SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13
of
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 Commission File No. 0-9377
KINNARD INVESTMENTS, INC.
(Exact name of registrant as specified in its charter)
920 Second Avenue South, Minneapolis, Minnesota 55402 (612) 370-2700
(Address of principal executive offices) Telephone number
Minnesota 41-0972952
(State of incorporation) (I.R.S. Employer identification number)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.02
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for at least the past 90 days. Yes X No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant as of March 20, 1998, was $26,771,519 (based on the closing price
of the Registrant's Common Stock on such date).
Shares of $0.02 par value Common Stock outstanding at March 20, 1998:
5,963,227
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive Proxy Statement to be filed for the
Registrant's 1998 Annual Meeting of Shareholders is incorporated by
reference into Part III.
<PAGE>
PART I
ITEM 1. BUSINESS
General
Kinnard Investments, Inc. (the "Registrant" or "KII") is a holding company that
has been providing financial products and services for over 50 years. The
primary subsidiary, John G. Kinnard and Company, Incorporated ("John G. Kinnard"
or "JGK"), is a regional broker-dealer headquartered in Minneapolis. The
Registrant and John G. Kinnard are hereinafter collectively referred to as the
"Company".
John G. Kinnard is a full-service broker-dealer engaged in securities brokerage,
trading, investment banking, asset management and related financial services to
both retail and institutional customers. The focus of the Capital Markets group
is on emerging growth companies with market capitalizations of up to $250
million. Through the Fixed Income Originations group, the Company raises capital
for municipalities and other business entities. Other products and services
include mutual funds, insurance products, investment management, IRA services,
and fixed income securities. Nodak Bonds, Inc., a wholly-owned subsidiary of
John G. Kinnard, acts as a fiscal agent in the state of North Dakota. John G.
Kinnard is a member of the Chicago Stock Exchange, and is registered as an
investment adviser under the Investment Advisers Act of 1940.
Sources of Revenue
The following table sets forth a breakdown of the amount and percentage of
revenues from each principal source for the three most recent fiscal years:
<TABLE>
<CAPTION>
(Dollars in thousands)
- -----------------------------------------------------------------------------------------------------------------------
1997 1996 1995
Amount Percentage Amount Percentage Amount Percentage
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commissions
Mutual funds $4,151 8.3% $14,090 14.1% $9,426 12.5%
Over-the-counter securities 2,920 5.9 8,013 8.0 6,493 8.6
Listed securities 5,648 11.3 6,238 6.3 5,477 7.3
Insurance 1,498 3.0 6,119 6.1 3,975 5.3
Other 528 1.1 1,536 1.5 1,439 1.9
---------------------- ----------------------- -----------------------
14,745 29.6 35,996 36.0 26,810 35.6
---------------------- ----------------------- -----------------------
Principal transactions
Equity securities 18,837 37.8 30,514 30.5 25,993 34.5
Fixed income securities 7,092 14.2 5,393 5.4 5,794 7.7
---------------------- ----------------------- -----------------------
25,929 52.0 35,907 35.9 31,787 42.2
---------------------- ----------------------- -----------------------
Net gains (losses) on investment account
Realized 233 0.5 5,407 5.4 4,017 5.3
Unrealized 222 0.4 (434) (0.4) 2,546 3.4
---------------------- ----------------------- -----------------------
455 0.9 4,973 5.0 6,563 8.7
---------------------- ----------------------- -----------------------
Investment banking 3,977 8.0 4,985 5.0 5,303 7.0
Interest income 2,276 4.6 2,732 2.7 1,926 2.6
Other income 2,464 4.9 4,330 4.3 2,944 3.9
Sale of subsidiary 0 0.0 11,054 11.1 0 0.0
---------------------- ----------------------- -----------------------
Total revenues $49,846 100.0% $99,977 100.0% $75,333 100.0%
========================================================================================================================
</TABLE>
<PAGE>
Commissions
Commission revenues are generated through securities transactions for individual
and institutional investors where the Company acts as an agent. Commissions are
received on exchange transactions, mutual funds, insurance products, options and
over-the-counter securities in which the Company does not make a market.
Principal Transactions
The Company actively engages in trading as a principal in over-the-counter
equity and fixed income securities. When transactions are executed on a
principal basis, the Company, in lieu of commissions, marks up or marks down
securities and records the income as principal transactions revenues. The
Company buys, sells and maintains inventory of a security in order to "make a
market" in that security, which tends to expose the Company to more risk than
agency transactions. Revenues from principal transactions, including trading
profits or losses, depend upon the general trend of prices, the level of
activity in the security markets, the skills of employees engaged in market
making and the size of inventories. The Company makes a dealer market in
approximately 300 equity securities.
Investment Banking
The Corporate Finance department manages, co-manages and participates in the
underwriting of corporate equity securities. In addition, John G. Kinnard
provides merger and acquisition, valuation and advisory services. The Company
specializes in providing financing to emerging growth companies with market
capitalizations up to $250 million. During 1997, John G. Kinnard completed a
major initial public offering, executed its largest ever mergers & acquisitions
advisory assignment, and completed five private placements.
Through the Syndicate department, the Company coordinates the distribution of
public and private underwritings and accepts invitations to participate in
competitive or negotiated underwritings managed by other investment banking
firms. In 1997, John G. Kinnard participated in 38 offerings.
John G. Kinnard also negotiates, underwrites and participates in taxable and
tax-exempt offerings through its Fixed Income Originations group. In 1997, this
group raised a record $135 million by completing 62 financings, including 54
that were managed by the Company.
Investment Account
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.
As part of the compensation for underwriting securities, John G. Kinnard
typically receives warrants to purchase shares of its clients' common stock.
These warrants are initially carried at cost, but if the value of the underlying
shares appreciates, the warrants are valued by management at their estimated
fair value. Warrants and other securities held in the investment account are
frequently not immediately transferable and are subject to holding period
requirements.
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.
Interest Income
The Company derives interest income primarily from the financing of customer
margin loans, fixed income securities inventories carried for resale to
customers and fixed income securities held in the investment account.
<PAGE>
Interest Income (continued)
Customer securities transactions are effected on either a cash or margin basis.
In a margin transaction, interest is charged to the customer on the amount
loaned to purchase securities. The loan is collateralized by securities held in
the customer's account.
Research Department
John G. Kinnard's Research Department develops investment recommendations and
market information on a wide range of growth companies, with an emphasis on the
technology, health care and medical device industries. The department develops
proprietary research on approximately 70 companies, which includes analysis of
financial statements, assessment of management, evaluation of products and
services and projections of estimated future financial results. The Company's
research efforts are supplemented by research services purchased from outside
consultants.
Operations
BT Alex. Brown is John G. Kinnard's clearing agent on a fully disclosed basis.
Under terms of their agreement, BT Alex. Brown carries and clears all of John G.
Kinnard's customer securities accounts and performs the following services: (i)
preparation and mailing of monthly statements; (ii) settlement of contracts and
transactions in securities between John G. Kinnard and other broker-dealers and
between John G. Kinnard and its customers; (iii) custody and safekeeping of
securities and cash, the handling of margin accounts, dividends, exchanges,
rights offerings and tender offers; and (iv) execution of customer orders which
were placed on various exchanges. John G. Kinnard guarantees to BT Alex. Brown
the performance of every customer transaction introduced by John G. Kinnard.
In March 1998, the Company signed a letter of intent to transfer its clearing
services to Montgomery Clearing Services, a wholly owned subsidiary of
NationsBanc Montgomery Securities. Benefits expected from the change are
upgrades to the Company's technology platform, synergies in the investment
banking area and various cost efficiencies. Although a contract has not yet been
negotiated, the Company believes that a new clearing arrangement will be
established on terms acceptable to John G. Kinnard.
Customer transactions are recorded on a settlement date basis, which is
generally three business days after the trade date. The Company is exposed to
risk of loss on these transactions in the event of the customer's or broker's
inability to meet the terms of their contracts, in which case the Company may
have to purchase or sell financial instruments at prevailing market prices. The
customers' security activities are transacted on either a cash or margin basis.
The Company seeks to control the risks associated with customer margin
activities by requiring customers to maintain margin collateral in compliance
with various regulatory and internal guidelines. Required margin levels are
monitored daily and, pursuant to guidelines, customers may be required to
deposit additional collateral, or reduce margined positions, when necessary.
Regulation
John G. Kinnard is registered with the Securities and Exchange Commission
("SEC") as a broker-dealer under the Securities Exchange Act of 1934, and also
as an investment adviser under the Investment Advisers Act of 1940. John G.
Kinnard is registered as a broker-dealer under the securities laws in 49 states,
and is a member of the National Association of Securities Dealers, Inc. and
Chicago Stock Exchange. Every aspect of the Company's business is subject to
comprehensive regulation and inspection by governmental and self-regulatory
authorities, all of which have the power of curtailment, suspension, revocation
or expulsion in the event of violations of their respective statutes or rules.
As a broker-dealer registered with the SEC, John G. Kinnard is subject to
prohibitions against certain types of dealings with non-members, bookkeeping
requirements, an annual audit by an independent public accountant, the filing of
periodic reports, protection of customer accounts and maintaining minimum net
capital, as defined. In addition, broker-dealers may be prohibited from
expanding their business or declaring cash dividends if the ratio of aggregate
indebtedness to net capital is greater than 10 to 1.
John G. Kinnard computes its net capital using the standard net capital method,
which requires that the ratio of aggregate indebtedness to net capital not
exceed 15 to 1. The Company has at all times maintained its net capital above
the required levels.
<PAGE>
Competition
The Company encounters intense competition in all aspects of its business and
competes directly with other securities firms, a significant number of which
have greater capital and other resources, and many of which offer a wider range
of financial services. The securities industry also faces growing competition
from commercial banks, insurance companies and other businesses providing
financial services. The Company competes with other firms on the basis of
customer service, quality and ability of employees, the relative prices of
products and services, product availability and locations.
While the Company believes that it is competitively well positioned, it is
impossible to predict the effect of competing firms or lower costs which may be
offered by certain discount brokers. In addition, there is substantial
competition among firms in the securities industry to attract and retain
qualified and successful investment executives.
Employees
At December 31, 1997, the Company had 338 full-time employees. None of the
Company's employees are covered by a collective bargaining agreement. The
Company considers its relations with employees to be good and regards
compensation and employee benefits, including medical, life and disability,
deferred savings and retirement plans, to be competitive with those offered by
other securities firms.
Cautionary Statements
The Company wishes to caution investors that the following factors, among
others, could affect the Company's results of operations and cause such results
to differ materially from those anticipated in forward-looking statements made
in this document and elsewhere by or on behalf of the Company:
1. Industry Factors. The securities business is by its nature subject to
various risks, particularly in volatile or illiquid markets, including the
risk of losses resulting from underwriting or ownership of securities,
customer or issuer fraud, employee errors and misconduct, failures in
connection with the processing of securities transactions and litigation. A
substantial part of John G. Kinnard's business involves securities of
emerging growth companies, a segment of the securities industry which may be
subject to greater risks and volatility than the industry as a whole. There
is also a substantial competition among firms in the securities industry to
attract and retain qualified and successful investment executives.
2. Regulation. The securities industry is subject to extensive regulation, at
both federal and state levels. As a matter of public policy, various
regulatory bodies are charged with safeguarding the integrity of the
securities markets and with protecting the interests of customers
participating in those markets, as opposed to the interests of the Company's
shareholders. The SEC, state securities agencies and self-regulatory
organizations such as the NASD require strict compliance with their
extensive rules and regulations. Failure to comply with such rules and
regulations could expose the Company to civil liabilities, fines and other
penalties and sanctions that could materially impair the Company's
operations.
The SEC has provisions with respect to net capital requirements applicable
to the operations of brokerage firms. A significant loss in any year,
changes in the net capital requirements by applicable regulatory
authorities, or an extraordinary charge against net capital could adversely
affect the ability of the Company to expand or maintain present levels of
business. Additional legislation or regulation, changes in existing laws and
rules or changes in the interpretation or enforcement of existing law and
rules may directly affect the mode of operation and profitability of the
Company.
3. Economic and Market Conditions. The Company's business and its profitability
are affected by many factors, including the volatility and price level of
securities markets; the volume, size and timing of securities transactions;
the demand for investment banking services; the level and volatility of
interest rates; the availability of credit; legislation affecting the
business and financial communities; and the economy in general. Low trading
volume and depressed prices may reduce revenues, which would generally
negatively impact profitability because a portion of the Company's costs are
fixed. The failure of issuers, customers and other dealers to perform their
obligations may also result in losses to the Company.
<PAGE>
Cautionary Statements (continued)
As a market maker, John G. Kinnard maintains inventories of securities to
engage in principal transactions with retail and institutional customers as
well as other broker-dealers. The maintenance of such positions exposes the
Company to the possibility of significant losses if the market prices of the
securities comprising its inventory positions change. In addition, the
impact that new limit order handling rules will have on the Company's market
making activities is uncertain.
