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We have historically financed
our liquidity and capital needs primarily through
the use of funds generated from operations and from
borrowings under our credit agreements. Our liquidity
needs during fiscal 2002 were financed primarily
from our operating cash flows. We also issued Common
Stock to purchase Datek, as described under "BUSINESS
COMBINATION." We plan to finance our capital
and liquidity needs for fiscal 2003 primarily from
our operating cash flows and borrowings on our revolving
credit facility. In addition, we may issue other
equity or debt securities. We may also consider
selling, or entering into a forward contract to
sell, some or all of our 7.9 million shares of Knight
Trading Group, Inc. ("Knight") common
stock. As of September 27, 2002, approximately 4.1
million shares of our Knight common stock were pledged
or subject to pledge as collateral under an equity
index swap agreement, as described under "Other
Contractual Obligations".
If additional funds are raised through the issuance
of equity securities, the percentage ownership of
the stockholders may be reduced, stockholders may
experience additional dilution in net book value
per share or such equity securities may have rights,
preferences or privileges senior to those of the
holders of our common stock. There can be no assurance
that additional financing will be available when
needed on terms favorable to us, if at all. If adequate
funds are not available on acceptable terms, we
may be unable to develop or enhance our services
and products, take advantage of future opportunities
or respond to competitive pressures, any of which
could have a material adverse effect on our business,
financial condition and operating results.
Dividends from our subsidiaries are another source
of liquidity for the holding company. Some of our
subsidiaries are subject to requirements of the
Securities and Exchange Commission ("SEC")
and the National Association of Securities Dealers
relating to liquidity, capital standards and the
use of client funds and securities, which limit
funds available for the payment of dividends to
the holding company.
Under the SEC’s Uniform Net Capital Rule (Rule
15c3-1 under the Securities Exchange Act of 1934),
our broker-dealer subsidiaries are required to maintain
at all times at least the minimum level of net capital
required under Rule 15c3-1. This minimum net capital
level is determined based upon an involved calculation
described in Rule 15c3-1, but takes into account,
among other things, each broker-dealer’s "net
debit items", which primarily are a function
of client margin receivables at our broker-dealer
subsidiaries. Since our net debit items can fluctuate
significantly, our minimum net capital requirements
can also fluctuate significantly from period to
period. Historically, we have utilized our revolving
credit facility as a mechanism to provide additional
capital as needed to meet net capital requirements,
and the balance on our revolving credit facility
often has fluctuated significantly from period to
period due to changes in our net capital requirements. |
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Cash
Flow
Cash provided by operating activities was $88.8
million in fiscal 2002, compared to cash used in
operations of $47.3 million in fiscal 2001. The
increase in cash flows from operations was primarily
due to a substantial reduction in advertising expenditures
compared to the previous year, and $37.2 million
of debt conversion expense (net of income taxes)
in fiscal 2001.
Cash provided by investing activities was $110.1
million in fiscal 2002, compared to $1.2 million
in fiscal 2001, due primarily to cash acquired in
the Datek merger in fiscal 2002 and substantially
lower capital expenditures during fiscal 2002 compared
to the previous year, partly offset by $16.4 million
of proceeds from the sale of Epoch in fiscal 2001.
Cash used in financing activities was $24.6 million
in fiscal 2002, compared to $52.2 million in fiscal
2001. The financing activities consisted mainly
of net repayments on our revolving credit facility
during both fiscal 2002 and fiscal 2001.
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Loan
Agreement
On December 28, 2001, we entered into an amended
and restated revolving credit agreement. The revolving
credit agreement permits borrowings up to $20 million
through December 27, 2002, and is secured primarily
by our stock in our subsidiaries. Prior to July
11, 2002, it was also secured by 4.0 million shares
of our Knight common stock, and we could borrow
up to 70 percent of the fair market value of the
pledged Knight stock, subject to certain limitations.
On July 11, 2002, the lender under our revolving
credit agreement agreed to amend the agreement to
eliminate the Knight stock as collateral and to
eliminate the requirement that the borrowing availability
under the agreement be limited based on the market
value of the Knight stock. The interest rate on
borrowings, determined on a monthly basis, is equal
to the greater of (i) the national prime rate or
(ii) 90-day LIBOR plus 2.5 percent, subject to a
minimum rate of 5.0 percent. At September 27, 2002,
the interest rate on the revolving credit agreement
would have been 5.0 percent. We also pay a maintenance
fee of 0.375 percent of the unused borrowings through
the maturity date. We had no outstanding indebtedness
under the revolving credit agreement at September
27, 2002 and $22.5 million of outstanding indebtedness
under the prior revolving credit agreement at September
28, 2001. We were in compliance with or have obtained
waivers for all covenants under the revolving agreement
for all periods presented in the consolidated financial
statements.
