<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) September 8, 2000
------------------------
Stockwalk.com Group, Inc.
--------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Minnesota 0-22247 41-1756256
------------------------------- ------------------------ -------------------
(State or Other Jurisdiction of (Commission File Number) (IRS Employer
Incorporation) Identification No.)
</TABLE>
5500 Wayzata Boulevard, Suite 800, Minneapolis, Minnesota 55416
--------------------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
763.542.6000
--------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
--------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On June 6, 2000, the registrant announced that it had entered into a
definitive merger agreement with Kinnard Investments, Inc. ("Kinnard"). The
merger was completed on September 8, 2000. Following is a discussion of the
material terms of this transaction, including a description of the material
terms of the merger agreement.
Kinnard
Prior to its acquisition by the registrant, Kinnard was a publicly held
holding company that provided financial products and services, primarily through
its broker-dealer subsidiary, John G. Kinnard and Company, Incorporated ("JGK").
JGK is a member of the Chicago Stock Exchange and the NASD, and is a registered
investment advisor under the Investment Advisors Act of 1940. As of September 8,
2000, the registrant owned approximately 6.8% of Kinnard's outstanding shares of
common stock primarily acquired in 1999. As of December 31, 1999, Kinnard had
248 full-time employees. As of March 31, 2000, Kinnard employed 111 registered
representatives, had total revenues of approximately $54.9 million and was a
market maker for approximately 175 equity securities. Pursuant to the Kinnard
agreement, Kinnard merged with and into the registrant's wholly-owned
subsidiary, SW Acquisition, Inc., with SW Acquisition, Inc. being the surviving
entity.
The Merger
Pursuant to the terms of the Kinnard agreement, the registrant
obligated itself to issue an aggregate of 3,557,819 shares (the equivalent of
.7676 shares of the registrant's common stock for each issued and outstanding
share of Kinnard common stock) of its registered common stock to the former
shareholders of Kinnard, and to pay to such shareholders an aggregate of
$21,346,914 in cash ($6.00/share for each outstanding Kinnard share).
Pursuant to the terms of the Kinnard agreement, the registrant also
paid to the former holders of Kinnard's outstanding options and warrants to
purchase common stock an aggregate of $4.1 million, which is the equivalent of
$6.00 in cash plus the cash value of the stock that would have been issued had
the option or warrant been exercised prior to the merger, less the per share
exercise price of the option or warrant. In conjunction with Kinnard, we also
established a retention program to be used to retain various registrant and
Kinnard employees. We expect to pay approximately $3.5 million in retention
bonuses. Finally, pursuant to contractual obligations that existed between
Kinnard and its former Chief Executive Officer, Mr. William Farley, we will make
payments aggregating approximately $2.0 million to Mr. Farley, a portion of
which is allocated to a non-compete agreement, excluding consideration issued in
connection with outstanding shares of Kinnard common stock owned by him for the
merger consideration and consideration received in connection with payment for
the exchange of outstanding options and warrants owned by him.
The shares of the registrant's stock to be issued in connection with
the Kinnard transaction will be registered, i.e., they will be freely tradable,
except for shares issued to certain Kinnard affiliates. In addition to the
foregoing, the registrant's agreement with Kinnard contains other customary
terms and conditions, including representations and warranties from Kinnard.
2
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED:
<TABLE>
<CAPTION>
AUDITED FINANCIAL STATEMENTS FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1999:
<S> <C>
INDEPENDENT AUDITORS REPORT.................................................................... 4
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION................................................. 5
CONSOLIDATED STATEMENTS OF OPERATIONS.......................................................... 6
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY................................................ 7
CONSOLIDATED STATEMENTS OF CASH FLOWS.......................................................... 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................................................... 9-20
UNAUDITED FINANCIAL STATEMENTS FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2000:
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION.................................................21
CONSOLIDATED STATEMENTS OF OPERATIONS..........................................................22
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY................................................23
CONSOLIDATED STATEMENTS OF CASH FLOWS..........................................................24-25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.....................................................26-29
(B) UNAUDITED PRO FORMA FINANCIAL INFORMATION:
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA STATEMENT OF FINANCIAL CONDITION....................30
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA STATEMENT OF OPERATIONS.............................31
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA FOOTNOTES TO FINANCIAL STATEMENTS...................32-33
</TABLE>
3
<PAGE> 4
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Kinnard Investments, Inc.:
We have audited the accompanying consolidated statements of financial
condition of Kinnard Investments, Inc. and subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Kinnard
Investments, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Minneapolis, Minnesota
February 17, 2000
4
<PAGE> 5
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------
1998 1999
-------- --------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 2,689 $ 8,018
Receivable from clearing firm............................... 1,009 590
Miscellaneous receivables................................... 3,527 2,899
Trading securities, at market............................... 8,221 12,976
Office equipment at cost, less accumulated depreciation of
$2,540 and $3,594, respectively........................... 1,888 1,247
Investment securities, at fair value........................ 16,918 13,992
Income tax receivable....................................... 1,456 0
Deferred income taxes....................................... 242 354
Other assets................................................ 414 351
------- -------
Total assets........................................... $36,364 $40,427
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Securities sold but not yet purchased, at market.......... 257 844
Accrued compensation...................................... 3,770 6,233
Other accounts payable and accrued expenses............... 2,831 3,158
Income taxes payable...................................... 0 1,228
------- -------
Total liabilities...................................... 6,858 11,463
======= =======
Shareholders' equity
Common stock, $.02 par value; authorized 7,500 shares;
issued and outstanding 5,483 and 4,782 shares,
respectively........................................... 110 96
Additional paid-in capital................................ 9,265 6,028
Retained earnings......................................... 20,131 22,840
======= =======
Total shareholders' equity............................. 29,506 28,964
------- -------
Total liabilities and shareholders' equity............. $36,364 $40,427
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE> 6
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
Commissions................................... $14,745 $14,684 $16,645
Principal transactions........................ 25,929 16,453 22,708
Net gains/losses on investment account........ 455 (187) 6,520
Investment banking............................ 3,977 5,640 3,839
Interest...................................... 2,276 1,422 1,638
Other......................................... 2,464 2,932 3,518
------- ------- -------
Total revenues........................ 49,846 40,944 54,868
------- ------- -------
Expenses:
Compensation and benefits..................... 33,872 31,360 34,628
Floor brokerage and clearance................. 4,171 3,413 3,931
Communications................................ 787 910 765
Occupancy and equipment....................... 5,333 5,554 5,161
Other......................................... 5,147 5,336 5,870
------- ------- -------
Total expenses........................... 49,310 46,573 50,355
------- ------- -------
Income (loss) before income taxes............... 536 (5,629) 4,513
Income tax expense (benefit).................... 228 (2,253) 1,804
------- ------- -------
Net income (loss)............................... $ 308 $(3,376) $ 2,709
======= ======= =======
Earnings (loss) per common share:
Basic......................................... $ 0.05 $ (0.58) $ 0.54
Diluted....................................... $ 0.05 $ (0.58) $ 0.53
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
6
<PAGE> 7
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------- ----------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996.... 6,027 120 12,710 23,199 36,029