4. Investment Account. The Company maintains an investment account for excess
capital not currently required within the operating business units.
Investments include stocks, warrants and other securities or investments
that are restricted and non-marketable for varying periods of time. These
securities are recorded at their estimated fair value at the end of each
accounting period, with the resulting changes in value reported as net gains
or losses on investment account. Valuation of the investment account is
volatile, and changes may have a material effect on the Company's earnings.
5. Investment Banking. John G. Kinnard's investment banking activities subject
the Company to certain risks, including market, credit and liquidity, in the
event that securities purchased in an underwriting cannot be resold at
anticipated price levels. Further, under applicable securities laws and
court decisions with respect to underwriters' liability and limitations on
indemnification by issuers, an underwriter may be exposed to securities
liabilities arising out of the public and private offering of equity and
debt instruments.
6. Litigation and Arbitration. Many aspects of the Company's business involve
substantial risks of liability. In recent years, there has been an
increasing incidence of litigation and arbitration involving participants in
the securities industry. Claims by dissatisfied customers alleging fraud,
unauthorized trading, churning, mismanagement and breach of fiduciary duty
are periodically made against broker-dealers. Underwriters and agents are
subject to potential liability for material misstatements and omissions in
prospectuses and other communications with respect to offerings of
securities. A settlement or judgment related to these types of claims or
activities could have a material adverse effect on the Company.
ITEM 2. PROPERTIES
The Registrant's main office is located in the Kinnard Financial Center, 920
Second Avenue South, Minneapolis, Minnesota and is leased by John G. Kinnard.
John G. Kinnard has 20 branch offices located in Minnesota, North Dakota, South
Dakota, Wisconsin and Colorado, in addition to maintaining relationships with
various independent representatives. See Note 9 of the Notes to Consolidated
Financial Statements included herein for information concerning leases of the
Company's branches and offices.
ITEM 3. LEGAL PROCEEDINGS
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 violated securities laws by issuing false and misleading statements
related to financial results. John G. Kinnard managed the initial public
offering of Photran in May 1996. John G. Kinnard 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.
In June 1997, a lawsuit seeking class action status was filed in U.S. District
Court in Minnesota alleging that John G. Kinnard and the issuer violated
securities laws by issuing false and misleading statements relating to the
initial public offering of Electroscope, Inc. that was managed by John G.
Kinnard in May 1996. John G. Kinnard 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.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS (continued)
John G. Kinnard is a defendant in various other actions relating to its
business, some of which involve claims for unspecified amounts. Although the
ultimate resolution of these matters cannot be predicted with certainty,
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 consolidated financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the Registrant's fiscal year no matter was
submitted to a vote of security holders through the solicitation of proxies or
otherwise.
Executive Officers of the Registrant
The following table sets forth for each of the Company's current executive
officers their age, current positions with the Company, and business experience
during the past five years.
Principal Occupation and Business
Name Age Experience During Past Five Years
William F. Farley 54 Chief Operating Officer of the Registrant, and
President, Chief Executive Officer and
Chairman of John G. Kinnard since April 1997.
Private investor from April 1996 to April
1997, and Vice Chairman of First Bank System
from March 1990 to April 1996.
Gerald M. Gifford 53 Secretary of the Registrant since October 1979.
Executive Vice President of John G. Kinnard
since February 1990. Secretary of John G.
Kinnard since December 1973 and Treasurer of
the Registrant from February 1990 to February
1993. Treasurer of John G. Kinnard from
February 1990 to February 1991.
Daniel R. Sass 40 Treasurer of the Registrant since December
1996. Senior Vice President and Treasurer of
John G. Kinnard since March 1994. Additional
positions at John G. Kinnard were Controller
from December 1992 to March 1994, and Assistant
Controller from December 1991 to December 1992.
There are no family relationships between or among any of the executive officers
of the Registrant. The term of office of each executive officer is from one
annual meeting of directors until the next annual meeting of directors or until
a successor for each is elected.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
Market Information
The Registrant's common stock is traded in the over-the-counter market on The
Nasdaq Stock Market under the symbol "KINN". The following table sets forth the
high and low sale prices for the Registrant's common stock, as reported by
Nasdaq:
<PAGE>
Market Information (continued)
High Low
1997 First Quarter................................... $6.000 $4.500
Second Quarter.................................. 6.250 5.000
Third Quarter................................... 7.750 5.625
Fourth Quarter.................................. 8.250 5.688
1996 First Quarter.................................... $4.375 $3.125
Second Quarter................................... 5.500 4.000
Third Quarter.................................... 6.750 4.250
Fourth Quarter................................... 6.625 4.875
Number of Holders of Common Stock
As of March 20, 1998, there were 250 holders of record of the Registrant's
common stock and the Company estimates approximately 1,100 beneficial holders.
Dividends
The Company does not currently pay a dividend. The payment of future dividends,
if any, rests within the discretion of the Board of Directors, and will depend
upon the Company's earnings, regulatory capital requirements and financial
condition, as well as other relevant factors.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(In thousands, except per share data)
- --------------------------------------------------------------------------------------------------------------------------------
Fiscal Year
-------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Financial Condition:
Cash and cash equivalents $3,886 $14,031 $5,766 $2,750 $4,283
Total assets 43,972 47,141 45,897 31,617 40,429
Total liabilities 8,400 11,112 20,592 10,542 15,240
Shareholders' equity 35,572 36,029 25,305 21,075 25,189
Operating Results:
Total revenues 49,846 99,977 75,333 55,667 71,646
Total operating expenses 49,310 80,311 69,647 61,174 65,672
Income (loss) before income taxes 536 19,666 5,686 (5,507) 5,974
Net income (loss) 308 11,698 3,376 (3,210) 3,797
Per Share Data:
Earnings (loss) - Basic 0.05 1.93 0.54 (0.54) 0.67
Earnings (loss) - Diluted 0.05 1.92 0.54 (0.54) 0.64
Dividends declared 0.00 0.00 0.00 0.10 0.15
Book value 5.97 5.98 4.04 3.58 4.18
================================================================================================================================
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
The following table sets forth a summary of changes in the major categories of
revenues and expenses from the prior year's results.
<TABLE>
<CAPTION>
(Dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, Excluding PFS and gain As Reported
1997 versus 1996 1997 versus 1996 1996 versus 1995
Increase (decrease) Increase (decrease) Increase (decrease)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Commissions $942 7% ($21,251) (59%) $9,186 34%
Principal transactions (8,168) (24) (9,978) (28) 4,120 13
Net gains on investment account (4,362) (91) (4,518) (91) (1,590) (24)
Investment banking (975) (20) (1,008) (20) (318) (6)
Interest 484 27 (456) (17) 806 42
Other 272 12 (1,866) (43) 1,386 47
Sale of subsidiary 0 0 (11,054) (100) 11,054 100
- ----------------------------------------------------------------------------------------------------------------------------
Total revenues (11,807) (19) (50,131) (50) 24,644 33
- ----------------------------------------------------------------------------------------------------------------------------
Expenses:
Compensation and benefits (3,734) (10) (10,165) (23) 5,289 14
Bank commissions 0 0 (14,534) (100) 4,759 49
Floor brokerage and clearance (245) (6) (734) (15) 688 16
Communications (97) (11) (472) (37) 13 1
Occupancy and equipment 685 15 (740) (12) 305 5
Litigation settlements (2,865) (100) (2,865) (100) 9 0
Other 704 16 (1,491) (22) (399) (6)
- ----------------------------------------------------------------------------------------------------------------------------
Total expenses (5,552) (10) (31,001) (39) 10,664 15
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes (6,255) (92) (19,130) (97) 13,980 246
Income tax expense (2,530) (92) (7,740) (97) 5,658 245
- ----------------------------------------------------------------------------------------------------------------------------
Net income ($3,725) (92%) ($11,390) (97%) $8,322 247%
============================================================================================================================
</TABLE>
Business Environment
The Company is engaged in securities brokerage, trading, investment banking,
asset management and related financial services. These activities are highly
competitive and sensitive to a variety of market factors, including trading
volumes, interest rates, inflation and regional economies, which may result in
fluctuating revenues. At the same time, a sizable portion of the Company's
expenses are fixed, which could negatively impact profit margins if revenues
decline.
The securities industry is increasingly reliant on new technologies to improve
operating efficiencies and provide superior customer service. The Company is
committed to upgrading its technology systems and operating platform in 1998,
which it believes will position itself to remain competitive within the current
environment.
Fiscal years ended December 31, 1997 and 1996
For the twelve months ended December 31, 1997, the Company earned $308,000, or 5
cents per diluted share, on revenues of $49.8 million. This compares to $11.7
million, or $1.92 per diluted share, on revenues of $100.0 million for the same
period in 1996. Included in the prior year are results from former Kinnard
subsidiary PRIMEVEST Financial Services, Inc. ("PRIMEVEST"), which was sold in
October 1996. Excluding the results of PRIMEVEST and gain on sale, 1996
revenues, net income and diluted earnings per share would have been $61.7
million, $4.0 million and 66 cents, respectively.
<PAGE>
Fiscal years ended December 31, 1997 and 1996 (continued)
The decline in revenue was primarily due to a weak market for securities held in
the Company's investment account and volatility in small cap securities in which
the Company makes a market. All subsequent comparisons to prior years below
exclude the results of PRIMEVEST.
Commissions increased by $942,000 on the strength of record sales of mutual fund
products, annuities and over-the-counter equity securities executed on an agency
basis. Investors continued to invest new money into equity securities and
products during 1997 as major market indices achieved new record highs.
Revenues from principal transactions decreased by $8.2 million as the Company
experienced volatility in the stocks in which it makes a market. Revenues earned
trading over-the-counter equity securities were also negatively impacted in 1997
by new order-handling regulations and smaller fractions used in share pricing.
Partially offsetting the decline in equity principal transactions was a 34%
increase in fixed income principal transactions revenues. A favorable interest
rate environment combined with a record level of fixed income underwritings
contributed to the increase.
Net gains on the investment account were $455,000 in 1997, down from $4.8
million in 1996. In the first half of 1996, the Company realized significant
gains on certain securities held in the portfolio. The investment account has
historically been a volatile source of income for the Company.
Revenues from investment banking declined by $975,000 from the prior year.
Equity investment banking revenues declined as the Company transitioned to a new
corporate finance team. Fixed income investment banking revenues rose with the
placement of a record $135 million of capital raised during the year.
Interest income increased by 27% primarily as a result of earnings on the
proceeds of the sale of PRIMEVEST. Other income increased by 12% due to an
increase in fee based income.
Employee compensation expenses decreased by 10% from the prior year. Variable
compensation, such as commissions paid to investment executives and incentive
compensation, declined as a result of lower revenues and profitability. Salary
expense increased modestly as the Company added key senior executives.
Bank commissions, which relate solely to the operation of PRIMEVEST, were zero
in the current period. Floor brokerage and clearance declined by 6%, which was
less than the decline in associated revenues due to an increase in execution
costs relating to the Company's equity trading operation. Communications expense
declined by 11% during 1997 as a result of decreased activity and cost reduction
efforts. Occupancy expense increased by 15% due to an increase in real estate
taxes at the Company's headquarters location and the opening of two retail
branch offices.
Other expenses increased by 16% from the prior year due in part to costs
associated with recruiting new employees and the resolution of certain
litigation matters.
Fiscal years ended December 31, 1996 and 1995
The Company posted record revenues in 1996 approaching $100 million, an increase
of 33% over the $75.3 million for 1995. The increase was attributable to strong
results in the Capital Markets group and to a gain on the sale of PRIMEVEST. For
the year ended December 31, 1996, diluted earnings per share were $1.92 compared
to $0.54 per share for the prior year. Excluding the results of PRIMEVEST and
gain on sale, 1996 revenues, net income and diluted earnings per share would
have been $61.7 million, $4.0 million and 66 cents per share, respectively.
Commission income increased by 34% in 1996 compared to the same period in 1995,
mainly due to significant increases in the sale of listed securities, mutual
fund products and annuities. PRIMEVEST was responsible for more than 70% of the
increase in commission income. The Company's growth in mutual funds benefited
from the industry trend of record investments into funds during 1996.
<PAGE>
Fiscal years ended December 31, 1996 and 1995 (continued)
Revenue from principal transactions increased by 13% on the strength of an
active Nasdaq equity market. The Capital Markets group, which includes equity
trading, institutional equity sales, investment banking and research, has been
increasing their focus on emerging growth companies located primarily in the
Upper Midwest. Principal income from the sale of fixed income products decreased
by 8% as investors tended to focus their investment activities in equities due
to the above-average returns being achieved in those markets.
Income resulting from the change in valuation of the investment account declined
24% from 1995. The lower income was due primarily to changes in value of equity
securities held in the portfolio. This account has historically been a volatile
source of income for the Company.
