of Knight/Trimark and
Arbitrade. The unaudited Pro Forma Condensed Combined Financial Statement
Information presented is not necessarily indicative of the results of
operations that might have occurred had the Merger actually taken place as
of the dates specified, or that may be expected to occur in the future.
Unaudited Pro Forma Condensed Combined Statement of Financial Condition
as of September 30, 1999
HISTORICAL
--------------------------------------
PRO FORMA PRO FORMA
KNIGHT/TRIMARK ARBITRADE ADJUSTMENTS COMBINED
-------------- --------- ----------- ---------
ASSETS
Cash and cash equivalents $ 265,298,079 $ 173,240 - $ 265,471,319
Securities owned, at market value 100,822,606 411,414,083 - 512,236,689
Receivable from clearing brokers 107,738,486 2,794,424 - 110,532,910
Other assets 60,295,628 53,406,606 - 113,702,234
------------------- ---------------- --------------- -----------------
Total assets $ 534,154,799 $ 467,788,353 - $ 1,001,943,152
=================== ================ =============== =================
LIABILITIES AND STOCKHOLDERS'
(MEMBERS') EQUITY
Liabilities
Securities sold, not yet purchased,
at market value $ 86,789,389 $ 325,344,324 - $ 412,133,713
Payable to clearing brokers - 52,846,149 - 52,846,149
Accrued compensation payable 21,442,851 7,510,163 - 28,953,014
Distributions payable to members - 2,927,227 $21,401,212(a) 24,328,439
Other liabilities 25,920,295 19,759,278 - 45,679,573
------------------- ---------------- --------------- -----------------
Total liabilities 134,152,535 408,387,141 21,401,212 563,940,888
------------------- ---------------- --------------- -----------------
Stockholders' equity / Members' equity
Class A common stock 1,113,342 - 105,050(a) 1,218,392
Additional paid-in capital 259,634,209 - 37,894,950(a) 297,529,159
Retained earnings 139,254,713 - - 139,254,713
Members' equity - 59,401,212 (59,401,212)(a) -
------------------- ---------------- --------------- -----------------
Total stockholders' (members') equity 400,002,264 59,401,212 (21,401,212) 438,002,264
------------------- ---------------- --------------- -----------------
Total liabilities and stockholders'
(members') equity $ 534,154,799 $ 467,788,353 $ - $ 1,001,943,152
=================== ================ =============== =================
Unaudited Pro Forma Condensed Combined Statement of Operations for the
Nine Months Ended September 30, 1999
HISTORICAL
--------------------------------------
PRO FORMA PRO FORMA
KNIGHT/TRIMARK ARBITRADE ADJUSTMENTS COMBINED
-------------- --------- ----------- ---------
REVENUES
Net trading revenue $ 524,423,136 $ 53,045,754 - $ 577,468,890
Asset management and incentive fees - 14,909,013 - 14,909,013
Interest, net and other income 19,868,314 1,574,302 - 21,442,616
------------------ ---------------- -------------- ---------------
Total revenues 544,291,450 69,529,069 - 613,820,519
------------------ ---------------- -------------- ---------------
EXPENSES
Employee compensation and benefits 164,428,927 17,022,084 $ 6,705,707 (b) 188,156,718
Payments for order flow 98,850,716 - - 98,850,716
Execution and clearance fees and
exchange seat leases 57,472,143 6,802,125 - 64,274,268
Other expenses 38,377,420 6,312,649 - 44,690,069
------------------ ---------------- -------------- ---------------
Total expenses 359,129,206 30,136,858 6,705,707 395,971,771
------------------ ---------------- -------------- ---------------
Income before income taxes 185,162,244 39,392,211 (6,705,707) 217,848,748
Income tax expense 75,718,212 - 75,718,212
Pro forma income tax expense - - 13,891,764 (c) 13,891,764
------------------ ---------------- -------------- ---------------
NET INCOME $ 109,444,032 $ 39,392,211 $ (20,597,471) $ 128,238,772
================== ================ ============== ===============
Basic earnings per share $ 1.00 $ 1.06
================== ===============
Diluted earnings per share $ 0.95 $ 1.02
================== ===============
Shares used in basic earnings per share
calculation 109,921,171 10,505,001 (d) 120,426,172
================== ============== ===============
