SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1998 Commission File No. 0-9377
KINNARD INVESTMENTS, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-0972952
(State of incorporation) (I.R.S. Employer identification number)
920 Second Avenue South, Minneapolis, Minnesota 55402 (612) 370-2700
(Address of principal executive offices) Telephone number
Former name, former address and former fiscal year, if changed since last report
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 _____
Shares of $0.02 par value common stock outstanding at August 10, 1998: 5,830,407
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONTENTS
PART I Page
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated statements of financial condition.............3
Consolidated statements of operations......................4
Consolidated statements of shareholders' equity............5
Consolidated statements of cash flows......................6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.....................8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.......................10
PART II
OTHER INFORMATION.............................................13
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
(In thousands, except share data)
- --------------------------------------------------------------------------------- -------------------- --------------------
June 30, December 31,
1998 1997
- --------------------------------------------------------------------------------- -------------------- --------------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $1,759 $3,886
Funds held in escrow 0 1,593
Receivable from clearing firm 1,229 0
Miscellaneous receivables 3,395 3,311
Trading securities, at market 9,998 10,730
Office equipment at cost, less accumulated depreciation
of $2,079 and $2,876, respectively 2,138 1,267
Investment securities, at fair value 22,988 22,705
Income tax receivable 673 0
Other assets 336 480
- --------------------------------------------------------------------------------- -------------------- --------------------
Total assets $42,516 $43,972
================================================================================= ==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Due to clearing firm
$0 $1,069
Securities sold but not yet purchased, at market 803 915
Accrued compensation 2,806 3,594
Other accounts payable and accrued expenses 4,019 2,584
Income taxes payable 0 18
Deferred tax liability 287 220
- --------------------------------------------------------------------------------- -------------------- --------------------
Total liabilities 7,915 8,400
- --------------------------------------------------------------------------------- -------------------- --------------------
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 5,991 and 5,955 shares, respectively 119 119
Additional paid-in capital 12,055 11,946
Retained earnings 22,427 23,507
- --------------------------------------------------------------------------------- -------------------- --------------------
Total shareholders' equity 34,601 35,572
- --------------------------------------------------------------------------------- -------------------- --------------------
Total liabilities and shareholders' equity $42,516 $43,972
================================================================================= ==================== ====================
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)
- ---------------------------------------------- ---------------------------------- ---- ----------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
- ---------------------------------------------- ---------------- ----------------- ---- ----------------- ----------------
1998 1997 1998 1997
- ---------------------------------------------- ---------------- ----------------- ---- ----------------- ----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Commissions $3,793 $3,261 $7,436 $6,938
Principal transactions 3,573 6,608 8,780 13,144
Net gains (losses) on investment account (203) 878 764 194
Investment banking 1,640 1,005 3,621 1,543
Interest 323 557 698 1,140
Other 784 589 1,513 1,111
- ---------------------------------------------- ---------------- ----------------- ---- ----------------- ----------------
Total revenues 9,910 12,898 22,812 24,070
- ---------------------------------------------- ---------------- ----------------- ---- ----------------- ----------------
Expenses:
Compensation and benefits 8,058 8,122 16,773 16,290
Floor brokerage and clearance 873 915 1,847 1,897
Communications 228 196 409 383
Occupancy and equipment 1,443 1,283 2,860 2,481
Other 1,557 1,199 2,726 2,352
- ---------------------------------------------- ---------------- ----------------- ---- ----------------- ----------------
Total expenses 12,159 11,715 24,615 23,403
- ---------------------------------------------- ---------------- ----------------- ---- ----------------- ----------------
Income (loss) before income taxes (2,249) 1,183 (1,803) 667
Income tax expense (benefit) (906) 482 (723) 282
- ---------------------------------------------- ---------------- ----------------- ---- ----------------- ----------------
Net income (loss) ($1,343) $701 ($1,080) $385
- ---------------------------------------------- ---------------- ----------------- ---- ----------------- ----------------
Earnings (loss) per common share:
Basic ($0.22) $0.11 ($0.18) $0.06
Diluted ($0.22) $0.11 ($0.18) $0.06
============================================== ================ ================= ==== ================= ================
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands)
- -------------------------------------------- --------------- --------------- -------------- --------------- -----------------
Additional Total
Common Stock Paid-in Retained Shareholders'
Shares Amount Capital Earnings Equity
- -------------------------------------------- --------------- --------------- -------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 6,257 $125 $13,680 $11,500 $25,305
- -------------------------------------------- --------------- --------------- -------------- --------------- -----------------
Issuance of shares under employee
stock purchase plan 11 0 51 51
Issuance of shares under employee
stock option plan 88 2 311 313
Repurchase of stock (329) (7) (1,332) (1,339)
Net income 11,699 11,699
- -------------------------------------------- --------------- --------------- -------------- --------------- -----------------
Balance, December 31, 1996 6,027 120 12,710 23,199 36,029
- -------------------------------------------- --------------- --------------- -------------- --------------- -----------------
Issuance of shares under employee
stock option plan 68 1 230 231
Issuance of new shares 325 7 1,700 1,707
Repurchase of stock (465) (9) (2,694) (2,703)
Net income 308 308
- -------------------------------------------- --------------- --------------- -------------- --------------- -----------------
Balance, December 31, 1997 5,955 119 11,946 23,507 35,572
- -------------------------------------------- --------------- --------------- -------------- --------------- -----------------
Issuance of shares under employee
stock purchase plan 8 0 49 49
Issuance of shares under employee
stock option plan 78 1 365 366
Repurchase of stock (50) (1) (305) (306)
Net loss (1,080) (1,080)
- -------------------------------------------- --------------- --------------- -------------- --------------- -----------------
Balance, June 30, 1998 (unaudited) 5,991 $119 $12,055 $22,427 $34,601
============================================ =============== =============== ============== =============== =================
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands)
- ------------------------------------------------------------------------------ -------------------------------------------
Six Months Ended
June 30,
1998 1997
- ------------------------------------------------------------------------------ --------------------- ---------------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers and clearing firm $20,743 $20,225
Cash paid to suppliers and employees (24,510) (25,365)
Interest:
Received 698 1,140
Income taxes paid (received) 99 (3,606)
- ------------------------------------------------------------------------------ --------------------- ---------------------
Net cash used in operating activities (2,970) (7,606)
- ------------------------------------------------------------------------------ --------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investment securities 10,001 10,265
Purchase of:
Office equipment (1,340) (382)
Investment securities (9,520) (13,853)
Funds released from escrow 1,593 0
- ------------------------------------------------------------------------------ --------------------- ---------------------
Net cash provided by (used in) investing activities 734 (3,970)
- ------------------------------------------------------------------------------ --------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 414 1,831
Repurchase of common stock (305) (731)
- ------------------------------------------------------------------------------ --------------------- ---------------------
Net cash provided by financing activities 109 1,100
- ------------------------------------------------------------------------------ --------------------- ---------------------
Decrease in cash and cash equivalents (2,127) (10,476)
Cash and cash equivalents at beginning of period 3,886 14,031
- ------------------------------------------------------------------------------ --------------------- ---------------------
Cash and cash equivalents at end of period $1,759 $3,555
============================================================================== ===================== =====================
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
(In thousands)
- ------------------------------------------------------------------------------- -------------------------------------------
Six Months Ended
June 30,
1998 1997
- ------------------------------------------------------------------------------- --------------------- ---------------------
(Unaudited)
<S> <C> <C>
RECONCILIATION OF NET INCOME (LOSS) TO NET
CASH USED IN OPERATING ACTIVITIES:
Net income (loss) ($1,080) $385
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 469 290
Net unrealized gain on investment securities (129) (165)
Net realized gain on sale of investment securities (635) (29)
Deferred income taxes 67 (25)
(Increase) decrease in:
Receivable from clearing firm (1,229) (3,431)
Miscellaneous receivables (84) (684)
Trading securities at market 732 74
Income tax receivable (673) (70)
Other assets 144 144
Increase (decrease) in:
Due to clearing firm (1,069) 0
Securities sold but not yet purchased, at market (112) 847
Accrued compensation (788) (1,193)
Other accounts payable and accrued expenses 1,435 (521)
Income taxes payable (18) (3,228)
- ------------------------------------------------------------------------------- --------------------- ---------------------
Net cash used in operating activities ($2,970) ($7,606)
=============================================================================== ===================== =====================
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Summary of Significant Accounting Policies
The accompanying consolidated financial statements of Kinnard
Investments, Inc., (the "Company") have been prepared in
conformity with generally accepted accounting principles and
should be read in conjunction with the Company's annual report for
the year ended December 31, 1997. The results of operations for
the six months ended June 30, 1998 are not necessarily indicative
of the results to be expected for the year ended December 31,
1998.
The consolidated statement of financial condition as of June 30,
1998 and other financial information for the six months ended June
30, 1998 and 1997, are unaudited, but management of the Company
believes that all adjustments (consisting only of normal recurring
adjustments) necessary for a fair statement of the results of
operations for the periods have been included.
Note 2. Net Capital Requirements
The Company's brokerage subsidiary is subject to the Securities
and Exchange Commission (SEC) Rule 15c3-1, Net Capital
Requirements for Brokers and Dealers, which requires the Company
to maintain minimum net capital of $457,000 as of June 30, 1998.
Also, under this rule, the ratio of aggregate indebtedness to net
capital may not exceed 15 to 1, and the Company may be prohibited
from expanding its business or paying cash dividends if its ratio
of aggregate indebtedness to net capital is greater than 10 to 1.
At June 30, 1998, the Company had net capital of $4.8 million, and
a ratio of aggregate indebtedness to net capital of 1.4 to 1.
The Company is exempt from the provisions of SEC Rule 15c3-3,
Customer Protection: Reserves and Custody of Securities, as the
Company's clearing firm is responsible for complying with these
provisions. Accordingly, the Computation for Determination of
Reserve Requirements and Information Relating to the Possession or
Control Requirements is not required for the Company.
