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, 1998 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. [ ]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant as of March 19, 1999, was $19,425,198 (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 19, 1999: 5,161,215
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive Proxy Statement to be filed for the
Registrant's 1999 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 the National Association
of Securities Dealers, Inc. 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>
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 (a)
Amount Percentage Amount Percentage Amount Percentage
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commissions
Mutual funds $4,667 11.4% $4,151 8.3% $14,090 14.1%
Over-the-counter securities 2,976 7.3 2,920 5.9 8,013 8.0
Listed securities 5,032 12.3 5,648 11.3 6,238 6.3
Insurance 1,368 3.3 1,498 3.0 6,119 6.1
Other 641 1.6 528 1.1 1,536 1.5
---------------------- ----------------------- -----------------------
14,684 35.9 14,745 29.6 35,996 36.0
---------------------- ----------------------- -----------------------
Principal transactions
Equity securities 10,934 26.7 18,837 37.8 30,514 30.5
Fixed income securities 5,519 13.5 7,092 14.2 5,393 5.4
---------------------- ----------------------- -----------------------
16,453 40.2 25,929 52.0 35,907 35.9
---------------------- ----------------------- -----------------------
Net gains (losses) on investment account
Realized 439 0.9 233 0.5 5,407 5.4
Unrealized (626) (1.5) 222 0.4 (434) (0.4)
---------------------- ----------------------- -----------------------
(187) (0.6) 455 0.9 4,973 5.0
---------------------- ----------------------- -----------------------
Investment banking 5,640 13.8 3,977 8.0 4,985 5.0
Interest income 1,422 3.5 2,276 4.6 2,732 2.7
Other income 2,932 7.2 2,464 4.9 4,330 4.3
Sale of subsidiary 0 0.0 0 0.0 11,054 11.1
---------------------- ----------------------- -----------------------
Total revenues $40,944 100.0% $49,846 100.0% $99,977 100.0%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) 1996 data includes results of PRIMEVEST Financial Services, Inc., a
subsidiary sold in October 1996 as well as the gain from the sale of that
subisidary. See Note 13 in the Notes to Consolidated Financial Statements for
additional information.
<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 transaction 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 200 equity securities.
Investment Banking
The Equity Investment Banking department manages, co-manages and participates in
the underwriting of corporate equity securities, in addition to providing
merger, acquisition, valuation and advisory services. The Company specializes in
providing financing to emerging growth companies with market capitalizations up
to $250 million. During 1998, John G. Kinnard completed three public offerings,
two private placements, and was lead advisor on four mergers and acquisitions.
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 1998, John G. Kinnard participated in 50 such offerings.
The Fixed Income investment banking department negotiates, underwrites and
participates in taxable and tax-exempt offerings for municipalities and
corporate clients. In 1998, over $190 million in capital was raised by
completing 68 financings. The Company also participated in 23 municipal
syndications.
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 may
receive 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
typically 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.
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.
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 over 100 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.
<PAGE>
Operations
John G. Kinnard has cleared its trades through Montgomery Clearing Services
("Montgomery") on a fully disclosed basis since June 1998. Under terms of their
agreement, Montgomery 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 Montgomery the performance of
every customer transaction introduced by John G. Kinnard. For eight years prior
to June 1998 JGK cleared through BT Alex. Brown pursuant to a similar agreement.
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 all 50
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.
Competition
The Company encounters intense competition in all aspects of its business and
competes directly with other securities firms, including firms that offer
internet on-line trading and a significant number of which have greater capital
and other resources than the Company. Many competitors offer a wider range of
financial services than the Company. 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 other financial institutions. 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, 1998, the Company had 297 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.
<PAGE>
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 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.
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.
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 risk,
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.
<PAGE>
Cautionary Statements (continued)
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 14 branch offices located in Minnesota, North Dakota South
Dakota and Colorado, in addition to maintaining relationships with various
independent representatives. See Note 10 of the Notes to Consolidated Financial
Statements included herein for information concerning leases of the Company's
branches and offices.
ITEM 3. LEGAL PROCEEDINGS
John G. Kinnard is a defendant in various actions relating to its business, some
of which involve claims for unspecified amounts. Although the ultimate
resolution of these matters cannot be predicted with certainty, in management's
opinion, while their outcome may have a material effect on the earnings in a
particular period, the outcome will not have a material adverse effect on the
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 55 Chairman and Chief Executive Officer of the
Company since May 1998 and 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 U.S. Bancorp (formerly
First Bank System) from March 1990 to April
1996.
Daniel R. Sass 41 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.
George F. Stroebel 47 Secretary of the Registrant since August
1998. Senior Vice President of John G.
Kinnard since February 1998. Private
investor from September 1997 to February
1998. Chief Executive Officer of Origen
Group, a division of Phillips Plastics
Corporation from June 1994 to August 1997.
Partner of Ernst & Young from October 1987
to June 1994.
