SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13
of
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File No.
December 31, 1996 0-9377
KINNARD INVESTMENTS, INC.
(Exact name of registrant as specified in its charter)
920 Second Avenue South, Minneapolis, Minnesota 55402 (612) 370-2700
(Address of principal executive offices) Telephone number
Minnesota 41-0972952
(State of incorporation) (I.R.S. Employer identification number)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.02
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days. Yes X No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant as of March 20, 1997, was $21,884,647 (based on the closing price of
the Registrant's Common Stock on such date).
Shares of $0.02 par value Common Stock outstanding at March 20, 1997: 6,029,563.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive Proxy Statement to be filed for the
Registrant's 1997 Annual Meeting of Shareholders is incorporated by reference
into Part III.
<PAGE>
PART I
ITEM 1. BUSINESS
General
Kinnard Investments, Inc. (the "Registrant" or "KII") 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. The
Registrant 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. The focus of the Capital Markets group
is on emerging growth companies with market capitalizations up to $250 million.
Through the Public Finance Department, the Company negotiates and underwrites
municipal debt offerings. Other products and services include mutual funds,
insurance products, investment management, IRA services, and fixed income
securities. Subsidiaries include Continental Funding, Inc., which buys and sells
bank certificates of deposit, and NODAKBONDS, Inc., which acts as a fiscal agent
in the state of North Dakota. John G. Kinnard is a member of the Chicago Stock
Exchange, and is registered as an investment adviser under the Investment
Advisers Act of 1940.
On October 31, 1996, Kinnard Investments completed the sale of its PRIMEVEST
Financial Services, Inc. ("PRIMEVEST" or "PFS") subsidiary to ReliaStar
Financial Corporation for $15.5 million in cash. PRIMEVEST is a broker-dealer
that provides investment products and services to financial institutions and
their customers. The operations of PRIMEVEST are included in the consolidated
operations of KII through the date of sale. See Note 11 to the Consolidated
Financial Statements for additional information regarding the sale of PRIMEVEST.
Sources of Revenue
The following table sets forth a breakdown of the amount and percentage of
revenues from each principal source for the three most recent fiscal years:
<PAGE>
<TABLE>
<CAPTION>
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
Amount Percentage Amount Percentage Amount Percentage
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commission income
Mutual funds $14,090 14.1% $9,426 12.5% $8,661 15.6%
Over-the-counter securities 8,013 8.0 6,493 8.6 4,788 8.6
Listed securities 6,238 6.3 5,477 7.3 4,841 8.7
Insurance 6,119 6.1 3,975 5.3 4,550 8.2
Other 1,536 1.5 1,439 1.9 1,086 1.9
----------------------- ----------------------- -----------------------
35,996 36.0 26,810 35.6 23,926 43.0
----------------------- ----------------------- -----------------------
Principal transactions
Equity securities 30,514 30.5 25,993 34.5 18,874 33.9
Fixed income securities 5,393 5.4 5,794 7.7 4,676 8.4
----------------------- ----------------------- -----------------------
35,907 35.9 31,787 42.2 23,550 42.3
----------------------- ----------------------- -----------------------
Investment account income (loss)
Realized 5,407 5.4 4,017 5.3 347 0.6
Unrealized (434) (0.4) 2,546 3.4 (1,333) (2.4)
----------------------- ----------------------- -----------------------
4,973 5.0 6,563 8.7 (986) (1.8)
----------------------- ----------------------- -----------------------
Investment banking 4,985 5.0 5,303 7.0 5,588 10.0
Interest income 2,732 2.7 1,926 2.6 1,507 2.7
Other income 4,330 4.3 2,944 3.9 2,082 3.8
Sale of subsidiary 11,054 11.1 0 0.0 0 0.0
----------------------- ----------------------- -----------------------
Total revenues $99,977 100.0% $75,333 100.0% $55,667 100.0%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Commission Income
Commission revenues are generated through securities transactions for individual
and institutional investors where the Company acts as an agent. Commissions are
received on exchange transactions, mutual funds, insurance products, options and
over-the-counter securities in which the Company does not make a market.
Principal Transactions
The Company actively engages in trading as a principal in over-the-counter
equity and fixed income securities. When transactions are executed on a
principal basis, the Company, in lieu of commissions, marks up or marks down
securities and records the income as principal revenues. The Company buys, sells
and maintains inventory of a security in order to "make a market" in that
security, which tends to expose the Company to more risk than agency
transactions. Revenues from principal transactions, including trading profits or
losses, depend upon the general trend of prices, the level of activity in the
security markets, the skills of employees engaged in market making and the size
of inventories. The Company makes a dealer market in approximately 350 equity
securities.
Investment Banking
John G. Kinnard manages, co-manages and participates in the public underwriting
of corporate securities and private placement offerings. The Company specializes
in providing financing to emerging growth companies with a market capitalization
of up to $250 million. During 1996, John G. Kinnard raised over $50 million
through its investment banking activities, which included two public offerings,
and five private placements. In addition, John G. Kinnard provides mergers and
acquisitions, valuation and advisory services.
The Syndicate Department coordinates the distribution of corporate underwritings
and accepts invitations to participate in competitive or negotiated
underwritings managed by other investment banking firms. In 1996, John G.
Kinnard participated in 78 offerings.
John G. Kinnard also negotiates, underwrites and participates in municipal debt
offerings through its Public Finance department. In 1996, a total of 120
financings were underwritten or participated in, including 87 that were managed
by the Company.
Investment Account
The majority of the Company's investment account is invested in short to
medium-term investment grade marketable fixed income securities. In addition,
the Company holds both publicly traded and privately placed equity securities.
As part of the compensation for underwriting securities, John G. Kinnard
typically receives warrants to purchase shares of its clients' common stock.
These warrants are initially carried at cost, but if the value of the underlying
shares appreciates, the warrants, or shares obtained on exercise of the
warrants, are valued by management at their estimated fair value. Warrants and
other securities held in the investment account frequently are not immediately
transferable and are subject to holding period requirements.
The value of certain securities held in the investment account can fluctuate
substantially from month to month, with the resulting valuation changes being
reported as investment account income or loss. These fluctuations in value can
have a significant impact on reported earnings.
Interest Income
The Company derives interest income primarily from the financing of customer
margin loans, fixed income securities inventories carried for resale to
customers and fixed income securities held in the investment account.
<PAGE>
Interest Income (continued)
Customer securities transactions are effected on either a cash or margin basis.
In a margin transaction, interest is charged to the customer on the amount
loaned to purchase securities. The loan is collateralized by securities held in
the customer's account.
Research Department
John G. Kinnard's Research Department develops investment recommendations and
market information on emerging growth companies located primarily in the Upper
Midwest. The department develops proprietary research on approximately 70
companies, which includes analysis of financial statements, discussions with
senior management, evaluation of products and services and projections of
estimated future financial results. The Company's research efforts are
supplemented by research products and services purchased from outside
consultants.
Operations
Alex. Brown & Sons, Inc. ("Alex. Brown") is John G. Kinnard's clearing agent on
a fully disclosed basis. Under the terms of their agreement, Alex. Brown carries
and clears all of John G. Kinnard's customer securities accounts and performs
the following services: (i) preparation and mailing of monthly statements; (ii)
settlement of contracts and transactions in securities between John G. Kinnard
and other broker-dealers and between John G. Kinnard and its customers; (iii)
custody and safekeeping of securities and cash, the handling of margin accounts,
dividends, exchanges, rights offerings and tender offers; and (iv) execution of
customer orders which were placed on various exchanges.
John G. Kinnard guarantees to Alex. Brown the performance of every customer
transaction introduced by John G. Kinnard. In the event the arrangement with
Alex. Brown is terminated, the Company believes that a new clearing arrangement
could be established with another clearing correspondent on terms acceptable to
John G. Kinnard. The Company further believes that any disruption caused by such
a change would not have a material adverse effect on John G. Kinnard's
operations.
Customer transactions are recorded on a settlement date basis, which is
generally three business days after the trade date. The Company is therefore
exposed to risk of loss on these transactions in the event of the customer's or
broker's inability to meet the terms of their contracts, in which case the
Company may have to purchase or sell financial instruments at prevailing market
prices. The customers' security activities are transacted on either a cash or
margin basis. The Company seeks to control the risks associated with customer
margin activities by requiring customers to maintain margin collateral in
compliance with various regulatory and internal guidelines. Required margin
levels are monitored daily and, pursuant to guidelines, customers may be
required to deposit additional collateral, or reduce margined positions, when
necessary.
Regulation
John G. Kinnard is registered with the Securities and Exchange Commission
("SEC") as a broker-dealer under the Securities Exchange Act of 1934, and also
as an investment adviser under the Investment Advisers Act of 1940. John G.
Kinnard is registered as a broker-dealer under the securities laws in 48 states,
and is a member of the National Association of Securities Dealers, Inc. and
Chicago Stock Exchange. Every aspect of the Company's business is subject to
comprehensive regulation and inspection by governmental and self-regulatory
authorities, all of which have the power of curtailment, suspension, revocation
or expulsion in the event of violations of their respective statutes or rules.
As a broker-dealer registered with the SEC, John G. Kinnard is subject to
prohibitions against certain types of dealings with non-members, bookkeeping
requirements, an annual audit by an independent public accountant, the filing of
periodic reports, protection of customer accounts and maintaining minimum net
capital, as defined. In addition, broker-dealers may be prohibited from
expanding their business or declaring cash dividends if the ratio of aggregate
indebtedness to net capital is greater than 10 to 1.
<PAGE>
Regulation (continued)
John G. Kinnard computes its net capital using the standard net capital method,
which requires that the ratio of aggregate indebtedness to net capital not
exceed 15 to 1. The Company has at all times maintained its net capital above
the required levels.
Competition
The Company encounters intense competition in all aspects of its business and
competes directly with other securities firms, a significant number of which
have greater capital and other resources, and many of which offer a wider range
of financial services. The securities industry also faces growing competition
from commercial banks, insurance companies and other businesses providing
financial services. The Company competes with other firms on the basis of
customer service, quality and ability of employees, the relative prices of
products and services, product availability and locations.
While the Company believes that it is competitively well positioned, it is
impossible to predict the effect of competing firms or the lower costs which may
be offered by certain discount brokers. In addition, there is substantial
competition among firms in the securities industry to attract and retain
qualified and successful investment executives.
Employees
At December 31, 1996, the Company had 360 employees. None of the Company's
employees are covered by a collective bargaining agreement. The Company
considers its relations with employees to be good and regards compensation and
employee benefits, including medical, life and disability, deferred savings and
retirement plans, to be competitive with those offered by other securities
firms.
Cautionary Statements
As provided under the Private Securities Reform Act of 1995, the Company wishes
to caution investors that the following factors, among others, could affect the
Company's results of operations and cause such results to differ materially from
those anticipated in forward-looking statements made in this document and
elsewhere by or on behalf of the Company:
1. Industry Factors. The securities business is by its nature subject to
various risks, particularly in volatile or illiquid markets, including the
risk of losses resulting from underwriting or ownership of securities,
customer or issuer fraud, employee errors and misconduct, failures in
connection with the processing of securities transactions and litigation. A
substantial part of John G. Kinnard's business involves securities of
emerging growth companies, a segment of the securities industry which may be
subject to greater risks and volatility than the industry as a whole.
2. Regulation. The securities industry is subject to extensive regulation, at
both federal and state levels. As a matter of public policy, various
regulatory bodies are charged with safeguarding the integrity of the
securities markets and with protecting the interests of customers
participating in those markets, as opposed to the interests of the Company's
shareholders. The SEC, state securities agencies and self-regulatory
organizations such as the NASD require strict compliance with their
extensive rules and regulations. Failure to comply with such rules and
regulations could expose the Company to civil liabilities, fines and other
penalties and sanctions that could materially impair the Company's
operations.
The SEC has provisions with respect to net capital requirements applicable
to the operations of brokerage firms. A significant loss in any year,
changes in the net capital requirements by applicable regulatory
authorities, or an extraordinary charge against net capital could adversely
affect the ability of the Company to expand or maintain present levels of
business. Additional legislation or regulation, changes in existing laws and
rules or changes in the interpretation or enforcement of existing law and
rules may directly affect the mode of operation and profitability of the
Company.
<PAGE>
Cautionary Statements (continued)
3. Economic and Market Conditions. The Company's business and its profitability
are affected by many factors, including the volatility and price level of
securities markets; the volume, size and timing of securities transactions;
the demand for investment banking services; the level and volatility of
interest rates; the availability of credit; legislation affecting the
business and financial communities; and the economy in general. Low trading
volume and depressed prices may reduce revenues, which would generally
negatively impact profitability because a portion of the Company's costs are
fixed. The failure of issuers, customers and other dealers to perform their
obligations may also result in losses to the Company.
As a market maker, John G. Kinnard maintains inventories of securities to
engage in principal transactions with retail and institutional customers as
well as other broker-dealers. The maintenance of such positions exposes the
Company to the possibility of significant losses if the market prices of the
securities comprising its inventory positions change. In addition, the
impact that new limit order handling rules will have on the Company's market
making activities is uncertain.
4. Investment Account. The Company maintains investments in securities that are
generally held for long-term appreciation. The investments include stocks
and warrants, some of which are restricted and non-marketable for varying
periods of time. These securities are recorded at their estimated fair value
at the end of each accounting period, with the resulting changes in value
reported as investment account income or loss. Valuation of the investment
account is volatile, and changes may have a material effect on the Company's
earnings.
5. Investment Banking. John G. Kinnard's investment banking activities subject
the Company to certain risks, including market, credit and liquidity, in the
event that securities purchased in an underwriting cannot be resold at
anticipated price levels. Further, under applicable securities laws and
court decisions with respect to underwriters' liability and limitations on
indemnification by issuers, an underwriter may be exposed to securities
liabilities arising out of the public and private offering of equity and
debt instruments.
6. Litigation and Arbitration. Many aspects of the Company's business involve
substantial risks of liability. In recent years, there has been an
increasing incidence of litigation and arbitration involving participants in
the securities industry. Claims by dissatisfied customers alleging fraud,
unauthorized trading, churning, mismanagement and breach of fiduciary duty
are periodically made against broker-dealers. Underwriters and agents are
subject to potential liability for material misstatements and omissions in
prospectuses and other communications with respect to offerings of
securities. A settlement or judgment related to these types of claims or
activities could have a material adverse effect on the Company.
ITEM 2. PROPERTIES
The Registrant's main office is located in the Kinnard Financial Center, 920
Second Avenue South, Minneapolis, Minnesota and is leased by John G. Kinnard.
John G. Kinnard has 18 branch offices located in Minnesota, North Dakota, South
Dakota, Wisconsin and Colorado, in addition to maintaining relationships with
various independent representatives. See Note 9 of the Notes to Consolidated
Financial Statements filed herein for information concerning leases of the
Company's branches and offices.
ITEM 3. LEGAL PROCEEDINGS
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, the Company's management
believes that while the outcome of these matters 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.
In the normal course of business, the Company 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 financial statements.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the Registrant's fiscal year no matter was
submitted to a vote of security holders through the solicitation of proxies or
otherwise.
Executive Officers of the Registrant
The following table sets forth for each of the Company's current executive
officers their age, current positions with the Company, and business experience
during the past five years. The Company is currently engaged in the process of
recruiting a chief executive officer.
Principal Occupation and Business
Name Age Experience During Past Five Years
Gerald M. Gifford 52 Secretary of the Registrant since October 1979.
Executive Vice President of John G. Kinnard since
February 1990. Secretary of John G. Kinnard
since December 1973 and Treasurer of the
Registrant from February 1990 to February 1993.