Investment banking income declined by 6% in 1996 compared to the previous year.
During 1996, the Company completed two public offerings as compared to four in
1995. In addition, a number of private placement financings were completed in
each period.
Interest income increased by 42% as a result of higher levels of customer margin
balances and fixed income securities held as investments or cash equivalents.
Revenue from the sale of subsidiary relates to the sale of PRIMEVEST. Other
income increased $1.4 million or 47%, due primarily to an increase in fee-based
income.
Employee compensation increased by 14% due to an increase in commissions paid to
investment executives as a result of higher sales, increased incentive
compensation due to improved profitability and an increase in benefit expenses.
Bank commissions increased by 49%, which was in line with the change in
associated revenues. Floor brokerage and clearing charges increased by 16% as a
result of increased sales activity. Communication expense was relatively flat
compared to the previous year as the Company pursued more advantageous local and
long distance services. Occupancy and equipment costs increased primarily due to
costs associated with increased activity levels, converting to a new trading
system and implementation of other technologies. Other expenses declined by 6%
primarily as a result of higher expenses in the prior year related to legal
proceedings.
On October 31, 1996, the Company completed the sale of PRIMEVEST to ReliaStar
Financial Corporation. The sale price was $15.5 million in cash, of which $1.5
million was placed in escrow to secure indemnification obligations to ReliaStar.
For the ten months ended October 31, 1996, PRIMEVEST revenues were $27.5
million, or 28% of consolidated revenues, and net income was $1.2 million or 10%
of consolidated profits.
<PAGE>
Quarterly Results
Selected unaudited data reflecting the Company's results of operations for each
of the last eight quarters are shown in the following table. The information for
each of these quarters includes all normal and recurring adjustments and
accruals which the Company considers necessary for a fair presentation. These
operating results, however, are not necessarily indicative of results for any
future period.
<TABLE>
<CAPTION>
(In thousands, except per share data)
- ----------------------------------------------------------------------------------------------------------------------------
Three months ended March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
Revenues $11,173 $12,898 $14,596 $11,179
Net income (loss) (315) 701 794 (872)
Basic earnings (loss) per share (0.05) 0.11 0.13 (0.14)
Diluted earnings (loss) per share (0.05) 0.11 0.13 (0.14)
1996
Revenues $22,161 $30,932 $21,672 $25,212
Net income 1,329 3,260 1,139 5,970
Basic earnings per share 0.22 0.54 0.19 0.99
Diluted earnings per share 0.22 0.54 0.19 0.97
============================================================================================================================
</TABLE>
<PAGE>
Liquidity and Capital Resources
Operating Activities
A large portion of the Company's assets are cash and assets readily convertible
to cash. The portion of the Company's security investments and inventory that
are readily marketable are stated at quoted market values. The less liquid
portion of inventories and investments, which totaled $1.3 million at December
31, 1997, are stated at fair value, which is determined by management's best
estimate.
During 1997, the Company increased its long positions of trading securities by
$3.1 million. Inventories are generally maintained to facilitate customer
transactions rather than for market speculation. For the same period, investment
securities increased $1.8 million. Based on the Company's current liquidity
position, available bank lines, and operating plans, it is anticipated that the
Company has sufficient resources to meet the cash requirements of its operations
in the foreseeable future.
As a securities broker-dealer, John G. Kinnard is required by SEC regulations to
meet certain liquidity and capital standards. It has been in compliance with
these regulations at all times.
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.
Financing Activities
John G. Kinnard maintains two discretionary credit facilities providing for
conditional short-term borrowings of up to $10 million in aggregate. One
facility limits the borrowing to 90 days and is secured by firm marketable
securities. The other facility is to finance corporate bond private placement
activity and is secured on a non-recourse basis by the securities being
financed. Borrowings under the facility must be originated with a term of at
least 13 months, but may be prepaid. Advances under the facilities are at the
banks' sole discretion, accrue interest at a fluctuating interest rate to be
agreed upon by the Company and the bank, and are subject to certain affirmative
and negative covenants. There are no fees or compensating balances related to
these lines of credit. Both lines had no outstanding borrowings at December 31,
1997 and 1996.
In 1997 and 1996 the Company received proceeds of $231,000 and $364,000,
respectively, from the issuance of its common stock to participants in the
Employee Stock Purchase Plan and the exercise of options.
During the years 1997, 1996 and 1995 the Company repurchased 465,000, 330,000
and 15,000 shares of its common stock at a total cost of $2.7 million, $1.3
million and $48,000, respectively. The Board of Directors has authorized the
repurchase of up to 1.6 million shares of the Company's common stock. As of
December 31, 1997, a total of 1,053,000 shares have been repurchased at a cost
of $4.9 million.
In April 1997, the Company entered into a Subscription and Purchase Agreement
with William F. Farley, whereby Mr. Farley purchased 325,000 Units of securities
of the Company for $1.7 million or $5.25 per Unit. Each Unit consisted of one
share of common stock of the Company and a warrant to purchase an additional
share at a price of $6.00 per share.
Effects of Inflation
Because the Company's assets are to a large extent liquid in nature, they are
not significantly affected by inflation. Increases in certain Company expenses
due to inflation, such as employee compensation, rent and communications, may
not be readily recoverable in the price of its services. In addition, to the
extent that inflation results in rising interest rates or has other adverse
effects on the securities markets, it may adversely affect the Company's
financial position and results of operations.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Consolidated Financial Statements and Schedule" following Part IV,
Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
A change in the Company's outside auditors was previously reported in the
Company's Form 8-K dated July 7, 1997.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Other than "Executive Officers of the Registrant" which is set forth at the end
of Part I of this Form 10-K, the information required by Item 10 is incorporated
herein by reference to the sections labeled "Election of Directors" and "Section
16(a) Beneficial Ownership Reporting Compliance" which appear in the
Registrant's definitive Proxy Statement for its 1998 Annual Meeting of
Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to the
section labeled "Executive Compensation" which appears in the Registrant's
definitive Proxy Statement for its 1998 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference to the
sections labeled "Principal Shareholders" and "Management Shareholdings" which
appear in the Registrant's definitive Proxy Statement for its 1998 Annual
Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference to the
section labeled "Election of Directors" which appears in the Registrant's
definitive Proxy Statement for its 1998 Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Documents Filed as Part of this Report:
(1) Consolidated Financial Statements. See "Index to Consolidated
Financial Statements and Schedule" on the following page.
(2) Exhibits. See "Exhibit Index" starting on the page following
signatures.
Reports on Form 8-K
None.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Page
INDEPENDENT AUDITORS' REPORTS .................................... 15
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated statements of financial condition ................... 17
Consolidated statements of operations ............................ 18
Consolidated statements of shareholders' equity .................. 19
Consolidated statements of cash flows ............................ 20
Notes to consolidated financial statements ....................... 22
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Kinnard Investments, Inc.:
We have audited the accompanying consolidated statement of financial
condition of Kinnard Investments, Inc. and subsidiaries as of December
31, 1997, and the related consolidated statements of operations,
shareholders' equity and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit. The
accompanying consolidated financial statements of Kinnard Investments,
Inc. and subsidiaries as of and for the years ended December 31, 1996
and 1995 were audited by other auditors whose report thereon dated
January 30, 1997, expressed an unqualified opinion on those
consolidated financial statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the 1997 consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of Kinnard Investments, Inc. and subsidiaries as of December 31, 1997,
and the results of their operations and cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
January 28, 1998
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Kinnard Investments, Inc. and Subsidiaries
Minneapolis, Minnesota
We have audited the accompanying consolidated statement of financial
condition of Kinnard Investments, Inc. and Subsidiaries (the "Company")
as of December 31, 1996, and the related consolidated statements of
operations, shareholders' equity, and cash flows for each of the two
years in the period then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Company as of December 31, 1996, and the results of its operations and
its cash flows for each of the two years in the period then ended in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
January 30, 1997
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands except per share data)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------- -------------------- --------------------
At December 31, 1997 1996
- --------------------------------------------------------------------------------- -------------------- --------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $3,886 $ 12,518
Funds held in escrow 1,593 1,513
Receivable from clearing firm 0 968
Miscellaneous receivables 3,311 2,140
Trading securities, at market 10,730 7,658
Office equipment at cost, less accumulated depreciation
of $2,876 and $3,327, respectively 1,267 980
Investment securities, at fair value 22,705 20,940
Other assets 480 424
- --------------------------------------------------------------------------------- -------------------- --------------------
Total assets $43,972 $47,141
================================================================================= ==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Due to clearing firm $1,069 $0
Securities sold but not yet purchased, at market 915 842
Accrued compensation 3,594 3,900
Other accounts payable and accrued expenses 2,584 3,011
Income taxes payable 18 3,228
Deferred income taxes payable 220 131
- --------------------------------------------------------------------------------- -------------------- --------------------
Total liabilities 8,400 11,112
- --------------------------------------------------------------------------------- -------------------- --------------------
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 5,955 and 6,027 shares, respectively 119 120
Additional paid-in capital 11,946 12,710
Retained earnings 23,507 23,199
- --------------------------------------------------------------------------------- -------------------- --------------------
Total shareholders' equity 35,572 36,029
- --------------------------------------------------------------------------------- -------------------- --------------------
- --------------------------------------------------------------------------------- -------------------- --------------------
Total liabilities and shareholders' equity $43,972 $47,141
================================================================================= ==================== ====================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(In thousands, except per share data)
- --------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Commissions $14,745 $35,996 $26,810
Principal transactions 25,929 35,907 31,787
Net gains on investment account 455 4,973 6,563
Investment banking 3,977 4,985 5,303
Interest 2,276 2,732 1,926
Other 2,464 4,330 2,944
Sale of subsidiary 0 11,054 0
- --------------------------------------------------------------------------------------------------------------------------
Total revenues 49,846 99,977 75,333
- --------------------------------------------------------------------------------------------------------------------------
Expenses:
Compensation and benefits 33,872 44,037 38,748
Bank commissions 0 14,534 9,775
Floor brokerage and clearance 4,171 4,905 4,217
Communications 787 1,259 1,246
Occupancy and equipment 5,333 6,073 5,768
Litigation settlements 0 2,865 2,856
Other 5,147 6,638 7,037
- --------------------------------------------------------------------------------------------------------------------------
Total expenses 49,310 80,311 69,647
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 536 19,666 5,686
Income tax expense 228 7,968 2,310
- --------------------------------------------------------------------------------------------------------------------------
Net income $308 $11,698 $3,376
==========================================================================================================================
Earnings per common share:
Basic $0.05 $1.93 $0.54
Diluted $0.05 $1.92 $0.54
==========================================================================================================================
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands)
============================================ ========================= ============= ============ ============ ==============
Additional Unearned Total
Common Stock Paid-in Compen- Retained Shareholders
Shares Amount Capital sation Earnings Equity
- -------------------------------------------- ------------ ------------ ------------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 5,881 $118 $12,861 ($26) $8,122 $21,075
- -------------------------------------------- ------------ ------------ ------------- ------------ ------------ --------------
Forfeiture of restricted shares and adjust-
ment to common stock dividend (1) (5) 6 2 3
Exercise of warrants 381 7 850 857
Issuance of shares under employee
stock option plan 11 0 22 22
Repurchase of stock (15) 0 (48) (48)
Amortization of unearned compensation 20 20
Net income 3,376 3,376
- -------------------------------------------- ------------ ------------ ------------- ------------ ------------ --------------
Balance, December 31, 1995 6,257 125 13,680 0 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 0 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 $0 $23,507 $35,572
=============================================================================================================================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands)
=================================================================== =========================================================
For Years Ended December 31,
1997 1996 1995
- ------------------------------------------------------------------- ------------------ ------------------ -------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers and clearing firm $45,103 $80,657 $59,505
Cash paid to suppliers and employees (49,473) (77,992) (67,481)
Interest:
Received 2,276 2,732 1,926
Paid 0 (214) (87)
Income taxes (paid) refunded (3,349) (5,638) 722
- ------------------------------------------------------------------- ------------------ ------------------ -------------------
Net cash used in operating activities (5,443) (455) (5,415)
- ------------------------------------------------------------------- ------------------ ------------------ -------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of:
Office equipment 5 426 0
Investment securities 16,511 14,157 35,565
Purchases of:
Office equipment (1,074) (1,063) (488)
Investment securities (17,866) (18,295) (33,637)
Proceeds from sale of subsidiary, net of subsidiary's cash 0 13,574 0
- ------------------------------------------------------------------- ------------------ ------------------ -------------------
Net cash provided by (used in) investing activities (2,424) 8,799 1,440
- ------------------------------------------------------------------- ------------------ ------------------ -------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 1,938 364 879
Repurchase of common stock (2,703) (1,339) (48)
Net borrowings (payments) on notes payable 0 (617) 6,307
Dividends paid 0 0 (147)
- ------------------------------------------------------------------- ------------------ ------------------ -------------------
Net cash provided by (used in) financing activities (765) (1,592) 6,991
- ------------------------------------------------------------------- ------------------ ------------------ -------------------
Increase (decrease) in cash and cash equivalents (8,632) 6,752 3,016
Cash and cash equivalents at beginning of year 12,518 5,766 2,750
- ------------------------------------------------------------------- ------------------ ------------------ -------------------
Cash and cash equivalents at end of year $3,886 $12,518 $5,766
=================================================================== ================== ================== ===================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
(In thousands)
- ------------------------------------------------------------------------ ---------------------------------------------------------
Years Ended December 31,
1997 1996 1995
- ------------------------------------------------------------------------ ------------------ ------------------- ------------------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME TO NET
CASH USED IN OPERATING ACTIVITIES:
Net income $308 $11,698 $3,376
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 766 778 958
Unearned compensation 0 0 20
Net unrealized loss (gain) on investment securities (222) 434 (2,546)
Net realized gain on sale of investment securities (233) (5,407) (4,017)
Realized loss (gain) on sale of office equipment 21 (27) 24
Gain on sale of subsidiary 0 (11,054) 0
Deferred income taxes 89 (422) 1,499
(Increase) decrease in:
Receivable from clearing firm 968 1,234 (2,706)
Receivable from customers (2) (4,226) (6,410)
Miscellaneous receivables (1,209) (1,177) 0
Trading securities, at market (3,072) 2,375 (274)
Income tax receivable 0 0 1,187
Other assets (56) (256) 133
Increase (decrease) in:
Due to clearing firm 1,069 (236) (1,540)
Payable to customers 0 817 1,032
Securities sold but not yet purchased, at market 73 (733) 994
Accrued compensation (306) 1,943 1,284
Other accounts payable and accrued expenses (427) 1,053 1,225
Income taxes payable (3,210) 2,751 346
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities ($5,443) ($455) ($5,415)
======================================================================== ================== =================== ==================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business
Kinnard Investments, Inc. (the "Registrant" or "KII") is a
holding company that has been providing financial products and
services for over 50 years. The primary subsidiary, John G.
