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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 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 0-26225
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WIT SOUNDVIEW GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 13-3900397
(State of Other Jurisdiction of Incorporation or (IRS Employer Identification No.)
Organization)
826 BROADWAY, NEW YORK, NEW YORK 10003
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (212) 253-4400
Securities Registered Pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None None
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
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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 twelve 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 ninety 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. Yes / /
The market value of the Common Stock held by non-affiliates of the
registrant was $184,175,074 based on the last reported sale price of the
Registrant's Common Stock on the NASDAQ National Market as of the close of
business on February 28, 2001. For purposes of this response, the registrant has
assumed that its directors, executive officers and beneficial owners of 5% or
more of its common equity are affiliates of the registrant.
As of February 28, 2001, there were 108,925,505 shares of the Registrant's
Common Stock outstanding and 11,666,666 shares of the Registrant's Class B
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders
to be filed with the Securities and Exchange Commission not later than 120 days
after the end of the Company's fiscal year ended December 31, 2000 are
incorporated by reference into Part III of this Form 10-K.
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WIT SOUNDVIEW GROUP, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 8
Item 3. Legal Proceedings........................................... 9
Item 4. Submission of Matters to a Vote of Security Holders......... 10
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 11
Item 6. Selected Financial Data..................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 15
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 22
Item 8. Financial Statements and Supplementary Data................. 24
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 24
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 24
Item 11. Executive Compensation...................................... 24
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 24
Item 13. Certain Relationships and Related Transactions.............. 24
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 25
Certain statements in this Form 10-K that are not historical facts
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Statements preceded by, followed by,
or that include the words "expect," "expected," "will," "may," "intend,"
"anticipate," "believe," and "should", involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements, or those of the industry in which we operate, to be materially
different from any expected future results, performance or achievements
expressed or implied in these forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to, those
economic factors that affect the market for capital raising, including initial
public offerings and those factors discussed in the Registration Statement of
our initial public offering of common stock, the Proxy and Registration
Statements relating to our mergers with SoundView and E*OFFERING and periodic
reports filed from time to time with the Securities and Exchange Commission.
Unless otherwise indicated, the terms "Wit SoundView", "We" and the
"Company" refer to the combined company of Wit SoundView Group, Inc. and
subsidiaries.
PART I
ITEM 1. BUSINESS
We are a technology-focused investment banking firm that provides services
to an institutional and issuer client base. Wit SoundView was established to
address the opportunities and challenges posed by our rapidly changing economy
and employs technology industry specialists who focus our efforts and expertise
on this sector. We also seek to develop new investment banking products and
services that use technology and the Internet to better serve our issuer and
institutional client needs.
We offer services to a wide array of technology clients from start-ups to
industry leaders. We seek to be involved in every aspect of the capital raising
process, whether through venture capital investing or public or private equity
financing. We advise our clients in a variety of areas ranging from business
strategy to mergers and acquisitions. We are committed to serving our global
institutional investor client base through our industry-focused research, sales
and trading functions.
In parallel with our investment banking activities we bring investment
opportunities to the individual investor, which we believe has become an
integral component of the capital raising and investment process. Through a
strategic alliance with E*TRADE Group Inc. ("E*TRADE"), we will offer individual
investors access to public offerings and other investment banking products. We
believe that the combination of our strong institutional base with E*TRADE's
online retail base will provide a powerful distribution channel to connect our
issuer clients with investors.
MERGERS
On January 31, 2000, we completed our merger with SoundView Technology
Group, Inc. ("SoundView"), now known as Wit SoundView Corporation. The merger
with SoundView positioned us to be one of the largest investment banking and
research groups focused exclusively on the technology sector. It also enabled us
to significantly expand our research coverage and the availability of our
research product.
On October 16, 2000, we completed our merger with E*OFFERING Corp.
("E*OFFERING") and commenced our strategic alliance with E*TRADE. As part of the
strategic alliance agreement, Wit SoundView became the exclusive source of
retail equity or equity related securities in initial public offerings,
follow-on offerings and certain private placements to the 3.6 million customers
of E*TRADE. In connection with the merger and the strategic alliance agreement,
all of our online retail customer accounts were transferred to E*TRADE and we
will use E*TRADE's online brokerage platform to distribute products to E*TRADE's
retail investors. Additionally, as part of our alliance, E*TRADE has agreed to
use commercially reasonable efforts to direct all secondary market orders in
stocks in which
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Wit SoundView is a registered market maker in exchange for a competitive trading
flow rebate. Wit SoundView's right to receive secondary market orders is subject
to E*TRADE's fiduciary obligations to its customers and compliance with
applicable regulations.
RESEARCH
At the cornerstone of all of our service offerings, research is first and
foremost in defining the culture of our organization. We believe that our focus
on the technology sector is crucial to success in meeting the needs of our
corporate clients for investment and strategic advice and makes our research
valuable to our institutional clients. Our research universe historically has
been segmented in a manner which provides in-depth analysis of the secular and
cyclical trends within each individual sector. Our research professionals
maintain close relationships with key industry participants in each of those
sectors. These key participants include public and private technology companies,
venture capital and institutional investors, technical experts and professional
service providers. Through these relationships, we expect to gain opportunities
to participate actively in the capital raising and other corporate activity of
these technology companies. We have a continuing strategic partnership with the
Gartner Group that provides access to over 750 Gartner Group research analysts
worldwide as well as unique insight into end-user demand through the numerous
surveys which are conducted at conferences organized by the Gartner Group. In
addition, we have a strategic relationship with the Giga Group that provides
access to their analysts, their customers for survey purposes, and participation
in their research meetings on an exclusive basis.
As of December 31, 2000, we provided research coverage for over 260
companies. Our research universe is comprised of the following technology and
Internet industry groups and segments:
SOFTWARE COMPONENTS COMMUNICATIONS SYSTEMS INTERNET
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Internet Semiconductors telecom/datacom/ design automation e-commerce/other
Infrastructure/ semiconductor software enterprise systems marketplaces
e-commerce capital photonics PC/peripherals online
software/service/ equipment wireless channels/contract healthcare
security enterprise services manufacturing e-finance media/
software enterprise wireless new media web
applications equipment hosting Internet
service
providers
application
service
providers
We currently employ over 50 research professionals. In order to achieve the
depth of coverage required to maintain a leading technology research product, we
must often recruit specific industry and technical experience and train the
analysts in financial analysis disciplines. This specialization enables our
analysts to produce sophisticated research which is valued by our institutional
clients and also allows them to publish industry and thematic pieces which
distinguish them as experts in their respective fields. Our analysts work
closely with our investment banking professionals to identify those companies
that will evolve as leaders in their industries. It is with these companies that
we seek to develop long-term relationships helping to manage their capital
raising activities and offering strategic advice.
We hold an annual Technology Outlook Conference which has become a leading
venue for the top technology companies to present their stories to hundreds of
technology focused institutional investors in their industries. In 2000, a total
of 95 public companies made presentations to close to 300 of the senior
investment professionals at approximately 200 institutions. In addition to this
major conference, we sponsor industry specific conferences in the photonics,
semiconductor, and software sectors and other areas.
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INVESTMENT BANKING
Wit SoundView is a leading manager of public and private securities
offerings as well as a strategic advisor for technology leaders. With over 95
bankers, our investment banking team focuses its deep knowledge of technology
companies to counsel our clients throughout the various stages of their
lifecycle. In addition to advising our clients as they access the public and
private capital markets and seek strategic opportunities, we seek to leverage
technology to develop innovative and more efficient capital raising products. We
pioneered the digital distribution of initial public offerings to individual
investors and we are the exclusive distributor of retail equity or equity
related securities to E*TRADE's online individual investors. In 2000, we
developed Vostock, a transparent online auction for follow-on offerings that we
believe will eventually change the manner by which secondary offerings are
conducted.
As technology and the Internet continue their rapid development and continue
to change the way commerce is conducted for nearly all businesses and services,
we believe that corporate clients will gravitate towards those investment
banking firms that provide a deep understanding of their products and industry
sectors.
Our team of investment banking and research professionals have broad
abilities to perform traditional investment banking functions such as deal
selection and origination, due diligence, valuation, and deal structuring. Our
investment bankers, research personnel, executive officers and investors have
strong relationships with corporate issuers, venture capitalists and other
influential persons and entities in the financial services sector. In addition,
our senior investment banking and research professionals have a long history of
working with technology companies.
Our investment banking services are divided into three principal categories:
public underwriting, mergers and acquisitions and strategic advisory services
and private equity.
PUBLIC UNDERWRITING
We pioneered the business of online retail distribution of shares in public
offerings. As a result, we have benefited from publicity and word of mouth
exposure. With the addition of SoundView, we added a broader focus to our public
underwriting capabilities in the technology sector which we believe has
established us as a leading provider of investment banking services in the
technology sector. We are capitalizing on SoundView's competitive advantages
arising from its relationships, research, trading and distribution capabilities
in the technology sector for our underwriting efforts. In 2000, Wit SoundView
participated in 139 public equity offerings, including 89 initial public
offerings.
By melding SoundView's well-established access to the largest institutional
technology investors with our online retail distribution capability through our
strategic alliance with E*TRADE, our issuer clients should enjoy a stronger
platform for their capital raising needs when the markets for capital raising
open up. We offer issuers contemplating public offerings several capabilities:
- In-depth institutional research written by Wit SoundView's respected
research analysts that draws on their personal industry experience as well
as proprietary information sources. This research is disseminated by our
technology specialist sales force whose knowledge of the sector and deep
institutional penetration makes us a desirable manager with a proven track
record of outselling our competitors.
- Through our strategic alliance with E*TRADE, we provide broad
dissemination of offerings to online individual investors, which should
result in more demand for shares once they are publicly traded. For
retail-oriented issuers, our broad dissemination should also result in
increased customer awareness for the issuer's products or services.
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- We broaden the investor demand for the issuer's shares by providing a
timely and cost-effective way to access groups having an affinity
relationship with the issuer, such as customers, shareholders, suppliers
or employees.
We also operate an extensive market-making operation to support our
investment banking and institutional brokerage services. As of December 31,
2000, we were market-makers in 241 technology and Internet companies and our
trading team currently comprises over 30 professionals. We believe that our
market-making activities will allow us to garner sizable share allotments in
initial public offerings as issuers become aware of our trading position and
after-market support.
MERGERS AND ACQUISITIONS AND STRATEGIC ADVISORY SERVICES
In addition to our capital raising services, we have developed an M&A and
Strategic Advisory Group which works closely with clients helping them to grow
and evolve their businesses. We offer our clients the following types of
advisory services:
- Executing mergers, acquisitions and divestitures
- Identifying and building strategic partnerships and strategies
- Developing Internet business models and marketplace strategies
- Providing acquisition financing and valuations
For the year ended December 31, 2000, we advised on 17 transactions with a
total combined value of over $8 billion. These activities compliment our public
and private equity businesses and allow us to offer a mix of investment banking
services to our clients during the course of their development. Our expertise in
the technology sector coupled with our senior management's advisory
relationships with a number of corporations position us to receive advisory
service assignments that, in turn, enhance our reputation and lead to capital
raising and other investment banking engagements.
PRIVATE EQUITY
We have a private equity group that assists private and public corporate
issuers, as well as investment funds, in raising private capital. The private
equity group is focused on raising equity capital from traditional institutional
and venture capital sources and strategic investors.
BROKERAGE
We offer our institutional clients a variety of sales and trading services.
We are able to leverage our expertise in the technology sector through a sales
force with a comprehensive understanding of the complex and diverse technologies
at the heart of technology focused investing. Our extensive market-making
operations are a source of liquidity to some of the world's largest
institutional traders. We currently employ over 75 institutional sales and
trading professionals operating out of our offices in Stamford and San
Francisco.
On September 29, 2000, in connection with our merger with E*OFFERING and
strategic alliance agreement with E*TRADE, we transferred our online retail
brokerage accounts to E*TRADE. Going forward, we will use E*TRADE's online
brokerage platform to distribute products to E*TRADE's retail investors.
CLEARING AND SETTLEMENT. Bear Stearns & Co. ("Bear Stearns") clears our
institutional customer transactions on a fully disclosed basis. Clearing
services for our customers include the confirmation, receipt, execution,
settlement and delivery functions involved in securities transactions, as well
as safekeeping of customers' securities and assets and certain customer record
keeping, data processing and reporting functions. We continue to increase our
trade processing capabilities to better facilitate the clearing of trades we
execute for our customers.
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Under our separate agreements with Bear Stearns, we pay clearing and
execution fees according to a schedule. In addition, the agreements require Bear
Stearns to share with us interest revenue earned in connection with margin and
stock borrowing balances kept by our customers and also provide us fees on
balances maintained by these customers with selected money market funds. We must
indemnify Bear Stearns for, among other things, any loss or expense due to the
failure of customers to: (1) pay for securities purchased by them, (2) promptly
deliver securities sold by them, (3) deposit sufficient collateral to support
their borrowing when requested by the clearing firm, and (4) remit excessive
disbursements of funds or any other valid charges imposed by the clearing firm.
VENTURE CAPITAL GROUP
Through one of our subsidiaries, Wit SoundView Ventures Corp. ("Wit
SoundView Ventures"), the venture capital group emphasizes investments in
Internet and technology businesses and maintains a particular focus on
e-commerce companies, Internet enabling technologies, Internet infrastructure
and products and services that enhance digital businesses. Our venture capital
funds allow investors to pool their resources and gain access to a quality of
deal flow traditionally available to proprietary funds backed by large
institutions.
Our venture capital group currently manages Wit VC Fund I, LP (formerly
called Arista Capital Partners, LP) and a series of four funds collectively
known as Dawntreader Fund II, LP ("Dawntreader Fund II"). Wit VC Fund I, LP
raised approximately $39.5 million in August 1999 from high net worth
individuals and invests in second and later stage companies. Dawntreader Fund II
raised approximately $270 million in February and March 2000. It invests in
early stage, second stage, and later stage companies. The investors in
Dawntreader Fund II include publicly traded corporations, institutional
investors, and high net worth individuals. We intend to offer other venture
capital funds that are intended to invest on a global basis as well as
additional U.S. focused funds.
Our venture capital funds enable us to further take advantage of our
expertise in technology, e-commerce and the Internet. The development of these
funds will create new investment opportunities for our high net worth
individual, corporate and institutional clients and will create a wider range of
capital raising opportunities for corporate issuers. The management of current
and creation of additional venture capital funds should foster long term
partnerships with our corporate clients while providing significant returns to
the investors in our funds.
INTERNATIONAL
We have created two international joint ventures through which we plan to
extend our technology focused investment banking model to provide similar
services to clients throughout the world. We would like to emerge as a global
brand representing preeminence in investment banking and research focused on the
technology sector and the brokerage needs of our institutional customers. While
we hope to develop our global presence, our first two joint ventures are in the
developmental stage and we can provide no assurance that either will be
successful in developing their businesses.
WIT CAPITAL JAPAN
In July 1999, we entered into a joint venture agreement with Trans
Cosmos, Inc. and an investment agreement with Mitsubishi Corporation to
establish a Japanese investment banking firm, known as Wit Capital Japan, Inc.
("WCJ"). WCJ was incorporated in August 1999 and is based in Tokyo.
Although the Japanese government has recently suggested that there will be
support for efforts to develop new capital raising opportunities for Japanese
growth companies, WCJ will face challenges presented by traditional capital
raising conventions and by the dominance of large Japanese securities firms. WCJ
hopes to benefit from our experience and relationships with the U.S. technology
community. WCJ is currently reevaluating its business model in light of the
depressed state of the Japanese markets and the likelihood that the market for
technology IPOs will not be as robust as
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originally contemplated by the business model developed for WCJ. This
reevaluation has resulted in a reduction in the staffing levels and a focus on
its core investment banking business. In addition, WCJ has raised a $55 million
venture capital fund that is managed by one of its subsidiaries.
In May 2000 and September 2000, we made additional investments of
$10.5 million and $8.4 million, respectively in WCJ. As a result, our ownership
interest in WCJ is 39.5% as of December 31, 2000. Consistent with our strategy
in the U.S., during the fourth quarter, WCJ took steps to transfer its online
retail brokerage operations to an affiliate of one of its shareholders in order
to focus on its core investment banking business. The transfer should be
completed during the second quarter of 2001.
WIT CAPITAL EUROPE
In October 1999, we announced an agreement with enba plc ("enba") to
establish a Pan-European investment banking firm, known as Wit Capital Europe
Group PLC ("WCE"). Subsequently, Cazenove & Co., a London-based investment bank
and brokerage company made a $16.4 million investment in WCE. WCE received the
necessary regulatory approvals to commence operations in February 2001 and
commenced operations at that time. As of December 31, 2000, we held a 49%
interest in WCE. In February 2001, Cazenove and we participated in an additional
financing round in WCE, increasing our ownership percentage to a controlling
interest of 81.57%. Our initial joint venture partner, enba, now owns less than
1% of WCE, and we are currently in negotiation to unwind their participation in
the joint venture.
We anticipate that WCE's activities will become aligned with our focus on
the technology sector.
INFORMATION TECHNOLOGY
Technology is fundamental to our business strategy. We are committed to the
ongoing development, maintenance and use of technology throughout our
organization and across all business lines. Where possible, our preference is to
license or purchase software products and to build internally only what we
cannot cost effectively acquire or license. As a result, our systems include a
combination of licensed, purchased and internally developed products.
COMPETITION
The financial services industry is highly competitive and we expect
competition to intensify in the near future. We encounter direct competition
primarily from established investment banking firms. We compete with some of
these firms on a national basis and with others on a regional basis. Our
competitors include large and well established Wall Street firms as well as
relatively new securities firms, a growing number of which are rapidly
developing firms that are using technology to win business away from the more
traditional firms. General financial success within the securities industry and
the increasing popularity of the Internet will together attract additional
competitors for us, such as banks, software development companies, insurance
companies and providers of online financial and information services.
In recent years there has been a significant consolidation in the financial
services industry. Commercial banks and other financial institutions have
acquired or established investment banking and broker-dealer affiliates and have
begun offering financial services to individuals traditionally offered by
securities firms. These firms have the ability to offer a wide range of
products, including lending, deposit taking, insurance, brokerage, investment
management and investment banking services. This may enhance their competitive
position by attracting and retaining customers through the convenience of
one-stop shopping. They also have the ability to support investment banking and
securities products with commercial banking, insurance and other financial
service revenue in an effort to gain market share.
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Our principal competitors in connection with our investment banking and
brokerage businesses are traditional investment banking firms. Many of our
competitors have significantly greater financial, technical, marketing and other
resources than we do. Some of our competitors also offer a wider range of
products and services than we do and have greater name recognition, more
established reputations and more extensive client and customer bases. These
competitors may be able to respond more quickly to new or changing
opportunities, technologies and customer requirements due to superior systems
capabilities. They may also be better able to undertake more extensive
promotional activities, offer more attractive terms to customers, clients and
employees and adopt more aggressive pricing policies compared to our firm.
Competition is also intense for the attraction and retention of qualified
employees in the securities industry. Our ability to compete effectively in our
businesses will depend on our ability to attract new employees and retain and
motivate our existing employees.
REGULATION
REGULATION OF THE SECURITIES INDUSTRY AND BROKER-DEALERS. Our business is
subject to extensive regulation applicable to the securities industry in the
United States and elsewhere. As a matter of public policy, regulatory bodies in
the United States and rest of the world are charged with safeguarding the
integrity of the securities and other financial markets and with protecting the
interests of customers participating in those markets. In the United States, the
Securities and Exchange Commission, or SEC, is the federal agency responsible
for the administration of the federal securities laws. We are registered as a
broker-dealer with the SEC and in all 50 states, the District of Columbia and
Puerto Rico. We are also a member of the NASD, a self regulatory body to which
all broker-dealers belong. Certain self-regulatory organizations, such as the
NASD, adopt rules and examine broker-dealers and require strict compliance with
their rules and regulations. 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 SEC and
self-regulatory organization rules cover many aspects of a broker-dealer's
business, including capital structure and withdrawals, sales methods, trade
practices among broker-dealers, use and safekeeping of customers' funds and
securities, record-keeping, the financing of customers' purchases, broker-dealer
and employee registration and the conduct of directors, officers and employees.
