Knight TriMark - 1999 Annual Report

Supplementary Schedule I-Details of the Merger with Arbitrade Holdings LLC and Unaudited Condensed Combined Pro Forma Financial Information
On January 6, 2000 (the "KT Closing Date"), pursuant to the terms of an Agreement and Plan of Merger (the "Merger Agreement"), dated as of the 17th day of November, 1999, as amended, by and among KT Holding Company, a Delaware corporation ("Parent"), KT Acquisition I Corp., a Delaware corporation ("SubKT"), AH Acquisition I L.L.C., a Delaware limited liability company ("SubAH"), Knight/Trimark Group, Inc., a Delaware corporation ("KT"), Arbitrade Holdings LLC, a Delaware limited liability company ("AH") and Tarmachan Capital Management, Inc., Tarmachan Capital Co., Deephaven Inc., Gildor Trading, Inc., Irvin Kessler, Efraim Gildor, Peter Hajas, Merrill Ferguson and Mark Lyons (together, the "Members"), KT reorganized into a holding company structure as further described below.

Separately, on January 12, 2000 (the "AH Closing Date"), pursuant to the terms of the Merger Agreement, Parent acquired from the Members all of the outstanding Class B membership interests of AH (the "AH Membership Interests"). Parent, a newly formed holding company (which was originally named KT Holding Company but upon completion of the transactions assumed the name Knight/Trimark Group, Inc. while KT assumed the name Knight/Trimark, Inc.), formed two Delaware merger subsidiaries to undertake two separate transactions. One of such subsidiaries, SubKT, was merged with and into KT on the KT Closing Date (the "KT Merger"), while the second, SubAH, was merged with and into AH on the AH Closing Date (the "AH Merger"), with the result that each of KT and AH became wholly owned subsidiaries of Parent.

The KT Merger was undertaken in the form of a holding company reorganization pursuant to the terms of Section 251(g) of the Delaware General Corporation Law. Such a reorganization did not require stockholder approval and resulted in the automatic exchange of shares of Class A Common Stock, par value $.01 per share, of KT for shares of Class A Common Stock, par value $.01 per share, of Parent, on a one-for-one basis. The directors and officers of KT immediately prior to such closing held the same offices with Parent following the closing of the KT Merger. As a result of the KT Merger, KT is no longer a public company (but is rather a wholly owned subsidiary of Parent) and Parent replaced KT as the NASDAQ-listed publicly-owned company.

Separately, the AH Merger resulted in AH becoming a wholly owned subsidiary of Parent. The Members received 10,505,001 shares of newly-issued Class A Common Stock of Parent in exchange for all outstanding Class B membership interests in AH, such shares of Class A Common Stock representing approximately 8.6% of the outstanding stock of Parent. The number of shares received by the Members was calculated based on an exchange ratio which was determined through arms-length negotiation.

Unaudited Pro Forma Condensed Combined Financial Statements
The following Unaudited Pro Forma Condensed Combined Statement of Financial Condition and Unaudited Pro Forma Condensed Combined Statements of Income ("Unaudited Pro Forma Condensed Combined Financial Statement Information") are based upon the historical consolidated financial statements of the Company and Arbitrade and have been prepared to give pro forma effect to the merger. The Unaudited Condensed Combined Pro Forma Financial Information is presented only as supplementary information, but will become the historical consolidated financial statements of the Company after financial statements covering the date of consummation of the merger are issued.

The historical information for Arbitrade included in the Unaudited Pro Forma Condensed Combined Statement of Financial Condition and the Unaudited Pro Forma Condensed Combined Statements of Income as of December 31, 1999 and for the years ended December 31, 1999, 1998 and 1997, respectively, have been derived from the audited consolidated financial statements of Arbitrade for such periods which are not included in this Annual Report. The Unaudited Pro Forma Condensed Combined Statement of Financial Condition as of December 31, 1999 gives pro forma effect to the merger of a wholly owned subsidiary of the Company with and into Arbitrade (the "Merger") and the issuance of 10,505,001 shares of the Company's Class A common stock to the holders of the outstanding class B membership interests of Arbitrade as if such transactions occurred as of December 31, 1999. The Unaudited Pro Forma Condensed Combined Statements of Income for the years ended December 31, 1999, 1998 and 1997 give pro forma effect to the Merger as if it occurred as of January 1, 1997.