Kinnard and Company, Incorporated ("John G. Kinnard" or "JGK""),
is a regional broker-dealer headquartered in Minneapolis,
Minnesota. The Registrant and John G. Kinnard are hereinafter
collectively referred to as the "Company".
John G. Kinnard is a full-service broker-dealer engaged in
securities brokerage, trading, investment banking, asset
management and related financial services to both retail and
institutional customers. Its principal business is trading,
underwriting, research and sale of securities of emerging growth
companies with market capitalizations up to $250 million. The
Company also negotiates, underwrites and participates in fixed
income debt offerings. Other products and services include mutual
funds, insurance products, investment management, IRA services
and fixed income securities.
On October 31, 1996, Kinnard Investments completed the sale of
its PRIMEVEST Financial Services, Inc. ("PRIMEVEST" or "PFS")
subsidiary to ReliaStar Financial Corporation. See Note 12 to the
Consolidated Financial Statements for additional information
regarding the sale of PRIMEVEST. PRIMEVEST is a broker-dealer
that provides investment products and services to financial
institutions and their customers.
Summary of significant accounting polices
Principles of consolidation
The consolidated financial statements include the accounts of
Kinnard Investments, Inc. and its wholly owned subsidiaries. All
intercompany accounts and transactions have been eliminated in
consolidation.
Cash and cash equivalents
The Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be
cash equivalents.
Securities transactions
Securities transactions and the related revenues and expenses are
recorded on a settlement date basis, which is not materially
different than if such transactions were recorded on trade date.
Trading securities, securities sold but not yet purchased and
investment securities that are readily marketable are stated at
quoted market values. Trading and investment securities not
readily marketable are carried at fair value as determined by
management. Unrealized gains and losses are included in earnings.
Miscellaneous Receivables
Included in miscellaneous receivables are forgivable loans made
to investment executives and other revenue-producing employees,
typically in connection with their recruitment. Such loans are
forgivable based on continued employment and are amortized over
the term of the loan, which is generally three to five years,
using the straight-line method.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 1. Nature of Business and Significant Accounting Policies
(continued)
Income Taxes
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes". Under this method, deferred tax
liabilities and assets and the resultant provision for income
taxes are determined based on the difference between the
financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences
are expected to reverse.
Fair Value of Financial Instruments
Substantially all of the Company's financial assets and
liabilities are carried at market value or at amounts which,
because of their short-term nature, approximate current fair
value. The Company's borrowings, if any, if recalculated based on
current interest rates, would not significantly differ from the
amounts recorded at December 31, 1997.
Management estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of certain assets and liabilities and disclosure of contingent
liabilities at the balance sheet date, and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Office equipment
The cost of office equipment is depreciated using accelerated
methods over the estimated useful lives of two to seven years.
Reclassification
Certain amounts reflected in the 1996 and 1995 consolidated
financial statements have been reclassified to conform to the
presentation for 1997. These reclassifications had no impact on
net income or shareholders' equity as previously reported.
Employee stock compensation
The Company has elected to continue following the guidance of
Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees", for measurement and recognition
of stock-based transactions with employees. The Company adopted
the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation", in 1996. See Note 9 to the
Consolidated Financial Statements for additional information.
Earnings per common and common equivalent share
The company adopted SFAS No. 128, "Earnings per Share", during
the fourth quarter of 1997 and has restated prior year amounts.
SFAS No. 128 requires the reporting of basic and diluted earnings
per share amounts. Basic earnings per share are based upon the
weighted average number of common shares outstanding during the
reporting period. Diluted earnings per share take into account
the dilutive effect, if any, of stock options and other potential
dilutive common shares outstanding during the period.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 1. Nature of Business and Significant Accounting Policies
(continued)
The following reconciliation illustrates the computation of basic
and diluted earnings per share as prescribed under SFAS 128:
<TABLE>
<CAPTION>
(In thousands, except per share data)
---------------------------------------------------------- -----------------------------------------
Years Ended December 31,
1997 1996 1995
---------------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Net income $308 $11,698 $3,376
========================================================== ============= ============= =============
Weighted average number of common shares
outstanding 6,149 6,046 6,201
Dilutive effect of stock options and warrants 82 62 29
---------------------------------------------------------- ------------- ------------- -------------
Weighted average number of common and potential
dilutive common shares outstanding: 6,231 6,108 6,230
========================================================== ============= ============= =============
Basic earnings per share $0.05 $1.93 $0.54
Diluted earnings per share 0.05 1.92 0.54
---------------------------------------------------------- ------------- ------------- -------------
Non-dilutive options as of December 31, 1997, 1996 and 1995 totaled 477,000, 54,000 and 215,000,
respectively.
</TABLE>
Note 2 . Other Accounts Payable and Accrued Expenses
Included in other accounts payable and accrued expenses are
vendor accounts payable, accrual for contingencies, sales
incentive program accruals and miscellaneous payables.
<PAGE>
Note 3. Securities
Trading securities are summarized as follows:
<TABLE>
<CAPTION>
(In thousands)
------------------------------------------------------------------------------------------------------
December 31, 1997 1996
------------------------------------------------------------------------------------------------------
<S> <C> <C>
Trading securities:
Corporate stocks $2,752 $3,068
U.S. government and municipal bonds 3,982 1,656
Corporate debt securities 3,996 2,934
------------------------------------------------------------------------------------------------------
$10,730 $7,658
------------------------------------------------------------------------------------------------------
Securities sold but not yet purchased:
Corporate stocks $870 $841
Corporate debt securities 45 1
------------------------------------------------------------------------------------------------------
$915 $842
------------------------------------------------------------------------------------------------------
</TABLE>
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.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 4. Notes Payable
Lines of credit
JGK maintains two discretionary credit facilities providing for
conditional short-term borrowings of up to $10 million in the
aggregate. One facility limits the borrowing to 90 days and is
secured by firm trading securities. The other facility is to
finance corporate bond private placement activity and is secured
on a non-recourse basis by the securities being financed.
Borrowings under the facility must be originated with a term of
at least 13 months, but may be prepaid. Advances under the
facilities are at the banks' sole discretion, accrue interest at
a fluctuating interest rate to be agreed upon by the Company and
the bank, and are subject to certain affirmative and negative
covenants. There are no fees or compensating balances related to
these lines of credit. Both lines had no outstanding borrowings
at December 31, 1997 and 1996.
Note 5. Employee Benefit Plans
Employee Stock Ownership Plan and Trust
Employees are eligible to participate in the Employee Stock
Ownership Plan and Trust (ESOP) upon completing one year of
service. Contributions to the ESOP are made at the discretion of
the Company and can be made in cash or other property, as the
Trustees of the ESOP consider appropriate. These contributions
are used primarily to purchase stock of the Company. A
participant is generally fully vested after five years of
service. During the years ended December 31, 1997, 1996 and 1995,
the Company contributed $0, $1.3 million and $560,000,
respectively, to the ESOP.
Pension and Profit Sharing Plans
The Company has defined contribution pension and profit sharing
plans covering substantially all employees who have completed at
least one full year of continuous service. The Company
contributes to the pension plan, on behalf of each eligible
employee, an amount equal to 5 percent of their annual qualified
compensation. This contribution is reflected as an operating
expense and amounted to $1.0 million, $1.2 million and $1.0
million for the years ended December 31, 1997, 1996 and 1995,
respectively.
There were no contributions to the profit sharing plan for the
years ended December 31, 1997, 1996 and 1995. The Company does
not intend to make any further contributions to the profit
sharing plan so long as the ESOP is in effect.
Note 6. Income Taxes
Income tax expense (benefit) is as follows:
<TABLE>
<CAPTION>
(In thousands)
----------------------------------------------------------------------------------------------------
December 31, 1997 1996 1995
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $97 $6,551 $1,150
State 42 1,839 0
Deferred 89 (422) 1,160
----------------------------------------------------------------------------------------------------
$228 $7,968 $2,310
====================================================================================================
</TABLE>
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 6. Income Taxes (continued)
The provision for income taxes for the years ended December 31,
1997, 1996 and 1995, differs from the amount obtained by applying
the U.S. federal income tax rate to pretax income due to the
following:
<TABLE>
<CAPTION>
(In thousands)
----------------------------------------------------------------------------------------------------
Years ended December 31, 1997 1996 1995
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ordinary federal income tax expense $182 $6,883 $1,990
State income taxes, net of federal tax 42 1,079 301
benefit
Other, net 4 6 19
----------------------------------------------------------------------------------------------------
$228 $7,968 $2,310
====================================================================================================
</TABLE>
The tax effects of temporary differences that give rise to the
Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
(In thousands)
---------------------------------------------------------------- ---------------- -----------------
December 31, 1997 1996
---------------------------------------------------------------- ---------------- -----------------
<S> <C> <C>
Deferred tax asset:
Accruals not currently deductible $498 $501
Receivable 172 162
Other 118 91
---------------------------------------------------------------- ---------------- -----------------
788 754
---------------------------------------------------------------- ---------------- -----------------
Deferred tax liability:
Unrealized appreciation of investment
securities (916) (798)
Other (92) (87)
---------------------------------------------------------------- ---------------- -----------------
(1,008) (885)
---------------------------------------------------------------- ---------------- -----------------
Net deferred tax liability ($220) ($131)
===================================================================================================
</TABLE>
<PAGE>
Note 7. Net Capital Requirements and Dividend Restrictions
The Company 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 $617,000 as of December 31, 1997. 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 December
31, 1997, the Company had net capital of $4.5 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 8. Equity
The Company's 16.5 million shares of authorized undesignated
stock may be designated by the Board of Directors as either
preferred stock or common stock.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 8. Equity (continued)
During the years 1997, 1996 and 1995 the Company repurchased
465,000, 330,000 and 15,000 shares of its common stock at a total
cost of $2.7 million, $1.3 million and $48,000, respectively. The
Board of Directors has authorized the repurchase of up to 1.6
million shares of the Company's common stock. As of December 31,
1997, a total of 1,053,000 shares have been repurchased at a cost
of $4.9 million.
In April 1997, the Company entered into a Subscription and
Purchase Agreement with William F. Farley, whereby Mr. Farley
purchased 325,000 Units of securities of the Company for $1.7
million or $5.25 per Unit. Each Unit consisted of one share of
common stock of the Company and a warrant to purchase an
additional share at a price of $6.00 per share.
The Company has an Employee Stock Purchase Plan ("ESPP") under
which 1,050,000 shares are authorized for issuance. The ESPP
allows employees to set aside up to 15% of earnings to purchase
shares of the Company's common stock. Shares are issued
semi-annually at a price equal to 85% of the lower of the market
prices at the beginning or end of the applicable six-month
period, but not less than book value at the end of the period.
Reserved but unissued shares under the Plan were 702,839 at
December 31, 1997.