Treasurer of John G. Kinnard from February 1990 to
February 1991.
Daniel R. Sass 39 Treasurer of the Registrant since December 1996.
Senior Vice President and Treasurer of John G.
Kinnard since March 1994. Additional positions
at John G. Kinnard were Controller from December
1992 to March 1994, and Assistant Controller
from December 1991 to December 1992.
There are no family relationships between or among any of the executive officers
of the Registrant. The term of office of each executive officer is from one
annual meeting of directors until the next annual meeting of directors or until
a successor for each is elected.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Market Information
The Registrant's common stock is traded in the over-the-counter market on The
Nasdaq Stock Market under the symbol "KINN". The following table sets forth the
high and low last sale prices for the Registrant's common stock, as reported by
Nasdaq:
High Low
1996 First Quarter.............................. $4.375 $3.125
Second Quarter............................. 5.500 4.000
Third Quarter.............................. 6.750 4.250
Fourth Quarter............................. 6.625 4.875
1995 First Quarter............................... $2.750 $1.938
Second Quarter.............................. 4.125 2.125
Third Quarter............................... 4.375 3.125
Fourth Quarter.............................. 4.125 3.375
<PAGE>
Number of Holders of Common Stock
As of March 12, 1997, there were 673 beneficial holders of record of the
Registrant's common stock.
Dividends
The Company does not currently pay a regular quarterly dividend. The payment of
future dividends, if any, rests within the discretion of the Board of Directors,
and will depend upon the Company's earnings, regulatory capital requirements and
financial condition, as well as other relevant factors.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(In thousands, except per share data)
- --------------------------------------------------------------------------------------------------------------------------------
Fiscal Year
-------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Financial Condition:
Cash and cash equivalents $14,031 $5,766 $2,750 $4,283 $4,452
Total assets 47,141 45,897 31,617 40,429 28,443
Total liabilities 11,112 20,592 10,542 15,240 15,271
Shareholders' equity 36,029 25,305 21,075 25,189 13,172
Operating Results:
Total revenues 99,977 75,333 55,667 71,646 57,312
Total operating expenses 80,311 69,647 61,174 65,672 52,487
Income (loss) before income taxes 19,666 5,686 (5,507) 5,974 4,825
Net income (loss) 11,698 3,376 (3,210) 3,797 3,003
Per Share Data:
Earnings (loss) - Primary 1.92 0.54 (0.54) 0.64 0.73
Earnings (loss) - Fully diluted 1.89 0.54 (0.54) 0.63 0.71
Dividends declared 0.00 0.00 0.10 0.15 0.10
Book value 5.98 4.04 3.58 4.18 3.47
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
The following table sets forth a summary of changes in the major categories of
revenues and expenses from the prior year's results.
<TABLE>
<CAPTION>
(In thousands)
- --------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1996 versus 1995 1995 versus 1994
Increase (decrease) Increase (decrease)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Commission income $9,186 34% $2,884 12%
Principal transactions 4,120 13 8,237 35
Investment account income (1,590) (24) 7,549 766
Investment banking (318) (6) (285) (5)
Interest 806 42 419 28
Other 1,386 47 862 41
Sale of subsidiary 11,054 100 0 0
- --------------------------------------------------------------------------------------------------------------------------
Total revenues 24,644 33 19,666 35
- --------------------------------------------------------------------------------------------------------------------------
Expenses:
Compensation and benefits 5,289 14 3,928 11
Bank commissions 4,759 49 1,166 14
Floor brokerage and clearance 688 16 495 13
Communications 13 1 (102) (8)
Occupancy and equipment 305 5 227 4
Litigation settlements 9 0 2,856 100
Other (399) (6) (97) (1)
- --------------------------------------------------------------------------------------------------------------------------
Total expenses 10,664 15 8,473 14
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 13,980 246 11,193 203
Income tax expense 5,658 245 4,607 201
- --------------------------------------------------------------------------------------------------------------------------
Net income $8,322 247% $6,586 205%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Business Environment
The Company is engaged in securities brokerage, trading, investment banking,
asset management and related financial services. These activities are highly
competitive and sensitive to market factors, which include trading volumes,
interest rates, inflation and regional economies. In addition, a sizable portion
of the Company's expenses are fixed, which would negatively impact profit
margins if revenues were to decline. The Company believes that it is positioned
to operate efficiently within this environment, although revenues and net income
may be volatile from period to period.
The securities industry as a whole posted spectacular results in 1996, with
market indices reaching record highs and interest rates remaining relatively
stable. Equity markets were fueled by record amounts of new money invested into
mutual funds and a significant number of underwritings by investment banking
firms. Maintaining recent growth rates in revenues and profits may be difficult
if market conditions become less favorable.
Fiscal years ended December 31, 1996 and 1995
The Company posted record revenues in 1996 approaching $100 million, an increase
of 33% over the $75.3 million for 1995. The increase is attributable to strong
results in the Capital Markets group and to a gain on the sale of PRIMEVEST (see
Note 11 to the Consolidated Financial Statements for additional information
regarding the sale of PRIMEVEST). For the year ended December 31, 1996, primary
earnings per share were $1.92 compared to $0.54 per share for the prior year.
Excluding the one-time gain and associated expenses, net income for the year was
approximately $5.2 million, or $0.84 per share.
<PAGE>
Fiscal years ended December 31, 1996 and 1995 (continued)
Commission income increased by 34% in the current year compared to the same
period in 1995, mainly due to significant increases in the sale of listed
securities, mutual fund products and annuities. PRIMEVEST was responsible for
more than 70% of the increase in commission income. The Company's growth in
mutual funds benefited from the industry trend of record investments into funds
during 1996.
Revenue from principal transactions increased by 13% on the strength of an
active Nasdaq equity market. The Capital Markets group, which includes equity
trading, institutional equity sales, investment banking and research, has been
increasing their focus on emerging growth companies located primarily in the
Upper Midwest. Principal income from the sale of fixed income products decreased
by 8% as investors tended to focus their investment activities in equities due
to the above-average returns being achieved in those markets.
Income resulting from the change in valuation of the investment account declined
24% from the prior year. The lower income was due primarily to changes in value
of equity securities held in the portfolio. This account has historically been a
volatile source of income for the Company.
Investment banking income declined by 6% in the current year compared to the
previous year. During 1996, the Company completed two public offerings as
compared to four in 1995. In addition, a number of private placement financings
were completed in each period.
Interest income increased by 42% as a result of higher levels of customer margin
balances and fixed income securities held as investments or cash equivalents.
Revenue from the sale of subsidiary relates to the sale of PRIMEVEST. Other
income increased $1.4 million or 47%, due primarily to an increase in fee-based
income.
Employee compensation increased by 14% due to an increase in commissions paid to
investment executives as a result of higher sales, increased incentive
compensation due to improved profitability and an increase in benefit expenses.
Bank commissions increased by 49%, which was in line with the change in
associated revenues. Floor brokerage and clearing charges increased by 16% as a
result of increased sales activity. Communication expense was relatively flat
compared to the previous year as the Company pursued more advantageous local and
long distance services. Occupancy and equipment costs increased primarily due to
costs associated with increased activity levels, converting to a new trading
system and implementation of other technologies. Other expenses declined by 6%
primarily as a result of higher expenses in the prior year related to legal
proceedings.
On October 31, 1996, the Company completed the sale of PRIMEVEST to ReliaStar
Financial Corporation. The sale price was $15.5 million in cash, of which $1.5
million was placed in escrow to secure indemnification obligations to ReliaStar.
The after-tax gain on the sale, net of associated expenses, was $6.4 million, or
$1.05 per share. For the ten months ended October 31, 1996, PRIMEVEST revenues
were $27.5 million, or 28% of consolidated revenues, and net income was $1.2
million or 10% of consolidated profits. See Note 11 to the Consolidated
Financial Statements for additional information regarding the sale of PRIMEVEST.
Fiscal years ended December 31, 1995 and 1994
Revenues for 1995 increased 35% to a record $75.3 million as favorable financial
markets contributed to the strong increase in sales and trading of equity and
fixed income securities, as well as significant gains in the firm's investment
portfolio. Cost reduction efforts and improved productivity further contributed
to profitability. For the year ended December 31, 1995 primary earnings per
share were $0.54, compared to a $0.54 loss in the prior year.
<PAGE>
Fiscal years ended December 31, 1995 and 1994 (continued)
Commission income increased by 12% as sales of OTC stocks, listed securities and
mutual fund products rose in tandem with equity markets that established record
highs during the year. Revenues from the sale of insurance products declined as
lower interest rates made fixed annuities less attractive, and sales of limited
partnerships and commodities were down as the Company discontinued selling those
products.
Revenue from principal transactions increased by $8.2 million for the current
year compared to 1994. Income from equity transactions increased 38% as the
Company's sales force, Research Department and equity trading desk responded to
the strong Nasdaq market. Revenue from debt transactions increased 24% as
declining interest rates positively impacted revenue from fixed income
securities. The long-term treasury yield ended the year just below 6% after
beginning 1995 at 7.9%.
The Company recorded a gain in its investment account of $6.6 million in 1995.
The majority of this gain resulted from the increase in valuation of securities
that were acquired in conjunction with the Company's investment banking
activity. The investment account has historically been a volatile source of
income for the Company.
Investment banking revenues declined by $285,000 due in part to a decline in
participation in other broker-dealer underwritings. The prior year also includes
$239,000 in revenues of a leasing subsidiary whose operations were ceased in the
first quarter of 1995.
The increase in interest income is attributed to higher customer margin balances
and an increase in interest earned on fixed income securities held for resale to
customers. Other income rose in part due to increased fees earned on money
market balances.
Employee compensation rose by 11% from the prior year. Revenue-based
compensation increased in line with revenues while fixed salaries declined as a
result of cost reduction programs implemented during the past year. The total
number of employees at December 31, 1995 is down 6% from a year ago. The decline
in salaries was partially offset by severance charges related to staff
reductions.
Bank commissions increased by 14%, which is in line with the increase in
associated revenues. Occupancy costs increased primarily due to the expansion of
bank service facilities at PRIMEVEST along with increased depreciation charges
stemming from automation and service expansions. Floor and clearing charges
increased in relation to increased trading activity. Communication costs were
down from last year due primarily to employee reductions. Litigation settlements
reflects charges associated with the settlement of Citi-Equity and Palace Casino
litigation.
Quarterly Results
Selected unaudited data reflecting the Company's results of operations for each
of the last twelve quarters are shown in the following table. The information
for each of these quarters includes all normal and recurring adjustments and
accruals which the Company considers necessary for a fair presentation. These
operating results, however, are not necessarily indicative of results for any
future period.
<PAGE>
Quarterly Results (continued)
<TABLE>
<CAPTION>
(In thousands, except per share data)
- ----------------------------------------------------------------------------------------------------------------------------
Three months ended
------------------------------------------------------------------------------
March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
Revenues $22,161 $30,932 $21,672 $25,212
Net income 1,329 3,260 1,139 5,970
Primary earnings per share .22 .54 .19 .97
1995
Revenues $14,757 $21,272 $21,538 $17,766
Net income 317 1,266 1,135 658
Primary earnings per share .05 .20 .18 .11
1994
Revenues $16,633 $13,898 $13,575 $11,561
Net income (loss) 151 (1,270) (830) (1,261)
Primary earnings (loss) per share .02 (.21) (.14) (.21)
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Liquidity and Capital Resources
Operating Activities
A large portion of the Company's assets are cash and assets readily convertible
to cash. The majority of the Company's security investments and inventory are
stated at quoted market values and are readily marketable. The less liquid
portions of inventory and investments, which totaled $1.2 million at December
31, 1996, are stated at fair value which is determined by management's best
estimate.
During 1996, the Company decreased its long positions of trading securities by
$2.6 million. Inventories are generally maintained to facilitate customer
transactions rather than for market speculation. For the same period, investment
securities increased $9.1 million due to investment of proceeds from the sale of
PRIMEVEST. Based on the Company's current liquidity position, available bank
lines, and operating plans, it is anticipated that the Company has sufficient
resources to meet the cash requirements of its operations in the foreseeable
future.
As a securities broker-dealer, John G. Kinnard is required by SEC regulations to
meet certain liquidity and capital standards. It has been in compliance with
these regulations at all times.
Financing Activities
John G. Kinnard maintains two discretionary credit facilities providing for
conditional short-term borrowings of up to $10 million in aggregate. One
facility limits the borrowing to 90 days and is secured by firm marketable
securities. The other facility is to finance corporate bond private placement
activity and is secured on a non-recourse basis by the securities being
financed. Borrowings under the facility must be originated with a term of at
least 13 months, but may be prepaid. Advances under the facilities are at the
banks' sole discretion, accrue interest at a fluctuating interest rate to be
agreed upon by the Company and the bank, and are subject to certain affirmative
and negative covenants. There are no fees or compensating balances related to
these lines of credit. Both lines had no outstanding borrowings at December 31,
1996 and 1995.
PRIMEVEST had a discretionary line of credit available from a bank totaling $5
million. Draws in excess of $5 million could be made if prior approval was
granted by the bank. Outstanding borrowings were secured by customer margin
securities, investment securities, and certain clearing balances. Total
borrowings under the line of credit were $6.3 million at December 31, 1995.
Prior approval was obtained for the amount in excess of $5 million.
<PAGE>
Financing Activities (continued)
In 1996 and 1995, the Company received total proceeds of $364,000 and $879,000,
respectively, from the issuance of its common stock to participants in the
Employee Stock Purchase Plan and upon the exercise of options and warrants.
During 1996, the Company repurchased 329,000 shares of its common stock at a
total cost of $1.3 million. The Board of Directors has authorized the repurchase
of up to 1.1 million shares of the Company's common stock, of which a total of
587,420 shares have been repurchased as of December 31, 1996.
Effects of Inflation
Because the Company's assets are to a large extent liquid in nature, they are
not significantly affected by inflation. Increases in certain Company expenses
due to inflation, such as employee compensation, rent and communications, may
not be readily recoverable in the price of its services. In addition, to the
extent that inflation results in rising interest rates or has other adverse
effects on the securities markets, it may adversely affect the Company's
financial position and results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Consolidated Financial Statements and Schedule" following Part IV,
Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Other than "Executive Officers of the Registrant" which is set forth at the end
of Part I of this Form 10-K, the information required by Item 10 is incorporated
herein by reference to the sections labeled "Election of Directors" and "Section
16(a) Beneficial Ownership Reporting Compliance" which appear in the
Registrant's definitive Proxy Statement for its 1997 Annual Meeting of
Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to the
section labeled "Executive Compensation" which appears in the Registrant's
definitive Proxy Statement for its 1997 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference to the
section labeled "Principal Shareholders and Management Shareholdings" which
appears in the Registrant's definitive Proxy Statement for its 1997 Annual
Meeting of Shareholders.
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference to the
section labeled "Election of Directors" which appears in the Registrant's
definitive Proxy Statement for its 1997 Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Documents Filed as Part of this Report:
(1) Consolidated Financial Statements. See "Index to Consolidated
Financial Statements and Schedule" on the following page.
(2) Exhibits. See "Exhibit Index" starting on the page following
signatures.