In December 2002, we agreed in principle to a modification
and extension of the revolving credit agreement.
The amended agreement will permit borrowings up
to $50 million through December 26, 2003, bear interest
initially at the lesser of (i) the prime rate or
(ii) 30 day LIBOR plus 2.75 percent and will be
secured primarily by our stock in our subsidiaries.
We will also pay a maintenance fee of 0.375 percent
of the unused borrowings through the maturity date.
We expect to execute the amendment by December 27,
2002. |
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Convertible
Subordinated Notes
In August 1999, we issued $200 million of 5.75 percent
convertible subordinated notes due August 1, 2004.
The holders of the notes may convert the notes into
shares of Common Stock at any time prior to the
close of business on the maturity date of the notes,
unless previously redeemed or repurchased, at a
conversion rate of 30.7137 shares per $1,000 principal
amount of notes (equivalent to an approximate conversion
price of $32.56 per share), subject to adjustment
in certain circumstances. Interest on the notes
is payable on February 1 and August 1 of each year.
The notes are subject to redemption after August
6, 2002, and we may, at our option, redeem the notes
at a premium on or after such date, in whole or
in part, upon notice to each holder not less than
30 days nor more than 60 days prior to the redemption
date.
In February 2001, $152.4 million of our convertible
subordinated notes were converted for approximately
4.7 million shares of Class A Common Stock and $58.7
million of cash. As of September 27, 2002, we had
approximately $47.6 million of the convertible subordinated
notes outstanding. These notes are convertible into
approximately 1.5 million shares of Common Stock.
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Stock
Repurchase Program
On September 9, 2002, our Board of Directors authorized
a program to repurchase up to 40 million shares
of our Common Stock from time to time over a two-year
period beginning September 19, 2002. We have funded
our initial purchases with cash on hand and expect
to fund any future purchases primarily with operating
profits. Through December 6, 2002, we have repurchased
approximately 5.1 million shares at a weighted average
purchase price of $3.84 per share. |
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Other
Contractual Obligations
We are obligated to pay our Chief Executive Officer
("CEO") $15.6 million in deferred compensation,
adjusted for investment income or losses on the
$15.6 million, pursuant to our employment agreement
with the CEO. This payment will be made not sooner
than the day after the CEO’s employment with
the Company terminates. At September 27, 2002 and
September 28, 2001, we had an equity index swap
arrangement with a notional amount of $15.6 million
for the purpose of hedging our obligation under
this deferred compensation plan. Changes in the
fair value of this instrument are offset by changes
in our obligation to our CEO. As of September 27,
2002, approximately 4.1 million shares of our Knight
common stock were pledged or subject to pledge as
collateral under the equity index swap agreement.
We also have contractual obligations under operating
leases for facilities and equipment. The following
table summarizes future payments under our contractual
obligations. Amounts are in thousands. |
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Payments
Due for Fiscal Years Ending: |
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| Contractual
Obligations |
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|
Total |
|
|
2003 |
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|
2004-05 |
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2006-07 |
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After
2007 |
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| Operating
leases, net of sublease proceeds |
|
$ |
101,954 |
|
$ |
33,876 |
|
$ |
23,118 |
|
$ |
11,310 |
|
$ |
33,650 |
| Deferred
compensation (1) |
|
|
15,550 |
|
|
15,550 |
|
|
- |
|
|
- |
|
|
- |
| Convertible
subordinated notes |
|
|
47,645 |
|
|
- |
|
|
47,645 |
|
|
- |
|
|
- |
|
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| Total
contractual cash obligations |
|
$ |
165,149 |
|
$ |
49,426 |
|
$ |
70,763 |
|
$ |
11,310 |
|
$ |
33,650 |
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| (1) |
Our obligation to our CEO for
deferred compensation will become payable not sooner than the day
after the CEO's employment with the company terminates. The obligation
is presented in the fiscal 2003 column as that is the year in which
the entire amount of the compensation will have been earned by
the CEO.
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