Note 9. Stock Option Plans
Under the Company's 1990 and 1997 Stock Option Plans, a total of
620,000 and 1 million shares, respectively, have been reserved
for options to employees and directors of the Company. At
December 31, 1997 authorized but unissued shares were 94,357 for
the 1990 Stock Option Plan and 716,500 for the 1997 Stock Option
Plan. Under terms of the plan, options are generally granted at
the current market price, but not less than the book value per
share. The options may be exercised over the period prescribed at
the time of the grant, not to exceed ten years. The majority of
options have no vesting period, but certain options have vesting
periods of up to five years. Stock option transactions are
summarized below:
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
Exercise Weighted
Number Price Per Avg. Exercise
of Shares Share Price
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at December 31, 1994 218,300 $1.98 - $7.25 $4.68
Granted 70,000 3.55 - 3.94 3.63
Exercised (11,400) 1.98 1.98
Forfeited or expired (30,750) 3.55 - 7.25 5.43
----------------------------------------------------------
Outstanding at December 31, 1995 246,150 1.98 - 7.25 4.41
Granted 226,500 4.04 - 5.88 4.15
Exercised (86,200) 1.98 - 4.75 3.54
Forfeited or expired (18,250) 4.04 - 7.25 6.18
----------------------------------------------------------
Outstanding at December 31, 1996 368,200 3.55 - 7.25 4.40
Granted 488,000 5.92 - 6.00 5.98
Exercised (67,693) 3.55 - 4.75 4.01
Forfeited or expired (131,557) 3.55 - 7.25 5.39
----------------------------------------------------------
Outstanding at December 31, 1997 656,950 $3.55 - $6.00 $5.37
=====================================================================================================
</TABLE>
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 9. Stock Option Plans (continued)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
Exercise Weighted
Number Price Per Avg. Exercise
of Shares Share Price
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Exercisable at:
December 31, 1995 158,650 $1.98 - $7.25 $4.82
December 31, 1996 290,700 3.55 - 7.25 4.60
December 31, 1997 416,450 $3.55 - $5.98 $5.07
-----------------------------------------------------------------------------------------------------
</TABLE>
The Company applies APB Opinion No. 25 and related
interpretations in accounting for its stock option and stock
purchase plans. No compensation expense has been recognized for
its stock option and stock purchase plans because the exercise
price of all options granted under the stock option plan and
price of shares issued under the stock purchase plan were not
deemed to be less than fair value. Had compensation cost for
these equity instruments been determined based on the fair value
at the grant dates, the Company's net income and earnings per
share for the year ended December 31, 1997, 1996 and 1995 would
have been reduced to the pro forma amounts indicated below:
<PAGE>
<TABLE>
<CAPTION>
(In thousands, except per share data)
------------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss):
As reported $308 $11,698 $3,376
Pro forma (145) 11,367 3,350
Basic earnings (loss) per share:
As reported $0.05 $1.93 $0.54
Pro forma (0.02) 1.88 0.54
Diluted earnings (loss) per share:
As reported $0.05 $1.92 $0.54
Pro forma (0.02) 1.86 0.54
=======================================================================================================
</TABLE>
Using the Black-Scholes option pricing model, the estimated
weighted average fair value of options granted and vested during
1997, 1996 and 1995 was $2.04, $1.42 and $0.37 per share. The
assumptions used in the computations for 1997, 1996 and 1995 are
as follows: risk-free interest rate of 6.3%, 6.3% and 7.3%;
expected dividend yield of 0% in all three years; expected life
of approximately five, four and four years; and expected
volatility of 43%, 44% and 44%. Pro forma compensation cost of
options granted under the Employee Stock Purchase Plan is
measured based on the discount from market value. At December 31,
1997, the weighted average remaining contractual life of
outstanding options was 3.75 years, and the closing price of the
Company's common stock was $7.00 per share
Note 10. Commitments
The Company and its subsidiaries lease office space and equipment
under various operating leases with remaining terms ranging up to
nine years. Certain of these leases have escalation clauses and
renewal options. Minimum rentals required under these
non-cancelable operating leases are as follows:
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 10. Commitments (continued)
<TABLE>
<CAPTION>
(In thousands)
------------------------------------------------------------------------------------------------------
<S> <C>
1998 $1,213
1999 921
2000 686
2001 710
2002 666
Thereafter 1,343
------------------------------------------------------------------------------------------------------
$5,539
======================================================================================================
</TABLE>
Rent expense was $2.9 million for each of the years ended
December 31, 1997, 1996 and 1995, respectively.
In the normal course of business, the Company enters into
underwriting and other commitments. The ultimate settlement of
such transactions open at year-end is not expected to have a
material effect on the consolidated financial statements.
Note 11. 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 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.
In June 1997, a lawsuit seeking class action status was filed in
U.S. District Court in Minnesota alleging that JGK and the issuer
violated securities laws by issuing false and misleading
statements relating to the initial public offering of
Electroscope, Inc. that was managed by JGK 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 ultimate 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.
Note 12. Sale of Subsidiary
On October 31, 1996, the Company completed the sale of PFS to
ReliaStar Financial Corporation ("ReliaStar"). The sale price was
$15.5 million in cash, of which $1.5 million was placed in escrow
to secure indemnification obligations to ReliaStar. Excluding the
results of PRIMEVEST and the gain on sale, 1996 revenues, net
income, basic earnings per share and diluted earnings per share
would have been $61.7 million, $4.0 million, 67 cents and 66
cents, respectively.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 13. Financial Instruments with Off-Balance-Sheet Risk
The Company sells securities sold, but not yet purchased (short
sales) for its own account. The establishment of short positions
exposes the Company to off-balance-sheet market risk in the event
prices increase, as the Company may be obligated to acquire the
securities at prevailing market prices. Due to market
fluctuations, the amount necessary to acquire and deliver
securities sold but not yet purchased may be greater than the
obligation already recorded in the consolidated financial
statements.
In the normal course of business, the Company's activities
involve the execution, settlement and financing of various
securities transactions. These activities may expose the Company
to off-balance-sheet risk in the event the customer or
counterparty is unable to fulfill its contractual obligations.
Such risks may be increased by volatile trading markets.
The Company clears all transactions for its customers on a fully
disclosed basis with a clearing firm that carries all customer
accounts and maintains related records. However, the Company is
liable to the clearing firm for the transactions of its
customers. These activities may expose the Company to
off-balance-sheet risk in the event a customer or counterparty is
unable to fulfill its contractual obligations. The Company
maintains substantially all of its trading securities at the
clearing firm. These trading securities collateralize amounts due
to the clearing firm.
The Company is also exposed to the risk of loss on customer
transactions in the event of the customer's or counterparty's
inability to meet the terms of their contracts, in which case the
Company may have to purchase or sell financial instruments at
prevailing market prices. The impact of unsettled transactions is
not expected to have a material effect upon the Company's
consolidated financial statements.
The Company's customer securities activities are transacted on
either a cash or margin basis. The Company seeks to control the
risks associated with its customer margin activities by requiring
customers to maintain margin collateral in compliance with
regulatory and internal guidelines. The Company monitors required
margin levels daily, and pursuant to such guidelines, requires
that customers deposit additional collateral, or reduce margin
positions, when necessary.
As a broker dealer, JGK is engaged in various securities trading
and brokerage activities serving a diverse group of corporations,
governments, institutions and individual investors. JGK's
exposure to credit risk associated with the nonperformance of
these customers and the related counterparties in fulfilling
their contractual obligations pursuant to securities transactions
can be directly impacted by volatile security markets, credit
markets and regulatory changes which may impair the ability of
customers and/or counterparties to satisfy their obligations to
the Company. This exposure is measured on an individual customer
basis, as well as for groups of customers that share similar
attributes.
To alleviate the potential for risk concentrations, the Company
has established credit limits which are continually monitored in
light of market conditions.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
KINNARD INVESTMENTS, INC.
(the "Registrant")
By /s/ Hilding C. Nelson
Hilding C. Nelson
Chairman
Date: March 20, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
(POWER OF ATTORNEY)
Each person whose signature appears below constitutes and appoints HILDING C.
NELSON his true and lawful attorney-in-fact and agent, acting alone, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any or all amendments to this Annual
Report on Form 10-K and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent, acting alone, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all said
attorney-in-fact and agent, acting alone, or his substitute or substitutes, may
lawfully do or cause to be one by virtue thereof.
Signature Title Date
/s/ Hilding C. Nelson Chairman and Director March 20, 1998
Hilding C. Nelson
/s/ William F. Farley Chief Operating Officer March 20, 1998
William F. Farley and Director
(principal executive officer)
/s/ Daniel R. Sass Treasurer (principal financial March 20, 1998
Daniel R. Sass and accounting officer)
(Signatures continued on next page)
<PAGE>
Signature Title Date
/s/ Ronald A. Erickson Director March 20, 1998
Ronald A. Erickson
/s/ John J. Fauth Director March 20, 1998
John J. Fauth
/s/ Stephen H. Fischer Director March 20, 1998
Stephen H. Fischer
/s/ John H. Grunewald Director March 20, 1998
John H. Grunewald
/s/ Andrew J. O'Connell Director March 20, 1998
Andrew J. O'Connell
/s/ Robert S. Spong Director March 20, 1998
Robert S. Spong
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
KINNARD INVESTMENTS, INC.
(Commission File Number: 0-9377)
EXHIBIT INDEX
for
Form 10-K for 1997 fiscal year
Exhibit
2 Stock Purchase Agreement by and between ReliaStar Financial
Corporation and Kinnard Investments, Inc. for the sale of
PRIMEVEST Financial Services, Inc. -- incorporated by reference
to Exhibit 2 to the Registrant's Report on Form 8-K dated November
12, 1996 *
3.1 Registrant's Restated Articles of Incorporation, as amended to
date -- incorporated by reference to Exhibit 3.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996.*
3.2 Registrants Restated Bylaws - incorporated by reference to
Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996 *
10.1 ** Registrant's 1982 Incentive Stock Option Plan -- incorporated by
reference to Exhibit 10.6 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1988 *
10.2 ** JGK Employee Stock Ownership Plan and Trust Agreement --
incorporated by reference to Exhibit 10.12 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1989*
10.3 ** Registrant's 1990 Stock Option Plan -- incorporated by
reference to Exhibit 10.14 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1991*
10.4 ** 1992 Incentive Compensation Plans for JGK, PFS and Kinnard
Investments, Inc. *
10.5 ** Registrant's 1992 Employee Stock Purchase Plan -- incorporated
by reference to Exhibit 10.21 to the Registrant's Registration
Statement on Form S-2, Reg. No. 33-47736 *
10.6 Amendment, dated June 16, 1992, of Office Lease between JGK
and TPI/CMS St. Paul Limited Partnership covering space at
Norwest Center, St. Paul Minnesota -- incorporated by reference
to Exhibit 10.22 to the Registrant's Registration Statement on
Form S-2, Reg. No. 33-47736 *
10.7 Agreement, dated November 30, 1993, among the Registrant, MJC and
others -- incorporated by reference to Exhibit 2 of the
Registrant's Form 8-K dated December 13, 1993 *
10.8 Lease between ITL - CER II Corporation and JGK, dated July 20,
1993, covering space at 920 Second Avenue South in Minneapolis,
Minnesota -- incorporated by reference to Exhibit 10.25 to the
Registrant's Form 10-K Annual Report for the fiscal year ended
December 31, 1993 *
* Incorporated by reference to a previously filed report or document,
SEC File No. 0-9337
** Management contract or compensatory plan or arrangement
<PAGE>
Exhibit
10.9 Separation Agreement with Thomas J. Mulvaney dated September 21,
1995 -- incorporated by reference to Exhibit 10.1 to the
Registrant's Form 10-Q for the quarter ended September 30, 1995 *
10.10 Clearing Agreement, dated February 13, 1995, between Alex.
Brown & Sons, Inc. and JGK -- incorporated by reference to
Exhibit 10.20 to the Registrant's Form 10-K Annual Report for
the fiscal year ended December 31, 1994 *
10.11 Lease between Equitable Real Estate Investment Management, Inc.
and JGK, dated April 25, 1994 -- incorporated by reference to
Exhibit 10.20 to the Registrant's Form 10-K Annual Report for
the fiscal year ended December 31, 1994 *
10.12** Deferred Compensation Agreement dated October 30, 1996, between
the Registrant and Stephen H. Fischer -- incorporated by reference
to the Registrant's Form 10-K Annual Report for the fiscal year
ended December 31, 1996.*
10.13** Registrant's 1997 Stock Option Plan, as amended, including forms
of Incentive Stock Options Agreement and Nonqualified Stock Option
Agreement -- incorporated by reference to Exhibit 10.6 to the
Registrant's Form 10-Q Report for the quarter ended March 31,
1997.*
10.14 Subscription and Purchase Agreement dated April 7, 1997 between
Kinnard Investments, Inc. and William F. Farley -- incorporated
by reference to Exhibit 10.1 to the Registrant's Form 10-Q
Report for the quarter ended March 31, 1997.*
10.15 Warrant dated April 7, 1997 between Kinnard Investments, Inc. and
William F. Farley -- incorporated by reference to Exhibit 10.2 to
the Registrant's Form 10-Q Report for the quarter ended March 31,
1997.*
10.16** Employment Agreement dated April 7, 1997 among Kinnard
Investments, Inc., John G. Kinnard and Company, Incorporated and
William F. Farley -- incorporated by reference to Exhibit 10.3 to
the Registrant's Form 10-Q Report for the quarter ended March 31,
1997.*
10.17** Incentive Stock Option Agreement dated April 7, 1997 between
Kinnard Investments, Inc. and William F. Farley -- incorporated by
reference to Exhibit 10.4 to the Registrant's Form 10-Q Report for
the quarter ended March 31, 1997.*
10.18** Nonqualified Stock Option Agreement dated April 7, 1997 between
Kinnard Investments, Inc. and William F. Farley -- incorporated by
reference to Exhibit 10.5 to the Registrant's Form 10-Q Report for
the quarter ended March 31, 1997.*
10.19 Promissory Note dated April 30, 1997 payable to the Registrant by
William F. Farley -- incorporated by reference to Exhibit 10.7 to
the Registrant's Form 10-Q Report for the quarter ended March 31,
1997.*
10.20 Lease between Boat Works Development Company and John G. Kinnard
and Company, Incorporated dated February 11, 1997.