<PAGE>
Executive Officers of the Registrant (continued)
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:
High Low
1998 First Quarter......... $7.00 $5.88
Second Quarter........ 7.00 6.00
Third Quarter......... 6.50 4.13
Fourth Quarter........ 4.75 2.63
1997 First Quarter......... $6.00 $4.50
Second Quarter........ 6.25 5.00
Third Quarter......... 7.75 5.63
Fourth Quarter........ 8.25 5.69
Number of Holders of Common Stock
As of March 19, 1999, there were 212 holders of record of the Registrant's
common stock and the Company estimates there are approximately 1,000 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. The Company is actively engaged in
a share repurchase program which is a more tax efficient method of returning
capital to shareholders.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(In thousands, except per share data)
- ---------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Financial Condition:
Cash and cash equivalents $2,689 $3,886 $14,031 $5,766 $2,750
Total assets 36,364 43,972 47,141 45,897 31,617
Total liabilities 6,858 8,400 11,112 20,592 10,542
Shareholders' equity 29,506 35,572 36,029 25,305 21,075
Operating Results:
Total revenues 40,944 49,846 99,977 75,333 55,667
Total operating expenses 46,573 49,310 80,311 69,647 61,174
Income (loss) before income taxes (5,629) 536 19,666 5,686 (5,507)
Net income (loss) (3,376) 308 11,698 3,376 (3,210)
Per Share Data:
Earnings (loss) - Basic (0.58) 0.05 1.93 0.54 (0.54)
Earnings (loss) - Diluted (0.58) 0.05 1.92 0.54 (0.54)
Dividends declared 0.00 0.00 0.00 0.00 0.10
Book value 5.38 5.97 5.98 4.04 3.58
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
The following table sets forth a summary of changes in the major categories of
revenues and expenses from the prior year's results:
<TABLE>
<CAPTION>
(In thousands)
- --------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
1998 versus 1997 1997 versus 1996
Increase (decrease) Increase (decrease)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Commissions ($61) 0% ($21,251) (59%)
Principal transactions (9,476) (37) (9,978) (28)
Net gains/losses on investment account (642) (141) (4,518) (91)
Investment banking 1,663 42 (1,008) (20)
Interest (854) (38) (456) (17)
Other 468 19 (1,866) (43)
Sale of subsidiary 0 0 (11,054) (100)
- --------------------------------------------------------------------------------------------------------------------------------
Total revenues (8,902) (18) (50,131) (50)
- --------------------------------------------------------------------------------------------------------------------------------
Expenses:
Compensation and benefits (2,512) (7) (10,165) (23)
Bank commissions 0 0 (14,534) (100)
Floor brokerage and clearance (758) (18) (734) (15)
Communications 123 16 (472) (37)
Occupancy and equipment 221 4 (740) (12)
Litigation settlements 0 0 (2,865) (100)
Other 189 4 (1,491) (22)
- --------------------------------------------------------------------------------------------------------------------------------
Total expenses (2,737) (6) (31,001) (39)
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (6,165) N.M. (19,130) (97)
Income tax expense (benefit) (2,481) N.M. (7,740) (97)
- --------------------------------------------------------------------------------------------------------------------------------
Net income (loss) ($3,684) N.M. ($11,390) (97%)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
General
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 large portion of the Company's
expenses are fixed, which can result in earnings that vary significantly from
period to period.
Fiscal years ended December 31, 1998 and 1997
For the twelve months ended December 31, 1998, the Company incurred a net loss
of $3.4 million, or 58 cents per diluted share, on revenues of $40.9 million.
This compares to net earnings of $308,000, or five cents per diluted share, on
revenues of $49.8 million for the same period in 1997. Lower revenues were the
result of fewer retail transactions, a difficult equity trading environment, and
a slowdown of public equity offerings in the latter half of the year.
Commissions decreased by $61,000, or 0% in calendar 1998. Record sales of mutual
funds and options were offset by declines in listed equity securities and
insurance products.
Revenues from principal transactions decreased by $9.5 million, or 37%. The
Company experienced a difficult equity trading environment due in part to
volatile markets - particularly small-cap issues in which the Company focuses
its market making activities - and new trading rules and regulatory changes. The
Company responded by decreasing the number of stocks in which it makes a market
to under 200 from approximately 350 at December 31, 1997.
<PAGE>
Fiscal years ended December 31, 1998 and 1997 (continued)
The net loss on securities held in the investment account was $187,000 in 1998,
which compares to a net gain of $455,000 in 1997. The investment account has
historically been a volatile source of income for the Company.
Investment banking revenue increased by $1.7 million or 42% from the prior year.
During 1998 the Company completed three public equity offerings and two private
financings, which compares to one public offering and nine private placements in
the prior year. Also during the current year, the mergers, acquisitions and
advisory group participated in 15 transactions. The fixed income originations
group had a record year, raising over $190 million in capital for its municipal
and corporate clients.
Interest income decreased by 38% primarily as a result of declines in fixed
income trading and investment securities, margin balances, and interest rates.
Other income increased by 19% due primarily to an increase in managed accounts
and cash management fees.
The expense for employee compensation and benefits decreased by $2.5 million or
7% 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. Compensation and benefits were also favorably
impacted by a decline in the number of full-time employees to 297 at December
31, 1998 from 338 at year-end 1997.
Floor brokerage and clearance expense declined by 18%, which was greater than
the decline in associated transactions. The Company benefited from lower
clearing fees as a result of converting its clearing business to NationsBank
Montgomery Securities in June 1998.
The increase in communications expense in 1998 reflects the cost of enhancing
and expanding the Company's internal communication and information systems.
Occupancy and equipment expense increased by 4% due in part to the
implementation of new technologies and services, some of which were associated
with the clearing conversion. Other expenses increased by 4% from the prior year
as a result of consulting fees associated with system conversions.
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.
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.
<PAGE>
Fiscal years ended December 31, 1997 and 1996 (continued)
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.
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>
1998
Revenues $12,902 $9,910 $7,270 $10,862
Net income (loss) 263 (1,343) (2,068) (228)
Basic earnings (loss) per share 0.04 (0.22) (0.36) (0.04)
Diluted earnings (loss) per share 0.04 (0.22) (0.36) (0.04)
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)
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 $129,000 at December 31,
1998, are stated at fair value, which is determined by management's best
estimate.