EFFECT OF NET CAPITAL REQUIREMENTS. As a registered broker-dealer and
member of the NASD, we are subject to the Uniform Net Capital Rule under the
Exchange Act. The Uniform Net Capital Rule specifies the minimum level of net
capital a broker-dealer must maintain and also requires that at least a minimum
part of its assets be kept in relatively liquid form. As of December 31, 2000,
our broker-dealer subsidiary, Wit SoundView Corporation, was required to
maintain minimum net capital of $602,500 and had total net capital of
$79,350,521 which was $78,748,021 in excess of the minimum amount required. Our
other broker-dealer subsidiary, Wit Capital Corporation, as of December 31, 2000
was required to maintain minimum net capital of $432,951 and had total net
capital of $3,328,931, which was $2,895,980 in excess of the minimum amount
required.
The SEC and the NASD impose rules that require notification when net capital
falls below certain predefined levels, dictate the ratio of debt to equity in
the regulatory capital composition of a broker-dealer and constrain the ability
of a broker-dealer to expand its business under certain circumstances.
Additionally, the Uniform Net Capital Rule and the NASD rules impose certain
requirements that may have the effect of prohibiting a broker-dealer from
distributing or withdrawing capital and requiring prior notice to the SEC and
the NASD for certain withdrawals of capital. Because our principal asset is the
ownership of stock in our broker-dealer subsidiary, these rules governing net
capital and restrictions on withdrawals of funds could operate to prevent us
from meeting our financial obligations on a timely basis.
7
FOREIGN SECURITIES AUTHORITIES. We have entered into joint ventures to
establish broker-dealer businesses in foreign countries. Those businesses are
subject to foreign law and the rules and regulations of foreign governmental and
regulatory authorities. This may include laws, rules and regulations relating to
any aspect of the securities business, including sales methods, trade practices
among broker-dealers, use and safekeeping of customers' funds and securities,
capital structure, record-keeping, the financing of customers' purchases,
broker-dealer and employee registration requirements and the conduct of
directors, officers and employees.
CHANGES IN EXISTING LAWS AND RULES. Additional legislation or regulation,
changes in existing laws and rules or changes in the interpretation or
enforcement of existing laws and rules, either in the United States or
elsewhere, may directly affect our mode of operation and our profitability.
EMPLOYEES
We believe that one of our strengths is the quality and dedication of our
people and the shared sense of being part of a team. We strive to maintain a
work environment that fosters professionalism, excellence, diversity and
cooperation among our employees. We also believe that our employees should have
an equity stake in the firm. As of December 31, 2000, we had approximately 450
employees who, as a group, own roughly 20% of the equity of our company on a
fully-diluted basis.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information concerning each of the
executive officers of the Company:
NAME AGE POSITIONS
- ---- -------- ------------------------------------------
Robert H. Lessin.......................... 46 Chairman
Andrew D. Klein........................... 41 Chief strategist and director of
international development
Mark F. Loehr............................. 44 Chief executive officer
Russell D. Crabs.......................... 43 President
Curtis L. Snyder.......................... 39 Senior vice president and chief financial
officer
John W. Palmer............................ 48 Senior vice president and chief
information officer
Brian T. Bristol.......................... 49 Head of investment banking
Elizabeth Schimel......................... 41 Senior vice president and director of
business development
Daniel DeWolf............................. 43 Senior vice president and director of
venture capital fund group
Lloyd H. Feller........................... 58 Senior vice president and co-general
counsel
Robert C. Mendelson....................... 50 Senior vice president and co-general
counsel
ITEM 2. PROPERTIES
Our principal executive offices are located in New York City where we lease
31,500 square feet of office space and in Stamford, Connecticut where we lease
24,000 square feet of office space. The term of the lease in New York City
expires in November 2006 and the term of the lease in Stamford expires in
March 2003. To centralize our east coast operations, on February 21, 2001, we
entered into a lease in Greenwich, Connecticut for 79,000 square feet which
expires in July 2006. We also lease 6,500 square feet of additional office space
in New York City. The term of that lease expires in September 2001.
Additionally, we operate a 35,000 square foot office in San Francisco which
expires in July 2001 and will be replaced with a 53,600 square foot lease which
will expire in May 2011.
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ITEM 3. LEGAL PROCEEDINGS
We are currently subject to claims and legal proceedings arising in the
normal course of our business. We do not believe that the resolution of such
legal proceedings should have a material adverse effect on us.
On June 28, 1999, certain of Wit Capital Corporation's customers filed a
purported class action lawsuit in the Superior Court of the State of Delaware in
and for New Castle County styled ARTHUR E. BENNING, SR., ET AL. V. WIT CAPITAL
GROUP, INC. AND WIT CAPITAL CORPORATION. The seven count complaint charges Wit
Capital Corporation with (1) breach of contract for alleged failure to comply
with the "anti-flipping policy" contained in the account agreement with Wit
Capital Corporation customers; (2) breach of the implied covenant of good faith
and fair dealing by allegedly violating the anti-flipping policy and alleged
failure to "maintain adequate computer, communications, personnel, accounting,
bookkeeping, and/or other support systems and facilities"; (3) fraud by reason
of the fact that Wit Capital Corporation allegedly violated its own
anti-flipping policy and our alleged first-come/first-served policy in
connection with IPOs; (4) negligent misrepresentation in its method of
allocation of participation in IPOs; (5) breach of fiduciary duty as a broker;
(6) negligence in handling accounts; and (7) violation of Delaware's Consumer
Fraud Act. On January 10, 2001, the court issued an opinion denying plaintiffs'
motion for class certification, and on February 15, 2001 entered an order
dismissing the action of the named parties as individual defendants in light of
the arbitration provision in the plaintiffs' customer agreements. In
March 2001, the plaintiffs appealed the judgment of the Superior Court, arguing
that it improperly denied class certification. We intend to continue to defend
the lawsuit vigorously. We do not believe that this lawsuit should have a
material adverse effect on us.
On May 15, 2000, certain of Wit Capital Corporation's customers filed a
purported class action lawsuit in the Circuit Court of Cook County Illinois
styled JOSEPH YOUNES AND ROSANNE T. YOUNES V. WIT CAPITAL CORPORATION. The five
count complaint charges Wit Capital Corporation with (1) breach of contract for
alleged failure to provide "continuous, reliable trading services"; (2) breach
of fiduciary duty and unjust enrichment by reason of the fact that Wit Capital
Corporation allegedly failed to disclose material facts concerning its system
capacity and technical capabilities and allegedly failed to "incorporate the
latest technological advances" into its systems relating to customer account
access and order placement; (3) fraud by reason of the fact that Wit Capital
Corporation allegedly falsely represented its technical capabilities relating to
access to its services; (4) violation of the Illinois Consumer Fraud Act; and
(5) "negligent/intentional tort" by reason of Wit Capital Corporation's alleged
failure to provide, upgrade and maintain systems to enable customer order
placement. Wit Capital Corporation removed the action to the U.S. District Court
for the Northern District of Illinois, and plaintiffs, after denial of a motion
to remand the case back to state court, amended its complaint to plead a
violation of the antifraud provision of the federal securities laws. On
January 5, 2001, the U.S. District Court granted Wit Capital Corporation's
motion to dismiss, granting leave for plaintiffs to replead their complaint.
Plaintiffs have again amended the complaint, and Wit Capital Corporation has
again moved to dismiss. Plaintiffs have also moved to reconsider the denial of
the motion to remand. We intend to continue to defend the lawsuit vigorously. We
do not believe that this lawsuit should have a material adverse effect on us.
In September of 1996, Arnold Owen, a former officer, director and employee
of SoundView and a former trustee of SoundView's 401K and Profit Sharing Plan,
filed a complaint in the United States District Court for the Southern District
of New York naming SoundView and the Profit Sharing Plan as defendants. The
action, among other things, challenged the valuation methodology applied by the
Profit Sharing Plan trustees to value SoundView stock held in the Profit Sharing
Plan and the amount offered by the Profit Sharing Plan trustees to repurchase
the SoundView stock held by the Profit Sharing Plan on Mr. Owen's behalf. On
July 28, 1999, judgment was rendered by the District Court in favor of SoundView
and the Profit Sharing Plan on all counts, dismissing on the merits all claims
asserted by Mr. Owen and awarding SoundView in excess of $226,000 in attorney's
fees, costs and disbursements
9
from Mr. Owen. Subsequently, Mr. Owen filed an appeal, which was heard by the
United States Court of Appeals for the Second Circuit and in March 2000, the
Second Circuit affirmed the lower court's judgement.
The United States Department of Labor has initiated an investigation with
regard to SoundView's Profit Sharing Plan focusing on, among other things, stock
valuation issues relating to SoundView stock held in the Profit Sharing Plan.
The Department of Labor has outlined five reasons why it believes the Profit
Sharing Plan and/or the Profit Sharing Plan trustees have violated ERISA.
SoundView and the Profit Sharing Plan have issued a preliminary response to the
Department of Labor and we believe that the Department of Labor's position is
faulty and erroneous in many respects. We intend to vigorously contest any
charges the Department of Labor may bring. However, the Company and the Profit
Sharing Plan trustees are unable at this time to express any opinion as to the
likelihood of the Department of Labor filing a formal administrative or judicial
complaint, or the outcome of any such action if initiated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a Special Meeting of Stockholders on October 16, 2000 in
order to allow the stockholders to consider and vote on a proposal to approve
the Agreement and Plan of Merger, dated as of May 15, 2000 as amended
September 26, 2000, by and among Wit Capital Group, Inc., Wit SoundView
Corporation and E*OFFERING Corp.
FOR AGAINST ABSTENTIONS
---------- -------- -----------
Votes....................................................... 45,851,360 447,618 30,473
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has traded on the Nasdaq National Market under the symbol
"WITC" since June 4, 1999. The following table sets forth the range of high and
low sales prices reported on the Nasdaq National Market for the periods
indicated.
2000: HIGH LOW
- ----- -------- --------
First quarter.............................................. $22.25 $12.31
Second quarter............................................. 17.69 6.38
Third quarter.............................................. 12.00 7.75
Fourth quarter............................................. 9.00 3.09
1999: HIGH LOW
- ----- -------- --------
Second quarter (beginning June 4).......................... $38.00 $ 9.00
Third quarter.............................................. 37.50 15.50
Fourth quarter............................................. 24.75 15.38
The closing sale price of the Company's common stock on February 28, 2001
was $2.969. The number of holders of record of the Company's common stock as of
that date was 898. The number of stockholders of record does not reflect the
actual number of individual or institutional stockholders of the Company as
certain shares are held in the name of nominees. There was one holder of record
of the Company's Class B Common Stock as of February 28, 2001.
We have never declared or paid cash dividends on our common stock. We do not
anticipate paying cash dividends on our common stock or Class B Common Stock in
the foreseeable future.
We continue to use the net proceeds from our IPO for working capital
purposes. In January 2000, we paid approximately $22.5 million to shareholders
of SoundView in connection with our merger with SoundView. In March 2000, we
invested $10 million in Internet HealthCare Group, a business-to-business
e-commerce company focused on e-healthcare and e-insurance. During 2000 we also
made additional investments in Wit Capital Japan totaling $18.9 million. We
expect to continue to use the proceeds for working capital purposes and for
strategic acquisitions or investments.
On April 17, 2000, our Board of Directors approved a common stock repurchase
program authorizing the repurchase of up to 2 million shares of our common
stock. This repurchase program was effected through market and private
transactions and was completed on December 15, 2000 at an average cost per share
of $6.04. On January 22, 2001, our Board of Directors approved an additional
2 million share repurchase which will be effected from time to time depending on
market conditions and other factors.
RECENT SALES OF UNREGISTERED SECURITIES
(1) On January 31, 2000, the Company acquired by merger SoundView Technology
Group, Inc. for approximately 11.4 million shares and $22.5 million in cash.
Shares issued to nine of the shareholders were offered and sold in a private
placement, exempt from registration pursuant to Section 4(2) of the Securities
Act of 1933, as amended and the remaining shares were registered under such Act.
(2) On March 30, 2000, the Company issued 1,878,596 shares of common stock
to enba plc in exchange for 189,748 shares of enba plc. The transaction was a
private placement and exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
(3) During the year, the Company issued 363,300 shares of common stock to 2
investors for exercise of their warrants at an exercise price of $1.43 per
share. The transactions were private
11
placements and exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
(4) On October 16, 2000, the Company acquired by merger E*OFFERING Corp. for
approximately 27.2 million shares. Shares issued to nine of the shareholders
were offered and sold in a private placement, exempt from registration pursuant
to Section 4(2) of the Securities Act of 1933, as amended and the remaining
shares were registered under such Act.
(5) In the fourth quarter of 2000, the Company issued 2 million shares of
its common stock to each of E*TRADE Group Inc. and certain affiliates of General
Atlantic Partners at a price of $10.25 per share. The transactions were private
placements and exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
(6) On October 16, 2000 the Company issued 4,025,948 shares of common stock
to E*TRADE Group Inc. as consideration for the Strategic Alliance Agreement
dated as of May 15, 2000 as amended September 26, 2000. This transaction was a
private placement and exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
12
ITEM 6. SELECTED FINANCIAL DATA
The following summary selected financial data for the years ended
December 31, 2000, 1999, 1998, 1997 and for the period from inception through
December 31, 1996 has been derived from Wit SoundView's consolidated financial
statements, which have been audited by Arthur Andersen LLP, independent public
accountants, and for which the years ended December 31, 2000, 1999 and 1998 are
included elsewhere in this Annual Report on Form 10-K. All per share and
weighted average share information has been adjusted to reflect a 7 for 10
reverse stock split effected June 2, 1999. The selected financial data should be
read in conjunction with the consolidated financial statements and related notes
thereto and with Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Wit SoundView," which are included
elsewhere in this Annual Report on Form 10-K.
WIT SOUNDVIEW GROUP, INC.
STATEMENT OF OPERATIONS DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FROM INCEPTION
THROUGH,
YEARS ENDED DECEMBER 31, DECEMBER 31,
--------------------------------------------------- --------------
2000 1999 1998 1997 1996
----------- ----------- ---------- ---------- --------------
REVENUES:
Investment banking........... $ 200,239 $ 30,270 $ 1,515 $ 43 $ --
Brokerage.................... 154,928 7,088 295 10 --
Asset management fees........ 11,449 377 -- --
Gain (loss) on investments... (3,213) 6,028 45 -- --
Interest and investment
income
and other.................. 12,121 4,855 183 193 41
----------- ----------- ---------- ---------- ----------
Total revenues............. 375,524 48,618 2,038 246 41
----------- ----------- ---------- ---------- ----------
EXPENSES:
Compensation and benefits.... 215,319 39,014 4,444 1,550 378
Brokerage and clearance...... 25,538 5,347 186 6 2
Amortization of intangible
assets and goodwill........ 25,176 -- -- -- --
Marketing and business
development................ 15,711 2,594 1,205 641 340
Data processing and
communications............. 9,587 3,449 625 238 50
Professional services........ 9,209 4,953 878 330 283
Discontinuance of retail
brokerage operations....... 11,605 -- -- -- --
Write-off of computer
software
and equipment.............. 1,340 5,565 -- -- --
Other........................ 26,061 8,039 3,494 474 762
----------- ----------- ---------- ---------- ----------
Total expenses............. 339,546 68,961 10,832 3,239 1,815
----------- ----------- ---------- ---------- ----------
Income (loss) from
operations................... 35,978 (20,343) (8,794) (2,993) (1,774)
Loss on strategic
investment................... (13,728) -- -- -- --
----------- ----------- ---------- ---------- ----------
Income (loss) before provision
for income taxes and equity
in net loss of affiliates.... 22,250 (20,343) (8,794) (2,993) (1,774)
Provision for income taxes... 24,129 -- -- -- --
----------- ----------- ---------- ---------- ----------
Loss before equity in net loss
of affiliates................ (1,879) (20,343) (8,794) (2,993) (1,774)
Equity in net loss of
affiliates................... (20,080) (560) -- -- --
----------- ----------- ---------- ---------- ----------
Net Loss....................... $ (21,959) $ (20,903) $ (8,794) $ (2,993) $ (1,774)
=========== =========== ========== ========== ==========
13
FROM INCEPTION
THROUGH,
YEARS ENDED DECEMBER 31, DECEMBER 31,
--------------------------------------------------- --------------
2000 1999 1998 1997 1996
----------- ----------- ---------- ---------- --------------
NET LOSS PER SHARE:
Basic.......................... $ (0.26) $ (0.52) $ (1.23) $ (0.41) $ (0.33)
Diluted........................ (0.26) (0.52) (1.23) (0.41) (0.33)
WEIGHTED AVERAGE SHARES USED IN
THE COMPUTATION OF NET LOSS
PER SHARE:
Basic.......................... 84,551,145 39,909,794 7,140,123 7,303,013 5,378,167
Diluted........................ 84,551,145 39,909,794 7,140,123 7,303,013 5,378,167
DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Cash, cash equivalents and securities readily
convertible to cash........................... $281,454 $121,350 $18,110 $1,111 $ 750
Total assets.................................... 997,733 163,618 22,296 5,837 2,655
Stockholders' equity............................ 794,653 144,402 20,608 4,859 1,480
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read with the consolidated financial
statements of Wit SoundView and related notes thereto and Item 6, "Selected
Financial Data" appearing elsewhere in this report.
OVERVIEW AND BUSINESS
Wit SoundView Group, Inc. (the "Company" or "Wit SoundView", formerly Wit
Capital Group, Inc.) was incorporated on March 27, 1996 and commenced operations
in September 1997. The accompanying consolidated financial statements include
the accounts of the Company and our wholly-owned subsidiaries, Wit SoundView
Corporation ("WSV", formerly SoundView Technology Group, Inc.), Wit Capital
Corporation ("WCC"), SoundView Asset Management, Inc., SoundView Capital
Management, Inc. and Wit SoundView Ventures Corp. ("Wit SoundView Ventures",
formerly Wit VC LLC).
Wit SoundView is an investment banking firm focused exclusively on the
technology sector. We offer a strong complement of investment banking services,
including public offerings, M&A advisory and private equity placements. With one
of the largest research teams in the sector, Wit SoundView produces
comprehensive sell-side research on over 260 technology companies. Our brokerage
operations provide a variety of sales and trading services to institutional
investors. We leverage our technology expertise through a sales force which has
a comprehensive understanding of the complex and diverse technologies involved
in technology-focused investing. Our venture capital operation, Wit SoundView
Ventures, has established and currently manages a number of venture capital
funds that provide investors with the opportunity to participate in technology
and Internet related investments.
MERGERS
On January 31, 2000 we completed our merger with SoundView, a
privately-owned broker-dealer and investment banking firm focused exclusively on
technology. Under the terms of the agreement, we acquired the outstanding shares
of SoundView in exchange for approximately $313 million, consisting of newly
issued common stock, options replacing SoundView options and approximately
$22.5 million in cash. This merger has been accounted for using the purchase
method of accounting. The excess of cost over the estimated fair value of net
assets acquired was allocated to certain identifiable intangible assets and
goodwill, a total of approximately $275 million which is being amortized on a
straight-line basis over periods between 3 and 20 years.
On October 16, 2000 we completed our merger with E*OFFERING and commenced
our strategic alliance with E*TRADE. Our strategic alliance agreement with
E*TRADE provides that we will be the exclusive source of retail equity or equity
related securities in initial public offerings, follow-on offerings and certain
private placements to the 3.6 million customers of E*TRADE. In connection with
the merger and the strategic alliance agreement, all of our online retail
customer accounts were transferred to E*TRADE and we will leverage E*TRADE's
online brokerage platform to distribute products to E*TRADE's retail investors.
Additionally, E*TRADE has agreed to use commercially reasonable efforts to
direct all secondary market order flow in stocks in which Wit SoundView is a
registered market maker in exchange for a competitive trading flow rebate. Wit
SoundView's right to receive secondary market orders is subject to E*TRADE's
fiduciary obligations to its customers and compliance with applicable
regulations. As consideration for the merger, we issued approximately
27.2 million shares of our common stock and options and warrants to purchase
shares of our common stock with an approximate value of $302 million to the
shareholders of E*OFFERING. As consideration for the strategic alliance
agreement, we issued 4,025,948 shares of common stock and a warrant to purchase
an additional 2 million shares of common stock to E*TRADE. The excess of cost
over the estimated fair value of net assets acquired was allocated to certain
identifiable intangible
15
assets and goodwill, a total of approximately $304 million which is being
amortized on a straight-line basis over periods between 5 and 7 years.