* Incorporated by reference to a previously filed report or document,
SEC File No. 0-9337
** Management contract or compensatory plan or arrangement
<PAGE>
Exhibit
11 See Note 1 of the accompanying notes to consolidated financial
statements
21 List of the Registrant's subsidiaries:
State of Incorporation
Subsidiary
John G. Kinnard and Company, Incorporated Minnesota
Kinnard Futures Management Corporation Minnesota
Kinnard Capital Corporation Minnesota
Continental Funding, Inc. North Dakota
Nodak Bonds, Inc. North Dakota
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Deloitte & Touche LLP
Financial Data Schedules (filed in electronic form only):
27.1 Fiscal year ended December 31, 1997
27.2 Fiscal year ended December 31, 1996 (restated)
27.3 Nine months ended September 30, 1997 (restated)
27.4 Nine months ended September 30, 1996 (restated)
27.5 Three months ended March 31, 1996 (restated)
27.6 Nine months ended September 30, 1995 (restated)
27.7 Six months ended June 30, 1995 (restated)
* Incorporated by reference to a previously filed report or document,
SEC File No. 0-9337
** Management contract or compensatory plan or arrangement
L E A S E
THIS LEASE made this 11th day of February 1997 between Boatworks
Development Company ("Landlord"), and John G. Kinnard and Company, Incorporated
("Tenant"),
W I T N E S S E T H
In consideration of their respective promises herein contained, and of other
good and valuable consideration, the receipt of which each party hereby
acknowledges, the parties hereby agree with each other as follows:
1. PREMISES
Landlord does hereby lease to Tenant, and Tenant does hereby rent from
Landlord, that portion shown as crosshatched on the attached Exhibit A,
containing approximately 6588 usable square feet, (the "Leased Premises") of the
Minnetonka Boat Works Building ("Building"), located at 294 East Grove Lane in
the City of Wayzata, County of Hennepin, State of Minnesota, on land legally
described on the attached Exhibit A-1, (the "Land"). The Building and Land are
referred to, collectively, as the "Project".
2. TERM
The lease term shall commence on the earlier of (I) June 1, 1997 or (ii)
the date on which Tenant shall occupy the Leased Premises (the "Commencement
Date") and shall continue through and until May 31, 2007, unless earlier
terminated as set forth herein. After the Lease term commences, Tenant agrees to
furnish a letter to Landlord confirming the Commencement Date. However, in the
event that the Leased Premises are not ready for occupancy on the date set forth
in (I) for a reason other than Tenant's failure to timely submit the layout,
plans or color selections requested by Landlord, or other than Tenant's failure
to complete Tenant's work within Sixty (60) days of substantial completion of
Landlord's work, then the Commencement Date shall be the tenth day following the
scheduled completion date of Tenant's work on the leased premises. Furthermore,
if the Leased Premises are not substantially completed by September 30, 1997
because of any failure of the Landlord to complete the Landlord's Work, Tenant
may at its option terminate the Lease by giving written notice to the Landlord.
The Tenant may terminate the lease effective on May 31 of 2002 or any
subsequent year, provided that the Tenant has given written notice to the
Landlord on or before November 30 of the preceding year.
3. BASE RENT
Tenant shall pay to Landlord during the lease term, without any deduction
or set off whatsoever, the annual base rent of $25.00 per usable square foot,
payable in monthly installments of $13,725. Tenant shall pay base rent in
advance to Landlord at the office of Landlord, or at such other place or to such
other party as Landlord may designate, on or before the first day of each month
during the lease term. If not paid when due, the rent due shall bear interest at
a rate of 10% per annum from and after the tenth calendar day following the date
when due until such monthly rent is paid. For each day after June 30, 1997 that
the Leased Premises are not ready for occupancy because of delays in completion
of the Landlord's Work, the Tenant shall be entitled to one day's free rent
after the Lease commences. Tenant's obligation to pay base rent and additional
rent is independent of any other covenant, agreement or condition in this Lease,
Tenant shall have no right of offset of deduction as a result of any default by
Landlord.
4. OPERATING COST RENT PAYMENT
In addition to said base rent, Tenant shall pay to Landlord, in the manner
hereinafter provided, as additional rent, Tenant's Proportionate Share of
"Operating Costs," as defined below. "Operating Costs" include, but shall not be
limited to, all real estate taxes and annual installments of special assessments
and interest thereon levied against the Building and the land paid or accrued
during each Lease Year; reasonable management fees, insurance premiums, utility
costs, costs of wages, services, equipment and supplies, and all other costs of
any nature whatsoever which for federal tax purposes may be expensed rather than
<PAGE>
capitalized; and the yearly amortization of reasonable capital costs incurred by
Landlord for improvements or structural repairs to the Project required to
comply with any change in the laws, rules or regulations of any governmental
authority having jurisdiction, or for purposes of reducing Operating Costs,
which capital costs, together with simple interest at the annual rate of ten
percent, shall be amortized over the useful life of such improvements or
repairs, as reasonably estimated by Landlord. However, the following shall be
excluded from such Operating Costs and from any other amount payable by Tenant:
(a) Attorney's fees, costs and disbursements and other expenses
incurred in connection with negotiations or disputes with other
tenants, other occupants, or prospective tenants or occupants of the
Project;
(b) Costs of correcting defects in the design or construction of the
Project (including latent defects in the Project) or in the equipment
thereon, except that for the purposes of this subparagraph conditions
(not occasioned by design or construction defects) resulting from
ordinary wear and tear and use shall not be deemed defects;
(c) Costs relating to hazardous substances, except to the extent
caused, installed, disposed of or released by Tenant;
(d) Costs relating to the breach of any warranty, representation or
covenant of Landlord under this Lease;
(e) Any management fee or administrative cost in excess of 5% of Gross
Rent (excluding management fees) for the period in question;
(f) Interest on debt or payments on any mortgage, and rental under any
ground or underlying leases;
(g) Depreciation and amortization, except as may be expressly provided
for in this Paragraph 4;
(h) Except as may be expressly provided for in this Paragraph 4, costs
which under generally accepted accounting principles, consistently
applied, are capitalized;
(i) Rentals and other related expenses, if any, incurred in leasing
air conditioning systems, elevators or other equipment ordinarily
considered capital in nature;
(j) Costs of Landlord's general corporate and/or partnership overhead
and general administrative expenses (including but not limited to
costs paid to third parties to collect rents, prepare tax returns and
accounting reports and obtain financing), which would not be
chargeable to operating costs of the Building in accordance with
generally accepted accounting principles, consistently applied;
(k) All items and services for which Tenant is expressly required
under this Lease Agreement to pay to third persons;
(l) Costs incurred in leasing, advertising for the Project or other
marketing or promotional activity designed for marketing space in the
Project;
(m) Any expenses incurred in the operation of any paid parking located
within or on the Project;
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(n) Any bad debt expense or bad debt reserve;
(o) All interest penalties incurred as a result of Landlord's failure
to pay any costs as the same shall come due;
(p) Costs of tenant improvements;
(q) Costs of services, repairs or maintenance paid for by proceeds of
insurance or by other tenants or third parties;
(r) Costs related to the Marina;
(s) Costs of utilities for any restaurant;
(t) Costs related to any new roof for Building that would normally be
capitalized;
(u) Special services to other tenants (i.e., costs of electricity
outside normal business hours sold to tenants of the Building by
Landlord or any other special service whether or not Landlord receives
reimbursement from such tenants as an additional charge); and
(v) Costs arising from the negligence or intentional misconduct of
Landlord or Landlord's agents.
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Furthermore, promptly following the commencement of each Lease Year,
Landlord shall render to Tenant an estimate of the Operating Costs for the
ensuing Lease Year, and Tenant shall pay to Landlord, with each installment of
base rent, an amount equal to 1/12th of said estimated Operating Costs. As soon
as practical following the end of each Lease Year, Landlord shall render to
Tenant a statement of actual Operating Cost for said Lease Year. In the event
that the actual Operating Cost for said Lease Year is greater or lesser than the
cost as estimated for said Lease Year, Landlord shall credit any excess payments
made against the base rent then next due, and Tenant shall, promptly following
receipt of said statement, pay Landlord any deficiency. Tenant shall pay a
ratable share of the amount due under this Section for the initial, partial
Lease Year and for any final, partial Lease Year, computed on a per diem basis.
Tenant and its agents shall have the right to reasonable access to the
Landlord's books and records to the extent reasonably necessary to review
Landlord's estimates of Operating Costs or statements of actual Operating Costs.
Absent objection from Tenant within 90 days of providing Tenant with an estimate
of Operating Costs or with a statement of actual Operating Costs, such estimate
or statement shall become final and shall not be challenged or modified.
5. ADDITIONAL TAXES
Tenant shall pay to Landlord, as additional rent, together with each
monthly installment of base rent, the amount of any gross receipts tax, sales
tax, tax on rents or any other imposition paid, or which will be payable, by
Landlord by reason of the receipt of base rent, additional rent, or any other
amount due hereunder.
6. DEFINITIONS
For the purpose of this Lease:
(a) "Lease Year" shall mean a calendar year, and the initial, partial
Lease Year shall be the period from the Commencement Date to the next
succeeding December 31. Any final, partial Lease Year shall be the
period commencing on the January 1 next preceding the expiration or
earlier termination of the term of this Lease, and ending on the date
of such expiration or earlier termination.
(b) "Tenant's Proportionate Share" shall be the sum of items (i)
through (iii) below:
(i) With respect to those utilities charged to the Building,
for which any proposed or future restaurant is metered
separately, a proportionate share of such utilities equal to a
fraction, the numerator of which shall be the usable square
footage of the Leased Premises from time to time and the
denominator of which shall be the usable square footage of the
Building less the usable square footage of the restaurant from
time to time,. However, the Tenant's share of such utilities
shall never be more than 14.4% of the cost of such utilities.
If it is determined by Landlord that any other tenants are to
be metered separately for utilities, Landlord and Tenant agree
to adjust the maximum percentage rate to reflect the utilities
being billed separately.
<PAGE>
(ii) With respect to property taxes and assessments, such
taxes and assessments shall first be reduced by the proportion
allocable to the marina. For purposes of this calculation, the
marina shall be valued at $1,000,000 during the years of 1997,
1998 and 1999. In each year thereafter while this lease is in
force, the $1,000,000 allocated value shall be increased by
the same percentage as the overall property taxes increase..
(iii) With respect to Operating Costs other than those listed
in items (i) and (ii) above, a proportionate share of such
Operating Costs equal to a fraction, the numerator of which
shall be the usable square footage of the leased Premises from
time to time and the denominator of which shall be the usable
square footage of the Building. However, this fraction shall
never be more than 12.1%.
(c) "Landlord's Work" shall mean the work in the Leased Premises set
forth on the attached Exhibit B to be performed by Landlord.
(d) "Tenant's Work" shall mean all work performed in finishing and
fixturing the Leased Premises, other than Landlord's Work.