Note 3. Commitments and Contingent Liabilities
In May 1997, a lawsuit seeking class action status was filed in
U.S. District Court in Minnesota alleging that Photran
Corporation, its management, and John G. Kinnard and Company,
Incorporated ("JGK") violated securities laws by issuing false and
misleading statements related to financial results. JGK managed
the initial public offering of Photran in May 1996. JGK believes
that it has substantial defenses against these claims, and intends
to defend itself vigorously against them. The ultimate effect of
this matter on the future operating results and financial
condition of the Company is unknown at this time.
JGK is a defendant in various other 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 quarter-end is not expected to have a
material effect on the consolidated financial statements.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Earnings Per Share
The following reconciliation illustrates the computation of basic and diluted
earnings per share as prescribed under SFAS 128:
<TABLE>
<CAPTION>
(In thousands, except per share data)
------------------------------------------------------- ----------------------------- -----------------------------
Three Months ended Six Months ended
June 30, June 30,
------------------------------------------------------- ----------------------------- -----------------------------
1998 1997 1998 1997
------------------------------------------------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income (loss) ($1,343) $701 ($1,080) $385
------------------------------------------------------- -------------- -------------- -------------- --------------
Weighted average number of common shares
outstanding 5,990 6,285 5,982 6,155
Dilutive effect of stock options and warrants 0 79 0 84
------------------------------------------------------- -------------- -------------- -------------- --------------
Weighted average number of common and potential
dilutive common shares outstanding 5,990 6,364 5,982 6,236
------------------------------------------------------- -------------- -------------- -------------- --------------
Earnings per share:
Basic ($0.22) $0.11 ($0.18) $0.06
Diluted ($0.22) $0.11 ($0.18) $0.06
------------------------------------------------------- -------------- -------------- -------------- --------------
</TABLE>
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with Management's Discussion and
Analysis contained in the Company's Annual Report - Form 10-K for the year ended
December 31, 1997.
The following table sets forth a summary of second quarter and six month
increases (decreases) in the categories of revenues and expenses for 1998 versus
1997:
<TABLE>
<CAPTION>
- ---------------------------------------------- ---------------------------------- ---- ----------------------------------
Three Months ended Six Months ended
June 30, June 30,
- ---------------------------------------------- ---------------- ----------------- ---- ----------------- ----------------
Amount Percent Amount Percent
- ---------------------------------------------- ---------------- ----------------- ---- ----------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
Commissions $532 16% $498 7%
Principal transactions (3,035) (46) (4,364) (33)
Net gains on investment account (1,081) (123) 570 294
Investment banking 635 63 2,078 135
Interest (234) (42) (442) (39)
Other 195 33 402 36
- ---------------------------------------------- ---------------- ----------------- ---- ----------------- ----------------
Total revenues (2,988) (23) (1,258) (5)
- ---------------------------------------------- ---------------- ----------------- ---- ----------------- ----------------
Expenses:
Compensation and benefits (64) (1) 483 3
Floor brokerage and clearance (42) (5) (50) (3)
Communications 32 16 26 7
Occupancy and equipment 160 12 379 15
Other 358 30 374 16
- ---------------------------------------------- ---------------- ----------------- ---- ----------------- ----------------
Total expenses 444 4 1,212 5
- ---------------------------------------------- ---------------- ----------------- ---- ----------------- ----------------
Income before income taxes (3,432) (290) (2,470) (370)
Income tax expense (1,388) (288) (1,005) (356)
- ---------------------------------------------- ---------------- ----------------- ---- ----------------- ----------------
Net income (loss) ($2,044) (292%) ($1,465) (381%)
- ---------------------------------------------- ---------------- ----------------- ---- ----------------- ----------------
</TABLE>
Results of Operations
The Company recorded a net loss of $1.3 million, or 22 cents per diluted share,
on revenues of $9.9 million for the second quarter ended June 30, 1998. This
result compares with net income of $701,000, or 11 cents per diluted share, on
revenues of $12.9 million for the same quarter one year ago.
For the six months ended June 30, 1998, the net loss was $1.1 million, or 18
cents per diluted share, on revenues of $22.8 million. This compares to net
income of $385,000, or six cents per diluted share, on revenues of $24.1 million
for the same period in 1997.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations (continued)
Commission income increased by 16% for the quarter and 7% for June year-to-date.
The favorable comparison in both periods is due largely to increased sales of
mutual funds as this investment vehicle continues to be popular with retail
investors.
Principal transaction income declined by 46% and 33% for the three and six month
periods, due in part to new trading rules and regulatory changes affecting many
NASDAQ equity market makers. In addition, small cap stocks in which the
Company's trading activity is focused have not participated in the recent market
rally to the extent that large cap stocks have. The Company has responded to the
changing environment by decreasing the number of stocks it makes a market in to
approximately 200 from 350 at December 31, 1997.
The Company incurred a $203,000 loss on the valuation of its investment account
in the current quarter, which represented a $1.1 million decline from the
comparable quarter in 1997. For the six month period, revenue from the
investment account increased by $570,000 compared to the prior year. The
investment account has historically been a volatile source of revenue for the
Company.
Investment banking revenue increased by 63% for the quarter and 135% for the
six-month period due to strong performances by both the equity and fixed income
banking departments. Included in the quarter was the largest underwriting in
Kinnard's 54 year history, a $39 million follow-on offering for Zomax Optical
Media, Inc. The equity investment banking group has now completed three
underwritings during the first half of 1998, compared to two during all of 1997.
The fixed income investment banking group completed 21 transactions during the
quarter, raising $40 million in capital for its municipal and corporate clients.
Interest income decreased by 42% and 39% for the three and six month periods,
respectively, due to declines in customer margin balances and fixed income
securities held in the Company's investment account. Other income increased by
over 30% for both the quarter and six-month periods as a result of increases in
fees earned on managed and cash management accounts.
Compensation declined by 1% for the quarter and increased by 3% for the six
month period. Declines in variable compensation, such as commissions and
incentive compensation, were largely offset by costs incurred to grow and expand
the Company's capital markets group.
Floor brokerage and clearance fees declined by 5% for the quarter and 3% for the
six-month period, which was in line with the change in transactions that require
clearing services. The Company converted its clearing business to NationsBanc
Montgomery Securities at the end of the current quarter, which will result in
lower ticket clearing charges in future periods.
Increases in communication costs and other expenses are partly attributable to
costs incurred to convert the clearing business. In conjunction with the
conversion, the Company upgraded computers used throughout its branch network
and implemented a high-capacity network to provide enhanced services to
investment executives' workstations.
Liquidity and Capital Resources
Operating Activities
A large portion of the Company's assets are cash and assets readily convertible
to cash. The liquid portions of the Company's trading and investment securities
are stated at quoted market values and are readily marketable. The less liquid
portions of trading and investment securities, which totaled $1.4 million at
June 30, 1998, are stated at fair value, which is determined by management's
best estimate.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Operating Activities (continued)
Between December 31, 1997 and June 30, 1998 trading securities decreased
$732,000, and securities sold but not yet purchased decreased by $112,000. Both
long and short inventories are generally maintained to facilitate customer
transactions rather than for market speculation.
Based on the Company's current liquidity positions, 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.
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (year 2000) approaches. The Company
is utilizing both internal and external resources to identify, correct or
reprogram, and test its systems for the year 2000 compliance. It is anticipated
that all reprogramming efforts will be complete by December 31, 1998, allowing
adequate time for testing. To date, confirmations are being received from the
Company's primary processing vendors that plans are being developed to address
issues relating to the year 2000. Management does not expect the effort to have
a material effect on the Company's consolidated financial statements. However,
failure to repair the problem could have an adverse impact on the Company.
Investing Activities
The Company's investment account is invested in fixed income securities,
publicly traded equity securities and privately placed equity securities. Equity
securities are frequently held as a result of past investment banking activities
performed by the Company. In addition, the Company may utilize outside advisors
to manage a portion of the investment portfolio.
The value of certain securities held in the investment account can fluctuate
significantly, with the resulting valuation changes being reported as net gains
or losses on the investment account. These fluctuations in value can have a
material impact on reported earnings.
Financing Activities
John G. Kinnard maintains a credit facility in order to meet short-term
operating needs. At December 31, 1997 and June 30, 1998 there were no
outstanding balances under this facility.
During the first six months of 1998, the Company repurchased 50,000 shares of
its common stock at a total cost of $306,000. For the full year of 1997, a total
of 465,000 shares were repurchased at a cost of $2.7 million. The Board of
Directors has authorized the repurchase of up to 1.6 million shares of the
Company's common stock, of which a total of 1,103,000 shares have been
repurchased as of June 30, 1998.
Cautionary Statements
The Company wishes to caution investors of the following factors which 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 or elsewhere on behalf of the Company: volatility in the securities
markets, risks in the ownership and underwriting of securities, consolidation in
the financial services industries, volatility in earnings and losses of
investment securities, competition, government regulation, customer litigation
and arbitration, and off-balance-sheet credit and market risks. For a more
complete discussion of these and other factors, see the Company's Annual Report
on Form 10-K for the year ended December 31, 1997.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
See Note 3 in Notes to Consolidated Financial Statements.
ITEM 2 - CHANGES IN SECURITIES
None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were voted on at the Registrant's
Annual Meeting held on May 21, 1998:
1. To set the number of members of the Board of Directors at seven (7).
Number of Number of Number of Number of Broker
Votes For Votes Against Abstentions Nonvotes
5,503,264 118,660 21,497 0
2. To elect members of the Board.
Number of Votes
Number of Votes For Withheld
Ronald A. Erickson 5,340,444 166,651
William F. Farley 5,256,169 166,651
John J. Fauth 5,344,971 166,651
Stephen H. Fischer 5,259,612 166,651
John H. Grunewald 5,345,501 166,651
Andrew J. O'Connell 5,266,170 166,651
Robert S. Spong 5,249,264 166,651
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Fully Disclosed Clearing Agreement between John G. Kinnard
and Company, Incorporated and NationsBanc Montgomery
Securities LLC dated May 1, 1998. *
27 Financial Data Schedule (filed in electronic format only)
(b) Reports on Form 8-K
None
* Portions of this document have been omitted pursuant
to a request for confidential treatment.
<PAGE>
Signatures
Pursuant to the requirements 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.
/s/ Daniel R. Sass
Daniel R. Sass
Treasurer (principal financial and
accounting officer)
Date 08/10/98
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
KINNARD INVESTMENTS, INC.