CURRENT MARKET ENVIRONMENT
As an investment banking firm, our business and operations are effected by
the U.S. and global economic environment and market conditions. Commencing in
mid April 2000, the market for public equity offerings slowed from the levels
and strength experienced in the fourth quarter of 1999 and the first quarter of
2000. As a result, for the majority of the second, third and fourth quarters of
2000, we were operating under market conditions that were unfavorable to
potential issuers. The volatility of the equity markets, and in particular the
market for technology companies, has the potential to influence the strength of
our business operations. Sequentially, from the first to the third quarters of
2000, we experienced a decline in investment banking revenues as a result of
these unfavorable market conditions for technology companies. During the fourth
quarter, we experienced a further decline in investment banking revenue derived
from public equity offerings, which was offset by an increase in revenue derived
from our M&A services. With the market for public issuances and technology
companies in general remaining unfavorable, we expect total revenues to decrease
in the first and second quarters of 2001 from levels achieved in the comparative
periods in 2000. Further, we may experience a decline in total revenues in 2001
from the level achieved in 2000.
From our founding in 1996 through the first nine months of 1997, we were
engaged in organizational activities. During the last quarter of 1997 and the
first quarter of 1998, we were in an early stage of our operations, and
generated only minimal revenues from our investment banking and brokerage
activities. Accordingly, we do not believe that period to period comparisons of
our operating results are meaningful and should not be relied upon as indicators
of future performance. As a result of our merger with SoundView we believe that
our results of operations for the past four years will not be indicative of the
results for any future period. The financial information presented and discussed
below and elsewhere in this document includes the results of the merger with
SoundView beginning January 31, 2000, the closing date of that merger, and
includes the results of the merger with E*OFFERING beginning October 16, 2000,
the closing date of that merger.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
REVENUES
Total revenues for the year ended December 31, 2000 were $375.5 million,
compared to $48.6 million for the year ended December 31, 1999 and $2.0 million
for the year ended December 31, 1998.
Investment banking revenue for the year ended December 31, 2000 was
$200.2 million, compared to $30.3 million for the year ended December 31, 1999
and $1.5 million for the year ended December 31, 1998. Investment banking
revenue is primarily derived from the public offering of equity securities, and
also from mergers and acquisitions and strategic advisory services and private
equity offerings. The increase in investment banking revenue in 2000 as compared
to 1999 and 1998 is attributable to our acquisition of SoundView as well as
increased economics in public offerings in which we participated and an
increased contribution from our mergers and acquisitions advisory services. We
participated in a total of 139 securities offerings during 2000, 72 as
co-manager and 67 as syndicate member. For the year ended December 31, 2000, our
mergers and acquisitions and financial advisory group advised on 17 transactions
with a combined value of over $8 billion.
During 1998, the revenue generated from underwriting activities was limited
since we received none or only negligible portions of management fees paid to
co-managing underwriters, and underwriting sales credits reflected limited
allocations of the shares being underwritten. In 1998, approximately 36% of this
revenue was generated from one financial advisory transaction in connection
16
with the sale of a client company. During 1999, we began to receive management
fees and larger allocations of the shares in offerings, and have experienced a
general increase in the number of offerings in which we participated. Revenues
related to financial advisory services also increased during 1999 as a result of
an increase in strategic advisory relationships and frequency of transactions.
In 1999 we participated in 128 public securities offerings, 57 as co-manager and
71 as syndicate member.
Brokerage revenue for the year ended December 31, 2000 was $154.9 million,
compared to $7.1 million for the year ended December 31, 1999 and $294,000 for
the year ended December 31, 1998. Revenues derived from brokerage operations are
related to our institutional equity and online, or individual trading
operations. For the year ended December 31, 2000, our institutional and online
operations contributed $146.5 million and $8.4 million, respectively, to total
brokerage revenue. Comparing the year ended December 31, 2000 to 1999 and 1998,
brokerage revenues have increased as a result of the contribution of our
institutional brokerage operations which are now part of our operations as a
result of our merger with SoundView. For the years ended December 31, 1999 and
1998 all of our brokerage revenue was derived from our retail online brokerage
operations. The increase in revenue derived from our online business for the
year ended December 31, 2000 compared to the years ended December 31, 1999 and
1998 resulted primarily from an increase in the number of active customer
accounts and an increase in the number of trades executed for online customers,
offset by lower trading volumes as a result of market conditions and the
announcement of our strategic alliance with E*TRADE.
During 2000, we experienced a sequential increase in our institutional
brokerage revenue as a result of increased trading volumes, an increase in the
number of companies under research coverage and an increase in the number of
stocks for which we make a market. However, we can experience increases or
decreases in this revenue depending on market conditions and volatility.
Independent of those market factors, we expect this revenue to continue to
increase as we continue to grow our institutional brokerage business and
capitalize on our opportunity to receive order flow in securities for which we
act as market maker from E*TRADE.
On September 29, 2000, as part of our strategic alliance with E*TRADE, we
transferred approximately 100,000 online retail brokerage accounts to E*TRADE.
As a result of this transfer, these online customers will no longer execute
secondary market transactions through us and we will not derive further
brokerage revenue from these operations. Additionally, we expect to reduce our
direct and indirect expenses related to our online retail brokerage operations.
Asset management fees for the year ended December 31, 2000 increased to
$11.4 million from $377,000 for the year ended December 31, 1999 and $0 in 1998.
This revenue is derived from management and syndication fees received from our
series of venture capital funds which closed primarily during the first quarter
of 2000 and from incentive royalties from hedge funds that were formerly managed
by SoundView. In late 1999, we had commenced our venture capital operations
having closed Wit VC Fund I, LP, from which $377,000 in management fee income
was derived. During the year ended December 31, 1998, we had not yet commenced
our venture capital fund operations and had no hedge fund incentive royalty fees
until we closed our merger with SoundView, and accordingly, derived no revenue
from our asset management operations. In the future, we intend to establish new
venture capital funds and are continually exploring new opportunities to apply
our technology expertise in the asset management sector.
Interest and investment income for the year ended December 31, 2000 was
$12.3 million, compared to $4.7 million for the year ended December 31, 1999 and
$183,000 for the year ended December 31, 1998. We earn interest income from the
investment of cash balances raised through financing activities until the funds
are used in our business. During 2000, as a result of our merger with SoundView
and increased revenues, our average monthly cash balance was $194.6 million
compared to 1999 and 1998 averages of $93.5 million and $4.1 million,
respectively, resulting from funds raised in
17
private placements and our initial public offering. It is our current policy to
pay bonuses and other compensation related payments to employees on a
semi-annual basis. Accordingly, we expect our cash balance and the related
interest income to decrease once such payments are made subsequent to
December 31, 2000.
Gain (loss) on investments for the year ended December 31, 2000 was a loss
of $3.2 million, compared to gains of $6.0 million and $45,000 for the years
ended December 31, 1999 and 1998, respectively. For the year ended December 31,
2000, the loss on investments primarily consists of the net realized and
unrealized gains and losses on the mark-to-market and sale of equity securities
that the Company receives as consideration for financial advisory services and
from investment gains and losses from the Company's investments in equity
securities and investment partnerships focused on the technology sector. For the
years ended December 31, 1999 and 1998, this amount represents the value of
common stock warrants received from one client company for which we provided
investment banking services. We expect that we will continue to receive equity
securities or warrants representing the right to purchase equity in companies
for which we provide investment banking services and that the values of the
securities we own will continue to fluctuate based on market conditions.
Other income for the year ended December 31, 2000 was a loss of $155,000,
compared to income of $139,000 for the year ended December 31, 1999 and $0 for
the year ended December 31, 1998. For the year ended December 31, 2000 other
income consists of an adjustment to reduce estimated advertising revenue related
to the sale of banner advertisements on our website. For the year ended
December 31, 1999, this income consists of advertising revenue earned from the
sale of banner space on our website.
EXPENSES
Compensation and benefits expense for the year ended December 31, 2000 was
$215.3 million, compared to $39.0 million for the year ended December 31, 1999
and $4.4 million for the year ended December 31, 1998. Compensation and benefits
expense consists of salaries, bonuses and other benefits paid or provided to the
Company's employees. The increase in compensation expense primarily relates to
higher incentive compensation accrued on higher revenues and an increase in the
number of employees from 66 as of December 31, 1998 to 241 and 450 as of
December 31, 1999 and 2000, respectively. The 87% increase in our employee base
during fiscal 2000 was attributable to our mergers with SoundView and
E*OFFERING, offset by a reduction in staff employed in our online brokerage
operations. The 265% increase in our employee base during fiscal 1999 was
attributable to the growth in all areas of our business, primarily in investment
banking and research professionals. Compensation and benefits expense as a
percentage of total revenues was 57% for the year ended December 31, 2000, which
represents an improvement from 80% and 218% for the years ended December 31,
1999 and 1998, respectively.
In January 2001, we concluded a review of personnel and market conditions in
order to better position us for the current market environment. This review
resulted in a reduction in staff of approximately 60, bringing us to an employee
base of approximately 390. With the exception of increasing the number of people
we employ as a result of our increased ownership in WCE, we anticipate our
employee base remaining relatively constant in 2001.
Additionally, as part of our mergers with SoundView and E*OFFERING, we
issued approximately 2.1 million shares of restricted stock to designated
SoundView and E*OFFERING employees the value of which is being recorded as
compensation expense over the applicable vesting period, as well as agreed to a
cash retention bonus pool of up to $5,000,000 to be paid to designated former
E*OFFERING employees, who are now employed by Wit SoundView, no later than
March 31, 2001.
Amortization of intangible assets and goodwill increased to $25.2 million
for the year ended December 31, 2000 from $0 for the years ended December 31,
1999 and 1998. This expense relates to
18
the amortization of intangible assets and goodwill related to our mergers with
SoundView and E*OFFERING. Our merger with SoundView which was completed on
January 31, 2000, resulted in approximately $275 million in intangible assets
and goodwill. Our merger with E*OFFERING, which resulted in approximately
$304 million in intangible assets and goodwill, was completed on October 16,
2000, and accordingly our results of operations includes amortization expense
related to this merger for the period from October 16, 2000 to December 31,
2000. Results of operations in future years will include the effect of a full
year of amortization related to our merger with E*OFFERING. Intangible assets
and goodwill resulting from these mergers is being expensed on a straight-line
basis over various periods ranging from 3 and 20 years.
Professional services expense for the year ended December 31, 2000 was
$9.2 million, compared to $5.0 million for the year ended December 31, 1999 and
$878,000 for the year ended December 31, 1998. Professional services expense
includes legal, consulting, accounting, and recruiting fees which have increased
as we continue to make strategic investments, expand our business
internationally and hire additional personnel. Professional services expense
also includes the costs related to our strategic relationships with the Gartner
Group and the Giga Group, which allow us access to their products and services.
Brokerage and clearance expense for the year ended December 31, 2000 was
$25.5 million, compared to $5.3 million for the year ended December 31, 1999 and
$186,000 for the year ended December 31, 1998. This expense primarily consists
of fees paid to independent floor brokers on the New York Stock Exchange for the
execution of institutional customer agency business, as well as amounts paid to
the Company's clearing brokers for processing and clearing customers' trades.
The increase in brokerage and clearance expense for the year ended December 31,
2000 compared to December 31, 1999 resulted from the addition of our
institutional brokerage operations to our business as a result of our merger
with SoundView. The increase in brokerage and clearance expense for the year
ended December 31, 1999 compared to December 31, 1998 resulted from an increase
in the growth and volume related to our online brokerage operations. As a result
of the transfer of our online retail brokerage accounts to E*TRADE, we will no
longer incur expenses related to processing and clearing online retail
customer's trades. For the year ended December 31, 2000, this expense totaled
$4.3 million.
Additionally, in connection with the distribution of equity securities to
retail customers of E*TRADE, E*TRADE will receive a portion of the dealer
selling concession received by us. E*TRADE's percentage of such revenue will
depend on the number of shares allocated to E*TRADE's customers and whether we
act as lead managing underwriter or in another capacity. Under the amended and
restated Strategic Alliance Agreement, we have also agreed to pay E*TRADE a
competitive market rate for the order flow it directs to us. We expect our
brokerage and clearance expense to fluctuate to the extent we experience an
increase or decrease in brokerage revenue.
Data processing and communications expense for the year ended December 31,
2000 was $9.6 million, compared to $3.4 million for the year ended December 31,
1999 and $625,000 for the year ended December 31, 1998. Data processing and
communications expense includes costs related to market data services,
transaction processing and telephone and other communication charges. Comparing
the year ended December 31, 2000 to the year ended December 31, 1999, these
expenses have increased as a result of our merger with SoundView and the related
addition of our institutional brokerage operations. Comparing the year ended
December 31, 1999 to the year ended December 31, 1998, these expenses increased
as a result of the growth of our online brokerage operations and an increased
volume of transactions processed. We expect these costs will continue to grow as
transaction volume increases.
Technology development expense for the year ended December 31, 2000 was
$5.8 million, compared to $2.8 million for the year ended December 31, 1999 and
$1.2 million for the year ended
19
December 31, 1998. Comparing the year ended December 31, 2000 to the year ended
December 31, 1999, this expense increased as a result of the development of
Vostock, our online auction system for secondary and follow-on offerings as well
as from the continued development and enhancements to our technology
infrastructure. Comparing the year ended December 31, 1999 to the year ended
December 31, 1998, this expense increased as a result of continued development
of and enhancements to our online brokerage platform. We expect technology
development expense to increase as operations continue to grow and as we
continue to develop innovative, technology driven products and services.
Depreciation and amortization expense for the year ended December 31, 2000
was $6.9 million, compared to $1.6 million for the year ended December 31, 1999
and $897,000 for the year ended December 31, 1998. Depreciation and amortization
consists primarily of depreciation and amortization of furniture, equipment and
leasehold improvements and amortization of computer software. The increases in
depreciation and amortization reflect the increased investments we have made in
technology, equipment and facilities as well as the additional facilities and
equipment acquired in our mergers with SoundView and E*OFFERING.
Occupancy expense for the year ended December 31, 2000 was $5.2 million,
compared to $1.1 million for the year ended December 31, 1999 and $237,000 for
the year ended December 31, 1998. Occupancy expense includes costs related to
leasing office space in New York, Stamford and San Francisco and the increase
reflects our growth and need for expanded office facilities. We expect occupancy
expense to increase as we continue to consolidate our office facilities into
long-term facility solutions.
Marketing and business development expense for the year ended December 31,
2000 was $15.7 million, compared to $2.6 million for the year ended
December 31, 1999 and $1.2 million for the year ended December 31, 1998. For the
year ended December 31, 2000, marketing and business development expense
consists primarily of travel, entertainment and costs associated with hosting
our technology focused conferences which have increased as a result of our
merger with SoundView. Marketing and business development expense in 1999
primarily consisted of travel, entertainment and other costs associated with
developing our investment banking business. During 1998 this expense related to
developing our brand name recognition.
For the year ended December 31, 2000, we wrote-off computer software and
equipment totaling $1.3 million, a decrease from $5.6 million for the year ended
December 31, 1999. In December 1999, in light of the rapidly changing
environment for after-hours trading and alternative trading systems we
wrote-down the majority of computer software and hardware that we had developed
or purchased to operate a planned after hours trading system. Management
estimated the fair value of the assets remaining by determining which assets
were utilizable in other areas of the business as well as estimating the
potential future cash inflows that might be received from the sale or licensing
of part or all of the developed technology. In the first quarter of 2000, as a
result of information that became available to us regarding redeployment of the
remaining assets, we wrote-off an additional $1.3 million of capitalized costs
representing management's estimate of the impairment in the value of the
remaining assets.
For the year ended December 31, 2000, we recorded an expense of
approximately $11.6 million related to the transfer of our online retail
brokerage accounts to E*TRADE and the corresponding discontinuance of our retail
brokerage operations. This charge includes a payment to Wit Capital
Corporation's clearing agent to terminate its contract, an accrual for severance
payments to be made to certain employees whose services will no longer be
required, and an expense for all brokerage related assets that we will not
employ in our business in the future.
Other expenses for the year ended December 31, 2000 were $8.2 million,
compared to $2.5 million for the year ended December 31, 1999 and $1.2 million
for the year ended December 31, 1998. Other expenses includes costs for office
supplies, insurance, subscriptions, registrations and other general
20
administrative expenses which have all increased as we continue to expand our
business and operations through our mergers with SoundView and E*OFFERING. In
1999, other expenses includes $450,000 in primarily non-recurring costs
associated with past vendor and other relationships. Other expenses in 1998
includes write-offs of $782,000 related to media credits we had previously
acquired but which, in view of a revised marketing strategy in 1998, decided not
to use.
OTHER
During the year ended December 31, 2000, we recorded a loss on strategic
investment of $13.7 million related to our investment in enba. In March of 2000,
pursuant to a joint venture agreement related to the formation of WCE, we
exchanged 1,878,596 million of our shares for 189,748 shares of enba. The
parties to the joint venture agreement have been negotiating an unwinding of
enba's participation in the joint venture, including a settlement of claims the
parties have against each other. In light of these negotiations, we have
recorded a loss on our investment in enba to reduce its carrying value to equal
our estimate of the fair value of the shares as of December 31, 2000. We will
continue to evaluate developments affecting our investment in enba and
accordingly, additional losses may be recognized in future periods.
Equity in net loss of affiliates for the year ended December 31, 2000
increased to $20.1 million from $560,000 for the year ended December 31, 1999
and $0 for the year ended December 31, 1998. Equity in net loss of affiliates
represents our proportional share of the losses incurred by WCJ and WCE based on
our ownership interest in each entity. Both WCJ and WCE spent the majority of
the year hiring staff, building an infrastructure and incurring other costs
related to preparing to commence operations. On February 16, 2001, we
participated in a rights offering to purchase additional shares in WCE. We
purchased 8,772,500,000 shares for an aggregate purchase price of approximately
$8.2 million, increasing our ownership percentage to a controlling interest of
81.57%. We anticipate incurring additional losses related to our investments in
WCJ and WCE in the future as they commence and grow their operations. The
ability of WCJ and WCE to generate revenues is dependent on a number of factors
including the economic condition of the markets in which they operate. These
entities may experience slow growth as a result of unfavorable market conditions
or other factors specific to the environments in which they operate.
LIQUIDITY AND CAPITAL RESOURCES
From 1996 to mid 1999, we satisfied our cash requirements primarily through
private placements of common stock and convertible preferred stock. During
June 1999 we completed an initial public offering of our common stock in which
we issued 8,740,000 shares at $9.00 per share. We received $72.8 million in cash
proceeds, net of underwriting discounts and offering costs, from the offering
and an approximate $57.0 million from private placements of our equity in that
year. We believe that our existing cash balances will be sufficient to meet
anticipated cash requirements for at least the next twelve months. We may,
nonetheless, seek additional financing to support our activities during the next
twelve months or thereafter, including additional public offerings of our common
stock. There can be no assurance, however, that additional capital will be
available on reasonable terms, if at all, when needed or desired.
Net cash provided by operating activities was $68.6 million for the year
ended December 31, 2000, compared to net cash used in operating activities of
$8.9 million and $6.9 million for the years ended December 31, 1999 and 1998,
respectively. Fiscal 2000 represents the first fiscal year in which we
experienced positive cash flow from our operating activities. Cash provided by
operating activities for the year ended December 31, 2000 was primarily from a
net loss of $22.0 million, non-cash adjustments of $97.7 million, a net increase
in operating assets of $62.5 million, offset by a net increase in operating
liabilities of $55.4 million. Cash used in operating activities for the year
ended December 31, 1999 was primarily from a net loss of $20.9 million, non-cash
adjustments of $8.1 million, an increase in
21
operating assets of $13.6 million that was offset by a net increase in operating
liabilities of $17.5 million. Cash used in operating activities for the year
ended December 31, 1998 was primarily from a net loss of $8.8 million, non-cash
adjustments of $2.4 million, a net increase in operating assets of
$1.2 million, offset by a net increase in operating liabilities of $711,000.