Inventories are generally maintained to facilitate customer transactions rather
than for market speculation. For 1998, investment securities decreased $5.8
million. Based on the Company's current liquidity position, available bank line,
and operating plans, it is anticipated that the Company has sufficient resources
to meet the cash requirements of its operations in the foreseeable future.
<PAGE>
Operating Activities (continued)
As a securities broker-dealer, John G. Kinnard is required by SEC regulations to
meet certain liquidity and capital standards. It has been in compliance with
these regulations at all times.
Financing Activities
John G. Kinnard maintains a discretionary credit facility providing for
conditional short-term borrowings of up to $10 million. The facility limits the
borrowing to 90 days and is secured by the firm's marketable securities.
Advances under the facility are at the bank's sole discretion, accrue interest
at a fluctuating interest rate to be agreed upon by the Company and the bank,
and are subject to certain affirmative and negative covenants. There are no fees
or compensating balances related to the line of credit. There were no
outstanding borrowings at December 31, 1998 and 1997 nor during the years then
ended.
In 1998 and 1997 the Company received proceeds of $459,000 and $231,000,
respectively, from the issuance of common stock to participants in the Employee
Stock Purchase Plan and the exercise of options.
During the years 1998, 1997 and 1996 the Company repurchased 566,000, 465,000
and 329,000 shares of its common stock at a total cost of $3.1 million, $2.7
million and $1.3 million, respectively. In October 1998, the board of directors
authorized the repurchase of 1,000,000 shares in the open market or through
privately negotiated transactions, at the discretion of the firm's management.
This repurchase program commenced with completion of the existing 1,600,000
share plan.
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.
Year 2000 Issue
Year 2000 readiness presents corporate-wide challenges for all companies. The
Company recognizes the importance of the Year 2000 issue and its impact on
information technology and non-information technology systems. As a result, the
Company is actively managing efforts to plan, allocate resources, and monitor
progress to achieve Year 2000 readiness.
The executive sponsor for the Company's Year 2000 project is JGK's Chief
Executive Officer and Chairman of the Board. The managing executive is JGK's
Senior Vice President of Corporate Development. Reporting to the managing
executive is the Year 2000 Committee, which is led by the Director of the
MIS/Communications department and includes managers from most major functional
areas of the Company. This group is responsible for managing critical success
factors, implementation of action plans, and reporting on progress to executive
management.
The Company believes that it has adequate staffing and human resources to
complete its Year 2000 Plan.
Although retention has not been an issue, the Company does rely on certain key
individuals who may be difficult to replace in timely fashion if they were to
leave.
The Company has defined mission critical systems as those systems whose loss
would cause an immediate stoppage or significant impairment to core business
areas. Systems identified as mission critical include back office data, quote
delivery, trading, communication and accounting systems. In addition, the
Company clears its trades through a third-party clearing firm upon whose systems
it is reliant.
The majority of internal systems with a Year 2000 problem were addressed in
calendar year 1998. The Company's capital budget does not specifically identify
expenditures related to the Year 2000, although many items in the capital budget
relate to upgrading or replacing applications that are not Year 2000 compliant.
During 1998, the Company spent $1.5 million for capital equipment (which
includes software purchases), versus $1.1 million in 1997. The costs related to
replacing or upgrading non-compliant systems in future years has not been
determined, although the Company does not expect such costs to have a material
effect on the Company's consolidated financial statements, and expects to be
able to fund such costs from working capital.
<PAGE>
Year 2000 Issue (continued)
In conjunction with the Securities Industry Association ("SIA"), the Company
expects to participate in industry-wide testing of system interdependencies in
1999. Because the Company operates as a fully-disclosed broker-dealer, a large
portion of its information systems are provided by third parties. If these
outside information providers, which includes securities exchanges, clearing
agencies and other financial institutions, should experience a significant
disruption as a result of the Year 2000 problem, such disruption could affect
the Company's ability to conduct business and may have a material adverse effect
on the Company's results of operations.
The Company has developed a written contingency plan to provide for continuity
under various scenarios. The contingency plan will be updated and modified
during 1999 as the Company makes additional progress in addressing the Year 2000
issue.
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.
Segments
The Company's reportable segments are: retail sales, equity capital markets,
fixed income and other. The retail segment consists of various retail branch
locations and the financial services division. Equity capital markets consists
of equity trading, institutional sales, research and investment banking. Fixed
income includes the origination, trading, and institutional sale of fixed income
securities. Other consists of general corporate, administrative support
functions and net gains or losses on the investment account. Included in 1996
data are PRIMEVEST retail revenues and pretax income of $27.4 million and $2.1
million, respectively, and the gain on sale of PRIMEVEST in other revenue and
pretax income of $11.1 million. See Note 13 in the Notes to Consolidated
Financial Statements for additional information.
Information concerning operations in these segments of business is as follows:
(In thousands)
------------------------------------------------------------------------
Years ended December 31, 1998 1997 1996
------------------------------------------------------------------------
Revenue:
Retail sales $24,737 $30,422 $58,990
Equity capital markets 8,660 10,192 18,314
Fixed income 5,943 6,224 4,598
Other 1,604 3,008 18,075
------------------------------------------------------------------------
$40,944 $49,846 $99,977
------------------------------------------------------------------------
Pretax income (loss):
Retail sales $2,501 $4,342 $6,770
Equity capital markets (3,126) (509) 5,241
Fixed income 1,132 1,166 578
Other (6,136) (4,463) 7,077
------------------------------------------------------------------------
($5,629) $536 $19,666
------------------------------------------------------------------------
ITEM 7A. MARKET RISK
The primary market risk exposure of the Company is the impact that market and
interest rate volatility may have on the value of financial securities and
underwriting commitments. The Company manages this risk exposure through a
process of internal controls, due diligence and management review. Position
limits for trading and inventory controls are established and monitored on an
ongoing basis. The trading inventory is turned over frequently throughout the
year. Securities held in the investment portfolio are guided by an investment
policy and are reviewed on a regular basis. Current and proposed underwriting
and other banking commitments are subject to due diligence reviews by the
appropriate business unit as well as by senior management. See Note 14 in the
Notes to Consolidated Financial Statements for additional information.