(Commission File Number: 0-9377)
EXHIBIT INDEX
for
Form 10-Q for the quarter ended June 30, 1998
10.1 Fully Disclosed Clearing Agreement between John G. Kinnard
and Company, Incorporated and NationsBanc Montgomery Securities
LLC dated May 1, 1998. *
27 Financial Data Schedules (filed in electronic form only):
* Portions of this document have been omitted pursuant to a request for
confidential treatment.
<PAGE>
Confidential portions of this document indicated by "###" have been omitted
and filed separately with the Commission
May 1, 1998
William F. Farley
Chairman, President and Chief Executive Officer
John G. Kinnard & Co., Inc.
920 Second Avenue South
Minneapolis, MN 55402
RE: FULLY DISCLOSED CLEARING AGREEMENT
Dear Mr. Farley:
This Agreement sets forth the terms and conditions under which NationsBanc
Montgomery Securities LLC through Montgomery Clearing Services, a division of
NationsBanc Montgomery Securities LLC (NationsBanc Montgomery Securities LLC,
acting through Montgomery Clearing Services, is herein referred to as
"Montgomery Clearing Services" or the "Clearing Broker"), will clear and carry
on a fully disclosed basis your customer and proprietary accounts, and you
("you" or the "Introducing Broker") will become a correspondent of Montgomery
Clearing Services.
SECTION 1. Certain Regulatory Requirements.
(A) Laws and Regulations. This Agreement, and all transactions and
activities hereunder, are subject to the federal and state securities laws,
including the Securities Act of 1933 (the "Securities Act"), the Securities
Exchange Act of 1934 (the "Exchange Act"), the Investment Company Act of 1940
and the Investment Advisers Act of 1940, and to the Employee Retirement Income
Security Act of 1974 ("ERISA"), and to any other applicable federal, state,
local or non-U.S. law, and to any rule or regulation under the foregoing,
including the rules of the Securities and Exchange Commission (the "SEC"), of
any state securities authority, of the Board of Governors of the Federal Reserve
System including Regulation T, of any "foreign financial regulatory authority"
(as defined in Section 3 of the Exchange Act), of any "self-regulatory
organization" ("SRO") (as defined in Section 3 of the Exchange Act), including
the New York Stock Exchange, Inc. (the "NYSE") and the National Association of
Securities Dealers, Inc., (the "NASD") (each of the foregoing entities, a
"Financial Regulatory Authority") or of any other regulatory body or agency
having authority over a transaction or an account (collectively, the "Laws and
Regulations"). For purposes of this Agreement, if you are not a member of the
NYSE, you agree that in each case where there is a reference in this Agreement
to a rule of the NYSE (the "NYSE Rules") you will comply with the comparable
rules of the NASD.
(B) SIPC. Solely for the purposes of the financial responsibility rules
of the SEC and the Securities Investor Protection Act of 1970, the Introduced
Accounts shall be considered to be accounts of Montgomery Clearing Services, as
your clearing broker.
SECTION 2. Services to be provided by Montgomery Clearing Services.
Montgomery Clearing Services will provide the following services to you with
respect to the accounts owned by your customers (the "Customers") and your
proprietary accounts (all such accounts, collectively, the "Introduced
Accounts"):
<PAGE>
(A) Execution, Clearance and Settlement. Montgomery Clearing Services
will execute orders and/or clear and settle transactions for the purchase and
sale of securities in the Introduced Accounts. In the event you execute orders
for an Introduced Account away from Montgomery Clearing Services, Montgomery
Clearing Services will, on a best efforts basis, attempt to clear and settle the
transactions within a reasonable period.
(B) Confirmations and Statements. Montgomery Clearing Services will
prepare trade confirmations and monthly or quarterly statements for Customers as
required by the Laws and Regulations; provided that you shall provide Montgomery
Clearing Services on the day of any trade with any information required for the
Customer confirmation, including your role in any transaction. Montgomery
Clearing Services will mail periodic statements directly to Customers and you
will mail trade confirmations to Customers.
(C) Cashiering Functions. Montgomery Clearing Services will perform all
cashiering functions for the Introduced Accounts, including the receipt,
delivery, and transfer of securities purchased, sold, borrowed, and loaned, the
making and receipt of payments therefor, the custody and safeguarding of
securities and payments so received, the receipt and distribution of dividends
and other distributions, the processing of exchange offers, rights offerings,
warrants, tender offers, and redemptions, and such other functions as may be
agreed upon by the parties.
(D) Provision of Certain Information.
(i) Each business day with respect to the close of business on the
previous business day, Montgomery Clearing Services will supply you with copies
of all margin activity statements, money lines, and daily commission detail
reports. Montgomery Clearing Services will provide you with copies of Customers'
periodic statements on the day they are mailed to Customers.
(ii) Montgomery Clearing Services will advise you, with respect to the
Introduced Accounts, of the need for buying-in or selling-out positions, of any
failures to deliver or pay, and of any required margin calls.
(iii) Montgomery Clearing Services shall provide you, upon your
request, with all appropriate data in its possession pertinent to the proper
performance and supervision of any function specifically allocated to you
pursuant to the terms of this Agreement. If you request customized reports which
require special programming you will reimburse Montgomery Clearing Services for
any incremental expenses.
(E) Books and Records. Montgomery Clearing Services will establish and
maintain all prescribed books and records of transactions executed or cleared
through it that are customarily maintained by a clearing broker and that are not
specifically assigned to you pursuant to the terms of this Agreement, including
a stock record, a daily record of required margin, and other information
required by NYSE Rule 432(a) or by a Financial Regulatory Authority
(F) Services Expressly Limited. Unless otherwise agreed to in writing,
Montgomery Clearing Services shall not provide to you any services that are not
expressly and specifically set forth in this Agreement. Further, Montgomery
Clearing Services will not be bound to make any investigation into the facts
surrounding any transaction that it may have with you on a principal or agency
basis or that you may have with your Customers or other persons.
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(G) Notices about Financial Condition of Clearing Broker. At the time
you enter into this Agreement, Montgomery Clearing Services shall provide you
with the public version of its most recent annual audited financial statements,
and if of a later date, most recent semi-annual unaudited financial statement,
and with the public version of its most recent Financial and Operational
Combined Uniform Single Reports ("FOCUS" Reports). Subsequently, at your request
Montgomery Clearing Services shall provide you with copies of the public version
of its annual audited financial statements. At the time Montgomery Clearing
Services provides any notice or report to the SEC or any SRO pursuant to Rule
17a-11 under the Exchange Act, or pursuant to the Rules referenced in Rule
17a-11(h) under the Exchange Act, it shall notify you by telephone and
immediately thereafter provide a copy of such notice or report. Upon request,
Montgomery Clearing Services shall further provide you, monthly or more
frequently if so requested by you and if you have a reasonable purpose for
requesting, information and reports relating to its financial condition,
including but not otherwise limited to information regarding its aggregate
indebtedness ratio, net capital and excess net capital, but excluding any
information related to results of operations.
(H) Form BD and Restriction Agreement. Montgomery Clearing Services
shall provide you at the time of the execution of this Agreement, with a current
composite Form BD and any "Membership Agreement", and subsequently upon your
request, with any amendment or supplement to its Form BD or Membership
Agreement.
SECTION 3. Fees to Montgomery Clearing Services; Your Commissions.
(A) Fees. You agree to pay Montgomery Clearing Services for its
services pursuant to this Agreement the amounts set forth in Schedule A to this
Agreement.
(B) Introducing Broker Commissions. Clearing Broker will remit monthly
to you any commission revenue or markups due you, payable by the 5th day of each
calendar month for all amounts earned during the preceding month, and after
deduction of (a) all clearing and other charges, costs, or expenses due
Montgomery Clearing Services in accordance with the terms of this Agreement; (b)
all charges payable by Montgomery Clearing Services on your account; and (c) all
amounts due Montgomery Clearing Services from you under this Agreement including
amounts arising from any incurred or accrued losses, liabilities, or damages in
accordance with the terms hereof.
SECTION 4. Procedures for Introduced Accounts.
(A) Opening and Maintaining Accounts; Responsibility of Introducing
Broker
(i) Customer Agreements; Documentation and Information. At or prior to
the time of the opening of each Introduced Account, you shall obtain, verify and
furnish Montgomery Clearing Services with all information or documentation
concerning such Introduced Account which Montgomery Clearing Services may
require including, (I) a "Margin Agreement,"(ii) in respect of any agency
Introduced Account, the name of any principal for whom the agent is acting and
written evidence of the agent's authority, (iii) tax-related documentation and
certifications, and (iv) any other document necessary to comply with the Laws
and Regulations. The Margin Agreement and any other agreements in respect of the
Introduced Accounts to which Montgomery Clearing Services is a party or a
beneficiary (collectively, the "Customer Agreements") shall be on forms supplied
by Montgomery Clearing Services. Montgomery Clearing Services will mail Customer
Agreements and other documentation to Customers or potential customers at your
request, provided that you reimburse Montgomery Clearing Services for the
expenses of mailing. You shall obtain and retain for each Introduced Account a
"Cash Account Agreement" in form and substance reasonably satisfactory to
Montgomery Clearing Services and which names Montgomery Clearing Services as an
express third-party beneficiary. Within five days of any request of Montgomery
Clearing Services, you shall furnish Montgomery Clearing Services with any other
additional or supplementary documents regarding, and agreements executed by, the
Customer in respect of the Introduced Account on forms supplied by Montgomery
Clearing Services. Montgomery Clearing Services reserves the right to negotiate
the terms of its Customer Agreements and other agreements executed by the
Customers. All changes reflected in writing on the Customer Agreements are
deemed accepted by you if you do not promptly, following your receipt of such
agreement, object in writing to both Montgomery Clearing Services and the
Customer. The terms of all existing and future Customer Agreements are deemed
incorporated herein by reference.
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(ii) Requirement of Margin Agreements. All transactions in any
Introduced Account are to be considered cash transactions until such time as
Montgomery Clearing Services has received and accepted a Margin Agreement, duly
and validly executed in respect of such Introduced Account.
(iii) Credit Review and Information. You will be solely responsible for
the conduct of your own credit review of any Customer. Each party will make
available upon request of the other the information it obtains from standard
industry services regarding the creditworthiness of any Introduced Account.