<PAGE>
7. OBLIGATIONS OF LANDLORD
Landlord agrees that it shall do the following at no additional charge
(except to the extent costs otherwise would be considered part of Operating
Costs):
(a) Furnish heating and air-conditioning to provide a temperature
condition required in Landlord's judgment for comfortable occupancy of
the Leased Premises under normal business operations during the
following hours: Monday through Friday, 7:30 a.m. to 6:30 p.m.; and
Saturday, 9:00 a.m. to 1:00 p.m. Landlord also shall supply a means
for Tenant to manually turn on the heat or air-conditioning in the
Leased Premises during times other than normal business hours, with
the cost of such manual switch and timer and of such supplemental heat
or air-conditioning to be paid for by Tenant. In furnishing such
heating and air-conditioning, Landlord shall have the right to comply
at all times with any Federal, State or local law, ordinance, rule,
regulation, or guideline for or dealing with the conservation of
energy. Wherever Tenant's heat generating equipment are used in the
Leased Premises which affect the temperature otherwise maintained by
the air conditioning system, Landlord reserves the right to install
supplemental air conditioning equipment for the Leased Premises, and
the cost, operation and maintenance thereof shall be paid by Tenant.
(b) Provide passenger elevator service in common with others.
(c) Provide janitor service in and about the Leased Premises,
Saturdays, Sundays and holidays excepted.
(d) Provide water for drinking, lavatory and toilet purposes.
(e) Provide electricity to the Leased Premises for normal lighting and
office use, including normal computerization and cooling for computers
as typically used in a brokerage firm, exclusive of any extra
electricity for a dedicated computer room with a raised floor.
Landlord reserves the right to assess a service charge for any heavier
than normal loads that Tenant may connect to the system.
(f) Maintain the structural portions of the Building, common areas,
exteriors, parking lot and landscaping in good condition and repair,
excluding repairs to any special treatment of walls, floors or
ceilings made by or at the request of Tenant and excluding repairs to
any fixtures or other improvements installed by Tenant.
(g) Provide replacements of Building standard fluorescent tubes, light
bulbs and ballasts as required as a result of normal usage.
<PAGE>
(h) Provide a general directory board on which Tenant is entitled to
have its name and the names of up to twenty employees shown, provided
that Landlord shall have exclusive control thereof and of the space
thereon to be allocated to each tenant.
(i) Provide a suite number sign for Tenant. The design and composition
of the Tenant suite sign shall be at the sole discretion of the
Landlord.
(j) Use reasonable efforts to reduce Operating Costs to the minimum
which is reasonably possible, commensurate with the standards of
operation and maintenance provided for in this Lease and of a
first-class office building in the Minneapolis, Minnesota metropolitan
area.
(k) Landlord agrees to notify Tenant of available space in the
building before it is put on the market.
Landlord does not warrant that any of the services referred to in this
section will be free from temporary interruption for reasons beyond Landlord's
control. Such temporary interruption of service shall never be deemed an
eviction or disturbance of Tenant's use and possession of the Leased Premises or
any part thereof or render Landlord liable to Tenant for damages, or relieve
Tenant from performance of Tenant's obligations under this lease.
8. TENANT OBLIGATIONS
Tenant agrees that it shall:
(a) Use the Leased Premises for the purpose of general office
purposes, and for no other purpose whatsoever, without written
permission of Landlord. No part of the Leased Premises or the Project
shall be used by Tenant, or its agents, guests or employees, in a
manner which interferes with the safety, comfort or convenience of
Landlord or other tenants in the Building, or which violates
applicable laws or ordinances.
<PAGE>
(b) Not overload, damage or deface the Leased Premises or the Project,
or do any act which shall be in violation of any law or ordinance or
which may make void or voidable any insurance on the Leased Premises
or the Building or which may result in increased or extra premium
payable for insurance.
(c) Observe such reasonable rules and regulation as from time to time
may be put in effect by Landlord for the general safety and comfort of
Landlord, occupants and tenants of the Building.
(d) Give Landlord access to the Leased Premises at all reasonable
times, without charge or diminution of rent, to enable Landlord to
examine the same, to show the Leased Premises to prospective tenants
or purchasers, and to make such repairs, additions and alterations as
Landlord reasonably may deem advisable.
(e) Conserve heat, air-conditioning, water and electricity, and shall
use due care in the use of the Leased Premises and of the public areas
in the Building, and without qualifying the foregoing, shall not
neglect or misuse water fixtures, heating and air-conditioning
apparatus.
(f) Keep the Leased Premises in good order and condition, and make all
repairs and maintenance to Tenant's Work reasonably deemed necessary
by Landlord, but shall not be responsible for maintenance of the
foundation, exterior walls or the roof of the Building. Tenant shall,
however, promptly pay the Landlord, upon request, an amount equal to
any cost incurred by Landlord in repairing any part (structural or
otherwise) of the Leased Premises and the Building where such repairs
were made necessary by the negligence of or misuse by the Tenant, its
agents, customer, employees or invites, except to the extent the
damage or loss resulting from such negligence is covered under any
policy of insurance and the full amount of such loss is paid to or on
behalf of Landlord pursuant to such insurance coverage. Tenant shall
not place rubbish, dirt or mats in the public areas of the Building.
If Tenant fails or refuses to commence or complete maintenance or
repairs for which it is responsible, Landlord may, but is not required
to, perform such repairs or maintenance and Tenant shall pay as
additional rent all out of pocket costs thereof, plus 15% of the total
costs to reimburse Landlord for its overhead costs.
(g) Not place or cause to be place, signs on the Leased Premises
without prior written approval of the Landlord.
<PAGE>
(h) Not assign this lease or sublet all or any part of the Leased
Premises without the prior written consent of Landlord, which consent
shall not be unreasonably withheld or delayed, provided (i) Landlord
shall not be required to consent to an assignment or to a sublease to
any prospective tenant whose occupancy would be inconsistent with the
character of the Building or if Landlord would as a result of such
assignment or sublease incur any cost or expense in making any change
or addition to the Leased Premises or to the Building for any said
prospective tenant, or in removing any personal property in the Leased
Premises belonging to Tenant; (ii) such assignment or sublease shall
not relieve Tenant of any of its obligations under this lease; and
(iii) any profit or payment received by Tenant from such assignment or
sublease, after deducting all tenant=s reasonable and necessary
expenses of subleasing including without limitation commissions,
attorneys fees and moving expenses, shall promptly upon receipt
thereof, be paid by Tenant to Landlord. Landlord's consent to any one
assignment or sublease shall apply only to the specific transaction,
and Landlord's prior written consent shall be required for any
subsequent assignment or sublease.
(i) Not make any alterations to the Leased Premises without the
written approval of the Landlord. All of Tenant's alterations shall be
made in accordance with applicable laws. All Tenant's Work,
alterations or improvements to the Leased Premises paid for by Tenant
except movable furnishings, shall, upon termination of the lease,
become the property of the Landlord, and shall at the option of
Landlord, either remain upon and be surrendered with the Leased
Premises, at the termination of this Lease, or be removed, at Tenant's
expense, in which case, Tenant shall also repair all damage done to
the Leased Premises resulting from such Tenant's Work, alterations or
improvements and their removal.
(j) Keep the Leased Premises and the property in which the Leased
Premises are situated free from any liens arising out of any work
performed, materials furnished or obligations incurred by Tenant.
(k) Upon the expiration or termination of this lease, Tenant shall
remove, at its expense all, Tenant's goods and effects and other items
of personal property and equipment, repairing any damage caused, and
<PAGE>
quit and deliver up the Leased Premises to Landlord, peaceably and
quietly, in as good order, condition and repair as the same were in on
the Commencement Date or were thereafter placed in by Landlord,
reasonable wear and tear and damage by fire and the acts of God
excepted. Goods and effects not removed by Tenant at the termination
of this lease, however terminated, shall be considered abandoned and
Landlord may dispose of the same as it deems expedient.
(l) Tenant shall not store, keep, dispose of, transport or generate on
the Leased Premises any hazardous substances or wastes or dangerous
materials.
9. PARKING
Landlord reserves the right to establish reasonable rules, regulations for
use of the parking lot serving the Building, as shown in Exhibit D, designate
those areas of the parking lot which shall be used by Tenant's employees, and to
designate parking spaces reserved for the exclusive use by the parties
purchasing electrical "plug-in" service, if any, provided to said spaces by
Landlord. Tenant hereby further acknowledges the existence of City beach/marina
parking spaces which are intended exclusively for the use of the users of the
beach and marina during summer months, as shown on Exhibit D.
10. ALTERATIONS BY LANDLORD
Landlord may from time to time, make repairs, replacements, changes or
additions to the structure, systems, facilities and equipment in the Leased
Premises where necessary to serve the Leased Premises or other parts of the
Building. Landlord may also make changes in or additions to any part of the
Building or Land, and change, decrease or modify the common areas of the
Building and Land.
11. CONSTRUCTION
Prior to the commencement of the term hereof, Landlord shall complete
Landlord's Work in accordance with the base building construction documents, as
has been submitted to the City of Wayzata for the Building Permit.
Tenant will be responsible for preparing Tenant space plans to complete
Tenant's Work, and such plans shall be subject to Landlord's prior approval.
Landlord shall be responsible for preparing mechanical and electrical design
based on Tenant's plan, subject to Tenant's approval. Tenant's work shall be
done by qualified contractors in a workman like manner.
Tenant shall be allowed to install at Tenant's expense one satellite dish,
on the roof of the west wing no larger than three feet in diameter, subject to
City approval, for no additional rental charge. Installation of the satellite
dish shall be subject to Landlord's approval of the location and Tenant's
verification that there will be no structural or roofing problems created by its
installation. Tenant shall also indemnify Landlord against any damage to the
roof or structure from the installation and presence of the satellite dish, and
Tenant agrees to repair any such damage at Tenant's expense.
12. EMINENT DOMAIN
If the entire Building is taken by eminent domain, this lease shall
automatically terminate, and any rents and all additional payments due shall be
apportioned, as of the date when Tenant shall, by reason of such taking, lose
the right to the possession of the Leased Premises. If a portion of the Building
or Land is taken by eminent domain that results in a significant impact upon
Tenant's use of the Leased Premises, Landlord or Tenant shall have the right to
terminate this lease by giving written notice thereof to the other within ninety
(90) days after the taking. If Landlord or Tenant elects to terminate this lease
by reason of a portion of the Building or Land being condemned, this lease shall
cease and terminate, and any rents and all additional payments due hereunder
shall be apportioned, as of the date when Tenant=s use of the Leased Premises
shall terminate. If neither Landlord nor Tenant elects to terminate this lease,
then Landlord shall restore the Building to as near the condition which existed
prior to the day of taking as is reasonably possible and restore the Leased
Premises, exclusive of any Tenant's Work, to said condition. Rent (but not
additional rent) shall abate during such period of time as the Leased Premises
are untenantable, in the proportion that the untenantable portion of the Leased
<PAGE>
Premises bears to the entire Leased Premises. In the event the Leased Premises
are restored as aforesaid, the cost of restoring Landlord's Work shall be borne
by Landlord and the cost of restoring Tenant's Work shall be borne by Tenant.
Provided, however, Landlord shall in no event be required to spend more for
restoration hereunder than the condemnation proceeds received by Landlord or to
undertake restoration if said proceeds are unavailable to Landlord because of
the operation of any provision in a mortgage covering the Building, or the
action of any mortgagee thereunder. Taking by eminent domain shall include any
sale under threat or imminence thereof. All compensation awarded or paid upon
any condemnation of the Leased Premises shall belong solely to Landlord, without
participation by Tenant. Tenant may apply for reimbursement or seek damages from
the taking authority in the condemnation proceedings of relocation costs, loss
of business, and damage to Tenant's personal property, provided that no
reimbursement to Tenant shall diminish or adversely affect the Landlord's
condemnation award.
13. FIRE
If the Building is damaged or destroyed by fire or other casualty and the
Landlord elects not to restore the Building, the Landlord or Tenant shall have
the right to terminate this lease, provided it gives written notice thereof to
the other within ninety (90) days after such damage or destruction. Upon the
giving of such notice, this lease shall cease and terminate, and any rents and
all additional payments due hereunder shall be apportioned, as of the thirtieth
(30th) day after such notice is given, and Tenant shall vacate the Leased
Premises and surrender the same to Landlord on or before said thirtieth (30th)
day. If a portion of the Leased Premises is damaged by fire or other casualty,
and Landlord or Tenant has not terminated this lease, Landlord shall, restore
the Building to as near the condition which existed immediately prior to such
damage or destruction as is reasonably possible and restore the Leased Premises
to said condition. Rent (but not additional rent) shall abate during such period
of time as the Leased Premises are untenantable, in the proportion that the
untenantable portion of the Leased Premises bears to the entire Leased Premises.
Provided, however, Landlord shall in no event be required to spend more for
restoration hereunder than the insurance proceeds received by Landlord.
14. WAIVER OF SUBROGATION
Notwithstanding anything in this lease to the contrary, if the Building
and/or Landlord's Work and/or personal property is damaged or destroyed by fire,
or an extended coverage risk, Tenant, its agents, employees, representatives and
invites are hereby released from any liability by reason thereof to the extent
of insurance proceeds realized by Landlord as a result of such damage or
destruction. Notwithstanding anything in this lease to the contrary, if any of
Tenant's Work and/or personal property is damaged or destroyed by fire or an
extended coverage risk, Landlord, its agents, employees, representatives and
invites are hereby released from any liability by reason thereof to the extent
of insurance proceeds realized by Tenant as a result of such damage or
destruction.