Reports on Form 8-K
A report on Form 8-K dated November 12, 1996, was filed to report under
Item 2 the disposition of all outstanding stock of PRIMEVEST Financial
Services, Inc. and to file an unaudited pro forma condensed consolidated
statement of financial position prepared to reflect the sale as if the
transaction had occurred as of September 30, 1996.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
INDEPENDENT AUDITORS' REPORT ........................................... 16
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated statements of financial condition ......................... 17
Consolidated statements of operations .................................. 18
Consolidated statements of shareholders' equity ........................ 19
Consolidated statements of cash flows .................................. 20
Notes to consolidated financial statements ............................. 22
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Kinnard Investments, Inc. and Subsidiaries
Minneapolis, Minnesota
We have audited the accompanying consolidated statements of financial condition
of Kinnard Investments, Inc. and Subsidiaries (the "Company") as of December 31,
1996 and 1995, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. 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
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 the Company as of
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
January 30, 1997
Minneapolis, Minnesota
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
(In thousands)
- --------------------------------------------------------------------------------- -------------------- --------------------
At December 31, 1996 1995
- --------------------------------------------------------------------------------- -------------------- --------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 12,518 $ 5,766
Funds held in escrow 1,513 0
Receivable from clearing firm and other broker-dealers 968 4,324
Receivable from customers 0 9,734
Miscellaneous receivables 2,140 1,549
Trading securities, at market 7,658 10,226
Office equipment at cost, less accumulated depreciation
of $3,327 and $3,604, respectively 980 1,740
Investment securities, at fair value 20,940 11,827
Other assets 424 731
- --------------------------------------------------------------------------------- -------------------- --------------------
Total assets $47,141 $45,897
================================================================================= ==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Notes payable $0 $6,307
Due to clearing firm and other broker-dealers 0 405
Payable to customers 0 3,184
Securities sold but not yet purchased, at market 842 1,659
Employee compensation and related taxes payable 3,900 3,649
Other accounts payable and accrued expenses 3,011 4,489
Income taxes payable 3,228 346
Deferred tax liability 131 553
- --------------------------------------------------------------------------------- -------------------- --------------------
Total liabilities 11,112 20,592
- --------------------------------------------------------------------------------- -------------------- --------------------
Shareholders' Equity
Preferred stock, authorized 1,000 shares; none issued or outstanding 0 0
Undesignated stock, authorized 16,500 shares; none issued or outstanding 0 0
Common stock, $.02 par value; authorized 7,500 shares; issued
and outstanding 6,027 and 6,257 shares, respectively 120 125
Additional paid-in capital 12,710 13,680
Retained earnings 23,199 11,500
- --------------------------------------------------------------------------------- -------------------- --------------------
Total shareholders' equity 36,029 25,305
- --------------------------------------------------------------------------------- -------------------- --------------------
- --------------------------------------------------------------------------------- -------------------- --------------------
Total liabilities and shareholders' equity $47,141 $45,897
================================================================================= ==================== ====================
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(In thousands, except per share data)
- --------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Commission income $35,996 $26,810 $23,926
Principal transactions 35,907 31,787 23,550
Investment account income (loss) 4,973 6,563 (986)
Investment banking 4,985 5,303 5,588
Interest 2,732 1,926 1,507
Other 4,330 2,944 2,082
Sale of subsidiary 11,054 0 0
- --------------------------------------------------------------------------------------------------------------------------
Total revenues 99,977 75,333 55,667
- --------------------------------------------------------------------------------------------------------------------------
Expenses:
Compensation and benefits 44,037 38,748 34,820
Bank commissions 14,534 9,775 8,609
Floor brokerage and clearance 4,905 4,217 3,722
Communications 1,259 1,246 1,348
Occupancy and equipment 6,073 5,768 5,541
Litigation settlements 2,865 2,856 0
Other 6,638 7,037 7,134
- --------------------------------------------------------------------------------------------------------------------------
Total expenses 80,311 69,647 61,174
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 19,666 5,686 (5,507)
Income tax expense (benefit) 7,968 2,310 (2,297)
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) $11,698 $3,376 ($3,210)
==========================================================================================================================
Earnings (loss) per common share:
Primary $1.92 $0.54 ($0.54)
Fully diluted $1.89 $0.54 ($0.54)
- --------------------------------------------------------------------------------------------------------------------------
Weighted average number of common and common equivalent
shares outstanding:
Primary 6,108 6,230 5,994
Fully diluted 6,195 6,281 5,994
==========================================================================================================================
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands, except per share data)
================================================ ============================ ============= ============= =============
Additional Unearned
Common Stock Issued Paid-in Compen- Retained
Shares Amount Capital sation Earnings
- ------------------------------------------------ -------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 6,033 $121 $13,245 ($107) $11,930
- ------------------------------------------------ -------------- ------------- ------------- ------------- -------------
Dividends on common stock ($.10 per share) (598)
Exercise of warrants 21 0 47
Issuance of shares to the employee
stock option plan 57 1 299
Repurchase of stock (230) (4) (730)
Amortization of unearned compensation 81
Net loss (3,210)
- ------------------------------------------------ -------------- ------------- ------------- ------------- -------------
Balance, December 31, 1994 5,881 118 12,861 (26) 8,122
- ------------------------------------------------ -------------- ------------- ------------- ------------- -------------
Forfeiture of restricted shares and adjustment
to common stock dividend (1) (5) 6 2
Exercise of warrants 381 7 850
Issuance of shares under employee
stock option plan 11 0 22
Repurchase of stock (15) 0 (48)
Amortization of unearned compensation 20
Net income 3,376
- ------------------------------------------------ -------------- ------------- ------------- ------------- -------------
Balance, December 31, 1995 6,257 125 13,680 0 11,500
- ------------------------------------------------ -------------- ------------- ------------- ------------- -------------
Issuance of shares under employee
stock purchase plan 11 0 51
Issuance of shares under employee
stock option plan 88 2 311
Repurchase of stock (329) (7) (1,332)
Net income 11,699
- ------------------------------------------------ -------------- ------------- ------------- ------------- -------------
Balance, December 31, 1996 6,027 $120 $12,710 $0 $23,199
- ------------------------------------------------ -------------- ------------- ------------- ------------- -------------
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands)
=================================================================== =========================================================
For Years Ended December 31,
1996 1995 1994
- ------------------------------------------------------------------- ------------------ ------------------- ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers, brokers-dealers
and clearing agencies $80,657 $59,505 $61,049
Cash paid to suppliers and employees (77,992) (67,481) (62,890)
Interest:
Received 2,732 1,926 1,507
Paid (214) (87) (29)
Income taxes refunded (paid) (5,638) 722 (121)
- ------------------------------------------------------------------- ------------------ ------------------- ------------------
Net cash used in operating activities (455) (5,415) (484)
- ------------------------------------------------------------------- ------------------ ------------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of:
Fixed assets 426 0 0
Investment securities 14,157 35,565 11,233
Purchase of:
Fixed assets (1,063) (488) (1,552)
Investment securities (18,295) (33,637) (9,143)
Proceeds from sale of subsidiary, net of subsidiary's cash 13,574 0 0
- ------------------------------------------------------------------- ------------------ ------------------- ------------------
Net cash provided by investing activities 8,799 1,440 538
- ------------------------------------------------------------------- ------------------ ------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 364 879 349
Repurchase of common stock (1,339) (48) (735)
Net borrowings (payments) on notes payable and
revolving credit agreements (617) 6,307 (600)
Dividends paid 0 (147) (601)
- ------------------------------------------------------------------- ------------------ ------------------- ------------------
Net cash provided by (used in) financing activities (1,592) 6,991 (1,587)
- ------------------------------------------------------------------- ------------------ ------------------- ------------------
Increase (decrease) in cash and cash equivalents 6,752 3,016 (1,533)
Cash and cash equivalents at beginning of year 5,766 2,750 4,283
- ------------------------------------------------------------------- ------------------ ------------------- ------------------
Cash and cash equivalents at end of year $12,518 $5,766 $2,750
=================================================================== ================== =================== ==================
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
(In thousands)
- ------------------------------------------------------------------------ ---------------------------------------------------------
Years Ended December 31,
1996 1995 1994
- ------------------------------------------------------------------------ ------------------ ------------------- ------------------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME (LOSS) TO NET
CASH USED IN OPERATING ACTIVITIES:
Net income (loss) $11,698 $3,376 ($3,210)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 778 958 813
Unearned compensation 0 20 81
Net unrealized loss (gain) on investment securities 434 (2,546) 1,333
Net realized gain on sale of investment securities (5,407) (4,017) (347)
Realized loss (gain) on sale of office equipment (27) 24 131
Gain on sale of subsidiary (11,054) 0 0
Deferred income taxes (422) 1,499 (1,426)
(Increase) decrease in:
Receivable from clearing firm and other brokers-dealers 1,234 (2,706) (1,174)
Receivable from customers (4,226) (6,410) 3,635
Miscellaneous receivables (1,177) 0 0
Trading securities, at market 2,375 (274) 3,938
Income tax receivable 0 1,187 (992)
Other assets (256) 133 352
Increase (decrease) in:
Due to clearing firm and other broker-dealers (236) (1,540) (139)
Payable to customers 817 1,032 (84)
Securities sold but not yet purchased (733) 994 (544)
Employee compensation and related taxes payable 1,943 1,284 (3,044)
Other accounts payable and accrued expenses 1,053 1,225 193
Income taxes payable 2,751 346 0
======================================================================== ================== =================== ==================
Net cash used in operating activities ($455) ($5,415) ($484)
======================================================================== ================== =================== ==================
Supplemental Cash Flow Disclosure of Non-Cash Transaction:
Dividends declared but not paid of $0 in 1996, $0 in 1995 and $149,000 in 1994.
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business, Financial Instruments with Off-Balance-Sheet Risk
and Significant Accounting Policies
Nature of business:
Kinnard Investments, Inc. (the "Registrant" or "KII") 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. The Registrant 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. The Company also negotiates, underwrites and
participates in municipal debt offerings. Other products and services
include mutual funds, insurance products, investment management, IRA
services and fixed income securities.
On October 31, 1996, Kinnard Investments completed the sale of its
PRIMEVEST Financial Services, Inc. ("PRIMEVEST" or "PFS") subsidiary
to ReliaStar Financial Corporation. See Note 11 to the Consolidated
Financial Statements for additional information regarding the sale of
PRIMEVEST. PRIMEVEST is a broker-dealer that provides investment
products and services to financial institutions and their customers.
Financial instruments with off-balance-sheet risk:
Off-balance-sheet credit and market risk
In the normal course of business, the Company's customer activities
involve the execution, settlement and financing of various customers'
securities and options transactions. These activities may expose the
Company to off-balance-sheet risk in the event the customer is unable
to fulfill its contracted obligations. JGK clears all transactions for
its customers on a fully disclosed basis with a clearing firm that
carries all customer accounts and maintains the related records.
Nonetheless, the Company is liable to the clearing firm for the
transactions of its customers. The Company maintains substantially all
of its trading securities at the clearing firm, and these trading
securities collateralize amounts due to the clearing firm.
The Company currently has no plans to utilize interest rate swaps,
foreign currency contracts, futures, forward contracts or significant
amounts of other securities whose value is derived from other
investment products (derivatives) for either hedging or speculative
purposes.
Customer securities transactions are recorded on a settlement date
basis, which is generally three business days after the trade date.
The Company is therefore exposed to risk of loss on these transactions
in the event of the customer's or broker's inability to meet the terms
of their contracts in which case the Company 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
the Company's consolidated financial statements.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 1. Nature of Business, Financial Instruments with Off-Balance-Sheet Risk
and Significant Accounting Policies (continued)
Off-balance-sheet credit and market risk (continued)
The Company's customer securities activities are transacted on either
a cash or margin basis. The Company seeks to control the risks
associated with its customer margin activities by requiring customers
to maintain margin collateral in compliance with various regulatory
and internal guidelines. The Company monitors required margin levels
daily, and pursuant to such guidelines, requires the customers to
deposit additional collateral, or reduce margin positions, when
necessary.
The Company sells securities not yet purchased ("short sales") for its
own account. The establishment of short positions exposes the Company
to off-balance-sheet market risk in the event prices increase, as the
Company may be obligated to acquire the securities at unfavorable
market prices.
Concentrations of credit risk
As a broker and dealer, the Company engages in various securities
trading and brokerage activities serving a diverse group of
corporations, governments, institutional and individual investors. The
Company's exposure to credit risk associated with the nonperformance
of these customers in fulfilling their contractual obligations
pursuant to securities and options transactions can be directly
impacted by volatile securities markets, credit markets and regulatory
changes which may impair the customers' ability to satisfy their
obligations to the Company.
Summary of significant accounting policies:
Principles of consolidation
The consolidated financial statements include the accounts of Kinnard
Investments, Inc. and its subsidiaries. All intercompany accounts and
transactions have been eliminated.
Cash and cash equivalents
The Company considers all highly liquid debt instruments purchased
with an original maturity of three months or less to be cash
equivalents.
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 assets and
liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements, and reported amounts of revenues and
expenses during the reporting period. Significant estimates include
the valuation of the Company's investment account, income taxes and
legal reserves. Actual results could differ from those estimates.
Employee stock compensation
The Company has elected to continue following the guidance of
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees", for measurement and recognition of stock-based
transactions with employees. The Company adopted the disclosure
provisions of Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation" in 1996. See Note 8 to
the Consolidated Financial Statements for additional information.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 1. Nature of Business, Financial Instruments with Off-Balance-Sheet Risk
and Significant Accounting Policies (continued)
Office equipment
The cost of office equipment is depreciated using accelerated methods
over the estimated useful lives of two to seven years.
Reclassification
Certain amounts reflected in the 1995 and 1994 consolidated financial
statements have been reclassified to conform to the presentation for
1996. These reclassifications had no impact on net income or
shareholders' equity as previously reported.
Security transactions
Security transactions are recognized for accounting purposes on the
settlement date, generally three business days after the trade
execution date. The impact of unsettled transactions on trading
securities, securities sold but not yet purchased and income, net of
related expenses, is not material.
Marketable trading securities, securities sold but not yet purchased
and investment securities are carried at quoted market values.
Securities not readily marketable are carried at fair value as
determined by management. Unrealized gains and losses are included in
operations.
Earnings per common and common equivalent share
Earnings per common and common equivalent share have been computed
based upon the weighted average number of common shares and common
equivalent shares (options) outstanding. In a period that the Company
incurs a loss, common equivalent shares are excluded because their
effect would be anti-dilutive.
Note 2. Trading Securities
Trading securities are summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
------------------------------------------------------------------------------------------------------
December 31, 1996 1995
------------------------------------------------------------------------------------------------------
<S> <C> <C>
Long positions - trading securities
Corporate stocks $3,068 $2,647
U.S. and municipal bonds 1,656 5,326
Corporate notes and debentures 2,934 2,253
------------------------------------------------------------------------------------------------------
$7,658 $10,226
------------------------------------------------------------------------------------------------------
Short positions - securities sold but not yet purchased
Corporate stocks $841 $1,631
U.S. and municipal bonds 0 11
Corporate notes and debentures 1 17
------------------------------------------------------------------------------------------------------
$842 $1,659
------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 3. Notes Payable
Lines of credit
JGK maintains two discretionary credit facilities providing for
conditional short-term borrowings of up to $10 million in the
aggregate. One facility limits the borrowing to 90 days and is secured
by firm marketable securities. The other facility is to finance
corporate bond private placement activity and is secured on a
non-recourse basis by the securities being financed. Borrowings under
the facility must be originated with a term of at least 13 months, but
may be prepaid. Advances under the facilities are at the banks' sole
discretion, accrue interest at a fluctuating interest rate to be
agreed upon by the Company and the bank, and are subject to certain
affirmative and negative covenants. There are no fees or compensating
balances related to these lines of credit. Both lines had no
outstanding borrowings at December 31, 1996 and 1995.