(iv) Failure To Comply With Documentation Requirements. If any
documentary or agreement request made by Montgomery Clearing Services has not
been satisfied, Montgomery Clearing Services may in its sole discretion refuse
any or all orders or transactions for the Introduced Account or close the
Introduced Account at any time. If orders are placed or transactions executed
for an Introduced Account after Montgomery Clearing Services has restricted
trading in the Introduced Account because of insufficient documentation, no
commission credit will be granted to you on such orders or transactions. On
receipt of the necessary documents, this credit restriction will be lifted with
respect to future commissions, but no past commissions will be credited or paid.
(v) Rejection or Termination of Accounts. Montgomery Clearing Services
reserves the right to reject any requested Introduced Account and to terminate
any previously accepted Introduced Account at any time.
(B) Customer Payment and Delivery Obligations; Margin Requirements.
(i) Responsibility for Payments and Deliveries. You are liable as
primary obligor to Montgomery Clearing Services for all payments of money and
deliveries of securities by the Introduced Accounts including (a) timely
payments and deliveries following or in respect of a transaction, (b)
maintaining at all times margin in each Introduced Account to the satisfaction
of Montgomery Clearing Services, (c) the payment of any debit balance in an
Introduced Account and the delivery of securities in respect of any short sale
or securities borrowing, (d) until funds are credited to Montgomery Clearing
Services, all payments to Montgomery Clearing Services on checks received by it
in connection with the Introduced Accounts, (e) payment and delivery of "when
issued" transactions in the Introduced Accounts, (f) the delivery of securities
sold and the return of securities loaned in good delivery form, without
restrictive legends of any kind, and (g) any loss or damage Montgomery Clearing
Services may incur resulting from any failure by a Customer in respect of an
Introduced Account to pay or make delivery as required. Your obligations shall
continue whether or not any margin extensions have been granted by Montgomery
Clearing Services and whether or not such extensions have been requested by you.
You acknowledge that Montgomery Clearing Services has sole discretion to execute
buy-ins or sell-outs in any Introduced Account, or to exercise any other
remedies available against the Customer or Introduced Account, regardless of
whether such action is required by the Laws and Regulations. You further agree
that you are liable as primary obligor to Montgomery Clearing Services for the
obligations of your Customers under their respective Customer Agreements as such
may exist from time to time and as further provided in Section 11(C) of this
Agreement.
(ii) Determination of Margin Requirements. It shall be solely within
the discretion of Montgomery Clearing Services to determine from time to time
and at any time the minimum amount, type and timing of the collateral ("margin")
to be collected in respect of any Introduced Account or position held in an
Introduced Account. Montgomery Clearing Services may require more margin of an
Introduced Account than is required by the Laws and Regulations. Montgomery
Clearing Services shall be responsible for generating all initial and
maintenance margin calls and may itself send such calls or may instruct you to
send such calls. You shall remain responsible as primary obligor for the
collection of such margin payments as set forth in the preceding paragraph.
<PAGE>
(C) Prime Brokerage Customers. Where you act as an executing broker for
Introduced Accounts that prime broker their securities away from you (a "Prime
Brokerage Customer"), you shall notify Montgomery Clearing Services with respect
to each account for which you intend to act as an executing broker and you shall
be solely responsible for conducting your own credit review with respect to each
such Prime Brokerage Customer. You shall promptly notify Montgomery Clearing
Services, but in no event later than 5:00 p.m. New York time of trade date, in a
mutually acceptable fashion, of such trades in sufficient detail for Montgomery
Clearing Services to be able to report and transfer any trade executed by you on
behalf of a Prime Brokerage Customer to the relevant prime broker. You
understand and agree that if the prime broker shall disaffirm or "DK" any trade
executed by you on behalf of a Prime Brokerage Customer, you shall, if you have
not already done so, open an account for such Prime Brokerage Customer with
Montgomery Clearing Services and shall transfer or deliver the trade to such
account for your risk and expense to the same extent as for any other account
introduced by you pursuant to this Agreement and subject to the right of
Montgomery Clearing Services to reject Introduced Accounts or individual trades.
You understand and agree that for certain Prime Brokerage Customers, NationsBanc
Montgomery Securities LLC may act as the prime broker. In certain instances,
NationsBanc Montgomery Securities LLC as the prime broker will notify you that a
problem exists and that it is unable to settle the trade and NationsBanc
Montgomery Securities LLC acting as the clearing broker will request that you
open a margin account for such Prime Brokerage Customer and transfer or deliver
the trade to such margin account for your risk and expense to the same extent as
for any account introduced by you pursuant to this Agreement and subject to
Montgomery Clearing Services' right to reject an Introduced Account or an
individual trade. You understand and agree that all transactions for your Prime
Brokerage Customers shall be conducted in accordance with the requirements of
the SEC and of the Laws and Regulations generally governing prime brokerage
transactions. In this regard, you acknowledge that you will enter into all prime
brokerage agreements with your customers and that you are responsible for
obtaining and maintaining all prime brokerage documentation.
SECTION 5. Trading and Trading Procedures.
(A) Transmission of Orders. An order for an Introduced Account may be
transmitted to Montgomery Clearing Services only by you and your agents. You
shall be solely and exclusively responsible for approving all orders for the
Introduced Accounts and for establishing procedures to ensure that such approved
orders and transactions are transmitted properly to Montgomery Clearing Services
for execution and/or clearance.
(B) Acceptance/Rejection. Montgomery Clearing Services reserves the
right to accept or reject for execution or clearance any order or transaction
for an Introduced Account. Further, Montgomery Clearing Services reserves the
right, in its sole discretion, to restrict trading in any Introduced Account
owned by your customers, and to the extent Montgomery Clearing Services
considers it necessary or appropriate for the protection of its business or
capital, your proprietary accounts, to liquidating orders or cash transactions
only, or to prohibit certain trading strategies or trading of certain securities
or types of securities.
(C) Contra Broker. When you either execute your own orders or otherwise
designate the contra broker to any transaction, you shall be responsible as
primary obligor to Montgomery Clearing Services for any loss it suffers in the
event that the contra broker fails to perform. Without limiting the foregoing,
Montgomery Clearing Services shall have the right in its sole discretion to
<PAGE>
refuse to trade with any contra broker or to limit the size of any trade with a
contra broker. In the event you trade with a contra broker that has not been
approved by Montgomery Clearing Services, or in excess of an amount approved by
Montgomery Clearing Services, Montgomery Clearing Services shall have the right
to reject all or any part of the transaction for clearance and settlement. You
agree to take all appropriate capital charges on your books arising out of or
incurred in connection with your executing orders away from Montgomery Clearing
Services. You agree to comply with all requirements of the Automated
Confirmation Transaction system ("ACT"), including the provisions by which
Montgomery Clearing Services may limit your "Gross Dollar Thresholds" as such
term is defined in the ACT Rules.
SECTION 6. Charges and Interest Payments to Introduced Accounts.
(A) Commissions and Mark-Ups. You will have complete discretion over
the amount of commissions, mark-ups, or other charges or expenses in respect of
transactions in the Introduced Accounts (collectively, "Customer Charges");
provided that any such Customer Charge shall be within the usual and normal
operational capabilities of Montgomery Clearing Services. You represent and
warrant that no Customer Charge will violate the Laws and Regulations.
(B) Margin Interest Rate. Montgomery Clearing Services, as mutually
agreed, shall determine the minimum rate of margin interest charged on any
Introduced Account that has a debit balance. You and Montgomery Clearing
Services may mutually agree on an actual rate of margin interest which is higher
than such minimum rate. Interest income earned through such charges to any
Introduced Account shall be shared, as defined in Schedule A of this Agreement.
(C) Default Charges. Montgomery Clearing Services shall determine the
charge, and the timing of such charge, to any Introduced Account maintained by
Montgomery Clearing Services, including the liquidation of securities held in
the Introduced Account and the crediting of the proceeds to satisfy any
obligations owed to Montgomery Clearing Services, upon a loss or liability
incurred by Montgomery Clearing Services resulting from transactions or
positions in any Introduced Account, including, but not limited to any item
described in Section 4(B) of this Agreement.
(D) Free Credit Balances. Montgomery Clearing Services shall pay you
interest on free credit balances as defined in Schedule A of this Agreement.
SECTION 7. Communications with Customers and Others.
(A) NYSE Rule 382. Montgomery Clearing Services agrees to provide on
your behalf written notice from you to your existing Customers, and any future
Customer, before, as to the nature of the services to be provided by Montgomery
Clearing Services pursuant to this Agreement, and your and Montgomery Clearing
Service's respective obligations to such Customers. Such written notice shall be
in the form of a letter, in form and content agreeable to both parties, that
complies with NYSE Rule 382 (the "Rule 382 Letter").
<PAGE>
(B) Notations on Mailings. All confirmations, and monthly or quarterly
statements, and other notices prepared by Montgomery Clearing Services to
Introduced Accounts shall indicate that the Introduced Accounts were introduced
by you and that the role of Montgomery Clearing Services is that of a clearing
broker only. Inadvertent omission of such notations shall not be deemed to
constitute a breach of this Agreement. Copies of the forms of all of the
foregoing shall be furnished by Montgomery Clearing Services to you.
(C) Written Approval For References To Clearing Broker. You shall not,
without the prior written approval of Montgomery Clearing Services, state in any
advertisement, promotional material or any public media, including any
electronic media such as a Web site or over the Internet, that you have entered
into this Agreement with Montgomery Clearing Services, or make any reference to
Montgomery Clearing Services or the services it furnishes to you pursuant to
this Agreement.
(D) Customer Correspondence, Complaints, Actions.
(i) Customer inquiries and complaints shall be promptly investigated
and answered by the party responsible for the subject matter of the inquiry.
(ii) In the event any Customer correspondence is not directed to the
party who is responsible under the terms of this Agreement for the area to which
the correspondence relates, the original recipient of the Customer
correspondence shall immediately forward the correspondence to the other party,
which shall respond to it.
(iii) You and Montgomery Clearing Services shall give the other written
notice and provide a copy of any customer complaint, threat of action or
commencement of litigation involving any of the Introduced Accounts or Customers
which directly or indirectly refers to the other party or that relates to the
services that the other party is responsible for hereunder.