----- ---- ------- ------- -------
Issuance of shares under
employee stock option
plan..................... 68 1 230 231
Issuance of new shares...... 325 7 1,700 1,707
Repurchase of stock......... (465) (9) (2,694) (2,703)
Net income.................. 308 308
----- ---- ------- ------- -------
Balance, December 31, 1997.... 5,955 119 11,946 23,507 35,572
----- ---- ------- ------- -------
Issuance of shares under
employee stock purchase
plan..................... 13 0 78 78
Issuance of shares under
employee stock option
plan..................... 81 2 379 381
Repurchase of stock......... (566) (11) (3,138) (3,149)
Net loss.................... (3,376) (3,376)
----- ---- ------- ------- -------
Balance, December 31, 1998.... 5,483 $110 $ 9,265 $20,131 $29,506
----- ---- ------- ------- -------
Issuance of shares under
employee stock option
plan..................... 59 1 273 274
Repurchase of stock......... (760) (15) (3,604) (3,619)
Tax benefit from stock
options exercised........ 94 94
Net income.................. 2,709 2,709
----- ---- ------- ------- -------
Balance, December 31, 1999.... 4,782 $ 96 $ 6,028 $22,840 $28,964
===== ==== ======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
7
<PAGE> 8
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR YEARS ENDED
DECEMBER 31,
-----------------------------
1997 1998 1999
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers and clearing firm............ $45,103 $40,553 $42,960
Cash paid to suppliers and employees...................... (49,473) (46,550) (45,819)
Interest:
Received................................................ 2,276 1,422 1,638
Paid.................................................... 0 0 0
Income taxes (paid) refunded.............................. (3,349) 317 862
------- ------- -------
Net cash used in operating activities..................... (5,443) (4,258) (359)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of:
Office equipment........................................ 5 63 0
Investment securities................................... 16,511 16,285 18,220
Purchases of:
Office equipment........................................ (1,074) (1,505) (413)
Investment securities................................... (17,866) (10,685) (8,774)
Funds released from escrow................................ 0 1,593 0
------- ------- -------
Net cash provided by (used in) investing activities....... (2,424) 5,751 9,033
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock.................................. 1,938 459 274
Repurchase of common stock................................ (2,703) (3,149) (3,619)
------- ------- -------
Net cash used in financing activities..................... (765) (2,690) (3,345)
------- ------- -------
Increase (decrease) in cash and cash equivalents............ (8,632) (1,197) 5,329
Cash and cash equivalents at beginning of year.............. 12,518 3,886 2,689
------- ------- -------
Cash and cash equivalents at end of year.................... $ 3,886 $ 2,689 $ 8,018
======= ======= =======
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH USED IN
OPERATING ACTIVITIES:
Net income (loss)......................................... $ 308 $(3,376) $ 2,709
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization............................. 766 821 1,054
Net unrealized loss (gain) on investment securities....... (222) 626 (1,344)
Net realized gain on sale of investment securities........ (233) (439) (5,176)
Realized loss (gain) on sale of office equipment.......... 21 0 0
Deferred income taxes..................................... 89 (462) (322)
(Increase) decrease in:
Receivable from clearing firm........................... 968 (1,009) 419
Miscellaneous receivables............................... (1,211) (216) 628
Trading securities, at market........................... (3,072) 2,509 (4,755)
Income tax receivable................................... 0 (1,456) 1,456
Other assets............................................ (56) 66 63
Increase (decrease) in:
Due to clearing firm.................................... 1,069 (1,069) 0
Securities sold but not yet purchased, at market........ 73 (658) 587
Accrued compensation.................................... (306) 176 2,463
Other accounts payable and accrued expenses............. (427) 247 327
Income taxes payable.................................... (3,210) (18) 1,532
------- ------- -------
Net cash used in operating activities....................... $(5,443) $(4,258) $ (359)
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
8
<PAGE> 9
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Kinnard Investments, Inc. ("Kinnard") is a holding company that has been
providing financial products and services for over 50 years. The primary
subsidiary, John G. Kinnard and Company, Incorporated ("John G. Kinnard" or
"JGK"), is a regional broker-dealer headquartered in Minneapolis, Minnesota.
Kinnard and John G. Kinnard are hereinafter collectively referred to as the
"Company".
John G. Kinnard is a full-service broker-dealer engaged in securities
brokerage, trading, investment banking, asset management and related financial
services to both retail and institutional customers. Its principal business is
trading, underwriting, research and sale of securities of emerging growth
companies with market capitalizations up to $250 million. Kinnard also
negotiates, underwrites and participates in fixed income debt offerings. Other
products and services include mutual funds, insurance products, investment
management, IRA services and fixed income securities.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Kinnard
Investments, Inc. and its wholly owned subsidiaries. All intercompany accounts
and transactions have been eliminated in consolidation. Kinnard does not present
a statement of comprehensive income as there are no items. Kinnard does not
provide balance sheet data for segment reporting as this data is not measured.
CASH AND CASH EQUIVALENTS
Kinnard considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
SECURITIES TRANSACTIONS
Securities transactions and the related revenues and expenses are recorded
on a settlement date basis, which is not materially different than if such
transactions were recorded on trade date. Trading securities, securities sold
but not yet purchased and investment securities that are readily marketable are
stated at quoted market values. Trading and investment securities not readily
marketable are carried at fair value as determined by management. Unrealized
gains and losses are included in earnings.
MISCELLANEOUS RECEIVABLES
Included in miscellaneous receivables are forgivable loans made to
investment executives and other revenue-producing employees, typically in
connection with their recruitment. Such loans are forgivable based on continued
employment and are amortized
9
<PAGE> 10
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
over the term of the loan, which is generally three to five years, using the
straight-line method.
INCOME TAXES
Kinnard accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". Under this
method, deferred tax liabilities and assets and the resultant provision for
income taxes are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
OFFICE EQUIPMENT
The cost of office equipment is depreciated using accelerated methods over
the estimated useful lives of two to seven years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of Kinnard's financial assets and liabilities are carried
at market value or at amounts which, because of their short-term nature,
approximate current fair value.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
and disclosure of contingent liabilities at the balance sheet date, and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
EMPLOYEE STOCK COMPENSATION
Kinnard has elected to continue following the guidance of Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees", for measurement and recognition of stock-based transactions with
employees. Kinnard has adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". See Note 10 to the Consolidated
Financial Statements for additional information.
EARNINGS PER SHARE
Basic earnings per share are based upon the weighted average number of
common shares outstanding during the reporting period. Diluted earnings per
share take into account the dilutive effect, if any, of stock options and other
potential dilutive common shares outstanding during the period.
10
<PAGE> 11
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following reconciliation illustrates the computation of basic and
diluted earnings per share:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1998 1999
------ ------- ------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Net income (loss)..................................... $ 308 $(3,376) $2,709
====== ======= ======
Weighted average number of common shares
outstanding......................................... 6,149 5,825 5,050
Dilutive effect of stock options and warrants......... 82 0 22
------ ------- ------
Weighted average number of common and potential
dilutive common shares outstanding:................. 6,231 5,825 5,072
====== ======= ======
Basic earnings (loss) per share....................... $ 0.05 $ (0.58) $ 0.54
Diluted earnings (loss) per share..................... $ 0.05 $ (0.58) $ 0.53
====== ======= ======
</TABLE>
Non-dilutive options as of December 31, 1997, 1998 and 1999 totaled
447,000, 537,000 and 574,000, respectively.