<PAGE>
15. WAIVER OF LIABILITY; INDEMNITY
Landlord shall not be liable to Tenant, or those claiming through or under
Tenant, for injury, death or property damage occurring in, on or about the land
or the Building and appurtenances thereto, including the parking lot, unless
caused by the negligence of Landlord, its agents or employees. Tenant shall
indemnify Landlord and hold it harmless from any claim or damage arising out of
any injury, death or property damage occurring in, on or about the Leased
Premises to Tenant or to any third party, unless caused by the negligence of
Landlord, its agents or employees. During the full term hereof, Tenant shall
keep continually in full force and effect a comprehensive general liability
policy covering occurrences in, on and about the Leased Premises, naming
Landlord as an additional insured, with such reasonable limits of loss as may
from time to time be required by Landlord, but in no event less than a combined
single limit for personal injury and property damage of $1,000,000 for each
occurrence. Tenant shall deliver to Landlord a certificate evidencing said
liability insurance and providing that the same may be canceled only with thirty
(30) days prior notice to Landlord.
16. SUBORDINATION AND ATTORNMENT
Landlord may cause this lease to be subordinated to any ground or
underlying lease or mortgage, whether heretofore or hereafter created. If title
to the Building is hereafter vested in holder of any ground or underlying lease
or mortgage, or in anyone claiming through or under such holder, or in the
holder of a Sheriff's Certificate of Sale, or in any purchaser or transferee of
the Building, Tenant shall, at the option of such holder or other party, attorn
to such holder or party on the then terms of this lease. Such attornment and/or
subordination shall be upon the express condition that this lease shall be
recognized by any such holder or other party, and that the rights of Tenant
shall remain in full force and effect during the term of this lease so long as
Tenant shall continue to observe and perform promptly all of Tenant's covenants,
agreements and obligations under this lease. For confirmation of its
subordination and/or attornment obligations, Tenant shall promptly execute and
deliver such agreement or agreements as may be required by such nolder or other
party. And, in the event Tenant fails or refuses so to execute and deliver any
such agreement or agreements, Tenant irrevocably appoints Landlord as Tenant's
agent and attorney to execute any such agreement or agreements on behalf of
Tenant.
<PAGE>
17. DEFAULT
If Tenant shall abandon the Leased Premises; or default in the timely
payment of any installment of base rent or additional rent; or fail or refuse to
observe or perform any of Tenant's other covenants, or obligations hereunder and
such failure or refusal is not cured within ten (10) days for default of the
payment of rent or other financial obligations or twenty (20) days for default
of non-financial obligations after written notice thereof to Tenant; or if any
proceeding has been commenced by or against Tenant for the purpose of subjecting
the assets of Tenant to any law relating to bankruptcy or insolvency or for the
appointment of a receiver of Tenant or any of its assets, or if Tenant makes a
general assignment of its assets for the benefit of creditors, then, in any such
event, Landlord may without process (I) reenter immediately into the Leased
Premises and remove all persons and property therefrom, without terminating the
lease or the obligations to be performed by Tenant during the balance of the
term hereof, or (ii) reenter immediately into the Leased Premises and at its
option terminate this lease as to all future rights of Tenant. No such reentry
alone shall terminate this lease, and this lease shall only be terminated by
written notice to Tenant (with termination effective from the date of such
notice). The commencement of any action for the repossession of the Leased
Premises shall serve as notice of intention to reenter the Leased Premises, and
Tenant hereby expressly waives the service of any other notice of intention to
reenter, and also all right of restoration to possession thereof. In the event
Landlord shall not terminate this lease it may, but shall not be obligated to,
on Tenant's behalf, re-let all or part of the Leased Premises, on whatever terms
and conditions it deems proper, and apply the rent received in reduction of
Tenant's obligation hereunder; and, in said event, Tenant shall be liable to
Landlord, in addition to its continuing obligation to pay heat and all other
charges under the lease, for all cost and expense incurred in removing any
personal property not removed by Tenant; for remodeling the Leased Premises for
re-letting; and for any broker's or agent's fee or commission for such
re-letting. In the event Landlord terminates this lease because of default by
Tenant, Landlord may recover from Tenant as damages the worth, at the time of
such termination of the excess of the amount of base and additional rent
reserved in the lease of the remainder of the lease term over the reasonable
rental value of the Leased Premises for the remainder of the lease term, as
determined by the Landlord together with all other damages (including, without
limitation, said costs and expenses incurred for removing personal property,
remodeling, attorneys fees, expenses incurred in enforcement of any terms of
this lease and for a said fee or commission), which Landlord may incur by reason
of said Tenant default, all of which amounts shall be immediately due and
payable by Tenant to Landlord. If Tenant prevails in any litigation or
proceeding regarding any alleged default in this Lease, Tenant may also recover
attorneys fees and expenses incurred in enforcement of any terms of this lease
or defending against claims that Tenant was in default. The foregoing rights
shall be cumulative and shall exist in addition to any and all rights and
remedies Landlord or Tenant may have as a matter of law.
<PAGE>
18. HOLDING OVER
Should Tenant continue to occupy the Leased Premises, or any part thereof,
after the expiration or termination of this lease, such tenancy shall be from
month to month. The monthly rent during such month to month tenancy shall be
150% of the amount of the monthly base, plus the additional rent as set forth in
this lease. In any such event, Tenant shall be liable to Landlord for damages
which Landlord may incur as a result of such holding over.
19. ACCEPTANCE OF PREMISES
Taking of possession of the Leased Premises by Tenant shall be conclusive
evidence the Leased Premises were on the date substantially complete as to
Landlord's Work and in good, clean and tenantable condition and as represented
by Landlord, except for punch lists presented within thirty (30) days after
possession and except for latent defects not discoverable upon reasonable
inspection.
20. WAIVER; AMENDMENT
No waiver of any term, condition, covenant, provision or remedy hereunder
or delay in the enforcement of any remedy hereunder shall be deemed to be a
waiver of any other term, condition, covenant, provision or remedy in said or
any other instance. This lease may not be amended except unless agreed to in
writing by both parties.
21. QUIET ENJOYMENT
Landlord represents and warrants that the Leased Premises are owned by the
Landlord; that the Landlord is empowered to enter into this lease, and that it
will warrant and defend against all lawful claims, the Tenant's peaceful
possession of the Leased Premises during the lease term, subject only to such
conditions as are provided in this lease, so long as Tenant keeps and performs
promptly each of the terms, covenants and conditions of this lease to be
performed or kept by it.
<PAGE>
Tenant and its guests shall have the right to reasonable use of the common
areas, such as the "Gathering Space," consistent with the reasonable rights of
the owner and other tenants to use the space and use policies and standard
rental fees established from time to time by Landlord.
22. NOTICES
All notices required or permitted hereunder shall be in writing and shall
be deemed given when personally delivered to Landlord (or Landlord's agent) or
to Tenant, or when mailed registered or certified mail, return receipt card
requested:
If to Landlord, to: Boatworks Development Company
425 Lake Street
Wayzata, MN 55491
or if to Tenant, to: Chief Financial Officer
John G. Kinnard & Company, Inc.
920 Second Avenue South
Minneapolis, Minnesota 55402
Either party may, by proper notice, change its address hereunder.
23. SEVERABILITY
If any term, condition, covenant or provision of this lease, or the
application thereof to any circumstance shall, to any extent, be held by a court
of competent jurisdiction or by any authorized governmental authority to be
invalid, void or unenforceable, the remainder of this lease shall not be
affected by such holding, and the remaining terms, conditions, covenants and
provisions hereof shall continue in full force and effect.
24. BINDING
All of the terms, conditions, covenants and provisions of this lease shall
be construed as covenants running with the land and shall inure to the benefit
of and be binding upon the parties hereto and upon their respective personal
representatives, heirs, successors and permitted assigns.
25. ESTOPPEL CERTIFICATES
Tenant agrees that at any time and from time to time at reasonable
intervals, within ten (10) days after written request by Landlord, Tenant shall
execute, acknowledge and deliver to Landlord, Landlord's mortgagee, or any
transferee designated by Landlord, a statement in writing certifying: (I) that
Tenant has entered into occupancy of the Leased Premises and the date of such
occupancy; (ii) that this lease is in full force and effect, and has not been
assigned or amended in any way (or if there has been any assignment or
amendment, identifying the same); (iii) that this lease represents the entire
agreement between the parties hereto (or if there has been any modification or
amendment, identifying the same); (iv) the Commencement Date and expiration of
the term of the lease; (v) that to the knowledge of Tenant all conditions under
this lease to be performed by Landlord have been satisfied and any required
contribution by Landlord to Tenant on account of Tenant's improvements have been
received (and if not, what conditions remain unperformed); (vi) that to the
knowledge of Tenant no default exists in the performance or observance of any
term, condition or covenant of this lease and there are no defenses or offsets
against the enforcement of this lease by Landlord, or specifying such default,
defense or offset of which the Tenant may have knowledge; (vii) the amount of
rent which has been paid in advance, if any; and (viii) the date to which all
rents have been paid under this lease. Tenant hereby irrevocably appoints
Landlord its attorney-in-fact to execute such a writing if Tenant shall fail to
do so within ten (10) days of receipt of Landlord's written request therefor
which also refers Tenant to the ten (10) day deadline; and upon delivery of a
copy of such writing to Tenant, the facts set forth therein shall be
conclusively deemed to be true.
26. TRANSFER OF OWNERSHIP
If Landlord sells or otherwise transfers all of its interest in the Leased
Premises, all rights, privileges, and obligations of this Lease shall transfer
to said transferee and Landlord shall, without further action by any party, be
released and discharged from any obligation or duty under the Lease arising from
<PAGE>
and actions or omissions occurring after the time of the transfer, and no such
claim or demand upon Landlord shall thereafter be made by Tenant arising out of
any such obligation or duty of Landlord hereunder. Upon request by Landlord,
Tenant shall execute an attornment agreement with Landlord's transferee in form
reasonably satisfactory to such transferee.
27. RIDERS AND/OR EXHIBITS
The provisions set forth in any Rider and/or Exhibit attached hereto are by
this reference incorporated herein. Exhibit C is attached for reference
outlining some of the general assumptions that were used in the negotiations to
formalize this lease.
IN WITNESS WHEREOF, Landlord and Tenant have executed this instrument the
day and year first above written.
LANDLORD:
BOATWORKS DEVELOPMENT COMPANY
By /s/ Rick Born
Title President
TENANT:
JOHN G. KINNARD AND COMPANY, INCORPORATED
By /s/ Lee Felicetta
Title Executive Vice President
EXHIBIT A: [PLAN SHOWING THE LEASED PREMISES]
EXHIBIT B "Landlord's Work"
All base building and landscape construction required to finish all common and
exterior areas and all structural work required to provide space as contemplated
in the lease, as shown on the plans that have been submitted to the City of
Wayzata for the building permit, plus the following to be provided in the Leased
Premises:
Ceiling. Ceiling Grid to be installed, ceiling tiles to be stockpiled but not
installed.
Light fixtures. One light fixture to be provided for each 100 square feet of
space. 10 of these fixtures to be installed with one switch, balance to be
stockpiled but not installed.
HVAC. Ten VAV boxes installed, distribution from VAV Box and thermostat not
provided.
Sprinklers. Fire sprinklers to be installed per code per approved preliminary
tenant finish plan.
Electrical. Outlets, switches and telephone to be part of tenant finish-out
costs.
ADA. Project to be built to meet ADA requirements.
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Shareholders
Kinnard Investments, Inc.:
We consent to the incorporation by reference in Registration Statements No.
33-39874, No. 33-49720, No. 33-49722, No. 33-67830 and No. 33-82102 of Kinnard
Investments, Inc. on Form S-8 of our report dated January 28, 1998 on the 1997
consolidated financial statements of Kinnard Investments, Inc., appearing in
this Annual Report on Form 10-K of Kinnard Investments, Inc. and its
subsidiaries for the year ended December 31, 1997.
/s/ KPMG Peat Marwick LLP
March 20, 1998
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Shareholders
Kinnard Investments, Inc.:
We consent to the incorporation by reference in Registration Statements No.
33-39874, No. 33-49720, No. 33-49722, No. 33-67830 and No. 33-82102 of Kinnard
Investments, Inc. on Form S-8 of our report dated January 30, 1997 on the
consolidated financial statements of Kinnard Investments, Inc., appearing in
this Annual Report on Form 10-K of Kinnard Investments, Inc. and its
subsidiaries for the year ended December 31, 1997.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
March 20, 1998
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE COMPANY'S FORM 10-K ANNUAL REPORT
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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0
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0
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