(iv) In the event that Montgomery Clearing Services deems it advisable
to commence an action or proceeding against any of your Customers for
malfeasance, misfeasance or nonfeasance, Montgomery Clearing Services may do so
after notice to you, or, when you have an obligation to indemnify Montgomery
Clearing Services under Section 11 of this Agreement and upon the request of
Montgomery Clearing Services, you shall institute such action or proceeding.
SECTION 8. Certain Responsibilities of Introducing Broker.
(A) Deposits Of Payments and Securities. You shall promptly turn over
to Montgomery Clearing Services any and all payments and securities that you
receive from Customers and, concurrently therewith, all such information as may
be relevant or necessary to enable Montgomery Clearing Services to record
promptly and properly such payments and securities in the respective Introduced
Accounts.
(B) Responsibility as to Introduced Accounts and Transactions. Without
limiting your general obligations in respect of the Introduced Accounts, you
shall be solely and exclusively responsible for the following obligations (to
the extent required by the Laws and Regulations) in respect of all Introduced
Accounts and transactions executed with or for Introduced Accounts (including
Introduced Accounts managed by any investment adviser or other third party):
(i) ensuring that the Customers are not minors or subject to any
prohibitions under the Laws and Regulations generally relating to the incapacity
of any Introduced Account, or any conflict of interest relating to such
Introduced Account, such as those arising under Section 206(3) of the Investment
Advisers Act of 1940;
(ii) determining that any transactions introduced, or orders and
instructions given, to Montgomery Clearing Services have been properly
authorized in advance by the Introduced Account and determining the genuineness
of all certificates, papers, and signatures provided by each Introduced Account;
(iii) determining that all orders or transactions for Introduced
Accounts comply in all respects with the Laws and Regulations,
(iv) using due diligence to learn and know on a continuing basis the
essential facts concerning each Customer, including verifying the address
changes of each Customer, knowing all persons holding a power of attorney over
any Introduced Account, being familiar with each order in any Introduced Account
and at all times fully complying with NYSE Rule 405 and all similar Laws and
Regulations;
<PAGE>
(v) determining the suitability of all transactions (including option
transactions) for Introduced Accounts, including with respect to the frequency
of trading in the Introduced Accounts and that any transaction is consistent
with the investment objectives of the Introduced Account;
(vi) ensuring that there is a reasonable basis for all recommendations
made to Customers;
(vii) the handling of any discretionary Introduced Accounts, as
required by NYSE Rule 408 or any other
applicable Laws and Regulations;
(viii) compliance with any notice or approval requirement to any
employer of a Customer having an interest in, or controlling, an Introduced
Account, including obligations imposed by NYSE Rule 407 or any other applicable
Laws and Regulations;
(ix) compliance with any NASD regulation or interpretation governing
"Free-Riding and Withholding" and any other Law or Regulation governing
permitted purchases in a public offering;
(x) compliance with any and all disclosure document requirements,
option agreement requirements, and supervisory requirements, in connection with
Introduced Accounts that enter into option transactions;
(xi) compliance with "payment for order flow" disclosure; provided,
however, that any documents provided to Customers in connection therewith shall
be approved by Montgomery Clearing Services in advance of transmission;
(xii) making available to Montgomery Clearing Services for delivery any
prospectus required pursuant to the prospectus delivery requirements of the
Securities Act or by other applicable Laws and Regulations;
(xiii) specifically approving the opening of any new account, in
compliance with NYSE Rule 405(3) and other applicable Laws and Regulations,
before forwarding such account to Montgomery Clearing Services as a potential
Introduced Account;
(xiv) compliance with all Laws and Regulations concerning transfers
of "restricted" or "control" securities in Introduced Accounts; and
(xv) obtaining and maintaining all documents necessary for the
performance of your responsibilities under this Agreement and retaining such
documents in accordance with all applicable Laws and Regulations.
You shall promptly furnish Montgomery Clearing Services with such documentation
with regard to any of the foregoing matters as may be requested by Montgomery
Clearing Services. Nothing is this Section 8(B) creates or expands any legal,
regulatory or contractual duties that may be owed to any person not a party to
this Agreement.
(C) Supervisory Procedures/Training/Insider Trading. You shall be
responsible for your compliance with applicable supervisory requirements under
the NYSE Rules, including NYSE Rule 342 and 351, or any related or similar
provisions of the Laws and Regulations, including those concerning (i)
supervising the activities and training of your principals and registered
representatives and other agents in the performance of their functions allocated
to you pursuant to the terms of this Agreement, (ii) periodic reviews,
investigations, and reports on insider trading and manipulative and deceptive
practices with respect to Introduced Accounts, (iii) hiring, selecting,
investigating, training, and supervising all of your personnel who open, accept,
approve, or authorize transactions in the Introduced Accounts, (iv) establishing
written compliance and supervisory procedures for the conduct of the Introduced
Accounts and ongoing review of all transactions in Introduced Accounts, and (v)
maintaining compliance and supervisory personnel adequate to implement such
procedures.
(D) Registered Personnel. You shall be responsible for, and you
represent that, before you commence any trading in options or other special
types of securities for any Introduced Account, you will have appropriately
registered representatives and principals with the appropriate SRO(s).
<PAGE>
SECTION 9. Information to be Provided by Introducing Broker.
(A) Financial Information. At the time you enter into this Agreement,
you shall provide Montgomery Clearing Services with your most recent annual
audited financial statements, and if of a later date, most recent semi-annual
unaudited financial statement, and with your most recent Financial and
Operational Combined Uniform Single Reports ("FOCUS" Reports). Subsequently, you
shall provide Montgomery Clearing Services with copies of your annual audited,
and semi-annual unaudited, financial statements as well as copies of all
financial information and reports you file with or provide to the SEC or any
SRO, including but not otherwise limited to FOCUS Reports, at the same time you
so file or provide such document. At the time you provide any notice or report
to the SEC or any SRO pursuant to Rule 17a-11 under the Exchange Act, or
pursuant to the Rules referenced in Rule 17a-11(h) under the Exchange Act, you
shall notify Montgomery Clearing Services by telephone and immediately
thereafter provide a copy of such notice or report. You shall also immediately
inform Montgomery Clearing Services of any alleged deficiency or violation
asserted by a Financial Regulatory Authority or by your accountants, relating to
capital, financial recordkeeping or accounting matters, which if as alleged
could result in an adjustment to your net capital of 5% or more. Upon request,
you shall further provide Montgomery Clearing Services, monthly or more
frequently if so requested by Montgomery Clearing Services, information and
reports relating to your financial condition, including but not otherwise
limited to information regarding your aggregate indebtedness ratio, net capital
and excess net capital.
(B) Form BD and Restriction Agreement. You shall provide Montgomery
Clearing Services at the time of the execution of this Agreement, with a current
composite Form BD and any "Membership Agreement", and subsequently, upon request
of Montgomery Clearing Services, with any amendment or supplement to your Form
BD or Membership Agreement. In addition, upon request of Montgomery Clearing
Services, you shall provide any information you file or have on file with any
Financial Regulatory Authority relating to you or any of your directors,
officers and agents.
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(C) Litigation and Regulatory. You shall promptly provide to Montgomery
Clearing Services, but in any event within three (3) business days of the
initiation of any such event, to the extent it relates or could foreseeably
relate in a material way to your business activities, all information concerning
every action, suit, investigation, inquiry, or proceeding (formal or informal)
pending or threatened against or affecting you, any of your affiliates, or any
officer, director, general securities principal, financial or operations
principal, or employee, independent contractor, or other person associated with
you, or their respective property or assets, by or before any court or other
tribunal, any arbitrator, any governmental authority, or any SRO.
(D) Other Information. You shall provide Montgomery Clearing Services
with all appropriate data in your possession pertinent to the proper performance
and supervision of any function or responsibility specifically allocated to
Montgomery Clearing Services pursuant to the terms of this Agreement.
SECTION 10. Limitations on Activities of Introducing Broker.
(A) Market making. Upon the execution of this Agreement, you shall
provide to Montgomery Clearing Services a written list of all securities with
respect to which you are a market maker. You shall give Montgomery Clearing
Services prompt written notice of any change in the securities as to which you
make a market. To the extent necessary or appropriate for the protection of our
business or capital you shall cease making a market in any security or
securities within one business day following any request by Montgomery Clearing
Services that you so limit your activities.
(B) Large Positions. You will not accumulate a proprietary position in
the securities, whether debt or equity, of any single issuer that is in excess
of the dollar and percentage limits set out in Schedule A (the "Issuer Limits").
(C) No Other Clearing Agents. You agree that Montgomery Clearing
Services shall be your only clearing agent and that all transactions in any
customer or proprietary account serviced by your firm shall be cleared
exclusively through Montgomery Clearing Services.
(D) No Statements or Billings. You shall not generate and/or prepare
any statements, bills, or confirmations respecting any Introduced Account unless
expressly authorized to do so by Montgomery Clearing Services.
(E) Change in Business. You shall not make any change in your line of
business which would require you to indicate an additional item on Item 10 of
Form BD or would require you to obtain any additional registrations, including
but not limited to commodities or insurance registrations, without the prior
written consent of Montgomery Clearing Services. You shall not acquire another
business by merger, acquisition of stock or assets, or other similar transaction
without the prior written consent of Montgomery Clearing Services. Such consent
shall not be unreasonably withheld or delayed.
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SECTION 11. Errors, Controversies and Indemnities.
(A) Limitations of Montgomery Clearing Services Liability, Including
Use of Independent Service Providers.
(i) Montgomery Clearing Services' sole responsibility and liability is
expressly provided by the Agreement and is limited to you. In no event shall
Montgomery Clearing Services be responsible to any person for indirect or
consequential damages arising out of any action or inaction by it, regardless of
any notice. Montgomery Clearing Services shall not be liable for any loss
caused, directly or indirectly, by government restrictions, exchange or market
rulings, suspension of trading, war, strikes or other conditions beyond the
control of Montgomery Clearing Services. In the event that any communication
network, data processing system, or computer system used by Montgomery Clearing
Services or by you, not owned or provided by Montgomery Clearing Services, is
rendered inoperable, Montgomery Clearing Services shall not be liable to you for
any loss, liability, claim, damage or expense resulting, either directly or
indirectly, therefrom.