NOTE 2. BINDING ARBITRATION AWARD
On December 10, 1999, the National Association of Securities Dealers
("NASD") issued a binding arbitration award for $16.6 million in favor of
Kinnard and against Dain Rauscher Corporation ("Dain") and several of its
investment executives who were wrongfully recruited by Dain from Kinnard from
1997 to 1999.
NASD arbitration awards are not subject to appeal. While Dain has filed a
motion with the Hennepin County District Court (the "Court") to vacate the
arbitration panel's decision, Kinnard believes that vacatur is unlikely due to
the narrow grounds upon which a binding arbitration award may be vacated. Under
both Federal and Minnesota Arbitration Acts, the Court must find evidence of
fraud, corruption, misconduct or partiality on the part of the arbitration
panel, or that the panel exceeded its powers in rendering its award decision.
The award included compensatory damages of $9.1 million, punitive damages
of $7.1 million and reimbursement of legal costs of $350 thousand. Upon
exhaustion of all vacatur efforts, Kinnard anticipates recognizing up to $16.6
million in revenue. Recognition of such revenue may result in additional
compensation and income tax expense. The additional compensation expense would
result from an incremental ESOP contribution and additional incentive
compensation, both based on pre-tax income.
The following unaudited pro forma information has been prepared assuming
that the binding arbitration settlement had been recognized during the period
presented after the
11
<PAGE> 12
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. BINDING ARBITRATION AWARD (CONTINUED)
impact of certain adjustments to revenue, employee compensation based on current
formulas and the related income tax effects thereof.
PRO FORMA STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
---------------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
(UNAUDITED)
<S> <C>
Revenues.................................................... $71,085
Expenses.................................................... $53,491
-------
Income before income taxes.................................. 17,594
Income tax expense.......................................... 7,037
-------
Net income.................................................. $10,557
=======
Earnings per common share:
Basic..................................................... $ 2.09
Diluted................................................... $ 2.08
Book value per common share:................................ $ 7.70
=======
</TABLE>
NOTE 3. OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Included in other accounts payable and accrued expenses are vendor accounts
payable, accrual for contingencies, sales incentive program accruals and
miscellaneous payables.
NOTE 4. SECURITIES
Trading securities are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
------ -------
(IN THOUSANDS)
<S> <C> <C>
Trading securities:
Corporate stocks.......................................... $2,298 1,837
U.S. government and municipal bonds....................... 3,702 10,226
Corporate debt securities................................. 2,221 913
------ -------
$8,221 $12,976
====== =======
Securities sold but not yet purchased:
Corporate stocks.......................................... $ 252 $ 433
Corporate debt securities................................. 5 411
------ -------
$ 257 $ 844
====== =======
</TABLE>
12
<PAGE> 13
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4. SECURITIES (CONTINUED)
Revenues from principal transactions are generated by market making
activities in both equity and fixed income products. Revenues from equity
principal transactions were $18.8 million, $10.9 million and $17.2 million for
the years ended December 31, 1997, 1998 and 1999. Revenues from fixed income
principal transactions were $7.1 million, $5.5 million and $5.5 million for the
years ended December 31, 1997, 1998 and 1999.
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1999
------- -------
(IN THOUSANDS)
<S> <C> <C>
Investment securities:
Corporate stocks.......................................... $ 4,590 $ 3,166
U.S. government bonds..................................... 5,557 7,065
Outside money managers.................................... 6,771 3,761
------- -------
$16,918 $13,992
======= =======
</TABLE>
NOTE 5. NOTES PAYABLE
JGK maintains a discretionary credit facility providing for conditional
short-term borrowing of up to $10 million. The facility limits borrowing to 90
days and is secured by the firm's marketable securities. Advances under the
facility are at the bank's sole discretion, accrue interest at a fluctuating
interest rate to be agreed upon by JGK and the bank, and are subject to certain
affirmative and negative covenants. There are no fees or compensating balances
related to this line of credit. There were no outstanding borrowings at December
31, 1998 and 1999 nor for the years then ended.
NOTE 6. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
Employees are eligible to participate in the Employee Stock Ownership Plan
and Trust (ESOP) upon completing one year of service. Contributions to the ESOP
are made at the discretion of Kinnard and can be made in cash or other property,
as the Trustees of the ESOP consider appropriate. These contributions are used
primarily to purchase stock of Kinnard. A participant is generally fully vested
after five years of service. During the years ended December 31, 1997, 1998 and
1999, Kinnard contributed $0, $0 and $796,093, respectively, to the ESOP.
PENSION AND PROFIT SHARING PLANS
Kinnard has defined contribution pension and profit sharing plans covering
substantially all employees who have completed at least one full year of
continuous service. Kinnard contributes to the pension plan, on behalf of each
eligible employee, an amount equal to five percent of their annual qualified
compensation. This contribution is reflected
13
<PAGE> 14
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6. EMPLOYEE BENEFIT PLANS (CONTINUED)
as an operating expense and amounted to $1.0 million, $781,000 and $854,000 for
the years ended December 31, 1997, 1998 and 1999, respectively.
There were no contributions to the Profit Sharing Plan for the years ended
December 31, 1999, 1998 and 1997. Kinnard does not intend to make any further
contributions to the Profit Sharing Plan so long as the ESOP is in effect.
NOTE 7. INCOME TAXES
Income tax expense (benefit) is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
---- -------------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal........................................... $ 97 $(1,433) $2,533
State............................................. 42 (358) (407)
Deferred............................................ 89 (462) (322)
---- ------- ------
$228 $(2,253) $1,804
==== ======= ======
</TABLE>
The provision for income taxes for the years ended December 31, 1997, 1998
and 1999, differs from the amount obtained by applying the U.S. federal income
tax rate of 34% to pretax income due to the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
---- ------- ------
<S> <C> <C> <C>
Ordinary federal income tax expense (benefit)......... $182 $(1,914) $1,534
State income taxes, net of federal tax benefit........ 46 (339) 0
Other................................................. 0 0 270
---- ------- ------
$228 $(2,253) $1,804
==== ======= ======
</TABLE>
14
<PAGE> 15
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to Kinnard's
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1998 1999
---- ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accruals not currently deductible......................... $627 $ 680
Receivables............................................... 216 219
Other..................................................... 137 386
---- ------
980 1,285
==== ======
Deferred tax liabilities:
Unrealized appreciation of investment securities.......... 658 868
Other..................................................... 80 63
---- ------
738 931
---- ------
Net deferred tax asset...................................... $242 $ 354
==== ======
</TABLE>
Kinnard has determined that there is no need to establish a valuation
allowance for the deferred tax asset. That determination is based on the
assumption that it is more likely than not that the deferred tax asset will be
realized principally through future reversals of existing taxable temporary
differences and future taxable income.
NOTE 8. NET CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS
Kinnard is subject to the Securities and Exchange Commission (SEC) Rule
15c3-1, net capital requirements for brokers and dealers, which required Kinnard
to maintain minimum net capital of $799,000 as of December 31, 1999. Also, under
this rule, the ratio of aggregate indebtedness to net capital may not exceed 15
to 1, and Kinnard may be prohibited from expanding its business or paying cash
dividends if its ratio of aggregate indebtedness to net capital is greater than
10 to 1. At December 31, 1999, Kinnard had net capital of $8.0 million, and a
ratio of aggregate indebtedness to net capital of 1.5 to 1.