<PAGE>
ITEM 7A. MARKET RISK (continued)
The Company has evaluated its financial securities and underwriting commitments
at December 31, 1998 and assessed the related market risk. This inventory is
turned over frequently throughout the year. Based on this evaluation, in the
opinion of management, the market risk associated with the Company's financial
securities may have a material effect on the earnings in a particular period,
but will not have a material adverse effect on the financial condition of the
Company. See Note 3 in the Notes to Consolidated Financial Statements for
additional information.
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 1999 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 1999 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 1999 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 1999 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 next 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 statements of financial condition
of Kinnard Investments, Inc. and subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of operations, shareholders' equity and
cash flows for the years 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. The
accompanying consolidated statements of operations, shareholders' equity and
cash flows of Kinnard Investments, Inc. and subsidiaries for the year ended
December 31, 1996 were audited by other auditors whose report thereon dated
January 30, 1997, expressed an unqualified opinion on those consolidated
financial statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the 1998 and 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, 1998 and 1997, and
the results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
January 27, 1999
<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 operations,
shareholders' equity, and cash flows of Kinnard Investments, Inc. and
Subsidiaries (the "Company") for the year ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
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 financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the Company's results of its operations and
its cash flows for the year ended December 31, 1996 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
<TABLE>
<CAPTION>
(In thousands)
- ---------------------------------------------------------------------------------- ------- -------
At December 31, 1998 1997
- ---------------------------------------------------------------------------------- ------- -------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,689 $ 3,886
Funds held in escrow 0 1,593
Receivable from clearing firm 1,009 0
Miscellaneous receivables 3,527 3,311
Trading securities, at market 8,221 10,730
Office equipment at cost, less accumulated depreciation
of $2,540 and $2,876, respectively 1,888 1,267
Investment securities, at fair value 16,918 22,705
Income tax receivable 1,456 0
Deferred income taxes 242 0
Other assets 414 480
- ---------------------------------------------------------------------------------- ------- -------
Total assets $36,364 $43,972
- ---------------------------------------------------------------------------------- ------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Due to clearing firm $ 0 $ 1,069
Securities sold but not yet purchased, at market 257 915
Accrued compensation 3,770 3,594
Other accounts payable and accrued expenses 2,831 2,584
Income taxes payable 0 18
Deferred income taxes 0 220
- ---------------------------------------------------------------------------------- ------- -------
Total liabilities 6,858 8,400
- ---------------------------------------------------------------------------------- ------- -------
Shareholders' equity
Preferred stock, authorized 1,000 shares; none issued or outstanding 0 0
Undesignated stock, authorized 16,500 shares; none issued or outstanding 0 0
Common stock, $.02 par value; authorized 7,500 shares; issued
and outstanding 5,483 and 5,955 shares, respectively 110 119
Additional paid-in capital 9,265 11,946
Retained earnings 20,131 23,507
- ---------------------------------------------------------------------------------- ------- -------
Total shareholders' equity 29,506 35,572
- ---------------------------------------------------------------------------------- ------- -------
- ---------------------------------------------------------------------------------- ------- -------
Total liabilities and shareholders' equity $36,364 $43,972
- ---------------------------------------------------------------------------------- ------- -------
</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, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Commissions $14,684 $14,745 $35,996
Principal transactions 16,453 25,929 35,907
Net gains/losses on investment account (187) 455 4,973
Investment banking 5,640 3,977 4,985
Interest 1,422 2,276 2,732
Other 2,932 2,464 4,330
Sale of subsidiary 0 0 11,054
- -------------------------------------------------------------------------------------------------------------
Total revenues 40,944 49,846 99,977
- -------------------------------------------------------------------------------------------------------------
Expenses:
Compensation and benefits 31,360 33,872 44,037
Bank commissions 0 0 14,534
Floor brokerage and clearance 3,413 4,171 4,905
Communications 910 787 1,259
Occupancy and equipment 5,554 5,333 6,073
Litigation settlements 0 0 2,865
Other 5,336 5,147 6,638
- -------------------------------------------------------------------------------------------------------------
Total expenses 46,573 49,310 80,311
- -------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (5,629) 536 19,666
Income tax expense (benefit) (2,253) 228 7,968
- -------------------------------------------------------------------------------------------------------------
Net income (loss) ($3,376) $308 $11,698
- -------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share:
Basic ($0.58) $0.05 $1.93
Diluted ($0.58) $0.05 $1.92
- -------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands)
- -------------------------------------------------- ------------------------- ---------------- --------------- ----------------
Additional Total
Common Stock Paid-in Retained Shareholders'
Shares Amount Capital Earnings Equity
- -------------------------------------------------- ------------ ------------ ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 6,257 $125 $13,680 $11,501 $25,306
- -------------------------------------------------- ------------ ------------ ---------------- --------------- ----------------
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 11,698 11,698
- -------------------------------------------------- ------------ ------------ ---------------- --------------- ----------------
Balance, December 31, 1996 6,027 120 12,710 23,199 36,029
- -------------------------------------------------- ------------ ------------ ---------------- --------------- ----------------
Issuance of shares under employee
stock option plan 68 1 230 231
Issuance of new shares 325 7 1,700 1,707
Repurchase of stock (465) (9) (2,694) (2,703)
Net income 308 308
- -------------------------------------------------- ------------ ------------ ---------------- --------------- ----------------
Balance, December 31, 1997 5,955 119 11,946 23,507 35,572
- -------------------------------------------------- ------------ ------------ ---------------- --------------- ----------------
Issuance of shares under employee
stock purchase plan 13 0 78 78
Issuance of shares under employee
stock option plan 81 2 379 381
Repurchase of stock (566) (11) (3,138) (3,149)
Net loss (3,376) (3,376)