PFS had a discretionary line of credit available from a bank totaling
$5 million. Draws in excess of $5 million could be made if prior
approval was granted by the bank. Outstanding borrowings were secured
by customer margin securities, investment securities, and certain
clearing balances. Total borrowings under the line of credit were $6.3
million at December 31, 1995. Prior approval was obtained for the
amount in excess of $5 million.
Note 4. Employee Benefit Plans
Pension and Profit Sharing Plans
The Company has profit sharing and defined contribution pension plans
covering substantially all employees who have completed one year of
service. The Company contributes to the pension plan, on behalf of
each eligible employee, an amount equal to 5% of their qualified
compensation. This contribution is reflected as an operating expense
and amounted to $1.2 million, $1.0 million and $1.0 million for the
years ended December 31, 1996, 1995 and 1994, respectively.
There were no contributions to the profit sharing plan for the years
ended December 31, 1996, 1995 or 1994. The Company does not intend to
make any further contributions to the profit sharing plan so long as
the Employee Stock Ownership Plan and Trust is in effect.
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 the Company's
Board of Directors and can be made in cash or other property as the
Trustees consider appropriate. These contributions are used primarily
to purchase stock of Kinnard Investments, Inc. A participant is
generally fully vested after five years of service. During the years
ended December 31, 1996, 1995 and 1994, the Company contributed $1.3
million, $560,000 and $0, respectively, to the ESOP.
Note 5. Federal and State Income Taxes
The components of the income tax provision for the years ended
December 31, 1996, 1995 and 1994, are as follows:
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 5. Federal and State Income Taxes (continued)
<TABLE>
<CAPTION>
(In thousands)
----------------------------------------------------------------------------------------------------
Years ended December 31, 1996 1995 1994
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal $6,551 $1,150 ($1,386)
State 1,839 0 5
Deferred taxes (422) 1,160 (916)
----------------------------------------------------------------------------------------------------
$7,968 $2,310 ($2,297)
----------------------------------------------------------------------------------------------------
</TABLE>
The provision for income taxes for the years ended December 31,
1996, 1995 and 1994, differs from the amount obtained by applying
the U.S. federal income tax rate to pretax income due to the
following:
<TABLE>
<CAPTION>
(In thousands)
----------------------------------------------------------------------------------------------------
Years ended December 31, 1996 1995 1994
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) $6,883 $1,990 ($1,925)
State income taxes, net of federal effect 1,079 301 (268)
Other, net 6 19 (104)
----------------------------------------------------------------------------------------------------
$7,968 $2,310 ($2,297)
----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The tax effects of significant items comprising the Company's net
deferred tax liability as of December 31, 1996 and 1995 are shown
in the table below:
<TABLE>
<CAPTION>
(In thousands)
---------------------------------------------------------------- ---------------- -----------------
December 31, 1996 1995
---------------------------------------------------------------- ---------------- -----------------
<S> <C> <C>
Deferred tax asset:
Other accruals not currently deductible $501 $543
Receivable allowance 162 160
Trade date/settlement date differences 91 105
---------------------------------------------------------------- ---------------- -----------------
754 808
---------------------------------------------------------------- ---------------- -----------------
Deferred tax liability:
Unrealized appreciation of investment securities 798 1,284
Other 87 77
---------------------------------------------------------------- ---------------- -----------------
885 1,361
---------------------------------------------------------------- ---------------- -----------------
Net deferred tax liability $131 $553
---------------------------------------------------------------- ---------------- -----------------
</TABLE>
Note 6. Net Capital Requirements and Dividend Restrictions
Pursuant to the net capital provision of the Securities Exchange Act
of 1934, JGK is required to maintain minimum net capital as defined
under such provisions. Also under this rule, JGK's ratio of aggregate
indebtedness to net capital may not exceed 15 to 1, and JGK may be
prohibited from expanding their business or declaring cash dividends
if its ratio of aggregate indebtedness to net capital is greater than
10 to 1.
At December 31, 1996, JGK had net capital of $6.7 million, a net
capital requirement of $633,000 and a ratio of aggregate indebtedness
to net capital of 1.0 to 1.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 7. Equity
The Company'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 1996 the Company repurchased 329,000 shares of its common stock
at a total cost of $1.3 million. The Board of Directors has authorized
the repurchase of up to 1.1 million shares of the Company's common
stock, of which a total of 587,420 shares have been repurchased as of
December 31, 1996.
Note 8. Stock Option and Purchase Plans
Under the Company's stock option plan, a total of 660,000 shares have
been reserved for options to employees and directors of the Company.
At December 31, 1996 there were 159,300 authorized but unissued
shares. 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. The majority of options have no
vesting period, but certain options have vesting periods of up to five
years. Stock option transactions are summarized below:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
Exercise Weighted
Number Price Per Avg. Exercise
of Shares Share Price
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at December 31, 1993 185,100
Granted 85,700 $3.80 - $4.00 $3.92
Exercised 0 0.00 0.00
Forfeited (52,500) 4.75 - 7.25 3.58
----------------------------------------------------------
Outstanding at December 31, 1994 218,300 1.98 - 7.25 4.68
Granted 70,000 3.55 - 3.94 3.63
Exercised (11,400) 1.98 1.98
Forfeited (30,750) 3.55 - 7.25 5.43
----------------------------------------------------------
Outstanding at December 31, 1995 246,150 1.98 - 7.25 4.41
Granted 226,500 4.04 - 5.88 4.15
Exercised (86,200) 1.98 - 4.75 3.54
Forfeited (18,250) 4.04 - 7.25 6.18
----------------------------------------------------------
Outstanding at December 31, 1996 368,200 $3.55 - $7.25 $4.40
Exercisable 305,700 $3.55 - $7.25
-----------------------------------------------------------------------------------------------------
</TABLE>
The Company 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 the
Company's common stock. Shares are purchased semi-annually at a price
equal to 85% of the lower of the market prices at the beginning or end
of the applicable six-month period, but not less than book value at
the end of the period. Reserved but unissued shares under the Plan
were 703,086 at December 31, 1996.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 8. Stock Option and Purchase Plans (continued)
The Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its stock option and stock
purchase plans. No compensation expense has been recognized for its
fixed 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. Had compensation cost for the Company's stock option and
stock purchase plans been determined based on the fair value at the
grant dates for awards under those plans, the Company's net income and
earnings per share for the year ended December 31, 1996 and 1995 would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
In thousands, except per share date
-----------------------------------------------------------------------------------------------------
1996 1995
As Reported Pro Forma As Reported Pro Forma
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $11,698 $11,352 $3,376 $3,348
Primary earnings per share $1.92 $1.86 $0.54 $0.54
-----------------------------------------------------------------------------------------------------
</TABLE>
Using the Black-Scholes option pricing model, the estimated weighted
average fair value of options granted during 1996 was $1.42 per share.
The assumptions used in this computation are as follows: risk-free
interest rate of 6.3%; expected dividend yield of 0%; expected life of
four years; and expected volatility of 44%. Pro forma compensation
cost of options granted under the Employee Stock Purchase Plan is
measured based on the discount from market value.
Note 9. Lease Commitments
The Company 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 non-cancelable operating leases for
office space and equipment rental for the next five years and
thereafter are as follows:
(In thousands)
---------------------------------------------
Amount
---------------------------------------------
1997 $1,028
1998 967
1999 672
2000 364
2001 315
Thereafter 673
---------------------------------------------
$4,019
---------------------------------------------
Rent expense for all operating leases was $2.9 million, $2.9 million
and $3.0 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 10. Commitments and Contingent Liabilities
JGK 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, the
Company's 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.
In the normal course of business, the Company 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 11. Sale of Subsidiary
On October 31, 1996, the Company completed the sale of PFS to
ReliaStar Financial Corporation ("ReliaStar"). The sale price was
$15.5 million in cash, of which $1.5 million was placed in escrow to
secure indemnification obligations to ReliaStar. The after-tax gain on
the sale, net of associated expenses, was $6.4 million or $1.05 per
share.
PFS operation for the ten months ended October 31, 1996 and the years
ended December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
(In thousands)
- ----------------------------------- ----------------- ----------------------------------
For the ten
months ended For the years ended
10/31/96 12/31/95 12/31/94
- ----------------------------------- ----------------- ----------------- ----------------
<S> <C> <C> <C>
Revenues $27,550 $19,551 $16,783
Expenses 26,329 19,216 16,862
- ----------------------------------- ----------------- ----------------- ----------------
Net income (loss) $1,221 $335 ($79)
- ----------------------------------- ----------------- ----------------- ----------------
</TABLE>
The above table include the following amounts relating to
inter-company activity:
<TABLE>
<CAPTION>
(In thousands)
- ----------------------------------- ----------------- ----------------------------------
For the ten
months ended For the years ended
10/31/96 12/31/95 12/31/94
- ----------------------------------- ----------------- ----------------- ----------------
<S> <C> <C> <C>
Revenues $145 $204 $150
Expenses 134 59 107
- ----------------------------------- ----------------- ----------------- ----------------
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
KINNARD INVESTMENTS, INC.
(the "Registrant")
By /s/ Hilding C. Nelson
Hilding C. Nelson
Chairman
Date: March 20, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
(POWER OF ATTORNEY)
Each person whose signature appears below constitutes and appoints HILDING C.
NELSON his true and lawful attorney-in-fact and agent, acting alone, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any or all amendments to this Annual
Report on Form 10-K and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent, acting alone, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all said
attorney-in-fact and agent, acting alone, or his substitute or substitutes, may
lawfully do or cause to be one by virtue thereof.
Signature Title Date
/s/ Hilding C. Nelson Chairman and Director March 20, 1997
Hilding C. Nelson (principal executive officer)
/s/ Daniel R. Sass Treasurer (principal financial March 20, 1997
Daniel R. Sass and accounting officer)
/s/ Stephen H. Fischer Director March 20, 1997
Stephen H. Fischer
(Signatures continued on next page)
<PAGE>
Signature Title Date
/s/ James W. Hansen Director March 20, 1997
James W. Hansen
/s/ Thomas E. Moore Director March 20, 1997
Thomas E. Moore
/s/ Andrew J. O'Connell Director March 20, 1997
Andrew J. O'Connell
/s/ Robert S. Spong Director March 20, 1997
Robert S. Spong
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
KINNARD INVESTMENTS, INC.
(Commission File Number: 0-9377)
EXHIBIT INDEX
for
Form 10-K for 1996 fiscal year
Exhibit
2 Stock Purchase Agreement by and between ReliaStar Financial
Corporation and Kinnard Investments, Inc. for the sale of
PRIMEVEST Financial Services, Inc. -- incorporated by reference
to Exhibit 2 to the Registrant's Report on Form 8-K dated
November 12, 1996 *
3.1 Registrant's Restated Articles of Incorporation, as amended to
date -- incorporated by reference to Exhibit 3.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996.*
3.2 Registrants Restated Bylaws - incorporated by reference to
Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996 *
10.1 ** Registrant's 1982 Incentive Stock Option Plan -- incorporated by
reference to Exhibit 10.6 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1988 *
10.2 Lease between PFS and Norwest Center Associates, dated May 17,
1991, covering space in Norwest Center, St. Cloud, Minnesota --
incorporated by reference to Exhibit 10.7 to the Registrant's
Annual Report Form 10-K for fiscal year ended December 31, 1991 *
10.3 ** JGK Employee Stock Ownership Plan and Trust Agreement --
incorporated by reference to Exhibit 10.12 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1989*
10.4 ** Registrant's 1990 Stock Option Plan -- incorporated by reference
to Exhibit 10.14 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991*
10.5 Noncompetition Agreement, dated January 2, 1991 among JGK and
certain former shareholders of PFS -- incorporated by reference
to Exhibit 10.1 to the Registrant's Form 8-K dated January 2,
1991 *
10.6 ** 1992 Incentive Compensation Plans for JGK, PFS and Kinnard
Investments, Inc. *
10.7 ** Registrant's 1992 Employee Stock Purchase Plan -- incorporated by
reference to Exhibit 10.21 to the Registrant's Registration
Statement on Form S-2, Reg. No. 33-47736 *
10.8 Amendment, dated June 16, 1992, of Office Lease between JGK and
TPI/CMS St. Paul Limited Partnership covering space at Norwest
Center, St. Paul Minnesota -- incorporated by reference to
Exhibit 10.22 to the Registrant's Registration Statement on Form
S-2, Reg. No. 33-47736 *
* Incorporated by reference to a previously filed report or document, SEC
File No. 0-9337
** Management contract or compensatory plan or arrangement
<PAGE>
Exhibit
10.9 Agreement, dated November 30, 1993, among the Registrant, MJC and
others -- incorporated by reference to Exhibit 2 of the
Registrant's Form 8-K dated December 13, 1993 *
10.10 Lease between ITL - CER II Corporation and JGK, dated July 20,
1993, covering space at 920 Second Avenue South in Minneapolis,
Minnesota -- incorporated by reference to Exhibit 10.25 to the
Registrant's Form 10-K Annual Report for the fiscal year ended
December 31, 1993 *
10.11 Separation Agreement with Thomas J. Mulvaney dated September 21,
1995 -- incorporated by reference to Exhibit 10.1 to the
Registrant's Form 10-Q for the quarter ended September 30, 1995 *
10.12 Clearing Agreement, dated February 13, 1995, between Alex. Brown
& Sons, Inc. and JGK -- incorporated by reference to Exhibit
10.20 to the Registrant's Form 10-K Annual Report for the fiscal
year ended December 31, 1994 *
10.13 Lease between Equitable Real Estate Investment Management, Inc.
and JGK, dated April 25, 1994 -- incorporated by reference to
Exhibit 10.20 to the Registrant's Form 10-K Annual Report for the
fiscal year ended December 31, 1994 *
10.14 ** Deferred Compensation Agreement dated October 30, 1996, between
the Registrant and Stephen H. Fischer.
10.15 ** Registrant's 1997 Stock Option Plan, including Forms of Incentive
and Nonqualified Stock Option Agreements.
11 Calculation of Weighted Average Number of Common Shares and
Income for Determination of Earnings Per Share of Common Stock.
21 List of the Registrant's subsidiaries:
Subsidiary State of Incorporation
John G. Kinnard and Company, Incorporated Minnesota
Kinnard Futures Management Corporation Minnesota
Kinnard Capital Corporation Minnesota
Continental Funding, Inc. North Dakota
NODAKBONDS, Inc. North Dakota
23 Consent of Deloitte & Touche LLP
27 Financial Data Schedule (filed in electronic form only)
* Incorporated by reference to a previously filed report or document, SEC
File No. 0-9337
** Management contract or compensatory plan or arrangement
Exhibit 10.14
DEFERRED COMPENSATION AGREEMENT
EFFECTIVE DATE: October 30, 1996
PARTIES: Kinnard Investments, Inc. ("KII")
Stephen H. Fischer ("Executive")
RECITALS:
A. KII is a Minnesota corporation.
B. Executive has rendered valuable services to KII as
President and Chief Executive Officer of PrimeVest Financial Services, Inc.,
its wholly-owned subsidiary, and as Treasurer of KII.
C. KII has unilaterally decided to provide certain
deferred compensation benefits to Executive.
D. This agreement constitutes an unfunded deferred
compensation arrangement for a select management or highly compensated employee
within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee
Retirement Income Security Act of 1974 and 29 C.F.R. ss. 2520.104.23(b)(2).
AGREEMENTS:
1. Deferred Compensation Account. KII shall immediately
credit $100,000 to a deferred compensation account for Executive.