Net cash provided by investing activities was $67.0 million for the year
ended December 31, 2000, compared to net cash used in investing activities of
$129.3 million and $458,000 for the years ended December 31, 1999 and 1998,
respectively. Net cash provided by investing activities for the year ended
December 31, 2000 was primarily from sales of short-term investments of
$146.1 million offset by purchases of short-term investments of $43.7 million,
our acquisition of SoundView for $6.8 million (net of cash received), an
additional investment in WCJ of $18.9 million and purchases of computer software
and furniture, equipment and leasehold improvements of $10.0 million. Net cash
used in investing activities for the year ended December 31, 1999 was primarily
for an investment in WCE of $5.6 million, net purchases of short-term
investments of $108.6 million, purchases of furniture, equipment and leasehold
improvements of $6.6 million and purchases of computer software of
$8.4 million. Cash used in investing activities for the year ended December 31,
1998 resulted from purchases of furniture, equipment and leasehold improvements
of $436,000 and from purchases of computer software of $22,000.
Net cash provided by financing activities was $36.7 million for the year
ended December 31, 2000, compared to $132.5 million for the year ended
December 31, 1999 and $24.3 million for the year ended December 31, 1998. For
the year ended December 31, 2000, net cash provided by financing activities
resulted primarily from issuances of common stock totaling $46.1 million which
consists primarily of employee stock option exercises and the sale of 2 million
shares of our common stock to each of E*TRADE and certain affiliates of General
Atlantic Partners, offset by $12.1 million in repurchases of our common stock
through our repurchase program. For the year ended December 31, 1999, cash
provided by financing activities resulted primarily from net proceeds of
$72.8 million received from the initial public offering of our common stock and
from $24.9 million in net proceeds received from the issuance of our Series E
preferred stock, subsequently converted into Class B common stock, and the sale
of warrants to The Goldman Sachs Group, Inc. and from $31.5 million received
from issuances of our Series D preferred stock, now common stock, in private
placements. Cash provided by financing activities for the year ended
December 31, 1998, was primarily from $24.3 million from issuances of our
Series A and B preferred stock, subsequently converted into common stock, in
private placements.
On February 16, 2001, in addition to making an additional $8.2 million
investment in WCE, we entered into a short-term subordinated loan agreement with
Wit SoundView Europe Limited ("WSVE"), a wholly-owned subsidiary of WCE. The
maximum available to WSVE under the agreement is approximately $6.6 million, and
any outstanding balance under the agreement bears interest at a rate of 8% per
annum. As of March 31, 2001, WSVE had drawn down approximately $2.6 million
pursuant to the terms of this agreement.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary risk exposures are market risk (particularly equity price),
credit risk and legal risk. Market risk refers to the risk that a change in the
level of equity prices, interest rates or other factors could result in trading
losses or negatively impact the market for equity issuance. Credit and legal
risk refers to the risk that a counterparty to a transaction might fail to
perform under its contractual commitment resulting in our incurring losses. Our
risk management focuses on the trading of securities, extension of credit to
counterparties and investment banking activities, as well as the monitoring of
trading levels with institutional customers. We monitor these risks daily
through a number of control procedures in order to identify and evaluate the
various risks to which our company is exposed.
22
MARKET RISK
We may act as a principal to facilitate customer-related transactions in
financial instruments which exposes the firm to market risks. As of
December 31, 2000, we make markets in 241 equity securities. As such, we
maintain securities inventories to facilitate customer transactions. Our
management believes its practice of monitoring market risk very closely and we
believe that our risk management results in a carefully controlled exposure to
market volatility that should reduce our exposure to earnings volatility.
Managing market risk exposure includes limiting firm commitments by position
level both long and short for all securities traded and limiting the type of
trades that can occur in each inventory account.
We seek to manage daily risk exposure in our inventory accounts by requiring
various levels of management review of these accounts. The primary purpose of
risk management is to participate in the establishment of position limits, as
well as to monitor both the buy and sell activity in the firm's trading
accounts. Trading activities may result in the creation of inventory positions.
Position and exposure reports indicating both long and short position are
prepared, distributed and reviewed each day. These reports enable us to monitor
inventory levels, monitor daily trading results by stock and trader, as well as
review inventory aging, pricing and concentration.
We invest our excess cash in money market funds and in enhanced income funds
which include short-term obligations issued by the U.S. Government and its
agencies and in high-quality corporate issuers. Our investments in enhanced
income funds exposes us to market risk for changes in interest rates. We have
established investment guidelines that specify credit quality requirements as
well as diversification requirements by issuer and type of security. We do not
hold derivative financial instruments in our investment portfolio.
CREDIT RISK
Our exposure to credit risk arises from the possibility that a counterparty
to a transaction might fail to perform under its contractual commitment,
resulting in our incurring losses. Credit risk related to various financing
activities is reduced by the industry practice of obtaining and maintaining
possession and control of collateral which is accomplished with established
arrangements with the clearing broker. Along with our clearing broker, we manage
the credit exposure relating to our trading activities by monitoring the credit
worthiness of counterparties requesting additional collateral when deemed
necessary and limiting the amount and duration of exposure to individual
counterparties.
LEGAL RISK
Legal risk includes the risk of non-compliance with applicable legal and
regulatory requirements and the risk that a counterparty's performance
obligations will be unenforceable. We are generally subject to extensive
regulation in the different jurisdictions in which we conduct business. We have
established legal standards and procedures that are designed to ensure
compliance with all applicable statutory and regulatory requirements. We have
also established procedures that are designed to monitor compliance with senior
management's policies relating to conduct, ethics and business practices. In
connection with our business, we have various procedures that address issues
such as regulatory capital requirements, trading and sales practices,
supervision, and record keeping. We have also established certain procedures to
mitigate the risk that a counterparty's performance obligations will be
unenforceable, including consideration of counterparty legal authority and
capacity, adequacy or legal documentation, the permissibility of a transaction
under applicable law and whether applicable bankruptcy or insolvency laws limit
or alter contractual remedies.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WIT SOUNDVIEW GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Index to Consolidated Financial Statements.................. F-1
Report of Independent Public Accountants.................... F-2
Consolidated Statements of Financial Condition as of
December 31, 2000 and 1999................................ F-3
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998.......................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2000, 1999 and 1998...... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998.......................... F-6
Notes to Consolidated Financial Statements.................. F-8
Schedule to Consolidated Financial Statements............... F-20
Notes to Schedule to Consolidated Financial Statements...... F-25
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
Information called for by Item 10 will be set forth under the caption
"Election of Directors" in the Company's 2000 Proxy Statement, which will be
filed not later than 120 days after the end of the Company's fiscal year ended
December 31, 2000 and which is incorporated herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION
Information called for by Item 11 will be set forth under the caption
"Executive Compensation" in the Company's 2000 Proxy Statement, which will be
filed not later than 120 days after the end of the Company's fiscal year ended
December 31, 2000 and which is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information called for by Item 12 will be set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's 2000 Proxy Statement, which will be filed not later than 120 days
after the end of the Company's fiscal year ended December 31, 2000 and which is
incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information called for by Item 13 will be set forth under the caption
"Certain Relationships and Related Transactions" in the Company's 2000 Proxy
Statement, which will be filed not later than 120 days after the end of the
Company's fiscal year ended December 31, 2000 and which is incorporated herein
by this reference.
24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report on Form 10-K:
1. FINANCIAL STATEMENTS OF WIT SOUNDVIEW GROUP, INC.
The following consolidated financial statements of Wit SoundView Group, Inc,
and subsidiaries and the related notes thereto are filed as a part of this
report pursuant to Item 8, beginning on page F-1:
Report of Independent Public Accountants
Consolidated Statements of Financial Condition as of December 31, 2000
and 1999
Consolidated Statements of Operations for the years ended December 31,
2000, 1999 and
1998
Consolidated Statements of Changes in Stockholders' Equity for the years
ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended December 31,
2000, 1999 and
1998
Notes to Consolidated Financial Statements
Schedule to Consolidated Financial Statements
Notes to Schedule to Consolidated Financial Statements
FINANCIAL STATEMENTS OF WIT CAPITAL JAPAN, INC.
The following consolidated financial statements of Wit Capital Japan, Inc.
and the related notes thereto are filed as a part of this report pursuant to
Item 14, beginning on page F-26:
Report of Independent Public Accountants
Balance Sheet as of March 31, 2000
Statement of Operations for the period from August 25, 1999 (date of
inception) to March 31,
2000
Statement of Shareholders' Equity for the period from August 25, 1999
(date of inception) to
March 31, 2000
Statement of Cash Flows for the period from August 25, 1999 (date of
inception) to
March 31, 2000
Notes to Financial Statements
2. Financial Statement Schedules and Information
All financial statement schedules and information required by Item 14(a)(2)
have been omitted because they are inapplicable or because the required
information has been included in the consolidated financial statements or notes
thereto.
25
3. Exhibits
The following exhibits are filed as part of this report as required by Item
601 of Regulation S-K. The exhibits designed by an asterisk are management
contracts and compensatory plans and arrangements required to be filed as
exhibits to this report.
2.1 Agreement and Plan of Merger by and among Wit SoundView
Group, Inc., Wit SoundView Corporation and E*OFFERING Corp.,
dated as of May 15, 2000 (Incorporated by reference to
Appendix I to the Registration Statement on Form S-4
(No. 333-42062) of Wit SoundView Group, Inc.).
2.2 Amendment Agreement by and among Wit SoundView Group, Inc.,
Wit SoundView Corporation and E*OFFERING Corp., dated as of
September 26, 2000 (Incorporated by reference to
Exhibit 2.2 to the Post Effective Amendment No. 1 to
Registration Statement on Form S-4 (No. 333-42062) of Wit
SoundView Group, Inc.).
3.1 Amended and Restated Certificate of Incorporation of Wit
SoundView Group, Inc. (Incorporated by reference to
Exhibit 3.1 to the quarterly report of Wit SoundView
Group, Inc. on Form 10-Q for the period ended June 30,
1999).
3.2 Certificate of Amendment of Amended and Restated Certificate
of Incorporation of Wit SoundView Group, Inc. (Incorporated
by reference to Exhibit 3.1 to the Registration Statement on
Form S-4 (No. 333-42062) of Wit SoundView Group, Inc.).
3.3 By-Laws of Wit SoundView Group, Inc. (Incorporated by
reference to Exhibit 3.2 to the Registration Statement on
Form S-4 (No. 333-42062) of Wit SoundView Group, Inc.).
4.1 Rights Agreement between Wit SoundView Group, Inc. and
American Stock Transfer & Trust Company, as Rights Agent
(Incorporated by reference to Exhibit 4.1 to the quarterly
report of Wit SoundView Group, Inc. on Form 10-Q for the
period ended June 30, 1999).
4.2 Voting Agreement, dated as of May 15, 2000, by and among Wit
SoundView Group, Inc. and certain securityholders of
E*OFFERING Corp. (Incorporated by reference to Exhibit 4.2
to the Registration Statement on Form S-4 (No. 333-42062) of
Wit SoundView Group, Inc.).
10.1* Amended and Restated Wit SoundView Group, Inc. Stock
Incentive Plan.
10.2* SoundView Technology Group, Inc. Stock Option Plan.
(Incorporated by reference to Exhibit 10.2 to the
Registration Statement on Form S-4 (No. 333-92887) of Wit
SoundView Group, Inc.).
10.3(a)* E*OFFERING Corp. 1998 Stock Option Plan. (Incorporated by
reference to Exhibit 10.2(a) to the Registration Statement
on Form S-4 (No. 333-42062) of Wit SoundView Group, Inc.).
10.3(b)* E*OFFERING Corp. 2000 Stock/Stock Issuance Option Plan.
(Incorporated by reference to Exhibit 10.2(b) to the
Registration Statement on Form S-4 (No. 333-42062) of Wit
SoundView Group, Inc.).
10.4* Annual Bonus Plan (Incorporated by reference to
Exhibit 10.2 to the Registration Statement on Form S-1 (File
No. 333-74619) of Wit SoundView Group, Inc.).
10.5* Employment Agreement between Wit SoundView Group, Inc. and
Robert H. Lessin (Incorporated by reference to Exhibit 10.6
to the Registration Statement on Form S-1 (File
No. 333-74619) of Wit SoundView Group, Inc.).
26
10.6* Severance Agreement between Wit SoundView Group, Inc. and
Ronald Readmond. (Incorporated by reference to Exhibit 10.5
to Amendment No. 1 to the Registration Statement on
Form S-4 (No. 333-42062) of Wit SoundView Group, Inc.).
10.7* Employment Agreement between Wit SoundView Group, Inc. and
Andrew D. Klein (Incorporated by reference to Exhibit 10.8
to the Registration Statement on Form S-1 (File No.
333-74619) of Wit SoundView Group, Inc.).
10.8* Employment Agreement between Wit SoundView Group, Inc. and
Mark Loehr (Incorporated by reference to Exhibit 10.9 to the
Registration Statement on Form S-1 (File No. 333-74619) of
Wit SoundView Group, Inc.).
10.9* Employment Agreement between Wit SoundView Group, Inc. and
Lloyd H. Feller (Incorporated by reference to Exhibit 10.12
to the Registration Statement on Form S-4 (No. 333-92887)
of Wit SoundView Group, Inc.).
10.10* Employment Agreement between Wit SoundView Group, Inc. and
Robert C. Mendelson (Incorporated by reference to
Exhibit 10.13 to the Registration Statement on Form S-4
(No. 333-92887) of Wit SoundView Group, Inc.).
10.11* Employment Agreement between Wit SoundView Group, Inc. and
Russell D. Crabs (Incorporated by reference to
Exhibit 10.14 to the annual report of Wit SoundView
Group, Inc. on Form 10-K for the period ended December 31,
1999).
10.12* Employment Agreement between Wit SoundView Group, Inc. and
Curtis L. Snyder (Incorporated by reference to
Exhibit 10.14 to the annual report of Wit SoundView
Group, Inc. on Form 10-K for the period ended December 31,
1999).
10.13* Employment Agreement between Wit SoundView Group, Inc. and
John W. Palmer (Incorporated by reference to Exhibit 10.14
to the annual report of Wit SoundView Group, Inc. on
Form 10-K for the period ended December 31, 1999).
10.14* Employment Agreement between Wit SoundView Group, Inc. and
Brian Bristol.
10.15 Third Amended and Restated Stockholders Agreement, dated
April 8, 1999, between Wit SoundView Group, Inc. and the
stockholders named therein (Incorporated by reference to
Exhibit 10.13 to the Registration Statement on Form S-1
(File No. 333-74619) of Wit SoundView Group, Inc.).
10.16 Third Amended and Restated Registration Rights Agreement,
dated April 8, 1999, between Wit SoundView Group, Inc. and
the stockholders named therein (Incorporated by reference to
Exhibit 10.14 to the Registration Statement on Form S-1
(File No. 333-74619) of Wit SoundView Group, Inc.).
10.17 Purchase Agreement, dated as of March 29, 1999, by and
between Wit SoundView Group, Inc. and The Goldman Sachs
Group, L.P. (Incorporated by reference to Exhibit 10.15 to
the Registration Statement on Form S-1 (File No. 333-74619)
of Wit SoundView Group, Inc.).
10.18(a) Strategic Alliance Agreement, dated as of May 15, 2000, by
and between E*TRADE Group, Inc. (Incorporated by reference
to Exhibit 10.14 to the Registration Statement on Form S-4
(No. 333-42062) of Wit SoundView Group, Inc.).
10.18(b) Amended and Restated Strategic Alliance Agreement, dated as
of September 26, 2000 by and between E*TRADE Group Inc. and
Wit SoundView Group, Inc. (Incorporated by reference to
Exhibit 10.14(b) to the Post Effective Amendment No. 1 to
Registration Statement on Form S-4 (No. 333-42062) of Wit
SoundView Group, Inc.).
27
10.19 Account Transfer Agreement, dated as of May 15, 2000, by and
between E*TRADE Group Inc. and Wit SoundView Group, Inc.
(Incorporated by reference to Exhibit 10.15 to the
Registration Statement on Form S-4 (No. 333-42062) of Wit
SoundView Group, Inc.).
10.20 Standstill Agreement, dated as of May 15, 2000, by and
between E*TRADE Group Inc. and Wit SoundView Group, Inc.
(Incorporated by reference to Exhibit 10.16 to the
Registration Statement on Form S-4 (No. 333-42062) of Wit
SoundView Group, Inc.).
10.21 Form of Escrow Agreement by and among E*TRADE Group Inc.,
Wit SoundView Group, Inc. and Escrow Agent. (Incorporated by
reference to Exhibit 10.17 to the Registration Statement on
Form S-4 (No. 333-42062) of Wit SoundView Group, Inc.).
10.22 Stock Purchase Agreement, dated as of May 15, 2000, by and
among E*TRADE Group Inc., Wit SoundView Group, Inc. and
certain entities affiliated with General Atlantic Partners,
LLC. (Incorporated by reference to Exhibit 10.18 to the
Registration Statement on Form S-4 (No. 333-42062) of Wit
SoundView Group, Inc.).
10.23 E*OFFERING Corp. 2000 Restricted Stock Plan. (Incorporated
by reference to Exhibit 10.19 to the Registration Statement
on Form S-4 (No. 333-42062) of Wit SoundView Group, Inc.).
10.24 E*OFFERING Corp. 2000 Restricted Stock Plan Restricted Stock
Agreement (Incorporated by reference to Exhibit 10.20 to the
Registration Statement on Form S-4 (No. 333-42062) of Wit
SoundView Group, Inc.).
21.1 List of subsidiaries of Wit SoundView Group, Inc.
23.1 Consent of Arthur Andersen LLP with regard to the financial
statements of Wit SoundView Group, Inc.
23.2 Consent of Arthur Andersen with regard to the financial
statements of Wit Capital Japan, Inc.
24.1 Powers of Attorney (included on signature page).
(b) Reports on Form 8-K
On February 1, 2000, the Company filed a current report on Form 8-K
regarding the completion of the acquisition of SoundView Technology Group, Inc.
on January 31, 2000 pursuant to the terms of an Agreement and Plan of Merger,
dated as of October 31, 1999, by and among Wit Capital Group, Inc., SoundView
Technology Group, Inc. and W/S Merger Corp., a wholly-owned subsidiary of Wit
Capital Group, Inc.
On May 26, 2000, the Company filed a current report on Form 8-K regarding
the announcement of its strategic alliance with E*TRADE Group Inc. and its
proposed acquisition of E*OFFERING Corp. pursuant to the terms of an Agreement
and Plan of Merger, dated as of May 15, 2000, by and among Wit Capital
Group, Inc., Wit SoundView Corporation and E*OFFERING Corp.
On October 31, 2000 the Company filed a current report on Form 8-K regarding
the completion of the acquisition of E*OFFERING Corp. on October 16, 2000
pursuant to the terms of an Agreement and Plan of Merger, dated as of May 15,
2000, as amended September 26, 2000, by and among Wit Capital Group, Inc., Wit
SoundView Corporation and E*OFFERING Corp.
28
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized, in the City of New York,
the State of New York, on the 30th day of March 2001.
WIT SOUNDVIEW GROUP, INC.
By: /s/ ROBERT H. LESSIN
-----------------------------------------
Robert H. Lessin
CHAIRMAN OF THE BOARD
By: /s/ MARK F. LOEHR
-----------------------------------------
Mark F. Loehr
CHIEF EXECUTIVE OFFICER
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert H. Lessin and Mark F. Loehr, and each of
them, with full power to act without the other, such person's true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities to sign this report, any and all amendments thereto and to file the
same with exhibits and schedules thereto, and other documents in connection
therewith, with the Securities and Exchange commission granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing necessary or desirable to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ROBERT H. LESSIN
------------------------------------------- Chairman of the Board and March 29, 2001
Robert H. Lessin Director
/s/ MARK F. LOEHR Chief Executive Officer and
------------------------------------------- Director (Principal March 27, 2001
Mark F. Loehr Executive Officer)
/s/ ANDREW D. KLEIN
------------------------------------------- Director March 30, 2001
Andrew D. Klein
29
SIGNATURE TITLE DATE
--------- ----- ----
/s/ RUSSELL D. CRABS
------------------------------------------- President and Director March 30, 2001
Russell D. Crabs
------------------------------------------- Director March , 2001
Christos M. Cotsakos
------------------------------------------- Director March , 2001
William E. Ford
------------------------------------------- Director March , 2001
John H.N. Fisher
/s/ EDWARD H. FLEISCHMAN
------------------------------------------- Director March 30, 2001
Edward H. Fleischman
/s/ JOSEPH R. HARDIMAN
------------------------------------------- Director March 29, 2001
Joseph R. Hardiman
/s/ GILBERT C. MAURER
------------------------------------------- Director March 28, 2001
Gilbert C. Maurer
/s/ CURTIS L. SNYDER Chief Financial Officer
------------------------------------------- (Principal Financial and March 29, 2001
Curtis L. Snyder Accounting Officer)
30
WIT SOUNDVIEW GROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants.................... F-2
Consolidated Statements of Financial Condition as of
December 31, 2000 and 1999................................ F-3
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998.......................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2000, 1999 and 1998...... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998.......................... F-6
Notes to Consolidated Financial Statements.................. F-8
Schedule to Consolidated Financial Statements............... F-20
Notes to Schedule to Consolidated Financial Statements...... F-25
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Wit SoundView Group, Inc.:
We have audited the accompanying consolidated statements of financial
condition of Wit SoundView Group, Inc. (a Delaware corporation) and subsidiaries
as of December 31, 2000, and 1999 and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the three
years in the period ended December 31, 2000. These financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 financial position of Wit SoundView Group, Inc.
and subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index on page
F-1 is presented for the purpose of complying with the Securities and Exchange
Commission's rules and is not a part of the basic financial statements. Such
schedule 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.