(ii) Montgomery Clearing Services may, at its reasonable option, retain
one or more independent data processing or other service bureaus to perform
functions allocated to Montgomery Clearing Services under this Agreement.
Montgomery Clearing Services will not be responsible for any losses, damages,
liability or expenses claimed by you or your Customers arising from any such
failure beyond the amount of such losses, damages, or expenses incurred by you
that Montgomery Clearing Services is able to recover pursuant to the terms of
its agreement with such service bureau.
(B) Indemnification From Montgomery Clearing Services. Montgomery
Clearing Services hereby agrees to indemnify, defend and hold harmless you, your
agents, officers, directors and each person, if any, who controls you within the
meaning of Section 20 of the Exchange Act, from and against any and all losses,
claims, damages, liabilities and expenses, including attorney's fees and costs,
arising out of one or more of the following: (i) the failure of Montgomery
Clearing Services to properly perform its duties, obligations and
responsibilities as set forth in this Agreement; (ii) any dishonest, fraudulent,
negligent or criminal act or omission on the part of Montgomery Clearing
Services or any of its officers, directors or employees; or (iii) the breach by
Montgomery Clearing Services of any representation or warranty made by it under
this Agreement.
(C) Indemnification from Introducing Broker. You hereby agree to
indemnify, defend and hold harmless Montgomery Clearing Services, its agents,
officers and directors, and each person, if any, who controls Montgomery
Clearing Services within the meaning of Section 20 of the Exchange Act
(collectively, "Indemnified Persons") from and against any and all losses,
claims, damages, liabilities and expenses, including attorney's fees and costs,
arising out of one or more of the following:
(i) any obligation of an Introduced Account as provided in Section 4(B)
of this Agreement and failure of an Introduced Account to comply with a Customer
Agreement or other agreement with Montgomery Clearing Services that you have
approved or are deemed to have approved pursuant to Section 4(A) of this
Agreement, whether or not such failure is within your control;
(ii) your failure to properly perform your duties, obligations and
responsibilities as set forth in this Agreement;
(iii) any dishonest, fraudulent, negligent or criminal act or omission
on the part of any of your officers, directors, employees, registered
representatives or customers;
(iv) all claims or disputes between you and your Customers with respect
to the matters set forth in this Agreement (excluding claims or disputes to the
extent arising out of the failure of Montgomery Clearing Services to perform its
obligations under this Agreement), it being understood and agreed that you
guarantee the validity of Customer orders in the form such orders are
transmitted to Montgomery Clearing Services by you and you stand in the position
of primary obligor to Montgomery Clearing Services for the purpose of assuring
that each Customer will promptly and fully perform its commitments and
obligations with respect to all transactions in its accounts carried by
Montgomery Clearing Services;
<PAGE>
(v) any adverse claims with respect to any Customer securities
delivered to or cleared by Montgomery Clearing Services, except for adverse
claims created by Montgomery Clearing Service's failure to handle such
securities in accordance with your instructions, it being understood and agreed
that Montgomery Clearing Services shall be deemed to be an intermediary between
you and your Customers and Montgomery Clearing Services shall be deemed to make
no representations or warranties other than as provided in Section 8-306(3) of
the New York Uniform Commercial Code;
(vi) any default by any over-the-counter contra broker as provided in
Section 5(C) of this Agreement and claim by any third-party or contra broker
arising out of Montgomery Clearing Services' rejection of any transaction
pursuant to such Section;
(vii) your breach of any representation or warranty under this
Agreement; or
(viii) Montgomery Clearing Services' guarantee of any signatures with
respect to transactions in the Introduced Accounts.
(D) Customer Controversies. Errors, misunderstandings or controversies,
except those specifically otherwise covered in this Agreement, between the
Customer and you or any of your employees which shall arise out of your acts or
omissions (including, without limiting the foregoing, your failure to deliver
promptly to Montgomery Clearing Services any instructions received by you from
Customers with respect to the voting, tender or exchange of shares held in an
Introduced Account) shall be your sole and exclusive responsibility. In the
event that, by reason of such error, misunderstanding or controversy, you in
your discretion deem it advisable to commence an action or proceeding against a
Customer, you shall indemnify and hold Montgomery Clearing Services and the
Indemnified Parties harmless from any loss, liability, damage, claim, cost or
expense (including but not limited to reasonable fees and expenses of legal
counsel) which Montgomery Clearing Services or the Indemnified Parties may incur
or sustain directly or indirectly in connection therewith or under any
settlement thereof. If such error, misunderstanding or controversy shall result
in the bringing of any action or proceeding against Montgomery Clearing Services
<PAGE>
or the Indemnified Parties, you shall indemnify and hold Montgomery Clearing
Services and the Indemnified Parties harmless from any loss, liability, damage,
claim, cost or expense (including but not limited to reasonable fees and
expenses of legal counsel) which Montgomery Clearing Services or the Indemnified
Parties may incur or sustain directly or indirectly in connection therewith or
under any settlement thereof.
(E) Notification Requirements. In case any proceeding (including any
Financial Regulatory Authority investigation) shall be instituted involving any
person in respect of which indemnity may be sought pursuant to this Section,
such person (hereinafter called the indemnified party) shall promptly notify the
person against whom such indemnity may be sought (hereinafter called the
indemnifying party) in writing and the indemnifying party, upon request of the
indemnified party, shall retain counsel satisfactory to the indemnified party to
represent the indemnified party. It is understood that the indemnifying party
shall not, in connection with any proceeding or related proceeding in the same
jurisdiction, be liable for the reasonable fees and expenses of more than one
separate firm (in addition to any local counsel) for all such indemnified
parties, and that all such fees and expenses shall be reimbursed as they are
incurred. The indemnifying party shall not be liable for any settlement of any
proceeding effected without its written consent, but if settled with such
consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment. Notwithstanding the
foregoing sentence, if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel required to be paid in this Section, the indemnifying party agrees that
it shall be liable for any settlement of any proceeding effected without written
consent if (i) such settlement is entered into more than thirty (30) days after
receipt by such indemnifying party of the aforesaid request and (ii) such
indemnifying party shall not have reimbursed the indemnified party in accordance
with such request prior to the date of such settlement. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such proceeding.
<PAGE>
(F) Survival of Indemnity. The indemnification provisions in this
Section 11, shall remain operative and in full force and effect, regardless of
the termination of this Agreement, and shall survive any such termination.
SECTION 12. Collateral Account; Security Interest.
(A) The Collateral Account. You shall establish and maintain an account
at Montgomery Clearing Services (the "Collateral Account"), which shall at all
times contain either cash, or securities issued or guaranteed as to principal
and interest by the United States of America, having a remaining maturity of ten
(10) years or less, or a combination of both, having in the aggregate a market
value of not less than the amount set out in Schedule A (the "Required
Deposit"). The Collateral Account shall not be deemed to be margin for any
Introduced Account and shall not in any way constitute an ownership interest in
NationsBanc Montgomery Securities LLC. Montgomery Clearing Services shall have
the right, in its discretion, to increase the amount of the Minimum Deposit to
be maintained with Montgomery Clearing Services by you. You may not reduce the
value of cash or securities in the Collateral Account below the Minimum Deposit
until the latest of (i) the termination of this Agreement, (ii) ten days after
the last transaction in respect of an Introduced Account has been settled and
(iii) you have transferred to another broker-dealer all margin accounts of your
Customers or other Introduced Accounts having a debit balance, other than
accounts that NationsBanc Montgomery Securities LLC has agreed in writing to
accept.
(B) Transfers to Collateral Account. All transfers of funds by you to
the Collateral Account shall be in immediately available funds. All securities
transferred by you to the Collateral Account (i) shall be in suitable form for
transfer or shall be accompanied by duly executed instruments of transfer or
assignment in blank and such other documentation as the party receiving
possession may reasonably request, (ii) shall be transferred on the book-entry
system of a Federal Reserve Bank, or (iii) shall be transferred by any other
method acceptable to Montgomery Clearing Services. As used herein with respect
to securities, "transfer" is intended to have the same meaning as when used in
Section 8-313 of the New York Uniform Commercial Code.
(C) Security Interest; Remedies. You hereby grant Montgomery Clearing
Services a first priority perfected security interest in all your assets in the
possession of Montgomery Clearing Services (including all assets in the
Collateral Account and any after acquired property, the "Collateral") as
security for the repayment of all your obligations and liabilities to Montgomery
Clearing Services, including but not limited to the indemnification obligations
<PAGE>
under Section 11 hereof, the clearing fees and the Minimum Monthly Fee and any
other amounts owed by you to Montgomery Clearing Services. In the event that you
default (as defined below), Montgomery Clearing Services may, without further
notice to you, offset any and all liabilities, costs, or expenses (whether
mature or contingent, liquidated or unliquidated and regardless of the currency
in which denominated) due it from you, against commission revenue due you, the
Collateral Account or any other your assets then in the possession of Montgomery
Clearing Services.
Montgomery Clearing Services has the right to take any further action necessary
to perfect its security interest in the Collateral, including marking its books
and records to indicate the existence of such security interest. Moreover, you
agree to execute such documents and take such other action as Montgomery
Clearing Services shall reasonably request, now and in the future, in order to
allow it to perfect its rights with respect to any such Collateral.
You appoint Montgomery Clearing Services as your attorney-in-fact to act on your
behalf to sign, seal, execute and deliver all documents, and do all such acts as
may be required to realize upon all rights in the Collateral.
In the event of a breach or default under this Agreement or any other agreement,
instrument or document between NationsBanc Montgomery Securities LLC and you, or
by you for the benefit, in whole or in part, of NationsBanc Montgomery
Securities LLC, or in the event of the occurrence of any Event of Default (as
described below), Montgomery Clearing Services shall have, in addition to the
rights and remedies provided below, all rights and remedies available to a
secured creditor under common law and any other applicable law, including
Articles 8 and 9 of the New York Uniform Commercial Code (whether or not such
Articles 8 and 9 are otherwise applicable).