2. Ownership Rights in Account. The amount
credited to Executive's account and any assets purchased with amounts so
credited to Executive's account, if any, shall be the sole property of KII,
and Executive shall have no ownership rights of any kind with respect thereto
or any interest therein. The amounts credited to Executive's account under this
Agreement shall at all times be entirely unfunded and no action shall be taken
at any time which would have the effect of segregating assets of KII for
payment of any benefit hereunder. Neither Executive nor any other person shall
have any interest in any particular assets of KII by reason of the right to
receive a benefit hereunder, and Executive or any such other person shall
have only the rights of a general unsecured creditor of KII with respect to any
rights hereunder.
<PAGE>
3. Valuation of Account. The value of Executive's
account at any time shall be the amount credited to the account, adjusted for
interest at a rate equal to the prime interest rate, as reported by
First Bank, N.A. on the first business day following January 1 of each year,
plus one (1) percentage point compounded quarterly, until all amounts credited
to such account have been distributed as provided in Section 5 below.
4. Vesting. Amounts credited to Executive's account
under this Agreement shall be fully vested at all times.
5. Distributions. The vested portion of the amounts
credited to Executive's account shall be paid to Executive in cash, in a single
lump-sum payment, on the earlier of (i) January 4, 1999, or (ii) within sixty
(60) days following a "change of control" event. In the event of Executive's
death, such amount shall be paid as soon as administratively practicable to
Executive's beneficiary as determined pursuant to Section 6.
6. Beneficiary. Executive shall designate a
beneficiary to whom payments will be made in the event of Executive's death and
shall have the right to revoke or change his beneficiary designation at any
time without the consent of the beneficiary. To be effective, such
designation, alteration or revocation shall be in writing, in a form
approved by KII, and shall be filed with and accepted by KII. The most recently
dated beneficiary designation form which is validly filed with KII by
Executive shall revoke all previously dated beneficiary designation forms
filed by Executive. If Executive fails to designate a beneficiary or if
no beneficiary designated by Executive survives him, any amounts remaining
shall be paid to Executive's estate.
<PAGE>
7. Change of Control. For purposes of this Agreement,
"change of control" shall mean:
(a) A merger or consolidation to which KII is a party if
the individuals and entities who were shareholders of
KII immediately prior to the effective date of such
merger or consolidation have, immediately following
the effective date of such merger or consolidation,
beneficial ownership (as defined in Rule 13d-3 under
the Securities Exchange Act of 1934) of less than
fifty percent (50%) of the total combined voting
power of all classes of securities issued by the
surviving corporation for the election of directors
of the surviving corporation;
(b) The direct or indirect beneficial ownership (as
defined in Rule 13d-3 under the Securities Exchange
Act of 1934) of securities of KII representing, in
the aggregate, twenty percent (20%) or more of the
total combined voting power of all classes of KII's
then issued and outstanding securities by any person
or entity or by a group of associated persons or
entities acting in concert;
(c) The sale of substantially all of the properties and
assets of KII to any person or entity which is not a
wholly-owned subsidiary of KII;
(d) The shareholders of KII approve any plan or proposal
for the liquidation of KII; or
(e) A change in the composition of the Board at any time
during any consecutive twenty-four (24) month period
such that the "Continuity Directors" cease for any
reason to constitute at least a sixty percent (60%)
majority of the Board. For purposes of this event, a
"Continuity Director" means a member of the Board who
either:
(1) was a director as of the date of this
Agreement; or
(2) is a director whose election to or
nomination for election to the Board was
approved by at least a two-thirds (2/3)
majority of the Continuity Directors in
office at the time such director was first
elected to the Board.
<PAGE>
8. Nontransferability. Neither Executive nor any
beneficiary designated by Executive to receive his benefit hereunder shall have
any right to assign, encumber or otherwise anticipate the right to receive
payment hereunder, and the benefits under this Agreement shall not be
subject to garnishment, attachment or any other legal process by the
creditors of Executive or any beneficiary hereunder.
9. Payment in Case of Incompetence. If, in the judgment
of the Board of Directors of KII, based upon facts and information readily
available to it, any person entitled to receive a payment hereunder is
incapable for any reason of personally receiving and giving a valid receipt
of the payment of a benefit, the Board may cause such payment or any part
thereof to be made to the duly appointed guardian or to the legal
representative of such person or to any person or institution contributing to
or providing for the care and maintenance of such person, provided that no prior
claim for said payment has been made by a duly appointed guardian or legal
representative of such person. The Board shall not be required to see to the
proper application of any such payment made in accordance with the
provisions hereof and any such payment shall constitute a payment for the
account of such person and a full discharge of any liability or obligation of
KII.
10. Liability of KII. KII shall have no liability in
connection with this Agreement except to pay out any vested amounts credited to
Executive's account in accordance with the terms of this Agreement. KII has not
made any statements to Executive with respect to the tax implications of any
transactions contemplated by this Agreement and Executive has been advised by
his counsel with respect to the tax effect of this Agreement.
11. Withholding. To permit KII to comply with all applicable
federal or state tax laws or regulations, KII may take such action as it deems
appropriate to ensure that all applicable federal or state payroll, income or
other taxes are withheld from any amounts payable by KII to Executive pursuant
to this Agreement. If KII is unable to withhold such federal and state taxes,
for whatever reason, Executive hereby agrees to make the necessary arrangements
for the payment of such taxes, which may include paying to KII an amount equal
to the amount KII would otherwise be required to withhold under federal or state
law, or presenting to KII reasonably satisfactory evidence that Executive has in
fact paid the required federal and state income taxes occasioned by the
distribution of the deferred compensation benefits to Executive.
<PAGE>
12. Right to Terminate Employment. Neither this Agreement
nor any action taken hereunder shall be construed as giving Executive any right
to be retained in the employment of KII or any of its subsidiaries, or interfere
with the right of KII or any of its subsidiaries to discharge Executive at any
time.
13. Notices. Any notice to be delivered under this
agreement shall be given in writing and delivered, personally or by first-class
mail, postage prepaid, to KII, Executive or any other person at his or its last
known address.
14. Headings. Headings or titles at the beginning of
sections and paragraphs are for convenience of reference, shall not be
considered a part of this agreement, and shall not influence its construction.
15. Amendment or Termination. This Agreement may be
amended or terminated only by written agreement signed by KII and Executive.
16. Binding Effect. This Agreement shall be binding upon
the parties hereto and their heirs, executors and assigns. KII agrees that it
will not be a party to any merger, consolidation or reorganization unless and
until its obligations under this Agreement shall be expressly assumed by its
successor or successors.
17. Compliance with Applicable Laws. The parties intend that
the Agreement comply with the applicable provisions of the Internal Revenue Code
of 1986, as amended from time to time, and the regulations thereunder, with the
applicable provisions of ERISA, as amended, and the regulations thereunder, and
with any provisions of the Securities Exchange Act of 1934, as amended, that may
be applicable. If, at a later date, these provisions are construed in such a way
as to make the Agreement null and void, the Agreement shall be given effect in a
manner that shall best carry out the parties' purposes and intentions.
18. Governing Law. The provisions of this agreement
shall be construed and enforced according to the laws of the State of Minnesota,
to the extent that such laws are not preempted by any applicable federal law.
19. Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, KII and Executive have executed this
Agreement in the manner appropriate to each on the day and year first above
written.
KINNARD INVESTMENTS, INC.
By /s/ Hilding C. Nelson
Its Chairman
Dated: October 30, 1996
/s/ Stephen H. Fischer
STEPHEN H. FISCHER
Dated: October 31, 1996
Exhibit 10.15
Kinnard Investments, Inc.
1997 STOCK OPTION PLAN
SECTION 1.
DEFINITIONS
As used herein, the following terms shall have the meanings indicated below:
(a) "Book Value" shall mean the book value of a share of the Company's
Common Stock derived from the most current available financial statements of the
Company by dividing total shareholders' equity by the number of shares issued
and outstanding and making such adjustment for results of operations since the
date of such financial statements as the Board of Directors or Committee shall
deem appropriate.
(b) "Committee" shall mean a Committee of two or more directors who shall
be appointed by and serve at the pleasure of the Board. As long as the Company's
securities are registered pursuant to Section 12 of the Securities Exchange Act
of 1934, as amended, then, to the extent necessary for compliance with Rule
16b-3, or any successor provision, each of the members of the Committee shall be
a "Non-Employee Director." For purposes of this Section 1(b) "Non-Employee
Director" shall have the same meaning as set forth in Rule 16b-3, or any
successor provision, as then in effect, of the General Rules and Regulations
under the Securities Exchange Act of 1934, as amended.
(c) The "Company" shall mean Kinnard Investments, Inc., a Minnesota
corporation.
(d) "Fair Market Value" shall mean (i) if such stock is reported by the
Nasdaq National Market or Nasdaq SmallCap Market or is listed upon an
established stock exchange or exchanges, the reported closing price of such
stock by the Nasdaq National Market or Nasdaq SmallCap Market or on such stock
exchange or exchanges on the date the option is granted or, if no sale of such
stock shall have occurred on that date, on the next preceding day on which there
was a sale of stock; (ii) if such stock is not so reported by the Nasdaq
National Market or Nasdaq SmallCap Market or listed upon an established stock
exchange, the average of the closing "bid" and "asked" prices quoted by the
National Quotation Bureau, Inc. (or any comparable reporting service) on the
date the option is granted, or if there are no quoted "bid" and "asked" prices
on such date, on the next preceding date for which there are such quotes; or
(iii) if such stock is not publicly traded as of the date the option is granted,
the per share value as determined by the Board, or the Committee, in its sole
discretion by applying principles of valuation with respect to all such options.
<PAGE>
(e) The "Internal Revenue Code" is the Internal Revenue Code of 1986, as
amended from time to time.
(f) "Non-Employee Director" shall mean members of the Board who are not
employees of the Company or any subsidiary.
(g) "Option Stock" shall mean Common Stock of the Company (subject to
adjustment as described in Section 13) reserved for options pursuant to this
Plan.
(h) The "Optionee" means an employee of the Company or any Subsidiary to
whom an incentive stock option has been granted pursuant to Section 9; a
consultant or advisor to or director (including a Non-Employee Director),
employee or officer of the Company or any Subsidiary to whom a nonqualified
stock option has been granted pursuant to Section 10; or a Non-Employee Director
to whom a nonqualified stock option has been granted pursuant to Section 11.
(i) "Parent" shall mean any corporation which owns, directly or indirectly
in an unbroken chain, fifty percent (50%) or more of the total voting power of
the Company's outstanding stock.
(j) The "Plan" means the Kinnard Investments, Inc. 1997 Stock Option Plan,
as amended hereafter from time to time, including the form of Option Agreements
as they may be modified by the Board from time to time.
(k) A "Subsidiary" shall mean any corporation of which fifty percent (50%)
or more of the total voting power of outstanding stock is owned, directly or
indirectly in an unbroken chain, by the Company.
<PAGE>
SECTION 2.
PURPOSE
The purpose of the Plan is to promote the success of the Company and its
Subsidiaries by facilitating the retention of competent personnel and by
furnishing incentive to officers, directors, employees, consultants, and
advisors upon whose efforts the success of the Company and its Subsidiaries will
depend to a large degree.
It is the intention of the Company to carry out the Plan through the
granting of stock options which will qualify as "incentive stock options" under
the provisions of Section 422 of the Internal Revenue Code, or any successor
provision, pursuant to Section 9 of this Plan, and through the granting of
"nonqualified stock options" pursuant to Sections 10 and 11 of this Plan.
Adoption of this Plan shall be and is expressly subject to the condition of
approval by the shareholders of the Company within twelve (12) months before or
after the adoption of the Plan by the Board of Directors. Any incentive stock
options granted after adoption of the Plan by the Board of Directors shall be
treated as nonqualified stock options if shareholder approval is not obtained
within such twelve-month period.
SECTION 3.
EFFECTIVE DATE OF PLAN
The Plan shall be effective as of the date of adoption by the Board of
Directors, subject to approval by the shareholders of the Company as required in
Section 2.
SECTION 4.
ADMINISTRATION
The Plan shall be administered by the Board of Directors of the Company
(hereinafter referred to as the "Board") or by a Committee which may be
appointed by the Board from time to time (collectively referred to as the
"Administrator"). The Administrator shall have all of the powers vested in it
under the provisions of the Plan, including but not limited to exclusive
authority (where applicable and within the limitations described herein) to
determine, in its sole discretion, whether an incentive stock option or
nonqualified stock option shall be granted, the individuals to whom, and the
time or times at which, options shall be granted, the number of shares subject
to each option and the option price and terms and conditions of each option. The
Administrator shall have full power and authority to administer and interpret
the Plan, to make and amend rules, regulations and guidelines for administering
the Plan, to prescribe the form and conditions of the respective stock option
agreements (which may vary from Optionee to Optionee) evidencing each option and
to make all other determinations necessary or advisable for the administration
of the Plan. The Administrator's interpretation of the Plan, and all actions
taken and determinations made by the Administrator pursuant to the power vested
in it hereunder, shall be conclusive and binding on all parties concerned.
<PAGE>
No member of the Board or the Committee shall be liable for any action
taken or determination made in good faith in connection with the administration
of the Plan. In the event the Board appoints a Committee as provided hereunder,
any action of the Committee with respect to the administration of the Plan shall
be taken pursuant to a majority vote of the Committee members or pursuant to the
written resolution of all Committee members.
SECTION 5.
PARTICIPANTS
The Administrator shall from time to time, at its discretion and without
approval of the shareholders, designate those employees, officers, directors,
consultants, and advisors of the Company or of any Subsidiary to whom
nonqualified stock options shall be granted under this Plan; provided, however,
that consultants or advisors shall not be eligible to receive stock options
hereunder unless such consultant or advisor renders bona fide services to the
Company or Subsidiary and such services are not in connection with the offer or
sale of securities in a capital raising transaction. The Administrator shall,
from time to time, at its discretion and without approval of the shareholders,
designate those employees of the Company or any Subsidiary to whom incentive
stock options shall be granted under this Plan. The Administrator may grant
additional incentive stock options or nonqualified stock options under this Plan
to some or all participants then holding options or may grant options solely or
partially to new participants. In designating participants, the Administrator
shall also determine the number of shares to be optioned to each such
participant. The Board may from time to time designate individuals as being
ineligible to participate in the Plan.
<PAGE>
SECTION 6.
STOCK
The Stock to be optioned under this Plan shall consist of authorized but
unissued shares of Option Stock. One Million (1,000,000) shares of Option Stock
shall be reserved and available for options under the Plan; provided, however,
that the total number of shares of Option Stock reserved for options under this
Plan shall be subject to adjustment as provided in Section 13 of the Plan. In
the event that any outstanding option under the Plan for any reason expires or
is terminated prior to the exercise thereof, the shares of Option Stock
allocable to the unexercised portion of such option shall continue to be
reserved for options under the Plan and may be optioned hereunder.
SECTION 7.
DURATION OF PLAN
Incentive stock options may be granted pursuant to the Plan from time to
time during a period of ten (10) years from the effective date as defined in
Section 3. Nonqualified stock options may be granted pursuant to the Plan from
time to time after the effective date of the Plan and until the Plan is
discontinued or terminated by the Board. Any incentive stock option granted
during such ten-year period and any nonqualified stock option granted prior to
the termination of the Plan by the Board shall remain in full force and effect
until the expiration of the option as specified in the written stock option
agreement and shall remain subject to the terms and conditions of this Plan.
SECTION 8.
PAYMENT
Optionees may pay for shares upon exercise of options granted pursuant to
this Plan with cash, personal check, certified check or, if approved by the
Administrator in its sole discretion, Common Stock of the Company valued at such
Stock's then Fair Market Value, or such other form of payment as may be
authorized by the Administrator. The Administrator may, in its sole discretion,
limit the forms of payment available to the Optionee and may exercise such
discretion any time prior to the termination of the option granted to the
Optionee or upon any exercise of the option by the Optionee.