Kinnard is exempt from the provisions of SEC Rule 15c3-3, customer
protection: reserves and custody of securities, as Kinnard's clearing firm is
responsible for complying with these provisions. Accordingly, the computation
for determination of reserve requirements and information relating to the
possession or control requirements is not required for Kinnard.
NOTE 9. EQUITY
Kinnard's 16.5 million shares of authorized undesignated stock may be
designated by the Board of Directors as either preferred stock or common stock.
During the years 1997, 1998 and 1999 Kinnard repurchased 465,000, 566,000
and 760,000 shares of its common stock at a total cost of $2.7 million, $3.1
million and
15
<PAGE> 16
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. EQUITY (CONTINUED)
$3.6 million, respectively. In October 1998, the board of directors authorized
the repurchase of 1,000,000 shares in the open market or through privately
negotiated transactions, at the discretion of the firm's management. In November
1999, the board of directors authorized the repurchase of an additional
1,000,000. Remaining shares authorized for repurchase at December 31, 1999 are
1,231,491.
In April 1997, Kinnard entered into a Subscription and Purchase Agreement
with William F. Farley, whereby Mr. Farley purchased 325,000 Units of securities
of Kinnard for $1.7 million or $5.25 per Unit. Each Unit consisted of one share
of common stock of Kinnard and a warrant to purchase an additional share at a
price of $6.00 per share.
Kinnard has an Employee Stock Purchase Plan ("ESPP") under which 1,050,000
shares are authorized for issuance. The ESPP allows employees to set aside up to
15% of earnings to purchase shares of Kinnard's common stock. Shares are issued
semi-annually at a price equal to 85% of a defined market price, but not less
than book value at the end of the period. Reserved but unissued shares under the
Plan were 689,538 at December 31, 1999.
NOTE 10. STOCK OPTION PLANS
Under Kinnard's 1990 and 1997 Stock Option Plans, a total of 620,000 and 1
million shares, respectively, have been reserved for options to employees and
Directors of Kinnard. At December 31, 1999 authorized but unissued shares were
161,857 for the 1990 Stock Option Plan and 463,500 for the 1997 Stock Option
Plan. Under terms of the plan, options are generally granted at the current
market price, but not less than the book value per share. The options may be
exercised over the period prescribed at the time of the grant, not to exceed ten
years.
16
<PAGE> 17
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. STOCK OPTION PLANS (CONTINUED)
The options, in general, vest evenly over five years. Stock option
transactions are summarized below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding at December 31, 1996........................... 368,200 $4.40
Granted.................................................... 488,000 5.98
Exercised.................................................. (67,693) 4.01
Forfeited or expired....................................... (131,557) 5.39
-------- -----
Outstanding at December 31, 1997........................... 656,950 5.37
Granted.................................................... 250,000 5.97
Exercised.................................................. (81,250) 4.69
Forfeited or expired....................................... (95,000) 5.74
-------- -----
Outstanding at December 31, 1998........................... 730,700 5.62
Granted.................................................... 159,500 4.70
Exercised.................................................. (58,950) 3.74
Forfeited or expired....................................... (143,000) 4.98
-------- -----
Outstanding at December 31, 1999........................... 688,250 $5.52
======== =====
Exercisable at:
December 31, 1997..................................... 416,450 5.07
December 31, 1998..................................... 373,700 5.37
December 31, 1999..................................... 477,500 5.62
======== =====
</TABLE>
The following table summarizes information for stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
RANGE OF AVERAGE AVERAGE WEIGHTED
EXERCISE NUMBER LIFE EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING (YEARS) PRICE EXERCISABLE PRICE
-------- ----------- ------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$3.58 to $4.04................ 66,750 1.08 $4.00 0 N/A
$4.25 to $5.88................ 234,500 6.71 4.91 200,000 $4.91
$5.98 to $5.98................ 119,500 1.22 5.98 20,000 5.98
$6.00 to $6.88................ 267,500 6.51 6.18 257,500 6.15
------- ---- ----- ------- -----
$3.58 to $6.88................ 688,250 6.25 $5.50 477,500 $5.62
======= ==== ===== ======= =====
</TABLE>
No compensation expense has been recognized for its stock option and stock
purchase plans because the exercise price of all options granted under the stock
option plan and price of shares issued under the stock purchase plan were not
deemed to be less than fair value.
17
<PAGE> 18
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. STOCK OPTION PLANS (CONTINUED)
Had compensation cost for these equity instruments been determined based on
the fair value at the grant dates, Kinnard's net income (loss) and earnings
(loss) per share for the years ended December 31, 1997, 1998 and 1999 would have
been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1998 1999
------ ------- ------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Net income (loss):
As reported...................................... $ 308 $(3,376) $2,709
Pro forma........................................ $ (145) $(3,514) $2,357
Basic earnings (loss) per share:
As reported...................................... $ 0.05 $ (0.58) $ 0.54
Pro forma........................................ $(0.02) $ (0.60) $ 0.47
Diluted earnings (loss) per share:
As reported...................................... $ 0.05 $ (0.58) $ 0.53
Pro forma........................................ $(0.02) $ (0.60) $ 0.46
====== ======= ======
</TABLE>
Using the Black-Scholes option pricing model, the estimated weighted
average fair value of options granted during 1997, 1998 and 1999 was $2.04,
$2.71 and $5.25 per share. The assumptions used in the computations for 1997,
1998 and 1999 are as follows: risk-free interest rate of 6.3%, 5.6% and 6.2%;
expected dividend yield of 0% in all three years; expected life of five, four
and six years; and expected volatility of 43%, 42% and 61%. Pro forma
compensation cost of shares issued under the Employee Stock Purchase Plan is
measured based on the discount from market value. At December 31, 1999, the
closing price of Kinnard's common stock was $7.44 per share.
NOTE 11. COMMITMENTS
Kinnard and its subsidiaries lease office space and equipment under various
operating leases with remaining terms ranging up to eight years. Certain of
these leases have escalation clauses and renewal options. Minimum rentals
required under these non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
2000............................................... $ 758
2001............................................... 728
2002............................................... 709
2003............................................... 620
2004............................................... 322
Thereafter......................................... 398
------
$3,535
======
</TABLE>
Rent expense was $2.9 million, $3.2 million and $2.8 million for the years
ended December 31, 1997, 1998 and 1999, respectively.
18
<PAGE> 19
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11. COMMITMENTS (CONTINUED)
In the normal course of business, Kinnard enters into underwriting and
other commitments. The ultimate settlement of such transactions open at year-end
is not expected to have a material effect on the consolidated financial
statements.
NOTE 12. LEGAL PROCEEDINGS
Kinnard is a defendant in various other actions relating to its business,
some of which involve claims for unspecified amounts. Although the ultimate
resolution of these matters cannot be predicted with certainty, in management's
opinion, while their outcome may have a material effect on the earnings in a
particular period, the outcome will not have a material adverse effect on the
financial condition of Kinnard.