Arthur Andersen LLP
New York, New York
January 23, 2001
F-2
WIT SOUNDVIEW GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2000 AND 1999
2000 1999
------------ ------------
ASSETS
- ------------------------------------------------------------
CASH AND CASH EQUIVALENTS................................... $184,788,892 $ 12,447,885
RECEIVABLE FROM CLEARING BROKER............................. 96,664,731 681,807
SECURITIES OWNED, at market or fair value................... 9,170,897 114,468,173
INVESTMENT BANKING FEES RECEIVABLE.......................... 13,507,616 3,570,176
INVESTMENTS................................................. 50,055,639 540,535
INVESTMENTS IN AFFILIATES................................... 21,341,809 16,970,868
INTANGIBLE ASSETS, net of accumulated amortization of
$25,176,159 and $0 at December 31, 2000 and 1999,
respectively
Goodwill................................................ 401,744,007 --
Strategic alliance agreement............................ 82,991,667 --
Institutional client relationships...................... 61,464,587 --
Other................................................... 8,096,942 --
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net of
accumulated depreciation and amortization of $9,294,769
and $1,110,369 at December 31, 2000 and 1999,
respectively.............................................. 19,745,402 6,312,242
COMPUTER SOFTWARE, net of accumulated amortization of
$166,845 and $1,212,907 at December 31, 2000 and 1999,
respectively.............................................. 1,178,473 3,706,112
PREPAID EXPENSES............................................ 3,287,777 1,610,628
OTHER ASSETS................................................ 43,694,155 3,309,750
------------ ------------
Total assets................................................ $997,732,594 $163,618,176
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------
LIABILITIES:
Securities sold but not yet purchased, at market value...... 357,359 39,234
Accounts payable and accrued expenses....................... 15,053,362 5,130,675
Accrued compensation........................................ 129,050,585 13,506,087
Deferred tax liabilities.................................... 51,597,127 --
Other liabilities........................................... 7,021,564 540,647
------------ ------------
Total liabilities........................................... 203,079,997 19,216,643
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.001 par value, 30,000,000 shares
authorized, no shares issued or outstanding at December
31, 2000 and 1999......................................... -- --
Common Stock, $.01 par value, 500,000,000 shares authorized;
111,060,242 and 61,629,828 shares issued at December 31,
2000 and issued and outstanding at December 31, 1999,
respectively.............................................. 1,110,602 616,298
Common Stock, Class B, $.01 par value, 75,000,000 shares
authorized; 11,666,666 shares issued and outstanding at
December 31, 2000 and 1999................................ 116,667 116,667
Additional paid-in capital.................................. 897,103,173 196,777,759
Accumulated deficit......................................... (56,423,230) (34,464,356)
Notes receivable from stockholders.......................... (15,275,896) (15,333,070)
Deferred compensation....................................... (19,698,951) (3,311,765)
Treasury stock, at cost, 2,095,788 shares at December 31,
2000...................................................... (12,279,768) --
------------ ------------
Total stockholders' equity.................................. 794,652,597 144,401,533
------------ ------------
Total liabilities and stockholders' equity.................. $997,732,594 $163,618,176
============ ============
The accompanying notes are an integral part of these consolidated statements.
F-3
WIT SOUNDVIEW GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
------------ ------------ -----------
REVENUES:
Investment banking................................. $200,239,440 $ 30,269,532 $ 1,515,105
Brokerage.......................................... 154,928,197 7,087,700 294,454
Interest and investment income..................... 12,276,022 4,716,824 182,880
Asset management fees.............................. 11,449,342 376,966 --
Gain (loss) on investments......................... (3,213,202) 6,027,725 45,370
Other.............................................. (155,140) 138,804 --
------------ ------------ -----------
Total revenues..................................... 375,524,659 48,617,551 2,037,809
------------ ------------ -----------
EXPENSES:
Compensation and benefits.......................... 215,318,644 39,013,625 4,444,271
Brokerage and clearance............................ 25,537,532 5,346,959 186,322
Amortization of intangible assets and goodwill..... 25,176,159 -- --
Marketing and business development................. 15,711,361 2,594,222 1,205,965
Data processing and communications................. 9,587,089 3,449,259 625,231
Professional services.............................. 9,208,958 4,952,832 877,822
Depreciation and amortization...................... 6,894,094 1,609,492 896,652
Technology development............................. 5,780,940 2,771,792 1,155,959
Occupancy.......................................... 5,176,976 1,108,770 237,334
Discontinuance of retail brokerage operations...... 11,605,401 -- --
Write-off of computer software and equipment....... 1,339,772 5,565,247 --
Other.............................................. 8,209,551 2,548,829 1,202,143
------------ ------------ -----------
Total expenses..................................... 339,546,477 68,961,027 10,831,699
------------ ------------ -----------
Income (loss) from operations...................... 35,978,182 (20,343,476) (8,793,890)
Loss on strategic investment....................... (13,727,858) -- --
------------ ------------ -----------
Income (loss) before provision for income taxes and
equity in net loss of affiliates................... 22,250,324 (20,343,476) (8,793,890)
Provision for income taxes........................... 24,129,194 -- --
------------ ------------ -----------
Loss before equity in net loss of affiliates......... (1,878,870) (20,343,476) (8,793,890)
Equity in net loss of affiliates................... (20,080,004) (560,439) --
------------ ------------ -----------
Net loss............................................. $(21,958,874) $(20,903,915) $(8,793,890)
============ ============ ===========
NET LOSS PER SHARE:
Basic.............................................. $ (.26) $ (.52) $ (1.23)
Diluted............................................ $ (.26) $ (.52) $ (1.23)
WEIGHTED AVERAGE SHARES USED IN THE COMPUTATION OF
NET LOSS PER SHARE:
Basic.............................................. 84,551,145 39,909,794 7,140,123
Diluted............................................ 84,551,145 39,909,794 7,140,123
The accompanying notes are an integral part of these consolidated statements.
F-4
WIT SOUNDVIEW GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
OLD NEW CLASS B CLASS C ADDITIONAL
PREFERRED COMMON COMMON COMMON COMMON PAID-IN ACCUMULATED
STOCK STOCK STOCK STOCK STOCK CAPITAL DEFICIT
--------- -------- ---------- -------- -------- ------------ ------------
STOCKHOLDERS' EQUITY, December 31,
1997.................................. $ 77,200 $70,561 $ -- $ -- $ -- $ 9,786,065 $(4,766,551)
Issuance of common stock................ -- 1,836 -- -- -- 262,115 --
Issuance of common stock for note
receivable............................ -- 40,250 -- -- -- 5,709,750 --
Issuance of Series A Preferred Stock.... 12,780 -- -- -- -- 1,286,600 --
Issuance of Series B Preferred Stock.... 23,050 -- -- -- -- 2,251,932 --
Issuance of Series C Preferred Stock.... 59,028 -- -- -- -- 5,782,184 --
Issuance of Series D Preferred Stock.... 99,333 -- -- -- -- 14,456,011 --
Net loss................................ -- -- -- -- -- -- (8,793,890)
-------- -------- ---------- -------- -------- ------------ ------------
STOCKHOLDERS' EQUITY, December 31,
1998.................................. 271,391 112,647 -- -- -- 39,534,657 (13,560,441)
Issuance of common stock in initial
public offering, net.................. -- -- 87,400 -- -- 72,689,869 --
Issuance of common stock................ -- 15,330 4,718 -- 6,835 3,921,188 --
Issuance of common stock for notes
receivable............................ -- 47,595 -- -- -- 8,919,642 --
Issuance of Series D Preferred Stock.... 214,001 -- -- -- -- 31,362,528 --
Issuance of Series E Preferred Stock.... 116,667 -- -- -- -- 24,741,546 --
Conversion of Old Common Stock to Class
C Common.............................. -- (175,572) -- -- 175,572 -- --
Conversion of Class C to New Common
Stock................................. -- -- 524,180 -- (524,180) -- --
Conversion of Series A through E
Preferred to Class B and C Common..... (602,059) -- -- 116,667 339,773 145,619 --
Issuance of restricted stock to
employees............................. -- -- -- -- 2,000 3,642,880 --
Compensation expense on restricted stock
grants................................ -- -- -- -- -- -- --
Increase in equity investment in
affiliate resulting from issuance of
stock................................. -- -- -- -- -- 11,819,830 --
Net loss................................ -- -- -- -- -- -- (20,903,915)
-------- -------- ---------- -------- -------- ------------ ------------
STOCKHOLDERS' EQUITY, December 31,
1999.................................. -- -- 616,298 116,667 -- 196,777,759 (34,464,356)
Issuances of common stock............... -- -- 70,057 -- -- 45,797,956 --
Issuance of common stock for notes
receivable............................ -- -- 750 -- -- 978,938 --
Repurchases of common stock............. -- -- -- -- -- -- --
Notes receivable acquired in SoundView
and E*OFFERING mergers................ -- -- -- -- -- -- --
Repayments of notes receivable.......... -- -- -- -- -- -- --
Issuance of common stock in SoundView
merger................................ -- -- 113,647 -- -- 290,889,835 --
Issuance of common stock in E*OFFERING
merger................................ -- -- 272,366 -- -- 301,618,006 --
Issuance of restricted stock to
employees............................. -- -- 20,611 -- -- 22,641,480 --
Deferred compensation on unvested
replacement options................... -- -- -- -- -- -- --
Compensation expense on restricted stock
grants and unvested replacement
options............................... -- -- -- -- -- -- --
Forfeitures of restricted stock grants
and unvested options.................. -- -- (1,913) -- -- (1,864,326) --
Tax benefit on non-qualified option
exercises............................. -- -- -- -- -- 6,948,852 --
Issuance of common stock for strategic
investment............................ -- -- 18,786 -- -- 30,978,048 --
Modifications of stock based awards..... -- -- -- -- -- 2,336,625 --
Net loss................................ -- -- -- -- -- -- (21,958,874)
-------- -------- ---------- -------- -------- ------------ ------------
STOCKHOLDERS' EQUITY, December 31,
2000.................................. $ -- $ -- $1,110,602 $116,667 $ -- $897,103,173 $(56,423,230)
======== ======== ========== ======== ======== ============ ============
NOTES
RECEIVABLE
FROM DEFERRED SUBSCRIPTIONS
STOCKHOLDERS COMPENSATION TREASURY STOCK RECEIVABLE TOTAL
------------ ------------- -------------- ------------- ------------
STOCKHOLDERS' EQUITY, December 31,
1997.................................. $ -- $ -- $ -- $ (308,000) $ 4,859,275
Issuance of common stock................ -- -- -- -- 263,951
Issuance of common stock for note
receivable............................ (5,750,000) -- -- -- --
Issuance of Series A Preferred Stock.... -- -- -- 308,000 1,607,380
Issuance of Series B Preferred Stock.... -- -- -- -- 2,274,982
Issuance of Series C Preferred Stock.... -- -- -- -- 5,841,212
Issuance of Series D Preferred Stock.... -- -- -- -- 14,555,344
Net loss................................ -- -- -- -- (8,793,890)
------------ ------------ ------------ ------------ ------------
STOCKHOLDERS' EQUITY, December 31,
1998.................................. (5,750,000) -- -- -- 20,608,254
Issuance of common stock in initial
public offering, net.................. -- -- -- -- 72,777,269
Issuance of common stock................ -- -- -- -- 3,948,071
Issuance of common stock for notes
receivable............................ (9,583,070) -- -- -- (615,833)
Issuance of Series D Preferred Stock.... -- -- -- -- 31,576,529
Issuance of Series E Preferred Stock.... -- -- -- -- 24,858,213
Conversion of Old Common Stock to Class
C Common.............................. -- -- -- -- --
Conversion of Class C to New Common
Stock................................. -- -- -- -- --
Conversion of Series A through E
Preferred to Class B and C Common..... -- -- -- -- --
Issuance of restricted stock to
employees............................. -- (3,644,880) -- -- --
Compensation expense on restricted stock
grants................................ -- 333,115 -- -- 333,115
Increase in equity investment in
affiliate resulting from issuance of
stock................................. -- -- -- -- 11,819,830
Net loss................................ -- -- -- -- (20,903,915)
------------ ------------ ------------ ------------ ------------
STOCKHOLDERS' EQUITY, December 31,
1999.................................. (15,333,070) (3,311,765) -- -- 144,401,533
Issuances of common stock............... -- -- 437,494 -- 46,305,507
Issuance of common stock for notes
receivable............................ (979,688) -- -- -- --
Repurchases of common stock............. 596,560 -- (12,717,262) -- (12,120,702)
Notes receivable acquired in SoundView
and E*OFFERING mergers................ (2,306,269) -- -- -- (2,306,269)
Repayments of notes receivable.......... 2,746,571 -- -- -- 2,746,571
Issuance of common stock in SoundView
merger................................ -- -- -- -- 291,003,482
Issuance of common stock in E*OFFERING
merger................................ -- -- -- -- 301,890,372
Issuance of restricted stock to
employees............................. -- (22,662,091) -- -- --
Deferred compensation on unvested
replacement options................... -- (2,021,276) -- -- (2,021,276)
Compensation expense on restricted stock
grants and unvested replacement
options............................... -- 6,062,586 -- -- 6,062,586
Forfeitures of restricted stock grants
and unvested options.................. -- 2,233,595 -- -- 367,356
Tax benefit on non-qualified option
exercises............................. -- -- -- -- 6,948,852
Issuance of common stock for strategic
investment............................ -- -- -- -- 30,996,834
Modifications of stock based awards..... -- -- -- -- 2,336,625
Net loss................................ -- -- -- -- (21,958,874)
------------ ------------ ------------ ------------ ------------
STOCKHOLDERS' EQUITY, December 31,
2000.................................. $(15,275,896) $(19,698,951) $(12,279,768) $ -- $794,652,597
============ ============ ============ ============ ============
F-5
WIT SOUNDVIEW GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
------------ ------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................... $(21,958,874) $ (20,903,915) $(8,793,890)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities-
Deferred tax expense............................ 19,475,707 -- --
Equity in net loss of affiliates................ 20,080,004 560,439 --
Write-off of computer software and equipment.... 1,339,772 5,565,247 --
Loss on strategic investment.................... 13,727,858 -- --
Non-cash charges related to stock based
compensation.................................. 8,398,964 333,115 --
Depreciation and amortization................... 32,070,253 1,609,492 896,652
Discontinuance of retail brokerage operations... 2,630,255 -- --
Other non-cash expenses......................... -- -- 1,522,901
(Increase) decrease in operating assets-
Receivable from clearing broker................. (54,661,627) (562,495) 17,052
Securities owned................................ 5,647,167 (5,094,236) (217,789)
Investment banking fees receivable.............. 12,014,714 (3,057,224) (512,952)
Investments..................................... (10,185,523) (538,986) --
Prepaid expenses................................ (610,129) (1,466,198) (188,343)
Other assets.................................... (14,735,649) (2,888,393) (316,487)
Increase (decrease) in operating liabilities-
Securities sold but not yet purchased........... (374,552) 39,234 --
Accounts payable and accrued expenses........... (6,568,411) 4,730,846 (127,618)
Accrued compensation............................ 69,924,728 12,873,451 284,210
Other liabilities............................... (7,623,213) (115,042) 554,189
------------ ------------- -----------
Net cash provided by (used in) operating
activities.................................. 68,591,444 (8,914,665) (6,882,075)
------------ ------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Wit Capital Japan................... (18,919,083) (88,615) --
Investment in Wit Capital Europe.................. -- (5,624,429) --
Acquisition of SoundView, net of cash received.... (6,773,571) -- --
Cash received in acquisition of E*OFFERING........ 222,926 -- --
Purchases of short-term investments............... (43,660,851) (153,117,995) --
Sales of short-term investments................... 146,141,459 44,502,351 --
Purchases of computer software.................... (3,879,484) (8,399,254) (21,542)
Purchases of furniture, equipment and leasehold
improvements.................................... (6,125,662) (6,563,903) (436,243)
------------ ------------- -----------
Net cash provided by (used in) investing
activities.................................. 67,005,734 (129,291,845) (457,785)
------------ ------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments and issuances of notes receivable from
stockholders.................................... 2,746,571 (615,833) --
Repurchases of common stock....................... (12,120,702) -- --
Net proceeds from IPO of common stock............. -- 72,777,269 --
Proceeds from issuance of common stock............ 46,117,960 3,948,071 60,301
Net proceeds from issuance of preferred stock..... -- 56,434,742 24,278,918
------------ ------------- -----------
Net cash provided by financing activities......... 36,743,829 132,544,249 24,339,219
------------ ------------- -----------
Net increase (decrease) in cash and cash
equivalents................................. 172,341,007 (5,662,261) 16,999,359
Cash and cash equivalents, beginning of year........ 12,447,885 18,110,146 1,110,787
------------ ------------- -----------
Cash and cash equivalents, end of year.............. $184,788,892 $ 12,447,885 $18,110,146
============ ============= ===========
F-6
WIT SOUNDVIEW GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
------------ ------------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest........................................ $ -- $ 3,822 $ 7,211
Taxes........................................... 13,329,054 18,830 43,181
NON-CASH TRANSACTIONS:
Issuance of common stock for notes receivable..... $ 979,688 $ 8,967,237 $ 5,750,000
Issuance of common stock for web site
development..................................... -- -- 203,650
Issuance of common stock for strategic
investment...................................... 30,996,834 -- --
Issuance of common stock for consulting
services........................................ -- 40,613 --
Issuance of restricted stock to employees......... 22,662,091 3,644,880 --
Tax benefit from non-qualified option exercises
recorded through stockholders' equity........... 7,364,059 -- --
Increase in equity investment in affiliate
resulting from issuance of stock................ -- 11,819,830 --
Acquisition of SoundView:
Fair value of assets acquired, net of cash
received........................................ 44,431,499 -- --
Intangible assets and goodwill.................... 275,857,420 -- --
Issuance of common stock.......................... 291,003,482 -- --
Deferred tax asset................................ 16,770,000 -- --
Deferred tax liabilities.......................... 32,465,000 -- --
Acquisition of E*OFFERING:
Fair value of assets acquired, net of cash
received........................................ 12,594,705 -- --
Intangible assets and goodwill.................... 304,031,014 -- --
Issuance of common stock.......................... 301,890,372 -- --
Deferred tax asset................................ 9,295,676 -- --
Deferred tax liabilities.......................... 17,147,407 -- --
Deferred compensation on unvested replacement
options......................................... 2,021,276 -- --
The accompanying notes are an integral part of these consolidated statements.
F-7
WIT SOUNDVIEW GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
1. ORGANIZATION AND BUSINESS
Wit SoundView Group, Inc. (the "Company" or "WSVG", formerly Wit Capital
Group, Inc.) was incorporated on March 27, 1996 and commenced operations in
September 1997. The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, Wit SoundView
Corporation ("WSV", formerly SoundView Technology Group, Inc.), Wit Capital
Corporation ("WCC"), SoundView Asset Management, Inc. ("SAM"), SoundView Capital
Management, Inc. ("SCM") and Wit SoundView Ventures Corp. ("Wit SoundView
Ventures").
The Company is an investment banking firm focused exclusively on the
technology sector and offers a strong complement of investment banking services,
including public offerings, M&A advisory and private equity placements. The
Company produces comprehensive sell-side research on over 260 technology
companies. The Company's brokerage operations provide a variety of sales and
trading services to institutional investors. The Company's venture capital
operation, Wit SoundView Ventures, has established and currently manages a
number of venture capital funds that provide investors with the opportunity to
participate in technology and Internet related investments.