- -------------------------------------------------- ------------ ------------ ---------------- --------------- ----------------
Balance, December 31, 1998 5,483 $110 $9,265 $20,131 $29,506
- -------------------------------------------------- ------------ ------------ ---------------- --------------- ----------------
</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,
1998 1997 1996
- -------------------------------------------------------------------- ------------------- ------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Cash received from customers and clearing firm $40,553 $45,103 $80,657
Cash paid to suppliers and employees (46,550) (49,473) (77,992)
Interest:
Received 1,422 2,276 2,732
Paid 0 0 (214)
Income taxes (paid) refunded 317 (3,349) (5,638)
- -------------------------------------------------------------------- ------------------- ------------------ ------------------
Net cash used in operating activities (4,258) (5,443) (455)
- -------------------------------------------------------------------- ------------------- ------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of:
Office equipment 63 5 426
Investment securities 16,285 16,511 14,157
Purchases of:
Office equipment (1,505) (1,074) (1,063)
Investment securities (10,685) (17,866) (18,295)
Proceeds from sale of subsidiary, net of subsidiary's cash 0 0 13,574
Funds released from escrow 1,593 0 0
- -------------------------------------------------------------------- ------------------- ------------------ ------------------
Net cash provided by (used in) investing activities 5,751 (2,424) 8,799
- -------------------------------------------------------------------- ------------------- ------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 459 1,938 364
Repurchase of common stock (3,149) (2,703) (1,339)
Net payments on notes payable 0 0 (617)
- -------------------------------------------------------------------- ------------------- ------------------ ------------------
Net cash used in financing activities (2,690) (765) (1,592)
- -------------------------------------------------------------------- ------------------- ------------------ ------------------
Increase (decrease) in cash and cash equivalents (1,197) (8,632) 6,752
Cash and cash equivalents at beginning of year 3,886 12,518 5,766
- -------------------------------------------------------------------- ------------------- ------------------ ------------------
Cash and cash equivalents at end of year $2,689 $3,886 $12,518
- -------------------------------------------------------------------- ------------------- ------------------ ------------------
</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,
1998 1997 1996
- -------------------------------------------------------------------- ------------------- ------------------ ------------------
RECONCILIATION OF NET INCOME (LOSS) TO
NET CASH USED IN OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) ($3,376) $308 $11,698
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 821 766 778
Net unrealized loss (gain) on investment securities 626 (222) 434
Net realized gain on sale of investment securities (439) (233) (5,407)
Realized loss (gain) on sale of office equipment 0 21 (27)
Gain on sale of subsidiary 0 0 (11,054)
Deferred income taxes (462) 89 (422)
(Increase) decrease in:
Receivable from clearing firm (1,009) 968 1,234
Receivable from customers 0 0 (4,226)
Miscellaneous receivables (216) (1,211) (1,177)
Trading securities, at market 2,509 (3,072) 2,375
Income tax receivable (1,456) 0 0
Other assets 66 (56) (256)
Increase (decrease) in:
Due to clearing firm (1,069) 1,069 (236)
Payable to customers 0 0 817
Securities sold but not yet purchased, at market (658) 73 (733)
Accrued compensation 176 (306) 1,943
Other accounts payable and accrued expenses 247 (427) 1,053
Income taxes payable (18) (3,210) 2,751
- -------------------------------------------------------------------- ------------------- ------------------ ------------------
Net cash used in operating activities ($4,258) ($5,443) ($455)
- -------------------------------------------------------------------- ------------------- ------------------ ------------------
</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.
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. The
Company does not present a statement of comprehensive income as there
are no items.
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.
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.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 1. Nature of business and significant accounting policies (continued)
Office equipment
The cost of office equipment is depreciated using accelerated methods
over the estimated useful lives of two to seven years.
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.
Management estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of certain assets and
liabilities and disclosure of contingent liabilities at the balance
sheet date, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Employee stock compensation
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 has adopted the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation". See Note 9 to the Consolidated Financial Statements for
additional information.
Earnings per share
Basic earnings per share are based upon the weighted average number of
common shares outstanding during the reporting period. Diluted earnings
per share take into account the dilutive effect, if any, of stock
options and other potential dilutive common shares outstanding during
the period.
The following reconciliation illustrates the computation of basic and
diluted earnings per share:
<TABLE>
<CAPTION>
(In thousands, except per share data)
------------------------------------------------------------ -----------------------------------------
Years Ended December 31,
1998 1997 1996
------------------------------------------------------------ ------------- ------------- -------------
<S> <C> <C> <C>
Net income (loss) ($3,376) $308 $11,698
------------------------------------------------------------ ------------- ------------- -------------
Weighted average number of common shares
outstanding 5,825 6,149 6,046
Dilutive effect of stock options and warrants 0 82 62
------------------------------------------------------------ ------------- ------------- -------------
Weighted average number of common and potential
dilutive common shares outstanding: 5,825 6,231 6,108
------------------------------------------------------------ ------------- ------------- -------------
Basic earnings (loss) per share ($0.58) $0.05 $1.93
Diluted earnings (loss) per share ($0.58) 0.05 1.92
------------------------------------------------------------ ------------- ------------- -------------
</TABLE>
Non-dilutive options as of December 31, 1998, 1997 and 1996 totaled
731,000, 447,000 and 54,000, respectively.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 1. Nature of business and significant accounting policies (continued)
Segment reporting
In 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise
and Related Information". This standard superseded SFAS No. 14,
Financial Reporting for Segments of a Business Enterprise. SFAS No. 131
replaces the `industry segment approach' with the `management
approach'. This approach establishes disclosures based on how a Company
is managed rather than on the industry, geographic and major customer
approach of SFAS No. 14. The adoption of SFAS No. 131 did not affect
the Company's financial position, statements of operations nor cash
flows, but did initiate the disclosures of segment information. The
Company does not provide balance sheet data for segment reporting as
this data is not measured.