NOTE 13. SEGMENTS
Kinnard's reportable segments are: retail sales, equity capital markets,
fixed income and other. The retail segment consists of various retail branch
locations and the financial services division. Equity capital markets consists
of equity trading, institutional sales, research and investment banking. Fixed
income includes the origination, trading, and institutional sales of fixed
income securities. Other consists of general corporate, administrative support
functions and net gains or losses on the investment account. Kinnard does not
provide balance sheet data for segment reporting as this data is not measured.
Information concerning operations in these segments of business is as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue:
Retail sales................................... $30,422 $24,737 $28,760
Equity capital markets......................... 10,192 8,660 11,720
Fixed income................................... 6,224 5,943 6,182
Other.......................................... 3,008 1,604 8,206
------- ------- -------
$49,846 $40,944 $54,868
======= ======= =======
Pretax income (loss):
Retail sales................................... $ 4,342 $ 2,501 $ 4,983
Equity capital markets......................... (509) (3,126) (1,148)
Fixed income................................... 1,166 1,132 840
Other.......................................... (4,463) (6,136) (162)
------- ------- -------
$ 536 $(5,629) $ 4,513
======= ======= =======
</TABLE>
19
<PAGE> 20
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Kinnard sells securities that are not yet purchased (short sales) for its
own account. The establishment of short positions exposes Kinnard to
off-balance-sheet market risk in the event prices increase, as Kinnard may be
obligated to acquire the securities at prevailing market prices. Due to market
fluctuations, the amount necessary to acquire and deliver securities sold but
not yet purchased may be greater than the obligation already recorded in the
consolidated financial statements.
In connection with its trading securities, Kinnard does not, nor does it
have plans to, utilize interest rate swaps, foreign currency contracts, futures,
forward contracts, or other derivatives.
In the normal course of business, Kinnard's activities involve the
execution, settlement and financing of various securities transactions. These
activities may expose Kinnard to off-balance-sheet risk in the event the
customer or counterparty is unable to fulfill its contractual obligations. Such
risks may be increased by volatile trading markets.
Kinnard clears all transactions for its customers on a fully disclosed
basis with a clearing firm that carries all customer accounts and maintains
related records. However, Kinnard is liable to the clearing firm for the
transactions of its customers. These activities may expose Kinnard to
off-balance-sheet risk in the event a customer or counterparty is unable to
fulfill its contractual obligations. Kinnard maintains all of its trading
securities at the clearing firm. These trading securities may collateralize
amounts due to the clearing firm.
Kinnard is also exposed to the risk of loss on customer transactions in the
event of the customer's or counterparty's inability to meet the terms of their
contracts, in which case Kinnard may have to purchase or sell financial
instruments at prevailing market prices. The impact of unsettled transactions is
not expected to have a material effect upon Kinnard's consolidated financial
statements.
Kinnard's customer securities activities are transacted on either a cash or
margin basis. Kinnard seeks to control the risks associated with its customer
margin activities by requiring customers to maintain margin collateral in
compliance with regulatory and internal guidelines. Kinnard monitors required
margin levels daily, and pursuant to such guidelines, requires that customers
deposit additional collateral, or reduce margin positions, when necessary.
As a broker dealer, JGK is engaged in various securities trading and
brokerage activities serving a diverse group of corporations, governments,
institutions and individual investors. JGK's exposure to credit risk associated
with the nonperformance of these customers and the related counterparties in
fulfilling their contractual obligations pursuant to securities transactions can
be directly impacted by volatile security markets, credit markets and regulatory
changes which may impair the ability of customers and/or counterparties to
satisfy their obligations to Kinnard. This exposure is measured on an individual
customer basis, as well as for groups of customers that share similar
attributes.
To alleviate the potential for risk concentrations, Kinnard has established
credit limits which are monitored on an on-going basis in light of market
conditions.
20
<PAGE> 21
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
2000 1999
----------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $10,263 $8,018
Receivable from clearing firm 4,085 590
Miscellaneous receivables 4,028 2,899
Trading securities, at market 9,366 12,976
Office equipment at cost, less accumulated depreciation
of $4,089 and $3,594, respectively 989 1,247
Investment securities, at fair value 11,392 13,992
Deferred income taxes 702 354
Other assets 290 351
----------------------------------------------------------------------------------------------------------------------------
Total assets $41,115 $40,427
----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Securities sold but not yet purchased, at market 514 844
Accrued compensation 5,457 6,233
Other accounts payable and accrued expenses 2,563 3,158
Income taxes payable 1,241 1,228
----------------------------------------------------------------------------------------------------------------------------
Total liabilities 9,775 11,463
----------------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Common stock, $.02 par value; authorized 12,000 shares; issued
and outstanding 4,909 and 4,782 shares, respectively 98 96
Additional paid-in capital 6,641 6,028
Retained earnings 24,601 22,840
----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 31,340 28,964
----------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $41,115 $40,427
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
21
<PAGE> 22
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------------------------------------------------------------------------------
2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Commissions $4,225 $4,347 $10,256 $8,524
Principal transactions 5,848 5,520 15,172 10,569
Net gains/(losses) on investment account
(239) 200 (591) 872
Investment banking 1,878 1,462 4,266 2,024
Interest 542 418 1,212 811
Other 963 859 1,924 1,824
----------------------------------------------------------------------------------------------------------------------------
Total revenues 13,217 12,806 32,239 24,624
----------------------------------------------------------------------------------------------------------------------------
Expenses:
Compensation and benefits 9,048 8,433 21,718 16,063
Floor brokerage and clearance 1,096 944 2,593 1,910
Communications 204 191 404 389
Occupancy and equipment 1,221 1,250 2,513 2,686
Other 1,224 1,411 2,075 2,411
----------------------------------------------------------------------------------------------------------------------------
Total expenses 12,793 12,229 29,303 23,459
----------------------------------------------------------------------------------------------------------------------------
Income before income taxes 424 577 2,936 1,165
Income tax expense 170 253 1,175 487
----------------------------------------------------------------------------------------------------------------------------
Net income $254 $324 $1,761 $678
----------------------------------------------------------------------------------------------------------------------------
Earnings per common share:
Basic $0.05 $0.06 $0.36 $0.13
Diluted $0.05 $0.06 $0.34 $0.13
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
22
<PAGE> 23
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
Total
Common Stock Paid-in Retained Shareholders'
Shares Amount Capital Earnings Equity
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 5,955 $119 $11,946 $23,507 $35,572
----------------------------------------------------------------------------------------------------------------------------
Issuance of shares under
the employee stock purchase plan 13 0 78 78
Issuance of shares under the
employee stock option plan 81 2 379 381
Repurchase of stock (566) (11) (3,138) (3,149)
Net loss (3,376) (3,376)
----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 5,483 110 9,265 20,131 29,506
----------------------------------------------------------------------------------------------------------------------------
Issuance of shares under the
employee stock option plan 59 1 367 368
Repurchase of stock (760) (15) (3,604) (3,619)
Net income 2,709 2,709
----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 4,782 96 6,028 22,840 28,964
----------------------------------------------------------------------------------------------------------------------------
Issuance of shares under the
employee stock purchase plan 19 0 113 113
Issuance of shares under the
employee stock option plan 108 2 500 502
Net income 1,761 1,761
----------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2000 (unaudited) 4,909 $98 $6,641 $24,601 $31,340
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
23
<PAGE> 24
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
Six Months Ended
June 30,
----------------------------------------------------------------------------------------------------------------------------
2000 1999
----------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers and clearing firm $31,404 $21,096
Cash paid to suppliers and employees (31,248) (23,285)
Interest received 1,212 811
Income taxes paid (1,510) (443)
----------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (142) (1,821)
----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investment securities 2,765 9,173
Purchases of:
Office equipment (237) (307)
Investment securities (756) (5,434)
----------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 1,772 3,432
----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 615 68
Repurchase of common stock -- (2,247)
----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 615 (2,179)
----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 2,245 (568)
Cash and cash equivalents at beginning of period 8,018 2,689
----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $10,263 $2,121
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
24
<PAGE> 25
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
Six Months Ended
June 30,
----------------------------------------------------------------------------------------------------------------------------
2000 1999
----------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH
USED IN OPERATING ACTIVITIES:
Net income $1,761 $678
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 495 563
Net unrealized loss on investment securities 1,290 367
Net realized gain on sale of investment securities (699) (1,239)
Deferred income taxes (348) (183)
(Increase) decrease in:
Receivable from clearing firm (3,495) 588
Miscellaneous receivables (1,129) 271
Trading securities, at market 3,610 (2,981)
Income tax receivable 227
Other assets 61 52
Increase (decrease) in:
Securities sold but not yet purchased, at market (330) 548
Accrued compensation (776) (418)
Other accounts payable and accrued expenses (595) (294)
Income taxes payable 13 --
----------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities ($142) ($1,821)
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
25
<PAGE> 26
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements of Kinnard
Investments, Inc., (the "Company") have been prepared in
conformity with generally accepted accounting principles and
should be read in conjunction with the Company's Annual Report on
Form 10-K for the year ended December 31, 1999. The results of
operations for the three and six month periods ended June 30, 2000
are not necessarily indicative of the results to be expected for
the year ending December 31, 2000.