WSV has an agreement with Bear Stearns, pursuant to which Bear Stearns
clears securities transactions, carries customers' accounts on a fully disclosed
basis, and performs record-keeping functions for WSV.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period.
Management does not believe that actual results will differ materially from
these estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries WSV, WCC, SAM, SCM and Wit SoundView Ventures.
Material intercompany balances and transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include amounts that are readily convertible into
cash and highly liquid investments with original maturities of three months or
less at the time of purchase.
SECURITIES OWNED
Securities transactions and the related expenses are recorded on a trade
date basis and are valued at market or fair value.
INVESTMENTS
The Company holds investments in publicly traded and privately held
companies and in limited partnerships. The Company's investments in publicly
traded and privately held companies are accounted for at market or fair value.
The Company also holds strategic investments which are
F-8
WIT SOUNDVIEW GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
accounted for at market or fair value with the accompanying gains or losses
presented separately in the accompanying consolidated statement of operations.
INTANGIBLE ASSETS
Intangible assets are comprised of identifiable intangible assets and
goodwill from acquisitions. These intangible assets are being amortized on a
straight-line basis over periods ranging from three to twenty years. The
allocation of the purchase price in the mergers and the determination of useful
lives were based upon an independent appraisal. The Company continually
evaluates whether events and circumstances have occurred that indicate the
remaining estimated useful life may warrant revision or that the remaining
balance may be impaired.
COMPUTER SOFTWARE
Costs capitalized related to the purchase of computer software are being
amortized over a period of three years. Costs capitalized related to the
development of software for internal use are amortized over the estimated useful
lives of the software generally over periods of between one and three years.
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Furniture, equipment and leasehold improvements are carried at cost less
accumulated depreciation and amortization. Depreciation and amortization are
recorded on a straight-line basis over the estimated useful lives of the assets,
ranging from two and five years for furniture and computer hardware,
respectively, to ten years for leasehold improvements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all assets and liabilities carried at historical cost or
contract value approximate fair value due to their relatively short-term nature.
INVESTMENTS IN AFFILIATES
Investments in affiliates are accounted for under the equity method.
REVENUE RECOGNITION
Investment banking revenue is generated as a result of the Company managing,
co-managing and participating in various underwritings and from advisory or
other services provided to clients.
Fees from investment banking activities are recognized when the offering or
services are complete and the income is reasonably determinable.
REPORTABLE OPERATING SEGMENT
The Company considers its present operations to be one reportable segment
for purposes of presenting financial information and for evaluating its
performance. The financial statement information presented in the accompanying
consolidated financial statements is consistent with the preparation of
financial information for the purpose of internal use.
F-9
WIT SOUNDVIEW GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes", which requires the recognition of deferred tax assets and
liabilities at tax rates expected to be in effect when these balances reverse.
Future tax benefits attributable to temporary differences are recognized to the
extent that realization of such benefits is more likely than not.
PENDING ACCOUNTING PRONOUNCEMENTS
In June 1998, The Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
established accounting and reporting standards for derivative instruments,
certain derivative instruments embedded in other contracts and hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The accounting for changes in the fair value of a
derivative depends on the use of the derivative and the resulting designation.
This statement as amended by SFAS No. 137 is effective for all fiscal years
beginning after June 15, 2000. The Company does not believe that the adoption of
this statement will have a material impact on the Company's consolidated
financial statements.
In September of 2000, the Financial Accounting Standards Board issued SFAS
No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities--a replacement of FASB Statement No. 125"
("SFAS 140"). SFAS 140 amends the recognition and reclassification of collateral
and disclosures related to securitization transactions and collateral. These
changes are effective for fiscal years ending after December 15, 2000. SFAS 140
also amends the accounting for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. The impact of
SFAS 140 provisions effective subsequent to March 31, 2001 is not anticipated to
have a material impact on the Company's consolidated financial statements.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform with the
current year's presentation.
3. BUSINESS COMBINATIONS
On January 31, 2000, the Company completed its merger with SoundView
Technology Group, Inc. ("SoundView"). Under the terms of the agreement, the
Company acquired the outstanding shares of SoundView in exchange for
approximately $313 million, consisting of common stock, options replacing
SoundView's options and $22.5 million in cash. The acquisition was accounted for
using the purchase method of accounting. A portion of the purchase price has
been allocated to assets acquired and liabilities assumed based on estimated
fair value at the date of acquisition while the balance of $275 million was
recorded as intangible assets and goodwill and is being amortized over various
periods ranging from 3 to 20 years on a straight-line basis.
On October 16, 2000, the Company completed its merger with E*OFFERING Corp.
("E*OFFERING"). As consideration for the merger, the Company issued
approximately 27.2 million shares of common stock and options and warrants to
purchase shares of the Company's common stock with an approximate value of
$302 million to the shareholders of E*OFFERING. The excess of cost over the
estimated fair value of net assets acquired was allocated to certain
identifiable intangible
F-10
WIT SOUNDVIEW GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
3. BUSINESS COMBINATIONS (CONTINUED)
assets and goodwill, a total of approximately $304 million which is being
amortized on a straight-line basis over periods between 5 and 7 years. The
Company also entered into an amended and restated Strategic Alliance Agreement
with E*TRADE Group Inc. ("E*TRADE") which provides that the Company will be the
exclusive source of retail equity or equity related securities in initial public
offerings, follow-on offerings and certain private placements to the
3.6 million customers of E*TRADE. Pursuant to the Strategic Alliance Agreement,
E*TRADE will receive a portion of the dealer selling concession received by the
Company. E*TRADE's percentage of such revenue will depend on the number of
shares allocated to E*TRADE's customers and whether the Company acts as lead
managing underwriter or in another capacity. As consideration for the Strategic
Alliance Agreement, the Company issued 4,025,948 shares of common stock and a
warrant to purchase an additional 2 million shares of common stock to E*TRADE.
The following unaudited pro forma information reflects summary statement of
operations information had the acquisitions of SoundView and E*OFFFERING been
completed as of the beginning of the periods presented. The pro forma
information for the year ended December 31, 2000, includes the results of the
SoundView merger from January 31, 2000, the date on which that merger was
completed.
DECEMBER 31,
---------------------------
2000 1999
------------ ------------
Total revenues................................... $401,541,143 $239,430,941
Loss before income taxes and equity in net loss
of affiliates.................................. (39,430,041) (64,995,909)
Net loss......................................... (65,424,246) (58,426,631)
Net loss per diluted share....................... $ (0.60) $ (0.71)
4. INVESTMENTS IN AFFILIATES
In July 1999, the Company entered into a joint venture agreement with Trans
Cosmos, Inc. and an investment agreement with Mitsubishi Corporation to
establish a Japanese investment banking firm known as Wit Capital Japan, Inc.
("WCJ"). WCJ was incorporated in August 1999 and is based in Tokyo. As
anticipated, in October 1999, WCJ signed a second round of financing which
reduced the Company's ownership in the joint venture from 60 percent to
approximately 30 percent. In connection with the issuance of common stock by WCJ
in the above mentioned financing round, the Company recorded the difference
between the carrying amount of its investment in WCJ and its pro-rata share of
the underlying net book value as an increase to its investment and a
corresponding increase in stockholders' equity in the amount of $11,819,830.
In May 2000 and September 2000, the Company made additional investments of
$10.5 million and $8.4 million, respectively in WCJ. As of December 31, 2000 and
1999, the Company's ownership interest in WCJ was 39.5 percent and
33.2 percent, respectively.
On October 26, 1999, the Company and enba plc ("enba") announced their
intention to combine their efforts to establish a Pan-European investment
banking firm, known as Wit Capital Europe Group PLC ("WCE"). As of December 31,
1999, the Company and enba jointly controlled WCE and owned 55 percent and
45 percent, respectively, of the outstanding equity of WCE. In December 1999 the
Company contributed approximately $5.6 million to the joint venture. The Company
also entered into a
F-11
WIT SOUNDVIEW GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
4. INVESTMENTS IN AFFILIATES (CONTINUED)
subscription agreement to acquire 189,748 shares of enba in exchange for
1,878,596 shares of the Company's common stock, which took place during the
first quarter of 2000.
In March 2000, Cazenove & Co., a London based securities firm, made an
investment in WCE, decreasing the Company's ownership interest to 49 percent.
Additionally in 2000, the Company and enba commenced negotiating an unwinding of
enba's participation in the joint venture. Based on an agreement in principle
that was reached in late 2000, the Company recorded a loss on its investment in
enba of approximately $13.7 million, representing management's estimate of the
impairment in value of the investment at December 31, 2000.
The Company's equity investment in WCE was written-off during August 2000 as
a result of the Company's pro rata share of WCE's net losses since inception
exceeding the carrying value of its investment. The Company has continued to
accrue its pro rata share of WCE's net losses incurred subsequent to
August 2000, as it is probable that the Company will make an additional
investment in WCE in a future period (see Note 17).
5. SECURITIES OWNED
Details of securities owned at December 31, 2000 and 1999 are as follows:
DECEMBER 31,
-------------------------
2000 1999
---------- ------------
U.S. Government obligations........................ $ -- $ 23,645,877
Federal Agency securities.......................... -- 44,731,291
Asset Backed securities............................ -- 24,896,691
Corporate bonds.................................... -- 14,385,940
Equity securities.................................. 2,204,419 --
Warrants to purchase equity securities............. 717,714 5,566,495
Other.............................................. 6,248,764 1,241,879
---------- ------------
$9,170,897 $114,468,173
========== ============
As of December 31, 2000, other consists of certificates of deposit that are
currently pledged as collateral for certain of the Company's lease commitments.
6. RELATED PARTY TRANSACTIONS
WCC acted as a co-manager in the Company's initial public offering in
June 1999. In connection with its role as a co-manager, WCC received
approximately $1.3 million in underwriting concessions, which was recorded as a
credit to stockholder's equity.
F-12
WIT SOUNDVIEW GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
7. WRITE-OFF OF COMPUTER SOFTWARE AND EQUIPMENT
In December 1999, the Company completed its evaluation of whether to
continue the roll out of its digital trading facility. In light of the rapidly
changing environment for after-hours trading and alternative trading systems and
its need to complete the merger with SoundView, the Company determined that it
was not going to operate its digital trading facility. As of December 31, 1999,
the Company had capitalized a total of approximately $8 million in costs related
to the development of its digital trading facility and in light of its decision,
wrote-down approximately $5.6 million of those costs representing management's
estimate of the impairment in their value. Management estimated the fair value
of the assets remaining by determining which assets were utilizable in other
areas of the business as well as estimating the potential future cash inflows
that might be received from the sale or licensing of part or all of the
developed technology. In the first quarter of 2000, as a result of information
that became available regarding redeployment of the remaining assets, the
Company wrote-off an additional $1.3 million of capitalized costs representing
management's estimate of the impairment in the value of the remaining assets.
8. DISCONTINUANCE OF RETAIL BROKERAGE OPERATIONS
On September 29, 2000, in connection with the Company's merger with
E*OFFERING, the Company transferred its online retail brokerage accounts to
E*TRADE Securities, Inc. The Company recorded a corresponding expense of
$11.6 million related to the discontinuance of its online retail brokerage
operations. This charge includes a payment to WCC's clearing agent to terminate
its contract, an accrual for severance payments to be made to certain employees
whose services will no longer be required, and a write-off of all brokerage
related assets that the Company will not employ in its business in the future.
9. INCOME TAXES
The Company files consolidated Federal and combined New York State and New
York City income tax returns with certain of its wholly-owned subsidiaries. The
components of the Company's provision for income taxes are as follows:
Current:
Federal................................................... $ 558,026
State and local........................................... 4,095,461
-----------
$ 4,653,487
===========
Deferred:
Federal................................................... $17,194,019
State and local........................................... 2,281,688
-----------
$19,475,707
===========
The effective income tax differs from the amount computed by applying the
federal statutory income tax rate because of the effect of state and local taxes
and certain nondeductible expenses,
F-13
WIT SOUNDVIEW GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
9. INCOME TAXES (CONTINUED)
including amortization of intangible assets and goodwill. A reconciliation of
the significant differences between the federal statutory income tax rate and
the effective income tax rate is as follows:
2000
--------
Federal statutory income tax rate........................... 35%
State and local income taxes, net of federal benefit........ 11
Non-deductible amortization of intangible assets and
goodwill.................................................. 20
Other....................................................... 1
--
Effective income tax rate................................... 67%
==
At December 31, 2000 and 1999, the Company had deferred tax assets of
approximately $25.6 million and $14.3 million which were generated by the
Company's net operating losses, E*OFFERING's net operating losses and from the
exercise of non-qualified stock options. As of December 31, 1999 and 1998, the
deferred tax assets are fully offset by valuation allowances.
At December 31, 2000, the Company had deferred tax liabilities of
approximately $51.6 million which were recorded to reflect the difference
between the financial reporting and tax basis of intangible assets acquired in
the Company's mergers with SoundView and E*OFFERING.
10. STOCKHOLDERS' EQUITY
COMMON STOCK
As of December 31, 2000, the Company has $15,275,896 in partial recourse,
interest bearing loans outstanding which were extended to certain of its
executive officers and other employees, including its Chief Executive Officer in
connection with purchases of common stock. Interest on the loans is recourse and
nonrefundable. In the event these executive officers or employees cease to be
employed by the Company, the Company has the right to purchase the unvested
portion of such shares at the lower of the fair market value or the original
purchase price. The shares vest incrementally over specified periods following
their respective issuances. With the exception of shares owned by Robert H.
Lessin, the Company's Chairman, none of the shares will be repurchasable by the
Company after March 31, 2003; none of Mr. Lessin's shares will be repurchasable
by the Company after April 1, 2001. In addition, the loans may be repaid at any
time by these executive officers and their maturities will accelerate in the
event of employment termination. The loans are collateralized by the Company's
stock and will be reflected as notes receivable in stockholders' equity until
repaid.
On May 26, 1999, all outstanding common stock ("Old Common Stock") was
converted into a newly created class C common stock ("Class C Common Stock"). On
June 2, 1999, a 7 for 10 reverse stock split of Class C Common Stock and
Series E Preferred Stock was effected. Accordingly, all references in the
consolidated financial statements to the number of shares of Class C Common
Stock and Series E Preferred Stock and rights and per share amounts have been
retroactively restated to reflect this reverse split. On June 4, 1999 Series A,
B, C, D and E Preferred Stock was converted into Class C Common Stock at a
conversion rate of 1.43 to 1 and Series E Preferred Stock was converted into
class B common stock ("Class B Common Stock") at a conversion rate of 1 to 1.
F-14
WIT SOUNDVIEW GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
10. STOCKHOLDERS' EQUITY (CONTINUED)
In June 1999, the Company completed an initial public offering and issued
8,740,000 shares of a newly created common stock ("New Common Stock") at a price
of $9.00 per share. The Company received approximately $72.8 million in
proceeds, net of underwriting discounts and other offering costs. On
December 7, 1999, shares of the Company's Class C Common Stock were converted
into New Common Stock.
In June 2000, the Company's Class C Common Stock was eliminated.
11. NET LOSS PER SHARE
The following table sets forth the calculation of shares used in the
computation of basic and diluted net loss per share:
YEARS ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
Shares used in computations:
Weighted average common shares used in computation of
basic net loss per share............................. 84,551,145 39,909,794 7,140,123
Dilutive effect of common stock equivalents............ -- -- --
---------- ---------- ----------
Weighted average shares used in computation of diluted
net loss per share................................... 84,551,145 39,909,794 7,140,123
========== ========== ==========
Because the Company reported a net loss in each of the years above, the
calculation of diluted earnings per share does not include convertible preferred
stock, options, warrants, common stock collateralizing the notes receivable from
stockholders, and unvested restricted stock as they are anti-dilutive and would
result in a reduction of net loss per share. If the Company had reported net
income, there would have been an additional 19,460,197, 29,458,414 and 8,189,535
shares as of December 31, 2000, 1999 and 1998, respectively, included in the
calculation of diluted earnings per share.
12. EMPLOYEE BENEFIT PLANS AND OTHER COMPENSATION
OTHER COMPENSATION
In February 1999, the Company entered into employment contracts with several
employees which entitled the employees to a total of approximately $5.5 million
in upfront payments. The Company recognized compensation expense of
approximately $2.6 million related to amounts paid for which no future service
by the employee is required. The Company recorded advances of $2.9 million which
are being expensed over the employment contract periods for amounts for which
the employee is required to provide service and is obligated to repay any
unearned compensation in the event of termination or resignation prior to
completing the contract term. As of December 31, 1999, an advance of
approximately $1.4 million related to one employee's contract is included in
other assets on the accompanying consolidated statements of financial condition.
In February 2000, the remaining balance of this advance was expensed as future
service by the employee was no longer required to earn the remaining balance.
F-15
WIT SOUNDVIEW GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
12. EMPLOYEE BENEFIT PLANS AND OTHER COMPENSATION (CONTINUED)
STOCK OPTION PLAN
The Company has adopted a stock incentive plan (the "Plan") that permits the
granting of stock options, restricted stock and other awards to employees,
directors and certain consultants of the Company. The exercise price of any
share covered by an option granted to a person owning more than 10% of the
voting power of all classes of stock of the Company cannot be less than 110% of
the fair market value on the day of the grant. The exercise price of any share
covered by an option granted to any person cannot be less than 85% of the fair
value on the day of the grant. Options expire ten years from the date of grant,
with the majority of the options expiring in the year 2009.
As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," ("SFAS No. 123") the Company has
accounted for options granted to employees using the intrinsic value method
prescribed by Accounting Practice Bulletin ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." The Company has granted options with exercise
prices that are equal to or greater than management's estimate of the fair value
of such common stock at the date of grant, and accordingly, the Company has
recorded no related compensation expense. For restricted stock issued with
future service requirements, compensation expense is recognized over the
relevant vesting period.
The following table summarizes the status of the Company's stock options as
of December 31, 2000, 1999 and 1998 and the changes during these periods:
DECEMBER 31,
--------------------------------------------------------------------------------------------
2000 1999 1998
---------------- ---------------- ----------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- ---------------- ---------- ---------------- --------- ----------------
Outstanding, beginning
of year............. 11,368,027 $5.66 8,154,822 $1.47 3,267,772 $1.66
Granted........... 16,259,159 4.80 9,061,151 7.07 5,834,500 1.49
Exercised......... 2,916,608 1.64 4,584,107 1.74 5,950 1.71
Forfeited......... 3,314,356 7.33 1,263,839 3.10 941,500 1.56
Outstanding, end of
year................ 21,396,222 5.36 11,368,027 5.66 8,154,822 1.47
Options exercisable,
end of year......... 7,709,297 3.37 3,390,409 2.00 3,437,535 1.43
The range of exercisable prices for the options outstanding and the options
exercisable is $0.15--$34.88 and the weighted average is $5.36. The weighted
average contractual lives for outstanding and exercisable options are 8.9 and
8.6 years as of December 31, 2000, 8.4 and 8.4 years as of December 31, 1999,
and 8.9 and 8.0 years as of December 31, 1998, respectively.
The fair value of each option granted during 1999 and 1998 prior to the
Company's IPO was estimated on the date of the grant using the minimum value
method prescribed by SFAS No. 123, assuming a dividend yield of zero and a
risk-free interest rate of 6%. The fair value of each option granted after the
Company's IPO was estimated on the date of the grant using the Black-Scholes
method prescribed by SFAS No. 123, assuming a dividend yield of zero and a risk
free interest rate of
F-16
WIT SOUNDVIEW GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
12. EMPLOYEE BENEFIT PLANS AND OTHER COMPENSATION (CONTINUED)
6.37% and 5.29% for 2000 and 1999, respectively. If the Company had recorded
compensation expense for its stock options granted for the years ended
December 31, 2000, 1999 and 1998, in accordance with SFAS No. 123, the Company's
pro forma net loss and pro forma net loss per share would be as follows:
DECEMBER 31,
-------------------------------------------------------------------------------------
2000 1999 1998
--------------------------- --------------------------- -------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------ ------------ ------------ ------------ ----------- -----------
Net loss.............. $(21,958,874) $(30,629,139) $(20,903,915) $(22,923,461) $(8,793,890) $(9,268,941)
Net loss per common
share:
Basic................. $ (0.26) $ (0.36) $ (0.52) $ (0.57) $ (1.23) $ (1.30)
Diluted............... $ (0.26) $ (0.36) $ (0.52) $ (0.57) $ (1.23) $ (1.30)
Additionally, the Company granted a total of 2,061,073 and 200,000 shares of
restricted stock to employees during 2000 and 1999, respectively, at no cost to
the employees. The restricted stock vests over periods ranging from three to
four years from the initial date of grant and is subject to continued employment
and other restrictions. The Company is recording compensation expense related to
these grants on a straight-line basis over the vesting period.