Montgomery Clearing Services is hereby authorized, in its discretion: (1) to
cancel any outstanding orders for the purchase or sale of any securities or
other property, and/or (2) to sell or otherwise dispose of any or all of the
securities or other property which may be in its possession or control (either
individually or jointly with others), and/or (3) to buy in any securities or
other property of which your account or accounts may be short, and/or (4)
otherwise foreclose upon any Collateral. Such sale, purchase or cancellation may
be made on the exchange or other market, if any, where such business is then
usually transacted, or at public auction or at private sale. Except for such
notice as may be required under applicable law, Montgomery Clearing Services may
make such sale or transfer without advertising the same and without any notice
of the time or place of sale to you or to your representatives, and without
<PAGE>
prior tender, demand or call of any kind upon you or upon your representatives,
all of which are expressly waived. Furthermore, Montgomery Clearing Services may
be a purchaser at any sale of Collateral under this section. Montgomery Clearing
Services and any other purchaser may purchase the whole or any part of the
Collateral free from any right of redemption, and you shall remain liable for
any deficiency; it being understood that a prior tender, demand or call of any
kind from Montgomery Clearing Services, or prior notice from Montgomery Clearing
Services, of the time and place of such sale or purchase shall not be considered
a waiver of its right to sell or buy any securities or other Property held by
it, or which you may owe to it, at any time as provided herein.
To the extent permitted by the laws of the State of New York, you agree to pay
Montgomery Clearing Services the reasonable costs and expenses of collection,
including, but not limited to, attorneys' fees incurred and payable or paid by
it, for any debit balance and any unpaid deficiency in any Introduced Account.
(D) Interest. Clearing Broker shall, from time to time, pay interest to
you on the cash held in the Collateral Account at such rate as shall be set out
by Montgomery Clearing Services in a separate letter agreement.
SECTION 13. Additional Representations and Warranties.
(A) The Introducing Broker. You represent, warrant, and covenant as
follows, which representations, warranties and covenants shall be deemed
repeated on each day that Montgomery Clearing Services executes an order or
clears and settles a trade for an Introduced Account:
(i) You have and shall maintain at all times during the life of this
Agreement "net capital," computed in accordance with Rule 15c3-1 of the 1934
Act, equal to the greatest of the amount required of you by such Rule or the
amount required under the Rules of any SRO of which you are a member, and the
amount set out in Schedule A (the "Minimum Capital Requirement"). You are in
compliance, and during the term of this Agreement will remain in compliance
with, all financial reporting and record keeping requirements applicable to you
under the Laws and Regulations. You shall immediately notify Montgomery Clearing
Services if (i) your net capital is less than the amount set forth in the
preceding sentence, (ii) your excess net capital is less than 10% of required
net capital, (iii) if, assuming you compute your net capital under the "basic
method," your aggregate indebtedness ratio reaches or exceeds 10 to 1, or (iv)
if, assuming you operate under the "alternative method," your net capital is
less than 5% of aggregate debit items computed in accordance with Rule 15c3-3.
<PAGE>
(ii) You are a member in good standing of the NASD and your agents that
deal with any Introduced Accounts, or that trade for or supervise the Introduced
Accounts, are appropriately registered with the NASD or any other required SRO.
You agree to promptly notify Montgomery Clearing Services of any SRO memberships
or affiliations. You are registered with the SEC under Section 15 of the
Exchange Act. You and your agents are registered or licensed and are qualified
to do business in each jurisdiction where such registration or qualification
shall be required in respect of transactions in the Introduced Accounts or other
services provided to the Customers.
(iii) You have all the requisite authority in conformity with all
applicable Laws and Regulations to enter into this Agreement and to retain the
services of Montgomery Clearing Services in accordance with the terms hereof and
have taken all necessary action to authorize the execution of this Agreement and
the performance of your obligations hereunder.
(iv) Except as required by law or by Financial Regulatory Authorities,
you shall keep confidential any confidential information you may acquire as a
result of this Agreement regarding the business and affairs of Montgomery
Clearing Services, which requirement shall survive the life of this Agreement.
(v) You shall carry a Securities Dealer Blanket Bond insurance policy
in a minimum dollar amount and with a maximum deductible set out in Schedule A
and otherwise acceptable to Montgomery Clearing Services as to form, type of
coverage and insurance company, in order to fully protect and indemnify
Montgomery Clearing Services and the Indemnified Parties against any loss,
liability, damage, cost, or expense (including but not otherwise limited to fees
and expenses of legal counsel) that Montgomery Clearing Services may suffer or
incur, directly or indirectly, as a result of any act of your employees, agents,
or partners. The insurance policy should cover, but is not limited to, the
following items: employee fidelity, premises, transit, forgery, securities,
counterfeiting, facsimile signatures, central handling of securities (if
required), computer systems, and loss payee and notification (with Montgomery
Clearing Services designated as "joint loss payee"). This insurance coverage
shall remain in effect while Montgomery Clearing Services acts as your clearing
agent and will include coverage for any claims made or discovered within 90 days
following the termination of this clearing relationship. You further agree that
if such a 90 day discovery clause is exercisable at your option, you will
exercise such option.
<PAGE>
(B) Montgomery Clearing Services
Montgomery Clearing Services represents, warrants, and covenants as follows:
(i) NationsBanc Montgomery Securities LLC is, and will remain during
the term of this Agreement, a member in good standing of the NASD and the NYSE
and duly registered with the SEC.
(ii) Montgomery Clearing Services has all the requisite authority, in
conformity with all applicable Laws and Regulations, to enter into and perform
this Agreement and has taken all necessary action to authorize the execution of
this Agreement and the performance of its obligations hereunder.
(iii) NationsBanc Montgomery Securities LLC is, and during the term of
this Agreement will remain, in compliance with the capital and financial
reporting requirements of the SEC and of every SRO of which it is a member.
(iv) Montgomery Clearing Services agrees, represents and warrants that
the names and addresses of your customers that have or may come to its attention
in connection with the clearing and related functions it has assumed under this
Agreement are confidential and shall not be utilized by NationsBanc Montgomery
Securities LLC except in connection with the functions performed by Montgomery
Clearing Services pursuant to this Agreement. Notwithstanding the foregoing,
should an Introduced Account request, on an unsolicited basis, that NationsBanc
Montgomery Securities LLC become its broker, you acknowledge and agree that it
may accept such account.
(v) Except as required by law or by Financial Regulatory Authorities,
Montgomery Clearing Services shall keep confidential any confidential
information it may acquire as a result of this Agreement regarding your business
and affairs, which requirement shall survive the life of this Agreement.
SECTION 14. Termination.
(A) Events of Default. Notwithstanding any provision in this Agreement,
the following events or occurrences shall constitute an Event of Default by the
involved party, under this Agreement.
(i) either party hereto shall fail to perform or observe any term,
covenant, or condition to be performed hereunder (including, but not limited to,
any representation, warranty, or covenant relating to net capital requirements)
and such failure shall continue to be unremedied for a period of ten (10) days
after receipt of written notice from the non-defaulting party to the defaulting
party specifying the failure and demanding that the same be remedied; or
(ii) any representation or warranty made by either party hereto shall
prove to be incorrect at any time in any material respect and such status shall
continue unremedied for a period of ten (10) days after receipt of written
notice from the non-defaulting party to the defaulting party specifying the
matter in question and demanding that same be cured; or
(iii) a receiver, liquidator, or trustee of either party hereto or any
property held by either party, is appointed by court order and such order
remains in effect for more than thirty (30) days; or either party is adjudicated
bankrupt or insolvent; or a substantial amount of property of either party is
sequestered by court order and such order remains in effect for more than thirty
(30) days; or a petition is filed against either party under any bankruptcy,
reorganization, arrangement, insolvency, readjustment of debt, dissolution or
liquidation law of any jurisdiction, whether now or hereafter in effect, and is
not dismissed within thirty (30) days after such filings; or
(iv) either party hereto files a petition in voluntary bankruptcy or
seeks relief under any provision of any bankruptcy, reorganization, arrangement,
insolvency, readjustment of debt, dissolution or liquidation law of any
jurisdiction, whether now or hereafter in effect, or consents to the filing of
any petition against it under any such law; or
(v) either party hereto makes an assignment for the benefit of its
creditors, or admits in writing its inability to pay its debts generally as they
become due, or consents to the appointment of a receiver, trustee or liquidator
of either party, or of any property held by either party; or
(vi) either party is enjoined, disabled, suspended, prohibited, or
otherwise unable to engage in the securities business as a result of any
administrative or judicial proceeding or action by the SEC or any other
Financial Regulatory Authority.
<PAGE>
(B) Termination Upon The Occurrence Of An Event Of Default. Upon the
occurrence of any such Event of Default, the nondefaulting party may, at its
option, by notice to the defaulting party declare, that this Agreement shall be
thereby terminated and such termination shall be effective as of the date such
notice has been communicated to the defaulting party. If you default, Montgomery
Clearing Services shall have sole discretion to determine what orders, if any,
it shall accept for any Introduced Account, and shall in addition to all rights
it has under this Agreement, have all rights granted to it under the Customer
Agreements incorporated by reference herein. In such event, Montgomery Clearing
Services shall be entitled, upon the consent of the Customer, to accept
instructions directly from the Customer.
(C) Termination Upon Misrepresentation Of Clearing Relationship As
Branch, Affiliation Or Agency. Should you in any way hold yourself out as,
advertise or represent that you are the agent of, affiliated with, or a branch
of Montgomery Clearing Services or NationsBanc Montgomery Securities LLC,
Montgomery Clearing Services shall have the power, at its option, to terminate
this Agreement and you shall be liable for any loss, liability, damage, cost or
expense (including but not limited to fees and expenses of legal counsel)
sustained or incurred by Montgomery Clearing Services or NationsBanc Montgomery
Securities LLC as a result of such advertisement or representation.
(D) Termination For Other Reasons. After the first anniversary hereof
this Agreement may be canceled by either of the parties hereto upon ninety (90)
days' written notice.