The consolidated statement of financial condition as of June 30,
2000 and other financial information for the three and six month
periods ended June 30, 2000 and 1999, are unaudited, but
management of the Company believes that all adjustments
(consisting only of normal recurring adjustments) necessary for a
fair statement of the results of operations for the periods have
been included.
NOTE 2. BINDING ARBITRATION AWARD
On December 10, 1999, the National Association of Securities
Dealers ("NASD") issued a binding arbitration award for $16.6
million in favor of the Company and against Dain Rauscher
Corporation ("Dain") and several of its investment executives who
were wrongfully recruited by Dain from the Company from 1997 to
1999.
NASD arbitration awards are not subject to appeal. While Dain has
filed a motion with the Hennepin County District Court (the
"Court") to vacate the arbitration panel's decision, the Company
believes that vacature is unlikely due to the narrow grounds upon
which a binding arbitration award may be vacated. Under both
Federal and Minnesota Arbitration Acts, the Court must find
evidence of fraud, corruption, misconduct or partiality on the
part of the arbitration panel, or that the panel exceeded its
powers in rendering its award decision.
The award included compensatory damages of $9.1 million, punitive
damages of $7.1 million and reimbursement of legal costs of $350
thousand. Under NASD Rules, Dain is required to pay interest on
the unpaid settlement amount based on a statutory interest rate of
5.5%. Upon exhaustion of all vacature efforts, the Company
anticipates recognizing up to $16.6 million in revenue from the
settlement, plus interest income during the period that the
settlement remains unpaid. Recognition of such revenue may result
in additional compensation and income tax expense.
26
<PAGE> 27
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. BINDING ARBITRATION AWARD (CONTINUED)
The following unaudited pro forma information has been prepared
assuming that the binding arbitration settlement and related
accrued interest had been recognized at the end of the period
presented after the impact of certain adjustments to revenue,
employee compensation based on current formulas and the related
income tax effects thereof.
<TABLE>
<CAPTION>
PRO FORMA STATEMENT OF OPERATIONS DATA
(In thousands, except per share data)
(Unaudited)
-------------------------------------------------------------------------------------------------------
<S> <C>
Six-month period ended June 30, 2000
-------------------------------------------------------------------------------------------------------
Revenues $ 49,252
-------------------------------------------------------------------------------------------------------
Expenses $ 32,440
-------------------------------------------------------------------------------------------------------
Income before income taxes 16,812
-------------------------------------------------------------------------------------------------------
Income tax expense 6,725
-------------------------------------------------------------------------------------------------------
Net income $ 10,087
-------------------------------------------------------------------------------------------------------
Earnings per common share:
-------------------------------------------------------------------------------------------------------
Basic $ 2.07
Diluted $ 1.96
Book value per common share: $ 8.08
-------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 3. OTHER COMMITMENTS AND CONTINGENT LIABILITIES
John G. Kinnard and Company, Incorporated ("John G. Kinnard") is a
defendant in various actions relating to its business, some of
which involve claims for unspecified amounts. Although the
resolution of these matters cannot be predicted with certainty,
management believes that while their outcome may have a material
effect on the earnings in a particular period, the outcome will
not have a material adverse effect on the financial condition of
the Company.
NOTE 4. SEGMENTS
The Company's reportable segments are: retail sales, equity
capital markets, fixed income and other. The retail segment
consists of various retail branch locations and the financial
services division. Equity capital markets consists of equity
trading, institutional sales, research and investment banking.
Fixed income includes the origination, trading, and institutional
sales of fixed income securities. Other consists of general
corporate and administrative support functions. The Company does
not provide balance sheet data for segment reporting as this data
is not measured.
27
<PAGE> 28
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. SEGMENTS (CONTINUED)
Information concerning operations in these segments of business is
as follows:
<TABLE>
<CAPTION>
(In thousands)
---------------------------------------------------------------------------------------------------------------
Three months ended Six months ended
---------------------------------------------------------------------------------------------------------------
June 30, 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Retail sales $8,348 $7,096 $19,607 $13,992
Equity capital markets 3,429 2,628 9,026 5,061
Fixed income 1,193 2,467 3,075 3,879
Other 247 615 531 1,692
---------------------------------------------------------------------------------------------------------------
13,217 12,806 32,239 24,624
---------------------------------------------------------------------------------------------------------------
Pretax income (loss):
Retail sales 1,482 1,277 3,898 2,457
Equity capital markets 222 (57) 1,296 (480)
Fixed income 50 662 485 898
Other (1,330) (1,305) (2,743) (1,710)
---------------------------------------------------------------------------------------------------------------
$424 $577 $2,936 $1,165
---------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 5. PENDING ACQUISITION
On June 5, 2000, the Company entered into a definitive merger
agreement with Stockwalk.com Group, Inc. (Stockwalk) and SW
Acquisition, Inc., a subsidiary of Stockwalk, whereby the
Company's securities brokerage and investment banking firms will
be combined under the Stockwalk holding company.
Under the terms of the merger agreement, the Company's
shareholders will receive $6.00 in cash and a fraction of a share
of Stockwalk common stock in exchange for each share of the
Company's common stock that they own. The number of shares of
Stockwalk common stock to be received will be determined based
upon the average closing price of Stockwalk common stock for the
20 trading days ending on the trading day immediately prior to the
date on which all of the conditions in the merger agreement have
been satisfied.