13. WARRANTS OUTSTANDING
The Company has 10,153,045, 5,984,705 and 1,322,181 outstanding warrants as
of December 31, 2000, 1999 and 1998, respectively. Warrants are exercisable for
New Common Stock or Class B Common Stock. The following table summarizes the
status of the Company's warrants as of December 31, 2000, 1999 and 1998 and the
changes during these periods:
DECEMBER 31,
-------------------------------------------------------------------------------------
2000 1999 1998
--------------------------- -------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- -------------- --------- -------------- --------- --------------
Outstanding, beginning of
year........................ 5,984,705 $5.45 1,322,181 $1.50 221,900 $1.84
Granted................... 4,356,640 5.69 5,742,295 5.49 1,100,281 1.43
Exercised................. 188,300 1.43 1,009,771 1.54 -- --
Forfeited................. -- -- 70,000 .36 -- --
Outstanding, end of year...... 10,153,045 5.56 5,984,705 5.45 1,322,181 1.50
Warrants exercisable, end of
year........................ 8,153,045 3.54 347,410 1.59 1,302,348 1.50
14. COMMITMENTS AND CONTINGENCIES
The Company has noncancelable operating leases covering office space in New
York, Stamford, Connecticut and San Francisco, California. The leases include
scheduled rent increases and have various expirations ranging from 2001 to 2011.
F-17
WIT SOUNDVIEW GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
14. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rent expense for the years ended December 31, 2000, 1999 and 1998 is
$2,792,651, $514,083, and $137,454, respectively. Future lease commitments are
as follows:
MINIMUM LEASE
OBLIGATION
-------------
Year ending December 31:
2001...................................................... $ 7,890,398
2002...................................................... 6,511,920
2003...................................................... 6,081,192
2004...................................................... 6,076,684
2005...................................................... 6,193,293
Thereafter................................................ 31,124,988
The Company is currently subject to claims and legal proceedings arising in
the normal course of its business. In the opinion of management, the resolution
of such legal proceedings should not have a material adverse effect on the
financial position, results of operations or liquidity of the Company.
15. CAPITAL REQUIREMENTS
WSV and WCC are subject to the SEC's Uniform Net Capital Rule 15c3-1. WSV's
net capital, as defined, is required to be the greater of $250,000 or an amount
determinable based on the market prices and number of securities in which WSV
acts as a market maker. As of December 31, 2000, WSV's net capital was
$79,350,521, which was $78,748,021 in excess of the minimum net capital
requirement. WCC's net capital, as defined, shall be required to be the greater
of $100,000 or the minimum net capital required based on aggregate indebtedness.
As of December 31, 2000 and December 31, 1999, WCC's ratio of aggregate
indebtedness to net capital was 1.95 to 1 and .51 to 1 and its net capital was
$3,328,931 and $23,914,930 which was $2,895,980 and $23,095,740 in excess of the
minimum net capital requirements, respectively.
Proprietary accounts held at the clearing broker ("PAIB Assets") are
considered allowable assets in the computation of net capital pursuant to a
clearing agreement between the Company and the clearing broker which requires,
among other things, for the clearing broker to perform a computation of PAIB
Assets similar to the customer reserve computation under SEC rule 15c3-3.
16. OFF-BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK
Certain market and credit risks are inherent in the Company's business,
primarily in facilitating customers' trading transactions in financial
instruments. In the normal course of business, the Company's customer activities
include execution and settlement of various customer security transactions with
the clearing broker. These activities may expose the Company and the clearing
broker to off-balance sheet risk in the event the customer is unable to fulfill
its contractual obligation.
The Company's customer securities activities are transacted on either a cash
or margin basis. In margin transactions, the Company in conjunction with the
clearing broker extends credit to the customer which is collateralized by cash
and/or securities in the customer's account. In connection with these
activities, the Company executes customer transactions involving securities sold
but not yet
F-18
WIT SOUNDVIEW GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999 AND 1998
16. OFF-BALANCE SHEET RISK AND CONCENTRATION OF CREDIT RISK (CONTINUED)
purchased. The Company seeks to control the risks associated with its customer
activities by requiring customers to maintain margin collateral in compliance
with various regulatory, exchange and internal guidelines. The Company monitors
required margin levels daily and pursuant to such guidelines, requires customers
to deposit additional collateral or reduce positions when necessary. Such
transactions may expose the Company to significant off-balance sheet risk in the
event the margin is not sufficient to fully cover losses which customers may
incur. In the event the customer fails to satisfy its obligations, the Company
may be required to purchase or sell the collateral at prevailing market prices
in order to fulfill the customer's obligations.
In accordance with industry practice, customer securities transactions are
generally settled three business days after the trade date. The Company is
therefore exposed to risk of loss on these transactions in the event of the
customer's or broker's inability to meet the terms of its contracts in which
case the Company may have to purchase or sell financial instruments at
prevailing market prices. At December 31, 2000, the Company believes that the
settlement of these transactions will not have a material effect on the
Company's consolidated statement of financial condition or results of
operations.
The Company is engaged in various securities trading and brokerage
activities servicing customers primarily located in the United States. The
Company's exposure to credit risk associated with the nonperformance of these
counterparties in fulfilling their contractual obligations pursuant to
securities transactions can be directly impacted by volatile trading markets
which may impair the counterparties' ability to satisfy their obligations to the
Company.
The Company monitors credit risk on both an individual and group
counterparty basis.
17. SUBSEQUENT EVENTS
On February 16, 2001, the Company participated in a rights offering to
purchase additional shares in WCE. The Company purchased 8,772,500,000 shares
for an aggregate purchase price of approximately $8.2 million, increasing its
ownership percentage to 81.57%. Additionally, on February 16, 2001, the Company
entered into a short-term subordinated loan agreement with Wit SoundView Europe
Limited ("WSVE"), a wholly-owned subsidiary of WCE. The maximum available to
WSVE under the agreement is approximately $6.6 million, and any outstanding
balance under the agreement bears interest at a rate of 8% per annum. As of
March 5, 2001, WSVE had drawn down approximately $2.6 million pursuant to the
terms of this agreement.
F-19
WIT SOUNDVIEW GROUP, INC.
(PARENT COMPANY ONLY)
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2000 AND 1999
2000 1999
------------ ------------
ASSETS
- -----------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS................................... $ 12,376,048 $ 6,580,689
SECURITIES OWNED, at market or fair value................... 6,248,764 72,297,589
INVESTMENTS................................................. 32,253,720 323,938
INVESTMENTS IN SUBSIDIARIES................................. 707,809,890 41,135,011
INVESTMENTS IN AFFILIATES................................... 28,720,062 16,970,868
RECEIVABLE FROM SUBSIDIARY.................................. 39,529,734 --
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net of
accumulated depreciation and amortization of $3,252,203
and $1,079,861 at December 31, 2000 and 1999,
respectively.............................................. 7,604,301 4,737,845
COMPUTER SOFTWARE, net of accumulated amortization of
$166,845 and $604,554 at December 31, 2000 and 1999,
respectively.............................................. 1,162,348 2,231,699
PREPAID EXPENSES............................................ 869,207 930,382
OTHER ASSETS................................................ 28,969,271 9,717,595
------------ ------------
Total assets................................................ $865,543,345 $154,925,616
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------
LIABILITIES:
Accounts payable and accrued expenses....................... $ 5,470,591 $ 6,418,579
Payable to subsidiaries..................................... 8,000,110 --
Accrued compensation........................................ 3,255,257 3,964,710
Deferred tax liabilities.................................... 46,456,094 --
Other liabilities........................................... 6,176,496 140,794
------------ ------------
Total liabilities........................................... 69,358,548 10,524,083
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.001 par value, 30,000,000 shares
authorized; no shares issued or outstanding at December
31, 2000 and 1999......................................... -- --
Common Stock, $.01 par value, 500,000,000 shares authorized;
111,060,242 and 61,629,828 shares issued at December 31,
2000 and issued and outstanding at December 31, 1999,
respectively.............................................. 1,110,602 616,298
Common Stock, Class B, $.01 par value, 75,000,000 shares
authorized; 11,666,666 shares issued and outstanding at
December 31, 2000 and 1999................................ 116,667 116,667
Additional paid-in capital.................................. 897,103,173 196,777,759
Accumulated deficit......................................... (56,423,230) (34,464,356)
Notes receivable from stockholders.......................... (15,275,896) (15,333,070)
Deferred compensation....................................... (18,166,751) (3,311,765)
Treasury stock, at cost, 2,095,788 shares at December 31,
2000...................................................... (12,279,768) --
------------ ------------
Total stockholders' equity.................................. 796,184,797 144,401,533
------------ ------------
Total liabilities and stockholders' equity.................. $865,543,345 $154,925,616
============ ============
The accompanying notes are an integral part of this schedule.
F-20
WIT SOUNDVIEW GROUP, INC.
(PARENT COMPANY ONLY)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
------------ ------------ -----------
REVENUES:
Interest and investment income..................... $ 2,099,834 $ 3,016,998 $ 77,117
Gain (loss) on investments......................... (343,269) 159,236 --
Asset management fees.............................. -- 189,485 --
Other.............................................. (155,140) 136,648 --
------------ ------------ -----------
Total revenues................................. 1,601,425 3,502,367 77,117
------------ ------------ -----------
EXPENSES:
Compensation and benefits.......................... 32,515,446 25,198,861 3,969,604
Technology development............................. 5,018,522 1,703,546 922,036
Marketing and business development................. 4,095,611 2,144,417 1,057,744
Professional services.............................. 3,993,487 3,076,731 415,443
Depreciation and amortization...................... 3,767,130 1,278,706 659,259
Data processing and communications................. 2,435,396 1,336,533 414,181
Occupancy.......................................... 2,164,700 1,118,050 237,334
Brokerage and clearance............................ 39,906 205,559 --
Discontinuance of retail brokerage operations...... 9,821,019 -- --
Write-off of computer software and equipment....... 87,644 1,125,000 --
Other.............................................. 5,917,050 1,795,960 1,078,301
------------ ------------ -----------
Total expenses................................. 69,855,911 38,983,363 8,753,902
------------ ------------ -----------
Loss from operations................................. (68,254,486) (35,480,996) (8,676,785)
Loss on strategic investment......................... (13,727,858) -- --
------------ ------------ -----------
Loss before income tax benefit and equity in net
income (loss) of subsidiaries and affiliates....... (81,982,344) (35,480,996) (8,676,785)
Income tax benefit................................... (25,981,063) (6,155,010) --
------------ ------------ -----------
Loss before equity in net income (loss) of
subsidiaries and affiliates...................... (56,001,281) (29,325,986) (8,676,785)
Equity in net income (loss) of subsidiaries and
affiliates......................................... 34,042,407 8,422,071 (117,105)
------------ ------------ -----------
Net loss........................................... $(21,958,874) $(20,903,915) $(8,793,890)
============ ============ ===========
The accompanying notes are an integral part of this schedule.
F-21
WIT SOUNDVIEW GROUP, INC.
(PARENT COMPANY ONLY)
STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
OLD NEW CLASS B CLASS C ADDITIONAL
PREFERRED COMMON COMMON COMMON COMMON PAID-IN ACCUMULATED
STOCK STOCK STOCK STOCK STOCK CAPITAL DEFICIT
--------- --------- ---------- -------- --------- ------------ ------------
STOCKHOLDERS' EQUITY, December 31,
1997................................. $ 77,200 $ 70,561 $ -- $ -- $ -- $ 9,786,065 $(4,766,551)
Issuance of common stock............. -- 1,836 -- -- -- 262,115 --
Issuance of common stock for note
receivable......................... -- 40,250 -- -- -- 5,709,750 --
Issuance of Series A Preferred
Stock.............................. 12,780 -- -- -- -- 1,286,600 --
Issuance of Series B Preferred
Stock.............................. 23,050 -- -- -- -- 2,251,932 --
Issuance of Series C Preferred
Stock.............................. 59,028 -- -- -- -- 5,782,184 --
Issuance of Series D Preferred
Stock.............................. 99,333 -- -- -- -- 14,456,011 --
Net loss............................. -- -- -- -- -- -- (8,793,890)
--------- --------- ---------- -------- --------- ------------ ------------
STOCKHOLDERS' EQUITY, December 31,
1998................................. 271,391 112,647 -- -- -- 39,534,657 (13,560,441)
Issuance of common stock in initial
public offering, net............... -- -- 87,400 -- -- 71,348,644 --
Underwriting concessions received by
WCC from IPO of WSVG stock......... -- -- -- -- -- 1,341,225 --
Issuance of common stock............. -- 15,330 4,718 -- 6,835 3,921,188 --
Issuance of common stock for notes
receivable......................... -- 47,595 -- -- -- 8,919,642 --
Issuance of Series D Preferred
Stock.............................. 214,001 -- -- -- -- 31,362,528 --
Issuance of Series E Preferred
Stock.............................. 116,667 -- -- -- -- 24,741,546 --
Conversion of Old Common Stock to
Class C Common..................... -- (175,572) -- -- 175,572 -- --
Conversion of Class C to New Common
Stock.............................. -- -- 524,180 -- (524,180) -- --
Conversion of Series A through E
Preferred to Class B and C Common.. (602,059) -- -- 116,667 339,773 145,619 --
Issuance of restricted stock to
employees.......................... -- -- -- -- 2,000 3,642,880 --
Compensation expense on restricted
stock grants....................... -- -- -- -- -- -- --
Increase in equity investment in
affiliate resulting from issuance
of stock........................... -- -- -- -- -- 11,819,830 --
Net loss............................. -- -- -- -- -- -- (20,903,915)
--------- --------- ---------- -------- --------- ------------ ------------
STOCKHOLDERS' EQUITY, December 31,
1999................................. -- -- 616,298 116,667 -- 196,777,759 (34,464,356)
Issuances of common stock............ -- -- 70,057 -- -- 45,797,956 --
Issuance of common stock for notes
receivable......................... -- -- 750 -- -- 978,938 --
Repurchases of common stock.......... -- -- -- -- -- -- --
Notes receivable acquired in
SoundView and E*OFFERING mergers... -- -- -- -- -- -- --
Repayments of notes receivable....... -- -- -- -- -- -- --
Issuance of common stock in SoundView
merger............................. -- -- 113,647 -- -- 290,889,835 --
Issuance of common stock in
E*OFFERING merger.................. -- -- 272,366 -- -- 301,618,006 --
Issuance of restricted stock to
employees.......................... -- -- 20,611 -- -- 22,641,480 --
Compensation expense on restricted
stock grants....................... -- -- -- -- -- -- --
Forfeitures of restricted stock
grants............................. -- -- (1,913) -- -- (1,864,326) --
Tax benefit on non-qualified option
exercises.......................... -- -- -- -- -- 6,948,852 --
Issuance of common stock for
strategic investment............... -- -- 18,786 -- -- 30,978,048 --
Modifications of stock based
awards............................. -- -- -- -- -- 2,336,625 --
Net loss............................. -- -- -- -- -- -- (21,958,874)
--------- --------- ---------- -------- --------- ------------ ------------
STOCKHOLDERS' EQUITY, December 31,
2000................................. $ -- $ -- $1,110,602 $116,667 $ -- $897,103,173 $(56,423,230)
========= ========= ========== ======== ========= ============ ============
NOTES
RECEIVABLE
FROM DEFERRED SUBSCRIPTIONS
STOCKHOLDER COMPENSATION TREASURY STOCK RECEIVABLE TOTAL
------------ ------------- -------------- ------------- ------------
STOCKHOLDERS' EQUITY, December 31,
1997................................. $ -- $ -- $ -- $(308,000) $ 4,859,275
Issuance of common stock............. -- -- -- -- 263,951
Issuance of common stock for note
receivable......................... (5,750,000) -- -- -- --
Issuance of Series A Preferred
Stock.............................. -- -- -- 308,000 1,607,380
Issuance of Series B Preferred
Stock.............................. -- -- -- -- 2,274,982
Issuance of Series C Preferred
Stock.............................. -- -- -- -- 5,841,212
Issuance of Series D Preferred
Stock.............................. -- -- -- -- 14,555,344
Net loss............................. -- -- -- -- (8,793,890)
------------ ------------ ------------ --------- ------------
STOCKHOLDERS' EQUITY, December 31,
1998................................. (5,750,000) -- -- -- 20,608,254
Issuance of common stock in initial
public offering, net............... -- -- -- -- 71,436,044
Underwriting concessions received by
WCC from IPO of WSVG stock......... -- -- -- -- 1,341,225
Issuance of common stock............. -- -- -- -- 3,948,071
Issuance of common stock for notes
receivable......................... (9,583,070) -- -- -- (615,833)
Issuance of Series D Preferred
Stock.............................. -- -- -- -- 31,576,529
Issuance of Series E Preferred
Stock.............................. -- -- -- -- 24,858,213
Conversion of Old Common Stock to
Class C Common..................... -- -- -- -- --
Conversion of Class C to New Common
Stock.............................. -- -- -- -- --
Conversion of Series A through E
Preferred to Class B and C Common.. -- -- -- -- --
Issuance of restricted stock to
employees.......................... -- (3,644,880) -- -- --
Compensation expense on restricted
stock grants....................... -- 333,115 -- -- 333,115
Increase in equity investment in
affiliate resulting from issuance
of stock........................... -- -- -- -- 11,819,830
Net loss............................. -- -- -- -- (20,903,915)
------------ ------------ ------------ --------- ------------
STOCKHOLDERS' EQUITY, December 31,
1999................................. (15,333,070) (3,311,765) -- -- 144,401,533
Issuances of common stock............ -- -- 437,494 -- 46,305,507
Issuance of common stock for notes
receivable......................... (979,688) -- -- -- --
Repurchases of common stock.......... 596,560 -- (12,717,262) -- (12,120,702)
Notes receivable acquired in
SoundView and E*OFFERING mergers... (2,306,269) -- -- -- (2,306,269)
Repayments of notes receivable....... 2,746,571 -- -- -- 2,746,571
Issuance of common stock in SoundView
merger............................. -- -- -- -- 291,003,482
Issuance of common stock in
E*OFFERING merger.................. -- -- -- -- 301,890,372
Issuance of restricted stock to
employees.......................... -- (22,662,091) -- -- --
Compensation expense on restricted
stock grants....................... -- 5,940,866 -- -- 5,940,866
Forfeitures of restricted stock
grants............................. -- 1,866,239 -- -- --
Tax benefit on non-qualified option
exercises.......................... -- -- -- -- 6,948,852
Issuance of common stock for
strategic investment............... -- -- -- -- 30,996,834
Modifications of stock based
awards............................. -- -- -- -- 2,336,625
Net loss............................. -- -- -- -- (21,958,874)
------------ ------------ ------------ --------- ------------
STOCKHOLDERS' EQUITY, December 31,
2000................................. $(15,275,896) $(18,166,751) $(12,279,768) $ -- $796,184,797
============ ============ ============ ========= ============
The accompanying notes are an integral part of this schedule.
F-22
WIT SOUNDVIEW GROUP, INC.