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.
Note 3. Securities
Trading securities are summarized as follows:
(In thousands)
--------------------------------------------------------------------
December 31, 1998 1997
--------------------------------------------------------------------
Trading securities:
Corporate stocks $2,298 $2,752
U.S. government and municipal bonds 3,702 3,982
Corporate debt securities 2,221 3,996
--------------------------------------------------------------------
$8,221 $10,730
--------------------------------------------------------------------
Securities sold but not yet purchased:
Corporate stocks $252 $870
Corporate debt securities 5 45
--------------------------------------------------------------------
$257 $915
--------------------------------------------------------------------
Revenues from principal transactions are generated by market making
activities in both equity and fixed income products. Revenues from
equity principal transactions were $10.9 million and $18.8 million for
the years ended December 31, 1998 and 1997. Revenues from fixed income
principal transactions were $5.5 million and $7.1 million for the years
ended December 31, 1998 and 1997.
Investment securities are summarized as follows:
(In thousands)
---------------------------------------------------------------------
December 31, 1998 1997
---------------------------------------------------------------------
Investment securities:
Corporate stocks $4,590 $7,398
U.S. government bonds 5,557 15,307
Outside money managers 6,771 0
---------------------------------------------------------------------
$16,918 $22,705
---------------------------------------------------------------------
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 4. Notes payable
JGK maintains a discretionary credit facility providing for conditional
short-term borrowing of up to $10 million. The facility limits
borrowing to 90 days and is secured by firm marketable securities.
Advances under the facility are at the bank's sole discretion, accrue
interest at a fluctuating interest rate to be agreed upon by JGK and
the bank, and are subject to certain affirmative and negative
covenants. There are no fees or compensating balances related to this
line of credit. There were no outstanding borrowings at December 31,
1998 and 1997 nor for the years then ended.
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, 1998,
1997 and 1996, the Company contributed $0, $0 and $1.3 million,
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 $781,000, $1.0 million and $1.2
million for the years ended December 31, 1998, 1997 and 1996,
respectively.
There were no contributions to the Profit Sharing Plan for the years
ended December 31, 1998, 1997 and 1996. 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)
-----------------------------------------------------------------------------------------------------
Years ended December 31, 1998 1997 1996
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal ($1,433) $97 $6,551
State (358) 42 1,839
Deferred (462) 89 (422)
-----------------------------------------------------------------------------------------------------
($2,253) $228 $7,968
-----------------------------------------------------------------------------------------------------
</TABLE>
The provision for income taxes for the years ended December 31, 1998,
1997 and 1996, 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, 1998 1997 1996
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ordinary federal income tax expense (benefit) ($1,914) $182 $6,883
State income taxes, net of federal tax benefit (339) 46 1,085
---------------------------------------------------------------------------------------------------
($2,253) $228 $7,968
---------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 6. Income taxes (continued)
The tax effects of temporary differences that give rise to the
Company's deferred tax assets and liabilities are as follows:
(In thousands)
------------------------------------------------------- ------ -------
December 31, 1998 1997
------------------------------------------------------- ------ -------
Deferred tax assets:
Accruals not currently deductible $627 $498
Receivables 216 172
Other 137 118
------------------------------------------------------- ------ -------
980 788
------------------------------------------------------- ------ -------
Deferred tax liabilities:
Unrealized appreciation of investment securities 658 916
Other 80 92
------------------------------------------------------- ------ -------
738 1,008
------------------------------------------------------- ------ -------
Net deferred tax asset (liability) $242 ($220)
------------------------------------------------------- ------ -------
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
required the Company to maintain minimum net capital of $469,000 as of
December 31, 1998. Also, under this rule, the ratio of aggregate
indebtedness to net capital may not exceed 15 to 1, and the Company may
be prohibited from expanding its business or paying cash dividends if
its ratio of aggregate indebtedness to net capital is greater than 10
to 1. At December 31, 1998, the Company had net capital of $5.0
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.
During the years 1998, 1997 and 1996 the Company repurchased 566,000,
465,000 and 329,000 shares of its common stock at a total cost of $3.1
million, $2.7 million and $1.3 million, respectively. In October 1998,
the board of directors authorized the repurchase of 1,000,000 shares in
the open market or through privately negotiated transactions, at the
discretion of the firm's management. This repurchase program commenced
with completion of the existing 1,600,000 share plan.