Shares used in diluted earnings per
share calculation 114,843,985 10,505,001 (d) 125,348,986
================== ============== ===============
Unaudited Pro Forma Condensed Combined Statement of Operations for the
Year Ended December 31, 1998
HISTORICAL
---------------------------------------
PRO FORMA PRO FORMA
KNIGHT/TRIMARK ARBITRADE ADJUSTMENTS COMBINED
-------------- --------- ----------- ----------
REVENUES
Net trading revenue $ 348,098,874 $ 47,207,083 - $ 395,305,957
Asset management and
incentive fees - 6,134,265 - 6,134,265
Interest, net and other income 7,634,195 1,916,634 - 9,550,829
------------------ ---------------- ------------------ ----------------
Total revenues 355,733,069 55,257,982 - 410,991,051
------------------ ---------------- ------------------ ----------------
EXPENSES
Employee compensation and
benefits 108,002,843 14,701,359 $ 5,096,915 (b) 127,801,117
Payments for order flow 82,512,214 - - 82,512,214
Execution and clearance fees
and exchange seat leases 45,563,751 5,005,499 - 50,569,250
Other expenses 31,302,025 5,821,694 - 37,123,719
------------------ ---------------- ------------------ ----------------
Total expenses 267,380,833 25,528,552 5,096,915 298,006,300
------------------ ---------------- ------------------ ----------------
Income before income taxes 88,352,236 29,729,430 (5,096,915) 112,984,751
Income tax expense 21,751,209 500,000 - 22,251,209
Pro forma income tax expense 15,798,491 - 9,968,819 (c) 25,767,310
------------------ ---------------- ------------------ ----------------
NET INCOME $ 50,802,536 $ 29,229,430 $ (15,065,734) $ 64,966,232
================== ================ ================== ================
Basic and diluted earnings per
share $ 0.53 $ 0.63
================== ================
Shares used in basic and diluted
earnings per share calculation 95,022,222 8,093,490 (d) 103,115,712
================== ================== ================
Unaudited Pro Forma Condensed Combined Statement of Operations for the
Year Ended December 31, 1997
HISTORICAL
---------------------------------------
PRO FORMA PRO FORMA
KNIGHT/TRIMARK ARBITRADE ADJUSTMENTS COMBINED
-------------- --------- ----------- -----------
REVENUES
Net trading revenue $ 223,922,643 $ 38,293,902 - $ 262,216,545
Asset management and
incentive fees - 7,389,188 - 7,389,188
Interest, net and other income 2,744,003 (122,434) - 2,621,569
------------------ ------------------ ---------------------- ---------------
Total revenues 226,666,646 45,560,656 - 272,227,302
------------------ ------------------ ---------------------- ---------------
EXPENSES
Employee compensation and
benefits 57,716,994 13,113,807 $ 4,646,837(b) 75,477,638
Payments for order flow 66,912,040 - - 66,912,040
Execution and clearance fees
and exchange seat leases 32,068,573 2,544,097 - 34,612,670
Other expenses 19,891,806 3,173,839 - 23,065,645
------------------ ------------------ ---------------------- ---------------
Total expenses 176,589,413 18,831,743 4,646,837 200,067,993
------------------ ------------------ ---------------------- ---------------
Income before income taxes 50,077,233 26,728,913 (4,646,837) 72,159,309
Income tax expense - - - -
Pro forma income tax expense 21,282,824 - 9,384,882(c) 30,667,706
------------------ ------------------ ---------------------- ---------------
NET INCOME $ 28,794,409 $ 26,728,913 $ (14,031,719) $ 41,491,603
================== ================== ====================== ===============
Basic and diluted earnings per
share $ 0.34 $ 0.44
================== ===============
Shares used in basic and diluted
earnings per share calculation 85,603,272 8,093,490(d) 93,696,762
================== ====================== ===============
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
1. BASIS OF PREPARATION
As permitted by the rules and regulations of the Securities and Exchange
Commission, the Unaudited Pro Forma Condensed Combined Statement of
Financial Condition and Unaudited Pro Forma Condensed Combined Statements
of Operations are presented on a condensed basis.