With respect to payment in the form of Common Stock of the Company, the
Administrator may require advance approval or adopt such rules as it deems
necessary to assure compliance with Rule 16b-3, or any successor provision, as
then in effect, of the General Rules and Regulations under the Securities
Exchange Act of 1934, if applicable.
<PAGE>
SECTION 9.
TERMS AND CONDITIONS OF INCENTIVE STOCK OPTIONS
Each incentive stock option granted pursuant to this Section 9 shall be
evidenced by a written stock option agreement (the "Option Agreement"). The
Option Agreement shall be in such form as may be approved from time to time by
the Administrator and may vary from Optionee to Optionee; provided, however,
that each Optionee and each Option Agreement shall comply with and be subject to
the following terms and conditions:
(a) Number of Shares and Option Price. The Option Agreement shall state
the total number of shares covered by the incentive stock option. To
the extent required to qualify the Option as an incentive stock option
under Section 422 of the Internal Revenue Code, or any successor
provision, the option price per share shall not be less than one
hundred percent (100%) of the Fair Market Value of the Common Stock per
share on the date the Administrator grants the option; provided,
however, that if an Optionee owns stock possessing more than ten
percent (10%) of the total combined voting power of all classes of
stock of the Company or of its Parent or any Subsidiary, the option
price per share of an incentive stock option granted to such Optionee
shall not be less than one hundred ten percent (110%) of the Fair
Market Value of the Common Stock per share on the date of the grant of
the option. The Administrator shall have full authority and discretion
in establishing the option price and shall be fully protected in so
doing.
(b) Term and Exercisability of Incentive Stock Option. The term during
which any incentive stock option granted under the Plan may be
exercised shall be established in each case by the Administrator. To
the extent required to qualify the Option as an incentive stock option
under Section 422 of the Internal Revenue Code, or any successor
provision, in no event shall any incentive stock option be exercisable
during a term of more than ten (10) years after the date on which it is
granted; provided, however, that if an Optionee owns stock possessing
more than ten percent (10%) of the total combined voting power of all
classes of stock of the Company or of its parent or any Subsidiary, the
incentive stock option granted to such Optionee shall be exercisable
during a term of not more than five (5) years after the date on which
it is granted.
The Option Agreement shall state when the incentive stock option
becomes exercisable and shall also state the maximum term during which
the option may be exercised. In the event an incentive stock option is
exercisable immediately, the manner of exercise of the option in the
event it is not exercised in full immediately shall be specified in the
Option Agreement. The Administrator may accelerate the exercisability
of any incentive stock option granted hereunder which is not
immediately exercisable as of the date of grant.
(c) Other Provisions. The Option Agreement authorized under this
Section 9 shall contain such other provisions as the Administrator
shall deem advisable. Any such Option Agreement shall contain such
limitations and restrictions upon the exercise of the option as shall
be necessary to ensure that such option will be considered an
"incentive stock option" as defined in Section 422 of the Internal
Revenue Code or to conform to any change therein.
<PAGE>
SECTION 10.
TERMS AND CONDITIONS OF NONQUALIFIED STOCK OPTIONS
Each nonqualified stock option granted pursuant to this Section 10 shall be
evidenced by a written Option Agreement. The Option Agreement shall be in such
form as may be approved from time to time by the Administrator and may vary from
Optionee to Optionee; provided, however, that each Optionee and each Option
Agreement shall comply with and be subject to the following terms and
conditions:
(a) Number of Shares and Option Price. The Option Agreement shall state
the total number of shares covered by the nonqualified stock option.
Unless otherwise determined by the Administrator, the option price per
share shall be one hundred percent (100%) of the Fair Market Value of
the Common Stock per share on the date the Administrator grants the
option; provided, however, that the option price may not be less than
the higher of the Fair Market Value of the Book Value of the Common
Stock per share on the date of grant.
(b) Term and Exercisability of Nonqualified Stock Option. The term
during which any nonqualified stock option granted under the Plan may
be exercised shall be established in each case by the Administrator.
The Option Agreement shall state when the nonqualified stock option
becomes exercisable and shall also state the maximum term during which
the option may be exercised. In the event a nonqualified stock option
is exercisable immediately, the manner of exercise of the option in the
event it is not exercised in full immediately shall be specified in the
stock option agreement. The Administrator may accelerate the
exercisability of any nonqualified stock option granted hereunder which
is not immediately exercisable as of the date of grant.
(c) Withholding. The Company or its Subsidiary shall be entitled to
withhold and deduct from future wages of the Optionee all legally
required amounts necessary to satisfy any and all withholding and
employment-related taxes attributable to the Optionee's exercise of a
nonqualified stock option. In the event the Optionee is required under
the Option Agreement to pay the Company, or make arrangements
satisfactory to the Company respecting payment of, such withholding and
employment-related taxes, the Administrator may, in its discretion and
pursuant to such rules as it may adopt, permit the Optionee to satisfy
such obligation, in whole or in part, by electing to have the Company
withhold shares of Common Stock otherwise issuable to the Optionee as a
result of the option's exercise equal to the amount required to be
withheld for tax purposes. Any stock elected to be withheld shall be
valued at its Fair Market Value, as of the date the amount of tax to be
withheld is determined under applicable tax law. The Optionee's
election to have shares withheld for this purpose shall be made on or
before the date the option is exercised or, if later, the date that the
amount of tax to be withheld is determined under applicable tax law.
Such election shall be approved by the Administrator and otherwise
comply with such rules as the Administrator may adopt to assure
compliance with Rule 16b-3, or any successor provision, as then in
effect, of the General Rules and Regulations under the Securities
Exchange Act of 1934, if applicable.
(d) Other Provisions. The Option Agreement authorized under this
Section 10 shall contain such other provisions as the Administrator
shall deem advisable.
<PAGE>
SECTION 11.
GRANTING OF OPTIONS TO NON-EMPLOYEE DIRECTORS
(a) Upon Re-election to Board. Each Non-Employee Director who, on and
after the date this Plan is approved by the Company's shareholders, is
elected or re-elected as a director of the Company or whose term of
office continues after a meeting of shareholders at which directors are
elected shall, as of the date of such re-election or shareholder
meeting, automatically be granted an option to purchase 2,500 shares of
the Common Stock at an option price per share equal to 100% of the Fair
Market Value of the Common Stock on the date of such election,
re-election or shareholder meeting. Options granted pursuant to this
subsection (a) shall be immediately exercisable in full.
(b) General. No director shall receive more than one option pursuant to
subsection (a) of this Section 11 in any one fiscal year. All options
granted pursuant to this Section 11 shall be designated as nonqualified
options and shall be subject to the same terms and provisions as are
then in effect with respect to granting of nonqualified options to
officers and employees of the Company except that the option shall
expire on the earlier of (i) one month after the Optionee ceases to be
a director (except by death) and (ii) five years after the date of
grant. Notwithstanding the foregoing, in the event of the death of a
Non-Employee Director, any option granted to such Non-Employee Director
pursuant to this Section 11 may be exercised at any time within six
months of the death of such Non-Employee Director or on the date on
which the option, by its terms expires, whichever is earlier.
SECTION 12.
TRANSFER OF OPTION
No incentive stock option shall be transferable, in whole or in part, by
the Optionee other than by will or by the laws of descent and distribution and,
during the Optionee's lifetime, the option may be exercised only by the
Optionee. If the Optionee shall attempt any transfer of any incentive stock
option granted under the Plan during the Optionee's lifetime, such transfer
shall be void and the incentive stock option, to the extent not fully exercised,
shall terminate.
The Administrator may, in its sole discretion, permit the Optionee to
transfer any or all nonqualified stock options to any member of the Optionee's
"immediate family" as such term is defined in Rule 16a-1(e) promulgated under
the Securities Exchange Act of 1934, or any successor provision, or to one or
more trusts whose beneficiaries are members of such Optionee's "immediate
family" or partnerships in which such family members are the only partners;
provided, however, that the Optionee receives no consideration for the transfer
and such transferred nonqualified stock option shall continue to be subject to
the same terms and conditions as were applicable to such nonqualified stock
option immediately prior to its transfer.
<PAGE>
SECTION 13.
RECAPITALIZATION, SALE, MERGER, EXCHANGE
OR LIQUIDATION
In the event of an increase or decrease in the number of shares of Common
Stock resulting from a subdivision or consolidation of shares or the payment of
a stock dividend or any other increase or decrease in the number of shares of
Common Stock effected without receipt of consideration by the Company, the
number of shares of Option Stock reserved under Section 6 hereof and the number
of shares of Option Stock covered by each outstanding option and the price per
share thereof shall be adjusted by the Board to reflect such change. Additional
shares which may be credited pursuant to such adjustment shall be subject to the
same restrictions as are applicable to the shares with respect to which the
adjustment relates.
Unless otherwise provided in the stock option agreement, in the event of an
acquisition of the Company through the sale of substantially all of the
Company's assets and the consequent discontinuance of its business or through a
merger, consolidation, exchange, reorganization, reclassification, extraordinary
dividend, divestiture or liquidation of the Company (collectively referred to as
a "transaction"), all outstanding options shall become immediately exercisable,
whether or not such options had become exercisable prior to the transaction;
provided, however, that if the acquiring party seeks to have the transaction
accounted for on a "pooling of interests" basis and, in the opinion of the
Company's independent certified public accountants, accelerating the
exercisability of such options would preclude a pooling of interests under
generally accepted accounting principles, the exercisability of such options
shall not accelerate. In addition to the foregoing, in the event of such a
transaction, the Board may provide for one or more of the following:
(a) the complete termination of this Plan and cancellation of
outstanding options not exercised prior to a date specified by the
Board (which date shall give Optionees a reasonable period of time in
which to exercise the options prior to the effectiveness of such
transaction);
(b) that Optionees holding outstanding incentive or nonqualified
options shall receive, with respect to each share of Option Stock
subject to such options, as of the effective date of any such
transaction, cash in an amount equal to the excess of the Fair Market
Value of such Option Stock on the date immediately preceding the
effective date of such transaction over the option price per share of
such options; provided that the Board may, in lieu of such cash
payment, distribute to such Optionees shares of stock of the Company or
shares of stock of any corporation succeeding the Company by reason of
such transaction, such shares having a value equal to the cash payment
herein; or
(c) the continuance of the Plan with respect to the exercise of options
which were outstanding as of the date of adoption by the Board of such
plan for such transaction and provide to Optionees holding such options
the right to exercise their respective options as to an equivalent
number of shares of stock of the corporation succeeding the Company by
reason of such transaction.
The Board may restrict the rights of or the applicability of this Section 13 to
the extent necessary to comply with Section 16(b) of the Securities Exchange Act
of 1934, the Internal Revenue Code or any other applicable law or regulation.
The grant of an option pursuant to the Plan shall not limit in any way the right
or power of the Company to make adjustments, reclassifications, reorganizations
or changes of its capital or business structure or to merge, exchange or
consolidate or to dissolve, liquidate, sell or transfer all or any part of its
business or assets.
<PAGE>
SECTION 14.
SECURITIES LAW COMPLIANCE
No shares of Common Stock shall be issued pursuant to the Plan unless and
until there has been compliance, in the opinion of Company's counsel, with all
applicable legal requirements, including without limitation, those relating to
securities laws and stock exchange listing requirements. As a condition to the
issuance of Option Stock to Optionee, the Administrator may require Optionee to
(i) represent that the shares of Option Stock are being acquired for investment
and not resale and to make such other representations as the Administrator shall
deem necessary or appropriate to qualify the issuance of the shares as exempt
from the Securities Act of 1933 and any other applicable securities laws, and
(ii) represent that Optionee shall not dispose of the shares of Option Stock in
violation of the Securities Act of 1933 or any other applicable securities laws.
As a further condition to the grant of any incentive or nonqualified stock
option or the issuance of Option Stock to Optionee, Optionee agrees to the
following:
(a) In the event the Company advises Optionee that it plans an
underwritten public offering of its Common Stock in compliance with the
Securities Act of 1933, as amended, and the underwriter(s) seek to
impose restrictions under which certain shareholders may not sell or
contract to sell or grant any option to buy or otherwise dispose of
part or all of their stock purchase rights of the underlying Common
Stock, Optionee will not, for a period not to exceed 180 days from the
prospectus, sell or contract to sell or grant an option to buy or
otherwise dispose of any incentive or nonqualified stock option granted
to Optionee pursuant to the Plan or any of the underlying shares of
Common Stock without the prior written consent of the underwriter(s) or
its representative(s).
(b) In the event the Company makes any public offering of its
securities and determines in its sole discretion that it is necessary
to reduce the number of issued but unexercised stock purchase rights so
as to comply with any states securities or Blue Sky law limitations
with respect thereto, the Board of Directors of the Company shall have
the right (i) to accelerate the exercisability of any incentive or
nonqualified stock option and the date on which such option must be
exercised, provided that the Company gives Optionee prior written
notice of such acceleration, and (ii) to cancel any options or portions
thereof which Optionee does not exercise prior to or contemporaneously
with such public offering.
(c) In the event of a transaction (as defined in Section 13 of the
Plan) which is treated as a "pooling of interests" under generally
accepted accounting principles, Optionee will comply with Rule 145 of
the Securities Act of 1933 and any other restrictions imposed under
other applicable legal or accounting principles if Optionee is an
"affiliate" (as defined in such applicable legal and accounting
principles) at the time of the transaction, and Optionee will execute
any documents necessary to ensure compliance with such rules.
<PAGE>
The Company reserves the right to place a legend on any stock certificate
issued upon exercise of an option granted pursuant to the Plan to assure
compliance with this Section 14.
SECTION 15.
RIGHTS AS A SHAREHOLDER
An Optionee (or the Optionee's successor or successors) shall have no
rights as a shareholder with respect to any shares covered by an option until
the date of the issuance of a stock certificate evidencing such shares. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property), distributions or other rights for which the
record date is prior to the date such stock certificate is actually issued
(except as otherwise provided in Section 13 of the Plan).
SECTION 16.
AMENDMENT OF THE PLAN
The Board may from time to time, insofar as permitted by law, suspend or
discontinue the Plan or revise or amend it in any respect; provided, however,
that no such revision or amendment, except as is authorized in Section 13, shall
impair the terms and conditions of any option which is outstanding on the date
of such revision or amendment to the material detriment of the Optionee without
the consent of the Optionee. Notwithstanding the foregoing, no such revision or
amendment shall (i) materially increase the number of shares subject to the Plan
except as provided in Section 13 hereof, (ii) change the designation of the
class of employees eligible to receive options, (iii) decrease the price at
which options may be granted, or (iv) materially increase the benefits accruing
to Optionees under the Plan without the approval of the shareholders of the
Company if such approval is required for compliance with the requirements of any
applicable law or regulation. Furthermore, the Plan may not, without the
approval of the shareholders, be amended in any manner that will cause incentive
stock options to fail to meet the requirements of Section 422 of the Internal
Revenue Code.
SECTION 17.
NO OBLIGATION TO EXERCISE OPTION
The granting of an option shall impose no obligation upon the Optionee to
exercise such option. Further, the granting of an option hereunder shall not
impose upon the Company or any Subsidiary any obligation to retain the Optionee
in its employ for any period.
<PAGE>
INCENTIVE STOCK OPTION AGREEMENT
KINNARD INVESTMENTS, INC.
1997 STOCK OPTION PLAN
THIS AGREEMENT, made effective as of this ____ day of _____________,
19____, by and between Kinnard Investments, Inc., a Minnesota corporation (the
"Company"), and _____________ ("Optionee").