If the average closing price of Stockwalk common stock during the
measurement period is between $9.00 and $15.00 per share, the
Company's shareholders will receive one-half of a share of
Stockwalk common stock together with $6.00 in cash
28
<PAGE> 29
for each share of the Company's common stock that they own. If the
average closing price of Stockwalk common stock during the
measurement period is above $15.00 per share, the Company's
shareholders will receive a fraction of a share of Stockwalk
common stock with a nominal value equal to $7.50, together with
$6.00 in cash, for each share of the Company's common stock that
they own. If the average closing price of Stockwalk common stock
during the measurement period is less than $9.00 per share, the
Company's shareholders will receive a fraction of a share of
Stockwalk common stock with a nominal value equal to $4.50,
together with $6.00 in cash, for each share of the Company's
common stock that they own.
The merger is subject to regulatory and shareholder approval, and
is expected to be completed in the third quarter of 2000. The
meeting of the Company's shareholders to approve the merger
transaction has been scheduled for September 5, 2000.
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<PAGE> 30
STOCKWALK.COM GROUP, INC.
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
------------------------------------
STOCKWALK.COM PRO FORMA
GROUP, INC. ADJUSTMENTS FOR
JUNE 30, 2000 STEICHEN KINNARD STEICHEN
-------------- -------- ------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Cash............................................. $ 9,240 $ 59 $ 10,263 $ 3,000(5)
Cash and cash equivalents -- segregated.......... 59,701 -- -- --
Receivables from customers....................... 191,949 120,742 -- --
Receivables from brokers and dealers............. 277,775 9,156 -- (9,156)(6)
Deposits at clearing organizations............... 18,440 1,051 4,085 --
Trading securities owned, at market.............. 21,323 2,795 9,366 --
Investments...................................... -- -- 11,392 --
Secured demand notes receivable.................. 18,475 -- -- --
Intangibles, net of accumulated amortization..... 10,036 -- -- 40,242(4)
Other assets..................................... 15,595 2,254 6,009 --
-------- -------- ------- --------
Total assets................................. $622,534 $136,057 $41,115 $ 34,086
======== ======== ======= ========
LIABILITIES
Short-term borrowings............................ $ 52,800 $ 1,166 $ -- $ 7,852(6)
Payables to customers............................ 231,283 110,175 -- --
Payables to brokers and dealers.................. 272,339 1,425 -- --
Trading securities sold but not yet purchased, at
market......................................... 1,717 497 514 --
Notes payable.................................... 6,270 -- -- --
Liabilities subordinated to claims of general
creditors...................................... 18,475 -- -- 3,000(5)
Accounts Payable and other liabilities........... 16,131 3,020 9,261 --
-------- -------- ------- --------
Total liabilities............................ $599,015 $116,283 $ 9,775 $ 10,852
SHAREHOLDERS' EQUITY
Common stock
Authorized shares:
Common stock................................... 863 2 98 251(7)(8)
Paid-in capital.................................. 25,469 439 6,641 42,316(7)(8)
Retained earnings................................ (2,813) 19,333 24,601 (19,333)(8)
-------- -------- ------- --------
Total Shareholders' equity....................... 23,519 19,774 31,340 23,234
-------- -------- ------- --------
Total Liabilities and shareholders' equity....... $622,534 $136,057 $41,115 $ 34,086
======== ======== ======= ========
<CAPTION>
AS OF JUNE 30, 2000
------------------------------------
PRO FORMA PRO FORMA
ADJUSTMENTS FOR ADJUSTMENTS FOR PRO-FORMA
KINNARD OFFERING JUNE 30, 2000
--------------- --------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Cash............................................. $(25,367)(1) $19,357(2) $ 16,552
Cash and cash equivalents -- segregated.......... (40,000)(3) -- 19,701
Receivables from customers....................... 40,000(3) -- 352,691
Receivables from brokers and dealers............. -- -- 286,775
Deposits at clearing organizations............... 9,000(10) -- 23,576
Trading securities owned, at market.............. (2,264)(1) -- 31,220
Investments...................................... (11,392)(1) -- --
Secured demand notes receivable.................. -- -- 18,475
Intangibles, net of accumulated amortization..... 19,441(4) -- 69,719
Other assets..................................... 100(9) 2,191(2) 26,149
-------- ------- --------
Total assets................................. $(10,482) $21,548 $844,858
======== ======= ========
LIABILITIES
Short-term borrowings............................ $ -- $ $ 61,818
Payables to customers............................ -- -- 341,458
Payables to brokers and dealers.................. -- -- 273,764
Trading securities sold but not yet purchased, at
market......................................... -- -- 2,728
Notes payable.................................... -- 21,506(2) 27,776
Liabilities subordinated to claims of general
creditors...................................... -- -- 21,475
Accounts Payable and other liabilities........... -- 42(2) 28,454
-------- ------- --------
Total liabilities............................ $ -- $21,548 $757,473
SHAREHOLDERS' EQUITY
Common stock
Authorized shares:
Common stock................................... 41(7)(8) -- $ 1,255
Paid-in capital.................................. 14,078(7)(8) -- 88,943
Retained earnings................................ (24,601)(8) -- (2,813)
-------- ------- --------
Total Shareholders' equity....................... (10,482) -- 87,385
-------- ------- --------
Total Liabilities and shareholders' equity....... $(10,482) $21,548 $844,858
======== ======= ========
</TABLE>
30
<PAGE> 31
STOCKWALK.COM GROUP, INC.
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE TWELVE MONTHS ENDED JUNE 30, 2000
----------------------------------------------------------------------------------------------
PRO FORMA
PRO FORMA PRO FORMA ADJUSTMENTS
STOCKWALK.COM ADJUSTMENTS ADJUSTMENTS FOR
GROUP, INC. STEICHEN KINNARD FOR STEICHEN FOR KINNARD SUB DEBT PRO FORMA
------------- -------- ------- ------------ ----------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Trading profits............ $17,555 $19,562 $32,368 $ -- $ -- $ -- $ 69,485
Interest................... 24,849 10,278 2,039 -- 3,400(A) -- 40,566
Commissions................ 16,336 18,773 18,377 -- -- -- 53,486
Investment banking......... 9,732 4,845 6,081 -- -- -- 20,658
Clearing fees.............. 5,567 -- -- -- -- -- 5,567
Other income............... 4,523 1,222 3,618 (1,906)(H) (1,690)(B)(J) -- 5,767
---------- ------- ------- ------- ------- ------- ----------
Total revenues......... 78,562 54,680 62,483 (1,906) 1,710 -- 195,529
EXPENSES:
Employee compensation and
benefits................. 36,476 32,570 40,283 -- (3,500)(C) -- 105,829
Clearing fees.............. 2,777 333 4,614 -- (1,400)(D) -- 6,324
Occupancy and equipment.... 5,585 1,428 4,988 -- (265)(E) -- 11,736
Communication.............. 9,306 2,650 780 -- (537)(I) -- 12,199
Interest................... 19,787 5,503 -- -- 2,200(A) 2,151(G) 29,641
Other expense.............. 7,526 3,173 5,534 1,990(F) 922(F) 438(K) 19,583
---------- ------- ------- ------- ------- ------- ----------
Total expenses......... 81,457 45,657 56,199 1,990 (2,580) 2,589 185,312
Income (loss) before income
taxes...................... (2,895) 9,023 6,284 (3,896) 4,290 (2,589) 10,217
Income tax expense
(benefit).................. (1,079) 3,970 2,492 (838) 2,293 (1,139) 5,699
--------- ------- ------- ------- ------- ------- --------
Net income (loss)............ $(1,816) $ 5,053 $ 3,792 $(3,058) $ 1,997 $(1,450) $ 4,518
========== ======= ======= ======= ======= ======= ==========
BASIC EARNINGS PER COMMON
SHARE...................... $(0.08) $0.13
========== ==========
Weighted average shares
outstanding -- basic....... 21,579,900 34,000,000
========== ==========
DILUTED EARNINGS PER COMMON
SHARE...................... $(0.08) $0.13
========== ==========
Weighted average shares
outstanding -- diluted..... 21,861,800 34,000,000
========== ==========
</TABLE>
31
<PAGE> 32
STOCKWALK.COM GROUP, INC.