The Unaudited Pro Forma Condensed Combined Financial Statement Information and accompanying notes should be read in conjunction with the historical consolidated financial statements of the Company and Arbitrade. The Unaudited Pro Forma Condensed Combined Financial Statement Information presented is not necessarily indicative of the results of operations that might have occurred had the Merger actually taken place as of the dates specified, or that may be expected to occur in the future.

Notes to Unaudited Pro Forma Condensed Combined Financial Statements
1. Basis of Preparation
As permitted by the rules and regulations of the Securities and Exchange Commission, the Unaudited Pro Forma Condensed Combined Statement of Financial Condition and Unaudited Pro Forma Condensed Combined Statements of Income are presented on a condensed basis.
2. Pro Forma Adjustments
(a)Stockholders' Equity/Members' Equity- Adjustments to reflect the issuance of 10,505,001 shares of Knight/Trimark Class A Common Stock in the Merger.
(b)Compensation and Benefits for Arbitrade's Members - As Arbitrade has operated historically as a limited liability company ("LLC"), compensation and benefits to Arbitrade's members ("Members' Compensation") was accounted for as distributions of members' equity rather than as compensation expense. As a result, the historical compensation expense and income before income taxes of Arbitrade for the periods presented did not reflect Members' Compensation.
In connection with the closing of the Merger, each of Arbitrade's members signed an employment agreement with Arbitrade that was effective as of the closing date of the Merger. Such employment agreements entitle Arbitrade's members to annual compensation that includes a base salary and participation in Arbitrade's sub-pool of the Knight/Trimark Profit-Pool Incentive Plan. Arbitrade's sub-pool will equal 15% of the before-tax profits earned by Arbitrade during each fiscal quarter, and will be allocated on a quarterly basis by the executive officers of Arbitrade.
Accordingly, Knight/Trimark has estimated the historical compensation expense for Arbitrade's members for the periods presented based on the employment agreements with Arbitrade's members discussed above. As a result, pro forma compensation and benefits expense of $7,582,464, $5,096,915 and $4,646,837 has been recorded on the Unaudited Pro Forma Condensed Combined Statements of Income for the years ended December 31, 1999, 1998 and 1997, respectively.
(c)Pro Forma Provision for Income Taxes- As Arbitrade has operated as an LLC since inception, the historical results for all periods presented have been adjusted to reflect a pro forma provision for income taxes at an effective tax rate of 42.5% for Arbitrade. Prior to its initial public offering in July 1998, Knight/Trimark also operated as an LLC. Accordingly, the historical statements of income for the years ended December 1997 and 1998 reflect a pro forma provision for income taxes as if Knight/Trimark was a taxable entity for all periods presented.
(d)Pro Forma Basic and Diluted Average Common Shares Outstanding- Adjustments to the shares used in the basic and diluted earnings per share calculations for the periods presented to reflect the Knight/Trimark Class A Common Stock that would have been issued in exchange for outstanding Class B Membership Interests of Arbitrade based on the exchange ratio applicable upon the closing of the Merger.

The matters described herein contain forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve a number of risks, uncertainties or other factors beyond the Company's control, which could cause actual results to differ materially from historical results, performance or other expectations and from any opinions or statements expressed with respect to future periods. These factors include, but are not limited to, the Company's ability to implement its growth strategies, economic, political and market conditions and fluctuations, government and industry regulation, interest rate risk, intellectual property rights, and other factors detailed in the Company's registration statement and periodic reports filed with the Securities and Exchange Commission.