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 a defined market price, but not less than book value at the end of
the period. Reserved but unissued shares under the Plan were 689,538 at
December 31, 1998.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1998
authorized but unissued shares were 133,357 for the 1990 Stock Option
Plan and 522,500 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 options, in general, vest evenly over five years. Stock
option transactions are summarized below:
------------------------------------------------------------------------
Weighted
Number Average
of Shares Exercise Price
------------------------------------------------------------------------
Outstanding at December 31, 1995 246,150 $4.41
Granted 226,500 4.15
Exercised (86,200) 3.54
Forfeited or expired (18,250) 6.18
----------------------------------------------------------------------
Outstanding at December 31, 1996 368,200 4.40
Granted 488,000 5.98
Exercised (67,693) 4.01
Forfeited or expired (131,557) 5.39
----------------------------------------------------------------------
Outstanding at December 31, 1997 656,950 5.37
Granted 250,000 5.97
Exercised (81,250) 4.69
Forfeited or expired (95,000) 5.74
----------------------------------------------------------------------
Outstanding at December 31, 1998 730,700 $5.62
----------------------------------------------------------------------
Exercisable at:
December 31, 1996 290,700 $4.60
December 31, 1997 416,450 5.07
December 31, 1998 373,700 5.37
----------------------------------------------------------------------
The following table summarizes information for stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
Weighted Weighted
Range of Number Average Average Number Average
Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3.58 to $4.04 128,950 1.75 $3.94 116,950 $3.97
$4.50 to $5.88 145,000 4.88 5.51 20,000 5.88
$5.98 to $5.98 176,750 3.14 5.98 160,750 5.98
$6.00 to $6.88 280,000 6.89 6.22 76,000 6.12
------------------------------------------------------------------------------------------------------
$3.58 to $6.88 730,700 4.64 5.62 373,700 5.37
------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 9. Stock option plans (continued)
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 (loss) and
earnings (loss) per share for the years ended December 31, 1998, 1997
and 1996 would have been reduced to the pro forma amounts indicated
below:
(In thousands, except per share data)
--------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------
Net income (loss):
As reported ($3,376) $308 $11,698
Pro forma ($3,514) ($145) $11,367
Basic earnings (loss) per share:
As reported ($0.58) $0.05 $1.93
Pro forma ($0.60) ($0.02) $1.88
Diluted earnings (loss) per share:
As reported ($0.58) $0.05 $1.92
Pro forma ($0.60) ($0.02) $1.86
--------------------------------------------------------------------
Using the Black-Scholes option pricing model, the estimated weighted
average fair value of options granted and vested during 1998, 1997 and
1996 was $2.71, $2.04 and $1.42 per share. The assumptions used in the
computations for 1998, 1997 and 1996 are as follows: risk-free interest
rate of 5.6%, 6.3% and 6.3%; expected dividend yield of 0% in all three
years; expected life of four, five and four years; and expected
volatility of 42%, 43% 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, 1998, the closing price of
the Company's common stock was $4.75 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 eight
years. Certain of these leases have escalation clauses and renewal
options. Minimum rentals required under these non-cancelable operating
leases are as follows:
(In thousands)
-------------------------------------------------------------
1999 $933
2000 732
2001 625
2002 627
2003 621
Thereafter 1,034
-------------------------------------------------------------
$4,572
-------------------------------------------------------------
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 10. Commitments (continued)
Rent expense was $3.2 million, $2.9 million and $2.9 million for the
years ended December 31, 1998, 1997 and 1996, 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. Legal proceedings
The Company is a defendant in various other actions relating to its
business, some of which involve claims for unspecified amounts.
Although the ultimate resolution of these matters cannot be predicted
with certainty, in management's opinion, while their outcome may have a
material effect on the earnings in a particular period, the outcome
will not have a material adverse effect on the financial condition of
the Company.
Note 12. Segments
The Company's reportable segments are: retail sales, equity capital
markets, fixed income and other. The retail segment consists of various
retail branch locations and the financial services division. Equity
capital markets consists of equity trading, institutional sales,
research and investment banking. Fixed income includes the origination,
trading, and institutional sales of fixed income securities. Other
consists of general corporate, administrative support functions and net
gains or losses on the investment account. Included in 1996 data are
PRIMEVEST Financial Services, Inc. ("PRIMEVEST") retail revenues and
pretax income of $27.4 million and $2.1 million, respectively, and the
gain on sale of PRIMEVEST in other revenue and pretax income of $11.1
million. See Note 13 in the Notes to Consolidated Financial Statements
for additional information. The Company does not provide balance sheet
data for segment reporting as this data is not measured.
Information concerning operations in these segments of business is as
follows:
<TABLE>
<CAPTION>
(In thousands)
-----------------------------------------------------------------------------------------------------
Years ended December 31, 1998 1997 1996
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Retail sales $24,737 $30,422 $58,990
Equity capital markets 8,660 10,192 18,314
Fixed income 5,943 6,224 4,598
Other 1,604 3,008 18,075
-----------------------------------------------------------------------------------------------------
$40,944 $49,846 $99,977
-----------------------------------------------------------------------------------------------------
Pretax income (loss):
Retail sales $2,501 $4,342 $6,770
Equity capital markets (3,126) (509) 5,241
Fixed income 1,132 1,166 578
Other (6,136) (4,463) 7,077
-----------------------------------------------------------------------------------------------------
($5,629) $536 $19,666
-----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 13. Sale of subsidiary
On October 31, 1996, the Company sold its wholly-owned subsidiary
PRIMEVEST to ReliaStar Financial Corporation for $15.5 million in cash.
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.
Note 14. 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 connection with its trading securities, the Company does not, nor
does it have plans to, utilize interest rate swaps, foreign currency
contracts, futures, forward contracts, or other derivatives.
In the normal course of business, 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 all of its trading securities at the
clearing firm. These trading securities may 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 monitored on an on-going basis 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/ William F. Farley
William F. Farley
Chairman and Chief Executive Officer
Date: March 19, 1999
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 William F.