W I T N E S S E T H:
WHEREAS, Optionee on the date hereof is a key employee or officer of the
Company or one of its Subsidiaries; and
WHEREAS, the Company wishes to grant an incentive stock option to Optionee
to purchase shares of the Company's Common Stock pursuant to the Company's 1997
Stock Option Plan (the "Plan"); and
WHEREAS, the Administrator of the Plan has authorized the grant of an
incentive stock option to Optionee and has determined that, as of the effective
date of this Agreement, the fair market value of the Company's Common Stock is
$_____ per share;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties hereto agree as follows:
1. Grant of Option. The Company hereby grants to Optionee on the date set
forth above (the "Date of Grant"), the right and option (the "Option") to
purchase all or portions of an aggregate of ______________ shares of Common
Stock at a per share price of $___________________ on the terms and conditions
set forth herein, and subject to adjustment pursuant to Section 13 of the Plan.
Except as otherwise provided in Paragraphs 2(b) and 2(c), this Option is
intended to be an incentive stock option within the meaning of Section 422, or
any successor provision, of the Internal Revenue Code of 1986, as amended (the
"Code"), and the regulations thereunder.
2. Duration and Exercisability.
a. The term during which this Option may be exercised shall terminate on
______________, except as otherwise provided in Paragraphs 2(b) through 2(e)
below. This Option shall become exercisable according to the following schedule:
Percentage/Number
Vesting Date of Shares
Once the Option becomes exercisable to the extent of one hundred percent (100%)
of the aggregate number of shares specified in Paragraph 1, Optionee may
continue to exercise this Option under the terms and conditions of this
Agreement until the termination of the Option as provided herein. If Optionee
does not purchase upon an exercise of this Option the full number of shares
which Optionee is then entitled to purchase, Optionee may purchase upon any
subsequent exercise prior to this Option's termination such previously
unpurchased shares in addition to those Optionee is otherwise entitled to
purchase.
<PAGE>
b. Termination of Employment (other than Change of Control, Disability or
Death). If Optionee's employment with the Company or any Subsidiary is
terminated for any reason other than because of a "change of control
transaction" as described in Paragraph 2(c) or because of disability or death,
this Option shall completely terminate on the earlier of (i) the close of
business on the one-month anniversary date of such termination of employment,
and (ii) the expiration date of this Option stated in Paragraph 2 above. In such
period following the termination of Optionee's employment or, if applicable,
such other relationship, this Option shall be exercisable only to the extent the
Option was exercisable on the vesting date immediately preceding such
termination of employment or such other relationship, but had not previously
been exercised. To the extent this Option was not exercisable upon such
termination of employment or such other relationship, or if Optionee does not
exercise the Option within the time specified in this Paragraph 2(b), all rights
of Optionee under this Option shall be forfeited.
c. Change of Control. If (i) Optionee's employment with the Company or any
Subsidiary is terminated because of a "change of control transaction," (ii) such
transaction is treated as a "pooling of interests" under generally accepted
accounting principles, and (iii) Optionee is an "affiliate" of the Company or
Subsidiary under applicable legal and accounting principles, this Option shall
completely terminate on the later of (A) the close of business on the one-month
anniversary date of such termination of employment or (B) the close of business
on the date that is sixty (60) days after the date on which affiliates are no
longer restricted from selling, transferring or otherwise disposing of the
shares of stock received in the change of control transaction. Notwithstanding
the foregoing, if, upon such termination of employment, Optionee continues to
serve as a consultant, advisor or nonemployee director of the Company or
Subsidiary, this Option shall terminate on the later of (X) the close of
business on the one-month anniversary date of the termination of all of
Optionee's relationships with the Company or Subsidiary, and (Y) the close of
business on the date that is sixty (60) days after the date on which affiliates
are no longer restricted from selling, transferring or otherwise disposing of
the shares of stock received in the change of control transaction, and this
Option shall not, upon Optionee's termination of employment, be treated as an
incentive stock option within the meaning of Code Section 422.
In such period following the termination of Optionee's employment or, if
applicable, such other relationship, this Option shall be exercisable only to
the extent the Option was exercisable on the vesting date immediately preceding
such termination of employment or such other relationship, but had not
previously been exercised, unless the exercisability of this Option has been
accelerated as provided in Section 13 of the Plan. To the extent this Option was
not exercisable upon such termination of employment or such other relationship,
or if Optionee does not exercise the Option within the time specified in this
Paragraph 2(c), all rights of Optionee under this Option shall be forfeited. If
Optionee exercises this Option on a date that is after the three-month
anniversary of the termination of Optionee's employment or on a date that is
more than ten years (or five years, if applicable) after the Date of Grant, this
Option shall not be treated as an incentive stock option within the meaning of
Code Section 422.
For purposes of this Paragraph 2(c), a "change of control transaction"
means an acquisition of the Company through the sale of substantially all of the
Company's assets and the consequent discontinuance of its business or through a
merger, consolidation, exchange, reorganization, reclassification, extraordinary
dividend, divestiture (including a spin-off) or liquidation of the Company.
<PAGE>
d. Disability. If Optionee ceases to be an employee of the Company or any
Subsidiary due to disability (as such term is defined in Code Section 22(e)(3),
or any successor provision), this Option shall completely terminate on the
earlier of (i) the close of business on the six-month anniversary date of such
termination of employment, and (ii) the expiration date under this Option stated
in Paragraph 2(a) above. In such period following such termination of
employment, this Option shall be exercisable only to the extent the Option was
exercisable on the vesting date immediately preceding the date of Optionee's
termination of employment. If Optionee does not exercise the Option within the
time specified in this Paragraph 2(d), all rights of Optionee under this Option
shall be forfeited.
e. Death. In the event of Optionee's death, this Option shall terminate on
the earlier of (i) the close of business on the six-month anniversary date of
the date of Optionee's death, and (ii) the expiration date of this Option stated
in Paragraph 2(a) above. In such period following Optionee's death, this Option
shall be exercisable by the person or persons to whom Optionee's rights under
this Option shall have passed by Optionee's will or by the laws of descent and
distribution only to the extent the Option was exercisable on the vesting date
immediately preceding the date of Optionee's death. If such person or persons do
not exercise this Option within the time specified in this Paragraph 2(e), all
rights under this Option shall be forfeited.
3. Manner of Exercise.
a. General. The Option may be exercised only by Optionee (or other proper
party in the event of death or incapacity), subject to the conditions of the
Plan and subject to such other administrative rules as the Administrator may
deem advisable, by delivering within the Option Period written notice of
exercise to the Company at its principal office. The notice shall state the
number of shares as to which the Option is being exercised and shall be
accompanied by payment in full of the Option price for all shares designated in
the notice. The exercise of the Option shall be deemed effective upon receipt of
such notice by the Company and upon payment that complies with the terms of the
Plan and this Agreement. The Option may be exercised with respect to any number
or all of the shares as to which it can then be exercised and, if partially
exercised, may be so exercised as to the unexercised shares any number of times
during the Option period as provided herein.
b. Form of Payment. Subject to approval by the Administrator, payment of
the Option price by Optionee shall be in the form of cash, personal check,
certified check or previously acquired shares of Common Stock of the Company, or
any combination thereof. Any stock so tendered as part of such payment shall be
valued at its Fair Market Value as provided in the Plan. For purposes of this
Agreement, "previously acquired shares of Common Stock" shall include shares of
Common Stock that are already owned by Optionee at the time of exercise.
<PAGE>
c. Stock Transfer Records. As soon as practicable after the effective
exercise of all or any part of the Option, Optionee shall be recorded on the
stock transfer books of the Company as the owner of the shares purchased, and
the Company shall deliver to Optionee one or more duly issued stock certificates
evidencing such ownership. All requisite original issue or transfer documentary
stamp taxes shall be paid by the Company.
4. Miscellaneous.
a. Employment; Rights as Shareholder. This Agreement shall not confer on
Optionee any right with respect to continuance of employment by the Company or
any of its Subsidiaries, nor will it interfere in any way with the right of the
Company to terminate such employment. Optionee shall have no rights as a
shareholder with respect to shares subject to this Option until such shares have
been issued to Optionee upon exercise of this Option. No adjustment shall be
made for dividends (ordinary or extraordinary, whether in cash, securities or
other property), distributions or other rights for which the record date is
prior to the date such shares are issued, except as provided in Section 12 of
the Plan.
b. Securities Law Compliance. The exercise of all or any parts of this
Option shall only be effective at such time as counsel to the Company shall have
determined that the issuance and delivery of Common Stock pursuant to such
exercise will not violate any state or federal securities or other laws.
Optionee may be required by the Company, as a condition of the effectiveness of
any exercise of this Option, to agree in writing that all Common Stock to be
acquired pursuant to such exercise shall be held, until such time that such
Common Stock is registered and freely tradable under applicable state and
federal securities laws, for Optionee's own account without a view to any
further distribution thereof, that the certificates for such shares shall bear
an appropriate legend to that effect and that such shares will be not
transferred or disposed of except in compliance with applicable state and
federal securities laws.
c. Mergers, Recapitalizations, Stock Splits, Etc. Pursuant and subject to
Section 13 of the Plan, certain changes in the number or character of the Common
Stock of the Company (through sale, merger, consolidation, exchange,
reorganization, divestiture (including a spin-off), liquidation,
recapitalization, stock split, stock dividend or otherwise) shall result in an
adjustment, reduction or enlargement, as appropriate, in Optionee's rights with
respect to any unexercised portion of the Option (i.e., Optionee shall have such
"anti-dilution" rights under the Option with respect to such events, but shall
not have "preemptive" rights).
<PAGE>
d. Shares Reserved. The Company shall at all times during the option period
reserve and keep available such number of shares as will be sufficient to
satisfy the requirements of this Agreement.
e. Withholding Taxes on Disqualifying Disposition. In the event of a
disqualifying disposition of the shares acquired through the exercise of this
Option, Optionee hereby agrees to inform the Company of such disposition. Upon
notice of a disqualifying disposition, the Company may take such action as it
deems appropriate to insure that, if necessary to comply with all applicable
federal or state income tax laws or regulations, all applicable federal and
state payroll, income or other taxes are withheld from any amounts payable by
the Company to Optionee. If the Company is unable to withhold such federal and
state taxes, for whatever reason, Optionee hereby agrees to pay to the Company
an amount equal to the amount the Company would otherwise be required to
withhold under federal or state law. Optionee may, subject to the approval and
discretion of the Administrator or such administrative rules it may deem
advisable, elect to have all or a portion of such tax withholding obligations
satisfied by delivering shares of the Company's Common Stock having a fair
market value equal to such obligations.
f. Nontransferability. During the lifetime of Optionee, the accrued Option
shall be exercisable only by Optionee or by the Optionee's guardian or other
legal representative, and shall not be assignable or transferable by Optionee,
in whole or in part, other than by will or by the laws of descent and
distribution.
g. 1997 Stock Option Plan. The Option evidenced by this Agreement is
granted pursuant to the Plan, a copy of which Plan has been made available to
Optionee and is hereby incorporated into this Agreement. This Agreement is
subject to and in all respects limited and conditioned as provided in the Plan.
The Plan governs this Option and, in the event of any questions as to the
construction of this Agreement or in the event of a conflict between the Plan
and this Agreement, the Plan shall govern, except as the Plan otherwise
provides.
h. Lockup Period Limitation. Optionee agrees that in the event the Company
advises Optionee that it plans an underwritten public offering of its Common
Stock in compliance with the Securities Act of 1933, as amended, and that the
underwriter(s) seek to impose restrictions under which certain shareholders may
not sell or contract to sell or grant any option to buy or otherwise dispose of
part or all of their stock purchase rights of the underlying Common Stock,
Optionee hereby agrees that for a period not to exceed 180 days from the
prospectus, Optionee will not sell or contract to sell or grant an option to buy
or otherwise dispose of this option or any of the underlying shares of Common
Stock without the prior written consent of the underwriter(s) or its
representative(s).
<PAGE>
i. Blue Sky Limitation. Notwithstanding anything in this Agreement to the
contrary, in the event the Company makes any public offering of its securities
and determines in its sole discretion that it is necessary to reduce the number
of issued but unexercised stock purchase rights so as to comply with any state
securities or Blue Sky law limitations with respect thereto, the Board of
Directors of the Company shall have the right (i) to accelerate the
exercisability of this Option and the date on which this Option must be
exercised, provided that the Company gives Optionee 15 days' prior written
notice of such acceleration, and (ii) to cancel any portion of this Option or
any other option granted to Optionee pursuant to the Plan which is not exercised
prior to or contemporaneously with such public offering. Notice shall be deemed
given when delivered personally or when deposited in the United States mail,
first class postage prepaid and addressed to Optionee at the address of Optionee
on file with the Company.
j. Accounting Compliance. Optionee agrees that, in the event a "change of
control transaction" (as defined in Paragraph 4(g) above) is treated as a
"pooling of interests" under generally accepted accounting principles and
Optionee is an "affiliate" of the Company or any Subsidiary (as defined in
applicable legal and accounting principles) at the time of such change of
control transaction, Optionee will comply with all requirements of pooling
accounting rules and Rule 145 under the Securities Act of 1933, as amended, and
the requirements of such other legal or accounting principles as may be
applicable, and will execute any documents necessary to ensure such compliance.
k. Stock Legend. The certificates for any shares of Common Stock purchased
by Optionee (or, in the case of death, Optionee's successors) shall bear an
appropriate legend to reflect the restrictions of Paragraphs 4(b), 4(h), 4(i)
and 4(j) of this Agreement.
l. Scope of Agreement. This Agreement shall bind and inure to the benefit
of the Company and its successors and assigns and Optionee and any successor or
successors of Optionee permitted by Paragraph 4(f) above.
m. Arbitration. Any dispute arising out of or relating to this Agreement or
the alleged breach of it, or the making of this Agreement, including claims of
fraud in the inducement, shall be discussed between the disputing parties in a
good faith effort to arrive at a mutual settlement of any such controversy. If,
notwithstanding, such dispute cannot be resolved, such dispute shall be settled
by binding arbitration in accordance with the rules of the National Association
of Securities Dealers, Inc.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and year first above written.
--------------------------------------
By:
----------------------------------
Its:
-------------------------------
--------------------------------------
Optionee
<PAGE>
NONQUALIFIED STOCK OPTION AGREEMENT
KINNARD INVESTMENTS, INC.
1997 STOCK OPTION PLAN
THIS AGREEMENT, made effective as of this day of , 19 , by and between
Kinnard Investments, Inc., a Minnesota corporation (the "Company"), and
___________________ ("Optionee").
W I T N E S S E T H:
WHEREAS, Optionee on the date hereof is a key employee, officer,
consultant, nonemployee director or advisor of the Company or one of its
Subsidiaries; and
WHEREAS, the Company wishes to grant a nonqualified stock option to
Optionee to purchase shares of the Company's Common Stock pursuant to the
Company's 1997 Stock Option Plan (the "Plan"); and
WHEREAS, the Administrator has authorized the grant of a nonqualified stock
option to Optionee and has determined that, as of the effective date of this
Agreement, the fair market value of the Company's Common Stock is $__________
per share;
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained, the parties hereto agree as follows:
1. Grant of Option. The Company hereby grants to Optionee on the date set
forth above (the "Date of Grant"), the right and option (the "Option") to
purchase all or portions of an aggregate of ________________ shares of Common
Stock at a per share price of $___________ on the terms and conditions set forth
herein, and subject to adjustment pursuant to Section 12 of the Plan. This
Option is a nonqualified stock option and will not be treated as an incentive
stock option, as defined under Section 422, or any successor provision, of the
Internal Revenue Code of 1986, as amended (the "Code"), and the regulations
thereunder.