(PARENT COMPANY ONLY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
------------ ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................. $(21,958,874) $(20,903,915) $(8,793,890)
Adjustments to reconcile net loss to net cash used in
operating activities--
Deferred tax expense (benefit)................... 5,829,806 (6,155,010) --
Equity in net income (loss) of subsidiaries...... (54,122,411) (8,982,510) 117,105
Equity in net loss of affiliates................. 20,080,004 560,439 --
Write-off of computer software and equipment..... 87,644 1,125,000 --
Loss on strategic investment..................... 13,727,858 -- --
Non-cash charges related to stock based
compensation................................... 8,277,244 333,115 --
Depreciation and amortization.................... 3,767,130 1,278,706 659,259
Discontinuance of retail brokerage operations.... 901,019 -- --
Other non-cash expenses.......................... -- 1,565 1,522,901
(Increase) decrease in operating assets--
Securities owned................................. -- 103,540 --
Investments...................................... (22,039,059) (324,643) --
Receivable from subsidiaries..................... (39,529,734) -- --
Prepaid expenses................................. 61,175 (834,711) (139,584)
Other assets..................................... (480,316) (3,454,150) (101,275)
Increase (decrease) in operating liabilities--
Accounts payable and accrued expenses............ 2,697,694 6,122,989 (41,269)
Payable to subsidiaries.......................... 3,939,221 -- --
Accrued compensation............................. (709,453) 3,926,377 (309,493)
Other liabilities................................ 725,150 80,591 (17,414)
------------ ------------ -----------
Net cash used in operating activities.......... (78,745,902) (27,122,617) (7,103,660)
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in subsidiaries and affiliates........... (18,919,083) (29,929,802) (8,147,598)
Acquisition of SoundView............................. (22,473,143) -- --
Capital distribution from subsidiary................. -- 3,000,000 --
Purchases of short-term investments.................. (16,283,934) (110,432,652) --
Sales of short-term investments...................... 82,332,759 38,031,523 --
Purchases of computer software....................... (1,514,086) (2,384,593) (21,917)
Purchases of furniture, equipment and leasehold
improvements....................................... (5,038,812) (4,964,998) (434,880)
------------ ------------ -----------
Net cash provided by (used in) investing
activities..................................... 18,103,701 (106,680,522) (8,604,395)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments and issuances of notes receivable from
stockholders....................................... 440,302 (615,833) --
Net proceeds from IPO of common stock................ -- 71,436,044 --
Capital distributions from subsidiaries.............. 32,000,000 -- --
Repurchases of common stock.......................... (12,120,702) -- --
Net proceeds from issuance of common stock........... 46,117,960 3,948,071 60,301
Net proceeds from issuance of preferred stock........ -- 56,434,742 24,278,918
------------ ------------ -----------
Net cash provided by financing activities........ 66,437,560 131,203,024 24,339,219
------------ ------------ -----------
Net increase (decrease) in cash and cash
equivalents.................................... 5,795,359 (2,600,115) 8,631,164
Cash and cash equivalents, beginning of year......... 6,580,689 9,180,804 549,640
------------ ------------ -----------
Cash and cash equivalents, end of year............... $ 12,376,048 $ 6,580,689 $ 9,180,804
============ ============ ===========
F-23
WIT SOUNDVIEW GROUP, INC.
(PARENT COMPANY ONLY)
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
------------ ------------ -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for--
Interest......................................... $ -- $ 3,822 $ 7,211
Taxes............................................ 696,500 18,830 43,181
NON-CASH TRANSACTIONS:
Issuance of common stock for notes receivable.... $ 979,688 $ 8,967,237 $ 5,750,000
Issuance of common stock for web site
development.................................... -- -- 203,650
Issuance of common stock for strategic
investment..................................... 30,996,834 -- --
Issuance of common stock for consulting
services....................................... -- 40,613 --
Issuance of restricted stock to employees........ 22,662,091 3,644,880 --
Tax benefit from non-qualified option exercises
recorded through stockholders' equity.......... 7,364,059 -- --
Increase in equity investment in affiliate
resulting from issuance of stock............... -- 11,819,830 --
Underwriting concessions received by WCC from IPO
of WSVG common stock........................... -- 1,341,225 --
Acquisition of SoundView:
Fair value of net assets acquired, net of cash
received....................................... 44,431,499 -- --
Intangible assets and goodwill................... 275,857,420 -- --
Issuance of common stock......................... 291,003,482 -- --
Deferred tax asset............................... 16,770,000 -- --
Deferred tax liabilities......................... 32,465,000 -- --
Acquisition of E*OFFERING:
Fair value of net assets acquired, net of cash
received....................................... 12,594,705 -- --
Intangible assets and goodwill................... 304,031,014 -- --
Issuance of common stock......................... 301,890,372 -- --
Deferred tax asset............................... 9,295,676 -- --
Deferred tax liabilities......................... 17,147,407 -- --
Deferred compensation on unvested replacement
options........................................ 2,021,276 -- --
The accompanying notes are an integral part of this schedule.
F-24
WIT SOUNDVIEW GROUP, INC.
(PARENT COMPANY ONLY)
NOTES TO SCHEDULE TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial information of Wit SoundView Group, Inc. (parent company only)
should be read in conjunction with the consolidated financial statements of Wit
SoundView Group, Inc. and Subsidiaries and the notes thereto contained elsewhere
in this Annual Report on Form 10-K.
2. RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform with the
current year's presentation.
F-25
WIT CAPITAL JAPAN, INC.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants.................... F-27
Balance Sheet as of March 31, 2000.......................... F-28
Statement of Operations for the period from August 25, 1999
(date of inception) to March 31, 2000..................... F-29
Statement of Shareholders' Equity for the period from August
25, 1999 (date of inception) to March 31, 2000............ F-30
Statement of Cash Flows for the period from August 25, 1999
(date of inception) to March 31, 2000..................... F-31
Notes to Financial Statements............................... F-32
F-26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors of
Wit Capital Japan, Inc.:
We have audited the accompanying balance sheet of Wit Capital Japan, Inc. as
of March 31, 2000, and the related statements of operations, shareholders'
equity and cash flows for the period from August 25, 1999 (date of inception) to
March 31, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Wit Capital Japan, Inc. as
of March 31, 2000, and the results of its operations and its cash flows for the
period from August 25, 1999 (date of inception) through March 31, 2000 in
conformity with accounting principles generally accepted in Japan.
/s/ Arthur Andersen
Tokyo, Japan
February 15, 2001
STATEMENT OF ACCOUNTING PRINCIPLES
This statement is to remind users that accounting principles and their
application in practice may vary among nations and therefore could affect,
possibly materially, the reported financial position and results of operations.
The accompanying financial statements are prepared based on accounting
principles generally accepted in Japan. Accordingly, the accompanying financial
statements are for users familiar with Japanese accounting principles and their
application in practice.
F-27
WIT CAPITAL JAPAN, INC.
BALANCE SHEET
AS OF MARCH 31, 2000
THOUSANDS OF
JAPANESE YEN
------------------
ASSETS
- ------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents................................. Y 1,278,905
Advanced payment.......................................... 703,620
Commission receivables.................................... 21,000
Other receivables......................................... 96,071
Trading securities........................................ 1,910,940
Other current assets...................................... 19,966
------------------
Total current assets.................................. 4,030,502
------------------
OTHER ASSETS:
Software.................................................. 27,168
Leasehold deposits........................................ 80,612
Other..................................................... 2,032
------------------
Total other assets.................................... 109,812
------------------
Total assets.......................................... Y 4,140,314
==================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------------------------
CURRENT LIABILITIES:
Short-term borrowing...................................... Y 350,000
Accounts payable.......................................... 35,150
Accrued expenses.......................................... 48,686
Accrued bonuses........................................... 25,750
Accrued income taxes...................................... 1,336
Other current liabilities................................. 9,192
------------------
Total current liabilities............................. 470,114
------------------
Total liabilities..................................... 470,114
------------------
COMMITMENT AND CONTINGENT LIABILITIES (Note 7 and 8)
SHAREHOLDERS' EQUITY:
Common stock, par value Y 50,000 per share;
authorized--800 shares issued--653 shares............... 3,000,000
Additional paid-in capital................................ 1,149,550
Accumulated deficit....................................... (479,350)
------------------
Total shareholders' equity............................ 3,670,200
------------------
Total liabilities and shareholders' equity............ Y 4,140,314
==================
The accompanying notes to the financial statements are an integral part of this
statement.
F-28
WIT CAPITAL JAPAN, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM AUGUST 25, 1999 (DATE OF INCEPTION) TO MARCH 31, 2000
THOUSANDS OF
JAPANESE YEN
-----------------
REVENUES:
Commissions............................................... Y 20,000
Interest and dividend income.............................. 1,502
Other..................................................... 47
-----------------
Total revenues.......................................... 21,549
-----------------
OPERATING EXPENSES:
Compensation and benefits................................. 252,073
Occupancy and rental...................................... 56,170
Taxes other than income taxes............................. 21,870
Other operating expenses.................................. 169,450
-----------------
Total operating expenses................................ 499,563
-----------------
LOSS BEFORE INCOME TAXES.................................... (478,014)
PROVISION FOR INCOME TAXES.................................. 1,336
-----------------
NET LOSS.................................................... Y (479,350)
=================
The accompanying notes to the financial statements are an integral part of this
statement.
F-29
WIT CAPITAL JAPAN, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM AUGUST 25, 1999 (DATE OF INCEPTION)
TO MARCH 31, 2000
(IN THOUSANDS OF JAPANESE YEN)
COMMON ADDITIONAL PAID-IN ACCUMULATED SHAREHOLDERS'
STOCK CAPITAL DEFICIT EQUITY
------------------ ------------------ ----------------- ------------------
Opening Balance.......................... Y -- Y -- Y -- Y --
Capital Contributions.................... 3,000,000 1,149,550 -- 4,149,550
Net loss................................. -- -- (479,350) (479,350)
------------------ ------------------ ----------------- ------------------
Balance as of March 31, 2000............. Y 3,000,000 Y 1,149,550 Y (479,350) Y 3,670,200
================== ================== ================= ==================
The accompanying notes to the financial statements are an integral part of this
statement.
F-30
WIT CAPITAL JAPAN, INC.
STATEMENT OF CASH FLOWS FOR THE PERIOD
FROM AUGUST 25, 1999 (DATE OF INCEPTION)
TO MARCH 31, 2000
THOUSANDS OF
JAPANESE YEN
------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss before income taxes.................................. Y(478,014)
Depreciation and amortization............................. 163
Provision for accrued bonuses............................. 25,750
Interest and dividends income............................. (1,502)
Increase in commission receivables........................ (21,000)
Increase in trading securities............................ (1,910,940)
Increase in deposits to TSE............................... (670,019)
Increase in other current assets.......................... (67,262)
Increase in other current liabilities..................... 93,028
------------------
Total................................................... (3,029,796)
Interest and dividends received........................... 1,502
Interest paid............................................. (1,213)
------------------
Net cash used in operating activities..................... (3,029,507)
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in other investments............................. (191,138)
------------------
Net cash used in investing activities..................... (191,138)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term loans.............................. 350,000
Proceeds from issuance of stocks.......................... 4,149,550
------------------
Net cash provided by financing activities................. 4,499,550
------------------
Net increase in cash........................................ 1,278,905
CASH, at beginning of this period........................... --
------------------
CASH, at end of this period................................. Y1,278,905
==================
The accompanying notes to the financial statements are an integral part of this
statement.
F-31
WIT CAPITAL JAPAN, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2000
1. SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in Japan. Significant accounting and
reporting policies are summarized below.
BASIS OF PRESENTING FINANCIAL STATEMENTS
The accounts and the financial statements of the Company are maintained in
Japanese yen. The books of the Company are generally maintained to conform with
accounting principles generally accepted in Japan, which are different from the
accounting and disclosure requirements of International Accounting Standards.
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, cash and cash equivalents
include cash on hand and deposits placed with banks on demand or with an
original maturity of three months or less.
SECURITIES
Securities listed on stock exchanges are valued at the lower of cost or
market. Cost is determined using the moving average method. Cost and market are
compared on an item-by-item basis. Unlisted securities are valued at cost,
except where there is permanent diminution in value.
DEPRECIATION AND AMORTIZATION
Software is stated at net of depreciation. Depreciation is computed
principally by the straight-line method over estimated useful lives, mainly over
five years.
ACCRUED BONUSES
The Company accrued the estimated amounts of employees' bonus based on
estimated amounts to be paid in the subsequent period.
INCOME TAXES
Deferred tax assets and liabilities are recorded for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
basis of the assets and liabilities based upon enacted tax laws and rates. The
Company recognizes deferred tax assets to the extent it is believed more likely
than not that a benefit will be realized. A valuation allowance is provided, as
deemed appropriate, for tax benefits available to the Company but for which
realization is in doubt.
2. LEASEHOLD DEPOSITS
Leasehold deposits are deposits for leases of office space and employees'
residences, which are refundable upon termination of the leases and bear no
interest.
F-32
WIT CAPITAL JAPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
3. ADVANCED PAYMENT
Outstanding balance of advanced payment at March 31, 2000 included a deposit
amounted to Y670,019 thousand to the Tokyo Stock Exchange ("TSE") to have a
licence of the TSE. The Company obtained the licence on April 1, 2000.
4. TRADING SECURITIES
Trading Securities consist of an investment in a medium-term government bond
fund and is reported at fair value, with unrealized gains and losses included in
earnings.
5. NET LOSS PER SHARE
Net loss per share of common stock is based on the average number of shares
of common stock outstanding during the period. Net loss per share is
Y970,480.80.
6. INCOME TAXES
The Company is currently subject to corporate, inhabitant and enterprise
taxes based on income with an aggregate normal tax rate of approximately 42% in
Japan, after giving effect to enterprise tax which is deductible for income tax
purposes when paid.
The income tax effect of temporary differences in the recognition of certain
revenue and expenses for tax and financial reporting purposes is recognized.
However, the Company provided for valuation allowances of the full amount of net
deferred tax assets since realization of deferred tax is not fully assured in
view of the next fiscal year's profit projection, so that there is no effect on
the financial statements.
7. CONTINGENT LIABILITIES
The amount of compensation to be provided to an appointed advisor for the
issuance of new common stock after the establishment of the Company is being
discussed between the Company and the advisor. The management estimates that the
maximum amount of such compensation is $857 thousand.
8. COMMITMENTS
The Company has cancelable and non-cancelable long-term rental and lease
agreements, principally for office space and other equipment. These expenses
charged to income for the period ended March 31, 2000 are Y36,085 thousand.
F-33
WIT CAPITAL JAPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
9. US GAAP MATTERS
The Company's financial statements have been prepared in conformity with
Japanese GAAP, which differs from US GAAP in certain material respects. The
significant differences between Japanese GAAP and US GAAP that would apply to
the Company are as follows:
VALUATION OF SECURITIES
Under US GAAP, brokers and dealers in securities record all investments in
equity and debt securities at market or fair value with unrealized gains and
losses included in earnings.
Prior to April 1, 2000, the Company valued all exchange traded debt and
equity securities at the lower of cost or market under Japanese GAAP. All other
non-exchange traded securities were valued at cost.
Effective April 1, 2000, new accounting standards have been adopted. The new
standards provide that the investments in debt and equity securities be
classified into three categories: held-to-maturity securities, trading
securities and other securities.
ACCOUNTING FOR LEASED ASSETS BY A LESSEE
US GAAP requires that leases that transfer essentially all the risks and
rewards of ownership in the leased assets from a lessor to a lessee be
capitalized. To determine whether the risks and rewards of ownership have been
transferred to a lessee, at least one of the following criteria must be met:
(i) By the end of the lease term, ownership of the leased property is
transferred to the lessee.
(ii) The lease contains a bargain purchase option.
(iii) The lease term is greater than or equal to 75% of the estimated useful
life of the leased property.
(iv) At the inception of the lease, the present value of the minimum lease
payments is greater than or equal to 90% of the fair value of the
leased property.
Japanese GAAP defines certain types of leases as finance leases and requires
finance leases to be capitalized. Finance leases are generally defined as leases
which are substantially non-cancelable and in which the lessee substantially
received the economic benefits and bears the cost of the leased property. A
lease is a finance lease if it meets one of the following:
(i) By the end of the lease term, ownership of the leased property is
transferred to the lessee.
(ii) The lease contains a bargain purchase option
(iii) Lease of a property manufactured or constructed in accordance with the
specifications of the lessee for its intended use, and it is difficult
to lease or sell the leased property to others.
(iv) The lease term is greater than or equal to 75% of the estimated useful
life of the leased property.
(v) At the inception of the lease, the present value of the minimum lease
payments is greater than or equal to 90% of the fair value of the leased
property.
F-34
WIT CAPITAL JAPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
9. US GAAP MATTERS (CONTINUED)
However, as an exception to the general capitalization requirement for
finance leases, Japanese GAAP permits a company not to capitalize the finance
leases other than those that meet any of the conditions (i), (ii) or
(iii) above, if certain disclosure is made in the footnotes. Accordingly, most
Japanese companies account for finance leases of this type as operating leases,
where lease payments are charged to income when paid. In addition, immaterial
finance leases are permitted to be accounted for as operating leases.
ACCOUNTING FOR COMPENSATED ABSENCES
Under US GAAP, an employer shall accrue a liability for employees'
compensation for future absences if certain conditions are met.
Under Japanese GAAP, there is no specific accounting standard for
compensated absences and recognition of such liabilities is not generally
practiced in Japan.
STOCK ISSUANCE COSTS
Under US GAAP, all stock issuance costs are deducted from the proceeds.
Under Japanese GAAP, all stock issuance costs are expensed at the time of
payment or capitalized as deferred cost and amortized within 3 years. All stock
issuance costs of the Company were expensed at the time of payment.
RECONCILIATION OF NET LOSS:
THOUSANDS OF
JAPANESE YEN
-----------------
Net loss as shown in the financial statements............... Y(479,350)
Description of items having the effect of decreasing
reported loss:
To reverse stock issuance cost which must be treated as a
reduction to capital in accordance with US GAAP......... 21,490
To reverse rent expense for leased assets which must be
capitalized in accordance with US GAAP.................. 1,145
Description of items having the effect of increasing
reported loss:
To record accrued vacation................................ (1,001)
To record depreciation expense for capitalized leased
assets in accordance with US GAAP....................... (1,331)
-----------------
Net loss according to US GAAP............................... Y(459,047)
=================
F-35
WIT CAPITAL JAPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
9. US GAAP MATTERS (CONTINUED)
RECONCILIATION OF SHAREHOLDERS' EQUITY (IN THOUSANDS OF JAPANESE YEN):
ADDITIONAL PAID-IN ACCUMULATED SHAREHOLDERS'
COMMON STOCK CAPITAL DEFICIT EQUITY
------------------ ------------------ ----------------- ------------------
Shareholders' equity as shown in the
financial statements...................... Y 3,000,000 Y 1,149,550 Y (479,350) Y 3,670,200
To record stock issuance cost as a
reduction in additional paid-in
capital............................... -- (21,490) 21,490 --
To record vacation accrual.............. -- -- (1,001) (1,001)
To reverse rent expense on leased assets
which must be capitalized in
accordance with US GAAP............... -- -- 1,145 1,145
To record depreciation expense on assets
which must be capitalized in
accordance with US GAAP............... -- -- (1,331) (1,331)
------------------ ------------------ ----------------- ------------------
Shareholders' equity according to US GAAP... Y 3,000,000 Y 1,128,060 Y (459,047) Y 3,669,013
================== ================== ================= ==================
F-36
WIT CAPITAL JAPAN, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2000
9. US GAAP MATTERS (CONTINUED)
CASH FLOW STATEMENT PREPARED IN ACCORDANCE WITH US GAAP (IN THOUSANDS OF
JAPANESE YEN):
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss according to US GAAP............................... Y(459,047)
Adjustments to reconcile net loss to net cash used in
operating activities
Increase in operating assets
Depreciation and amortization........................... 1,494
Advanced payment........................................ (703,620)
Commission receivable................................... (21,000)
Other receivables....................................... (96,071)
Trading securities...................................... (1,910,940)
Other assets............................................ (21,998)
Increase in operating liabilities
Accounts payable........................................ 35,150
Accrued expenses........................................ 75,437
Accrued income taxes.................................... 1,336
Other current liabilities............................... 9,192
------------------
Net cash used in operating activities..................... (3,090,067)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of software...................................... (27,331)
Deposits for leases....................................... (80,612)
Cash paid for assets under capital lease.................. (1,145)
------------------
Net cash used in investing activities..................... (109,088)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term loans.............................. 350,000
Net proceeds from issuance of stocks...................... 4,128,060
------------------
Net cash provided by financing activities................. 4,478,060
------------------
Net increase in cash........................................ 1,278,905
CASH, at beginning of this period........................... --
------------------
CASH, at end of this period................................. Y 1,278,905
==================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES (in
thousands of Japanese yen)
A capital lease obligation of Y76,272 thousand was incurred when the Company
entered into a lease for new equipment.
NET LOSS PER SHARE UNDER US GAAP
Net loss per share of common stock and diluted loss per share as of
March 31, 2000 was Y929,375.18.
F-37