(E) Early Termination. In the event that this Agreement shall be
terminated by you for any reason other than pursuant to Section 14(B) prior to
two (2) years following the date hereof, you shall pay to Montgomery Clearing
Services an early termination fee equal to the expenses incurred by Montgomery
Clearing Services in establishing systems procedures and capacity for servicing
you and in discontinuing this Agreement. Such early termination fee shall not
exceed $250,000. If there is insufficient collateral in the Collateral Account
to cover all or part of the termination fee (in addition to any other
liabilities of you to Montgomery Clearing Services), said fee shall be paid
within ten (10) days after your receipt of a statement of Montgomery Clearing
Services setting forth the expenses incurred by Montgomery Clearing Services.
(F) Survival. Termination shall not affect any of the rights and
liabilities of the parties hereto incurred before the date of termination.
<PAGE>
SECTION 15. Miscellaneous.
(A) Agreement Supersedes Previous Agreements/Modifications. This
Agreement supersedes any previous agreement and may be modified only by a
writing signed by both parties to this Agreement. Such modification shall not be
deemed to be a cancellation of this Agreement.
(B) Submission of Agreement For Approval. This Agreement and any
amendment or modification shall be submitted to and/or approved by the NYSE or
such other SRO having authority to review and/or approve this Agreement or any
amendment or modification hereof. In the event of any such disapproval, the
parties hereto agree to bargain in good faith to achieve the requisite approval.
(C) Arbitration/Litigation. All disputes and controversies between you
and Montgomery Clearing Services relating to or arising out of their
relationship or this Agreement shall be submitted to binding arbitration under
the auspices of and pursuant to the arbitration rules of the NYSE or the NASD.
The award of the arbitrators shall be final and judgment on the award may be
entered in any court having jurisdiction.
(D) Assignment. This Agreement shall be binding upon all successors,
assigns or transferees of both parties hereto, irrespective of any change with
regard to the name of or the personnel of you or Montgomery Clearing Services.
Any assignment of this Agreement shall be subject to the requisite review and/or
approval of any SRO whose review and/or approval must be obtained prior to the
effectiveness and validity of such assignment. No assignment of this Agreement
by either party shall be valid unless the other party consents to such an
assignment in writing.
(E) Governing Law. The construction and effect of every provision of
this Agreement, the rights of the parties hereunder and any questions arising
out of the Agreement, shall be subject to the statutory and common law of the
State of New York without reference to the conflict of law provisions thereof.
(F) Headings. The headings preceding the text, articles, and sections
hereof have been inserted for convenience and reference only and shall not be
construed to affect the meaning, construction, or effect of this Agreement.
(G) Not a Joint Venture or Agency. Neither this Agreement nor any
operation hereunder shall create a general or limited partnership, association,
joint venture, branch, or agency relationship between you and Montgomery
Clearing Services, and you shall not make any statement or representation to the
contrary.
(H) Severability. If any provision or condition of this Agreement shall
be held to be invalid or unenforceable, such invalidity or unenforceability
shall attach only to such provision or condition. The validity of the remaining
provisions and conditions shall not be affected thereby and this Agreement shall
be carried out as if any such invalid or unenforceable provision or condition
were not contained herein.
(I) Waiver. The enumeration herein of specific remedies shall not be
exclusive of any other remedies. Any delay or failure by any party to this
Agreement to exercise any right, power, remedy or privilege in the Agreement, or
under any applicable statute or law, shall not be construed to be a waiver of,
or to limit the exercise of, such right, power, remedy or privilege. No single,
partial or other exercise of any such right, power remedy or privilege shall
preclude the further exercise thereof or the exercise of any other right, power,
remedy or privilege.
(J) Notices. All notices, consents, directions, approvals,
restrictions, requests, or other communications required or permitted to be
delivered hereunder shall be given to the parties hereto, effective upon
delivery, at the addresses specified below:
If to Clearing Broker:
Montgomery Clearing Services
a division of NationsBanc Montgomery Securities LLC
600 Montgomery Street
San Francisco, CA 94111
Attn: Seth J. Gersch
With a copy to: Jack G. Levin
<PAGE>
If to Introducing Broker:
John G. Kinnard and Company, Incorporated
920 Second Avenue South
Minneapolis, MN 55402
Attn: William F. Farley, Chairman, President and CEO
With a copy to: General Counsel
Either party may change its address for notice purposes by giving written notice
pursuant to registered mail of the new address to the other party.
(K) Investigation Of Introducing Broker's Credit. The Clearing Broker
shall have the right to investigate your credit and financial worthiness.
(L) Hiring Away. Without the prior written consent of the other party
to this Agreement, neither party shall, during the period of this Agreement and
for one year following its termination, hire or attempt to hire any person who
is employed by the other party or whose employment with the other party
terminated within the one-year period prior to the time of hiring.
(M) Obligations of NationsBanc Montgomery Securities LLC. Any
obligations or representations or warranties of Montgomery Clearing Services set
forth herein shall be legal obligations, representations or warranties of
NationsBanc Montgomery Securities LLC.
(N) No Third-Party Beneficiaries. Nothing in this Agreement shall be
construed in any way to create or enlarge any obligations running to any persons
or entities who are not parties to this Agreement or who are not specifically
mentioned in this agreement as being the object of any specific indemnification.
Nothing in this Agreement shall be construed in any way to create or enhance or
give any claims or causes of action to any persons or entities who are not
parties to this Agreement or who are not specifically mentioned in this
Agreement as being the object of any specific indemnification.
Please evidence your agreement to the following by executing and delivery to
Montgomery Clearing Services the enclosed copy hereof, and the information
required by Section 9(A) and (B) and 10(A) herein, whereupon you and Montgomery
Clearing Services, a division of NationsBanc Montgomery Securities LLC shall
have entered into this Agreement.
Very truly yours,
MONTGOMERY CLEARING SERVICES
a division of NationsBanc Montgomery Securities LLC
By: /s/ Seth J. Gersch
Seth J. Gersch, President and Chief Executive Officer
Accepted and Agreed:
JOHN G. KINNARD AND COMPANY, INCORPORATED
By: /s/ William F. Farley
William F. Farley, Chairman, President and Chief Executive Officer
<PAGE>
Confidential portions of this document indicated by "###" have been omitted
and filed separately with the Commission
Montgomery Clearing Services
a division of NationsBanc Montgomery Securities LLC
SCHEDULE A
JOHN G. KINNARD & CO., INC.
<TABLE>
<CAPTION>
<S> <C>
Trade Processing
Listed Equities Agency ###
OTC Equities Agency ###
Fixed Income Agency ###
Principal Equity Transactions Retail vs. Inventory Account ###
Principal Fixed Income Transactions Retail vs. Inventory Account ###
Principal Transactions - Dealer Side - Equity ###
Principal Transactions - Dealer Side - Fixed Income ###
Managed Accounts ###
Options ###
Mutual Funds Load and No Load Fund/SERV ###
Mutual Load Funds - X-Fund Serv ###
Foreign Securities ###
Syndicate ###
Average Price Transactions (into average price acct.) ###
Execution
Listed Equities
Executed through Electronic Execution Systems ###
NYSE DOT Rates ###
Market Orders up to 2,099 shares ###
Pre-Opening Market Orders up to 30,099 shares ###
Limit Orders executed under 2 minutes, up to 99,999 shares
###
Executed by NMS floor operations ###
OTC ###
Corporate Bonds ###
Options
Premiums of 1/16 to 15/16 ###
Premiums of 1 to 3 15/16 ###
Premiums of 4 and up ###
Interest Charges
DK's ###
Inventory ###
Margin Balances of:
$0-49,999 ###
$50,000-99,999 ###
$100,000-149,999 ###
$150,000-249,999 ###
$250,000-499,999 ###
$500,000-749,999 ###
$750,000-999,999 ###
1 Million and above ###
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Interest Income
Interest and 12b1 Fee Sharing
Dreyfus General Family of Funds - Class B ###
Dreyfus Cash Management Family of Funds ###
Dreyfus Treasury Cash Mgt. Adm. Shares ###
Based upon income received from the fund
Customer Debit Balances ###
Based upon the spread between Broker Call and the actual rate charged to
customers
Customer Free Credits
Based on NMS Credit Interest Rate ###
Miscellaneous Charges
Fund Transfers ###
Legal Transfers ###
Accommodation Transfers ###
Portfolio & Contact Management Systems ###
Inactive Accounts ###
Processing and Handling ###
Trade Corrections - Post Settlement ###
ACATS out ###
Reorganization Activity ###
IRA/Keogh Fees - Delaware Charter Set Up ###
Annual Fee ###
Termination ###
Foreign Transaction Clearance ###
Customization of Confirms & Statements ###
Returned Checks ###
VIP Type Accounts ###
NYSE Extensions ###
DK's ###
Exercise & Assignments ###
Dividend Reinvestments - Full Shares ###
New Accounts ###
Bond Redemptions ###
Account Protection $100 million ###
SIPC plus $99.5 million - Travelers Casualty & Surety Company
of America ###
Custodial Services ###
System Usage ###
Volume Discount
The schedule below is based on annual revenue from John G. Kinnard & Co., Inc.
generated from clearing and execution fees. Discounts are not retroactive.
Reverts to zero at the end of each year.
Clearing and Execution Fees Volume Discount
$3,000,000 to $4,000,000 ###
$4,000,001 to $6,000,000 ###
Over $6,000,001 ###
For 1998, clearing and execution fees will be prorated for purposes of
determining volume discount. Pro-ration will be determined by portion of the
year from first trade date.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Trading Limits
For firm inventory financing provided by NationsBanc Montgomery Securities LLC,
the aggregate total balances for all firm trading accounts will not exceed the
following except as mutually agreed:
Fixed Income Accounts ###
Equity Accounts ###
Same day notification is requested for any individual firm or customer trade for
the following items greater than the amounts listed below:
Equities ###
Municipal Bonds ###
Government Bonds ###
Corporate Bonds ###
Other
Clearing Deposit ###
Minimum Net Capital ###
Broker Blanket Bond ###
Monthly Minimum ###
Conversion ###
Termination Charge (Client initiated) ###
Contract Term (effective first trade date) ###
</TABLE>
MONTGOMERY CLEARING SERVICES
a division of NationsBanc Montgomery Securities LLC
By: /s/ Seth J. Gersch
Seth J. Gersch, President and Chief Executive Officer
Accepted and Agreed:
JOHN G. KINNARD AND COMPANY, INCORPORATED
By: /s/ William F. Farley
William F. Farley, Chairman, President and Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> BD
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
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