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA
FOOTNOTES TO FINANCIAL STATEMENTS
BASIS OF PRESENTATION
These pro forma financial statements are presented to reflect the
combination of Stockwalk.com Group, Inc. (the "Company"), R.J. Steichen &
Company and Kinnard Investments, Inc. as well as the receipt of proceeds from
the issuance of convertible debt used to finance the acquisitions and related
capital requirements for the acquired entities for the periods shown. The
statements have been prepared pursuant to the rules and regulations of the SEC
and, therefore, do not include all information and notes required by generally
accepted accounting principles for complete financial statements. The pro forma
financial statements and the related notes are not necessarily indicative of the
balance sheet and statements of operations that would have been reported had the
combination of the three companies occurred on the dates indicated, nor do they
represent a forecast of their combined financial position at any future period.
The tables set forth the unaudited pro forma financial information of the
Company (the "Pro Forma Financial Statements"), which consist of: (i) the
Statement of Financial Condition of the Company as of June 30, 2000, which
gives effect to the combination of R.J. Steichen & Company and Kinnard
Investments, Inc. and assumes the receipt of the net proceeds from and the
completion of the offering of Convertible Notes on June 30, 2000, and (ii) the
unaudited pro forma statement of operations of the Company for the year ended
June 30, 2000, which gives effect to the acquisition of Steichen and Kinnard
and assumes the receipt of the net proceeds from the sale and the completion of
the offering of the Convertible Notes as if they had occurred on July 1, 1999.
1) Represents the net reduction of cash related to the following: payment of
$6.00 per share for 4,634,991 shares of Kinnard, $4.1 million paid to retire
856,000 options and warrants for Kinnard stock, and $6,950,000 for various
acquisition costs including investment banking fees and severance costs;
offset by the liquidation of $11.4 million of investments.
2) Represents the net proceeds from the issuance of $21.5 million of
convertible debt and the related deferred financing costs and accrued
interest.
3) Represents the increase in customer receivables resulting from Kinnard's
customer margin accounts being held at MJK and funded by cash in the reserve
account.
4) Represents the goodwill and non compete agreements recorded on the
respective companies as a result of the acquisitions.
5) Represents earnings retained per the Steichen agreement.
6) Represents the reduction in discretionary broker lending and the increase in
short-term borrowings in connection with Mr. John E. Feltl removing
approximately $17 million of capital.
7) Represents the issuance of 3.6 million and 6.3 million shares of $.04 par
value common stock and additional paid in capital related to the acquisition
of Kinnard and Steichen, respectively at $6.00 per share.
32
<PAGE> 33
8) Represents the accounting elimination of shares of common stock, related
additional paid in capital and remaining retained earnings at acquisition of
the respective companies.
9) Represents the write off of $700,000 of fixed assets of Kinnard, and a
$800,000 tax benefit record for the early disposition of stock for the
options exercised.
10) Represents the after tax effect of recording the $16.6 million binding
arbitration awarded by the NASD in December 1999.
A.) Represents interest revenue and expense on the $40,000,000, of customer
margin balances at 8.5% and 5.5%, respectively, moved from Kinnard's current
clearing firm to MJK.
B.) Represents the increase in rebates associated with a $100,000,000 average
balance held by Kinnard earning the premium rate currently recognized by
MJK.
C.) Represents the reduction of compensation and benefit expense of certain
Kinnard employees offset by retention bonuses in first year offered to
certain employees and sales representatives.
D.) Represents the elimination of clearing fees paid to clearing brokers by
Kinnard, as a result of Kinnard's trades being cleared by MJK, offset by the
increase in administrative costs required to administer the additional
transaction volume.
E.) Represents a reduction in the space and related rent for the combined
companies.
F.) Represents the amortization of the goodwill of $18.4 million and $40.2
million recorded for Kinnard and Steichen over 20 years.
G.) Represents interest expense on the convertible note.
H.) Represents the reduction of income generated by the approximately $17
million of funds to be removed by Mr. Feltl at closing.
I.) Represents a reduction of quote feeds and other miscellaneous efficiencies
of scale.
J.) Represents a reduction of the other income generated by $20 million of
excess funds at Kinnard as these funds are depleted to finance the
acquisition.
K.) Represents the amortization of $2.2 million of deferred financing costs
associated with the issuance of convertible subordinated debt over five
years.
33
<PAGE> 34
(C) EXHIBITS:
2.1 Agreement and Plan of Merger, dated June 5, 2000, by and
between Kinnard Investments, Inc., Stockwalk.com Group, Inc.
and SW Acquisition Corporation*
23.1 Consent of KPMG LLP
99.1 Press Release
---------------
* Incorporated by reference to Exhibit 2.7 to Amendment No. 1 to the
Registration Statement on Form S-2 of Stockwalk.com Group, Inc. (Registration
No. 333-35544) filed on June 23, 2000.
FORWARD LOOKING STATEMENTS
Information contained herein and in the Exhibits attached hereto may
contain forward looking statements that involve risks and uncertainties with
respect to the fair value of assets acquired, the amount of liabilities assumed
and otherwise. These forward looking statements include the words "believes,"
"expects," "anticipates" and similar expressions. These forward looking
statements involve certain risks and uncertainties, including those related to
general economic and business conditions, changes in market conditions and
competitive pressures.
34
<PAGE> 35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STOCKWALK.COM GROUP, INC.
Dated: September 22, 2000 By: /s/ Philip T. Colton
--------------------------------------
Name: Philip T. Colton
Title: Senior Vice President and General
Counsel
35
<PAGE> 36
EXHIBIT INDEX
2.1 Agreement and Plan of Merger, dated June 5, 2000, by and between
Kinnard Investments, Inc., Stockwalk.com Group, Inc. and SW Acquisition
Corporation*
23.1 Consent of KPMG LLP
99.1 Press Release
---------------
* Incorporated by reference to Exhibit 2.7 to Amendment No. 1 to the
Registration Statement on Form S-2 of Stockwalk.com Group, Inc. (Registration
No. 333-35544) filed on June 23, 2000.
Exhibit Index-1