2. PRO FORMA ADJUSTMENTS
(a) Stockholders' Equity / Members' Equity - Adjustments to reflect the
issuance of 10,505,001 shares of Knight/Trimark class A common stock in the
Merger, and the estimated distributions payable to members of Arbitrade
from undistributed income of Arbitrade in accordance with Arbitrade's
annual distribution policy as if September 30, 1999 was the end of
Arbitrade's fiscal period.
(b) Compensation and Benefits for Arbitrade's Members - As Arbitrade has
operated historically as a limited liability company ("LLC"), compensation
and benefits to Arbitrade's members ("Members' Compensation") was accounted
for as distributions of members' equity rather than as compensation
expense. As a result, the historical compensation expense and income
before income taxes of Arbitrade for the periods presented did not reflect
Members' Compensation.
In connection with the closing of the Merger, each of Arbitrade's members
signed an employment agreement with Arbitrade, which will become effective
as of the closing date of the Merger. Such employment agreements entitle
Arbitrade's members to annual compensation that includes a base salary and
participation in Arbitrade's sub-pool of the Knight/Trimark Profit-Pool
Incentive Plan. Arbitrade's sub-pool will equal 15% of the before-tax
profits earned by Arbitrade during each fiscal quarter, and will be
allocated on a quarterly basis by the executive officers of Arbitrade.
Accordingly, Knight/Trimark has estimated the historical compensation
expense for Arbitrade's members for the periods presented based on the
employment agreements with Arbitrade's members discussed above. As a
result, pro forma compensation and benefits expense of $6,705,707,
$5,096,915 and $4,646,837 has been recorded on the Unaudited Pro Forma
Condensed Combined Statements of Operations for the nine months ended
September 30, 1999 and for the years ended December 31, 1998 and 1997,
respectively.
(c) Pro Forma Provision for Income Taxes - As Arbitrade has operated as an
LLC since inception, the historical results for all periods presented have
been adjusted to reflect a pro forma provision for income taxes at an
effective tax rate of 42.5% for Arbitrade. Prior to its initial public
offering in July 1998, Knight/Trimark also operated as an LLC.
Accordingly, the historical statement of operations for the years ended
December 1997 and 1998 reflect a pro forma provision for income taxes as if
Knight/Trimark was a taxable entity for all periods presented.
(d) Pro Forma Basic and Diluted Average Common Shares Outstanding -
Adjustments to the shares used in the basic and diluted earnings per share
calculations for the periods presented to reflect the Knight/Trimark class
A common stock that would have been issued in exchange for outstanding
class B membership interests of Arbitrade based on the exchange ratio
applicable upon the closing of the Merger.
EXHIBIT INDEX
2.1 Agreement and Plan of Merger, dated as of November 17, 1999, by
and among KT Holding Company, a Delaware corporation, KT
Acquisition I Corp., a Delaware corporation, AH Acquisition I
L.L.C., a Delaware limited liability company, Knight/Trimark
Group, Inc., a Delaware corporation, Arbitrade Holdings LLC, a
Delaware limited liability company, Tarmachan Capital
Management, Inc., Tarmachan Capital Co., Deephaven Inc., Gildor
Trading, Inc., Irvin Kessler, Efraim Gildor, Peter Hajas,
Merrill Ferguson and Mark Lyons, as amended by Amendment Number
One thereto on December 14, 1999. (without exhibits)
3.1 Amended and Restated Certificate of Incorporation of
Knight/Trimark Group, Inc.
3.2 By-Laws of Knight/Trimark Group, Inc.