2. Duration and Exercisability.
a. The term during which this Option may be exercised shall terminate on
____________________, except as otherwise provided in Paragraphs 2(b) through
2(e) below. This Option shall become exercisable according to the following
schedule:
Percentage/Number
Vesting Date of Shares
Once the Option becomes exercisable to the extent of one hundred percent (100%)
of the aggregate number of shares specified in Paragraph 1, Optionee may
continue to exercise this Option under the terms and conditions of this
Agreement until the termination of the Option as provided herein. If Optionee
does not purchase upon an exercise of this Option the full number of shares
which Optionee is then entitled to purchase, Optionee may purchase upon any
subsequent exercise prior to this Option's termination such previously
unpurchased shares in addition to those Optionee is otherwise entitled to
purchase.
<PAGE>
b. Termination of Relationship (other than Change of Control, Disability or
Death). If Optionee ceases to be an employee, consultant, nonemployee director
or an advisor of the Company or any Subsidiary for any reason other than because
of a "change of control transaction" as described in Paragraph 2(c) or because
of disability or death, this Option shall completely terminate on the earlier of
(i) the close of business on the one-month anniversary date of the termination
of all such relationships, and (ii) the expiration date of this Option stated in
Paragraph 2(a) above. In such period following such termination, this Option
shall be exercisable only to the extent the Option was exercisable on the
vesting date immediately preceding the date on which all of Optionee's
relationships with the Company or Subsidiary have terminated, but had not
previously been exercised. To the extent this Option was not exercisable upon
the termination of such relationship, or if Optionee does not exercise the
Option within the time specified in this Paragraph 2(b), all rights of Optionee
under this Option shall be forfeited.
c. Change of Control. If (i) Optionee ceases to be an employee, consultant,
nonemployee director or advisor of the Company or any Subsidiary because of a
"change of control transaction," (ii) such transaction is treated as a "pooling
of interests" under generally accepted accounting principles, and (iii) Optionee
is an "affiliate" of the Company or Subsidiary under applicable legal and
accounting principles, this Option shall completely terminate on the later of
(A) the close of business on the one-month anniversary date of the termination
of all such relationships, and (B) the close of business on the date that is
sixty (60) days after the date on which affiliates are no longer restricted from
selling, transferring or otherwise disposing of the shares of stock received in
the change of control transaction. In such period following such termination,
this Option shall be exercisable only to the extent the Option was exercisable
on the vesting date immediately preceding the date on which all of Optionee's
relationships with the Company or Subsidiary have terminated, but had not
previously been exercised, unless the exercisability of this Option has been
accelerated as provided in Section 13 of the Plan. To the extent this Option was
not exercisable upon such termination of such relationships, or if Optionee does
not exercise the Option within the time specified in this Paragraph 2(c), all
rights of Optionee under this Option shall be forfeited.
For purposes of this Paragraph 2(c), a "change of control transaction"
means an acquisition of the Company through the sale of substantially all of the
Company's assets and the consequent discontinuance of its business or through a
merger, consolidation, exchange, reorganization, reclassification, extraordinary
dividend, divestiture or liquidation of the Company.
d. Disability. If Optionee ceases to be an employee, consultant,
nonemployee director or advisor of the Company or any Subsidiary because of
disability (as such term is defined in Code Section 22(e)(3), or any successor
provision), this Option shall completely terminate on the earlier of (i) the
close of business on the six-month anniversary date of the termination of all
such relationships, and (ii) the expiration date under this Option stated in
Paragraph 2(a) above. In such period following such termination, this Option
shall be exercisable only to the extent the Option was exercisable on the
vesting date immediately preceding the termination of all of Optionee's
relationships. If Optionee does not exercise the Option within the time
specified in this Paragraph 2(d), all rights of Optionee under this Option shall
be forfeited.
<PAGE>
e. Death. In the event of Optionee's death, this Option shall terminate on
the earlier of (i) the close of business on the six-month anniversary date of
the date of Optionee's death, and (ii) the expiration date of this Option stated
in Paragraph 2(a) above. In such period following Optionee's death, this Option
may be exercised by the person or persons to whom Optionee's rights under this
Option shall have passed by Optionee's will or by the laws of descent and
distribution only to the extent the Option was exercisable on the vesting date
immediately preceding the date of Optionee's death. If such person or persons
fail to exercise this Option within the time specified in this Paragraph 2(e),
all rights under this Option shall be forfeited.
3. Manner of Exercise.
a. General. The Option may be exercised only by Optionee (or other proper
party in the event of death or incapacity), subject to the conditions of the
Plan and subject to such other administrative rules as the Administrator may
deem advisable, by delivering within the option period written notice of
exercise to the Company at its principal office. The notice shall state the
number of shares as to which the Option is being exercised and shall be
accompanied by payment in full of the option price for all shares designated in
the notice. The exercise of the Option shall be deemed effective upon receipt of
such notice by the Company and upon payment that complies with the terms of the
Plan and this Agreement. The Option may be exercised with respect to any number
or all of the shares as to which it can then be exercised and, if partially
exercised, may be exercised as to the unexercised shares any number of times
during the option period as provided herein.
b. Form of Payment. Subject to the approval of the Administrator, payment
of the option price by Optionee shall be in the form of cash, personal check,
certified check or previously acquired shares of Common Stock of the Company, or
any combination thereof. Any stock so tendered as part of such payment shall be
valued at its Fair Market Value as provided in the Plan. For purposes of this
Agreement, "previously acquired shares of Common Stock" shall include shares of
Common Stock that are already owned by Optionee at the time of exercise.
c. Stock Transfer Records. As soon as practicable after the effective
exercise of all or any part of the Option, Optionee shall be recorded on the
stock transfer books of the Company as the owner of the shares purchased, and
the Company shall deliver to Optionee one or more duly issued stock certificates
evidencing such ownership. All requisite original issue or transfer documentary
stamp taxes shall be paid by the Company.
<PAGE>
4. Miscellaneous.
a. Rights as Shareholder. This Agreement shall not confer on Optionee any
right with respect to the continuance of any relationship with the Company or
any of its Subsidiaries, nor will it interfere in any way with the right of the
Company to terminate any such relationship. Optionee shall have no rights as a
shareholder with respect to shares subject to this Option until such shares have
been issued to Optionee upon exercise of this Option. No adjustment shall be
made for dividends (ordinary or extraordinary, whether in cash, securities or
other property), distributions or other rights for which the record date is
prior to the date such shares are issued, except as provided in Section 12 of
the Plan.
b. Securities Law Compliance. The exercise of all or any parts of this
Option shall only be effective at such time as counsel to the Company shall have
determined that the issuance and delivery of Common Stock pursuant to such
exercise will not violate any state or federal securities or other laws.
Optionee may be required by the Company, as a condition of the effectiveness of
any exercise of this Option, to agree in writing that all Common Stock to be
acquired pursuant to such exercise shall be held, until such time that such
Common Stock is registered and freely tradable under applicable state and
federal securities laws, for Optionee's own account without a view to any
further distribution thereof and that such shares will be not transferred or
disposed of except in compliance with applicable state and federal securities
laws.
c. Mergers, Recapitalizations, Stock Splits, Etc. Pursuant and subject to
Section 13 of the Plan, certain changes in the number or character of the Common
Stock of the Company (through sale, merger, consolidation, exchange,
reorganization, divestiture (including a spin-off), liquidation,
recapitalization, stock split, stock dividend or otherwise) shall result in an
adjustment, reduction or enlargement, as appropriate, in Optionee's rights with
respect to any unexercised portion of the Option (i.e., Optionee shall have such
"anti-dilution" rights under the Option with respect to such events, but shall
not have "preemptive" rights).
d. Shares Reserved. The Company shall at all times during the option period
reserve and keep available such number of shares as will be sufficient to
satisfy the requirements of this Agreement.
<PAGE>
e. Withholding Taxes. In order to permit the Company to comply with all
applicable federal or state income tax laws or regulations, the Company may take
such action as it deems appropriate to insure that, if necessary, all applicable
federal or state payroll, income or other taxes are withheld from any amounts
payable by the Company to Optionee. If the Company is unable to withhold such
federal and state taxes, for whatever reason, Optionee hereby agrees to pay to
the Company an amount equal to the amount the Company would otherwise be
required to withhold under federal or state law. Optionee may, subject to the
approval and discretion of the Administrator or such administrative rules it may
deem advisable, elect to have all or a portion of such tax withholding
obligations satisfied by delivering shares of the Company's Common Stock having
a fair market value equal to such obligations.
f. Transferability of Options. Optionee may, for no consideration, transfer
this Option to a member of Optionee's immediate family, to a trust for the
benefit of Optionee's immediately family member(s) or to a partnership in which
such family member(s) are the only partners. The family member to whom, or the
trust or partnership to which, this Option has been transferred shall be subject
to all terms and conditions set forth herein, and shall not subsequently assign
or transfer this Option, either voluntarily or involuntarily, unless such
transfer is to another family member, trust or partnership which meets the
requirements of this Paragraph 4(f). If Optionee does not transfer this Option
to such a family member, trust or partnership, this Option shall be exercisable
only by Optionee or by Optionee's guardian or other legal representative and,
upon Optionee's death, shall be exercisable by the person or persons to whom
Optionee's rights under this Option have passed by will or by the laws of
descent and distribution.
g. 1997 Stock Option Plan. The Option evidenced by this Agreement is
granted pursuant to the Plan, a copy of which Plan has been made available to
Optionee and is hereby incorporated into this Agreement. This Agreement is
subject to and in all respects limited and conditioned as provided in the Plan.
The Plan governs this Option and, in the event of any questions as to the
construction of this Agreement or in the event of a conflict between the Plan
and this Agreement, the Plan shall govern, except as the Plan otherwise
provides.
h. Lockup Period Limitation. Optionee agrees that in the event the Company
advises Optionee that it plans an underwritten public offering of its Common
Stock in compliance with the Securities Act of 1933, as amended, and that the
underwriter(s) seek to impose restrictions under which certain shareholders may
not sell or contract to sell or grant any option to buy or otherwise dispose of
part or all of their stock purchase rights of the underlying Common Stock,
Optionee hereby agrees that for a period not to exceed 180 days from the
prospectus, Optionee will not sell or contract to sell or grant an option to buy
or otherwise dispose of this option or any of the underlying shares of Common
Stock without the prior written consent of the underwriter(s) or its
representative(s).
<PAGE>
i. Blue Sky Limitation. Notwithstanding anything in this Agreement to the
contrary, in the event the Company makes any public offering of its securities
and determines in its sole discretion that it is necessary to reduce the number
of issued but unexercised stock purchase rights so as to comply with any state
securities or Blue Sky law limitations with respect thereto, the Board of
Directors of the Company shall have the right (i) to accelerate the
exercisability of this Option and the date on which this Option must be
exercised, provided that the Company gives Optionee 15 days' prior written
notice of such acceleration, and (ii) to cancel any portion of this Option or
any other option granted to Optionee pursuant to the Plan which is not exercised
prior to or contemporaneously with such public offering. Notice shall be deemed
given when delivered personally or when deposited in the United States mail,
first class postage prepaid and addressed to Optionee at the address of Optionee
on file with the Company.
j. Accounting Compliance. Optionee agrees that, in the event a "change of
control transaction" (as defined in Paragraph 4(g) above) is treated as a
"pooling of interests" under generally accepted accounting principles and
Optionee is an "affiliate" of the Company or any Subsidiary (as defined in
applicable legal and accounting principles) at the time of such change of
control transaction, Optionee will comply with all requirements of pooling
accounting rules and Rule 145 under the Securities Act of 1933, as amended, and
the requirements of such other legal or accounting principles as may be
applicable, and will execute any documents necessary to ensure such compliance.
k. Stock Legend. The certificates for any shares of Common Stock purchased
by Optionee (or, in the case of death, Optionee's successors) shall bear an
appropriate legend to reflect the restrictions of Paragraph 4(b), 4(h), 4(i) and
4(j) of this Agreement.
l. Scope of Agreement. This Agreement shall bind and inure to the benefit
of the Company and its successors and assigns and Optionee and any successor or
successors of Optionee permitted by Paragraph 2(b) above.
m. Arbitration. Any dispute arising out of or relating to this Agreement or
the alleged breach of it, or the making of this Agreement, including claims of
fraud in the inducement, shall be discussed between the disputing parties in a
good faith effort to arrive at a mutual settlement of any such controversy. If,
notwithstanding, such dispute cannot be resolved, such dispute shall be settled
by binding arbitration in accordance with the rules of the National Association
of Securities Dealers, Inc.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and year first above written.
-------------------------------------
By:
----------------------------------
Its:
------------------------------
-------------------------------------
Optionee
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CALCULATION OF WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND INCOME
FOR DETERMINATION OF EARNINGS PER SHARE OF COMMON STOCK
EXHIBIT 11
<TABLE>
<CAPTION>
===================================================================== ===================================================
Years Ended December 31,
1996 1995 1994
- --------------------------------------------------------------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
Calculation of Primary Earnings Per Share:
Weighted average number of common shares outstanding 6,046 6,201 5,994
Dilutive effect for stock options and warrants computed
using treasury stock method 62 29 0
- --------------------------------------------------------------------- ---------------- ----------------- ----------------
Weighted average number of common and common
equivalent shares outstanding: 6,108 6,230 5,994
- --------------------------------------------------------------------- ---------------- ----------------- ----------------
Net income (loss) applicable to common stock $11,698 $3,376 ($3,210)
Net income (loss) per share $1.92 $0.54 ($0.54)
- --------------------------------------------------------------------- ---------------- ----------------- ----------------
Calculation of Fully Diluted Earnings Per Share:
Weighted average number of common shares outstanding 6,102 6,201 5,994
Dilutive effect of stock options and warrants computed
using the treasury stock method 92 80 0
- --------------------------------------------------------------------- ---------------- ----------------- ----------------
Weighted average number of common and common
equivalent shares outstanding: 6,194 6,281 5,994
- --------------------------------------------------------------------- ---------------- ----------------- ----------------
Net income (loss) applicable to common stock $11,698 $3,376 ($3,210)
Net income (loss) per share $1.89 $0.54 ($0.54)
===================================================================== ================ ================= ================
</TABLE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-39874, No. 33-49720, No. 33-49722, No. 33-67830 and No. 33-82102 of Kinnard
Investments, Inc. on Form S-8 of our report dated January 30, 1997 on the
consolidated financial statements of Kinnard Investments, Inc., appearing in
this Annual Report on Form 10-K of Kinnard Investments, Inc. and its
subsidiaries for the year ended December 31, 1996.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
March 20, 1997
<TABLE> <S> <C>
<ARTICLE> BD
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 12518
<RECEIVABLES> 3108
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 28598
<PP&E> 980
<TOTAL-ASSETS> 47141
<SHORT-TERM> 0
<PAYABLES> 0
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 842
<LONG-TERM> 0
0
0
<COMMON> 120
<OTHER-SE> 35909
<TOTAL-LIABILITY-AND-EQUITY> 47141
<TRADING-REVENUE> 35907
<INTEREST-DIVIDENDS> 2732
<COMMISSIONS> 35996
<INVESTMENT-BANKING-REVENUES> 4985
<FEE-REVENUE> 4330
<INTEREST-EXPENSE> 0
<COMPENSATION> 44037
<INCOME-PRETAX> 19666
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11698
<EPS-PRIMARY> 1.92
<EPS-DILUTED> 1.89
</TABLE>