Farley 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/ William F. Farley Chairman and Chief Executive March 19, 1999
William F. Farley Officer (principal executive officer)
/s/ Daniel R. Sass Treasurer (principal financial March 19, 1999
Daniel R. Sass and accounting officer)
/s/ Ronald A. Erickson Director March 19, 1999
Ronald A. Erickson
(Signatures continued on next page)
<PAGE>
Signature Title Date
/s/ John J. Fauth Director March 19, 1999
John J. Fauth
/s/ Stephen H. Fischer Director March 19, 1999
Stephen H. Fischer
/s/ John H. Grunewald Director March 19, 1999
John H. Grunewald
/s/ Andrew J. O'Connell Director March 19, 1999
Andrew J. O'Connell
/s/ Robert S. Spong Director March 19, 1999
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 1998 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 ** 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*
10.2 ** 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*
10.3 ** 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 *
10.4 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 *
10.5 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
10.6 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 *
10.7** 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.
10.8** 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.
10.9 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.
10.10 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.
10.11** 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.
10.12** 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.
10.13** 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.
10.14 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.
10.15 Lease between Boat Works Development Company and John G. Kinnard and
Company, Incorporated dated February 11, 1997 - incorporated by
reference to Exhibit 10.2 to the Registrant's Form 10-K Report for the
year ended December 31, 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
10.21 Fully disclosed clearing agreement between John G Kinnard and Company,
Incorporated and Nationsbanc Montgomery Secutities LLC dated May 1,
1998 - incorporated by reference to the Registrant's Form 10-Q report
for the quarter ended June 30, 1998.
10.22 Employment Agreement dated February 23, 1998 among Kinnard Investments,
Inc., John G. Kinnard and Company, Incorporated and George F. Stroebel.
11 See Note 1 of the accompanying notes to consolidated financial
statements
21 List of the Registrant's subsidiaries:
State of Incorporation
Subsidiary Minnesota
John G. Kinnard and Company, Incorporated Minnesota
Kinnard Futures Management Corporation Minnesota
Kinnard Capital Corporation North Dakota
Continental Funding, Inc. North Dakota
Nodak Bonds, Inc.
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule (filed in electronic form only)
* Incorporated by reference to a previously filed report or document, SEC
File No. 0-9337
** Management contract or compensatory plan or arrangement
Exhibit 10.22
John G. Kinnard and Company, Incorporated
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into between George F. Stroebel (hereinafter
"Employee") and John G. Kinnard and Company, Incorporated (hereinafter
"Kinnard") at its principal place of business at Kinnard Financial Center, 920
Second Avenue South, Minneapolis, Minnesota 55402.
1. Duties. Kinnard agrees to employ Employee, and Employee agrees to perform the
duties of a Senior Vice President , Director of Corporate Development for the
benefit of Kinnard on a full time basis.
2. Compensation. For all services rendered during the term of employment,
Kinnard shall compensate Employee in accordance with the schedule attached
hereto as Exhibit A.
3. Benefits. Employee will receive the full range of standard benefits that
accrue to Kinnard employees, including 401(k) plan, retirement plan, vacation,
and medical plans, as Employee meets the eligibility criteria set forth in those
benefit plans. Kinnard reserves the right to modify, change, or discontinue its
benefit plans. In such event, Employee will be eligible for such benefits as are
then afforded to other Kinnard employees in positions similar to that held by
Employee.
4. Licensing. Kinnard agrees during the term of employment to train and educate
Employee in certain securities laws of the United States, the rules of the
National Association of Securities Dealers, Inc. ("NASD"), and the various stock
exchanges of which Kinnard is a member, the operation and functions of the
various securities markets, the execution of securities trading transactions,
customer advising, sales techniques, and such other requirements as shall be
necessary to qualify Employee as a licensed principal of Kinnard.
5. Compliance. Employee agrees to comply with and abide by all the rules and
regulations of the securities industry as set forth in state and federal law,
and in the rules and regulations of governmental agencies and self-regulatory
bodies. Employee also agrees to comply with and abide by all internal rules and
policies of Kinnard as may be established and amended from time to time.
6. Trade Secrets. Employee acknowledges and agrees that the identities of
Kinnard's customers, and all memoranda, notes, records, statements, reports, and
documents of every kind concerning customers or customer accounts, or concerning
Kinnard's internal operations and procedures, regardless of whether such
documents were created by Kinnard, Kinnard's clearing broker, an employee or
affiliate of Kinnard, or by the Employee, and including all originals, copies,
electronic and other data compilations (the "Records") are confidential business
records and trade secrets of Kinnard, and are the sole property of Kinnard.
Except as otherwise permitted by Kinnard, Employee agrees to maintain the
Records in the strictest confidence, to not share any Records with any person
outside of Kinnard, except as necessary in the interest of Kinnard. Upon
Employee's termination, whether voluntary or involuntary, with or without cause,
or whenever Kinnard may request, Employee shall immediately relinquish
possession to Kinnard of all Records. Employee agrees that Employee will not at
any time assert or claim an ownership or property interest in the Records nor
use information from the Records in any manner that might adversely affect
Kinnard's best interests.
7. Term of Employment. The Initial Term of Employment under the proposed
contract shall commence on March 1, 1998 and shall continue through September 1,
1999. After the end of the Initial Term of Employment, any continuing employment
relationship between Kinnard and Employee shall then be an "employment at will"
relationship. That is, Kinnard could terminate Employee at any time for any
reason, or for no reason at all, with or without notice. Likewise, Employee
could terminate his employment with Kinnard at any time for any reason, or for
no reason at all, with or without notice.
8. Arbitration. Kinnard and Employee agree that any dispute regarding or arising
out of this Agreement, the Employee's employment at Kinnard, or any event
occurring in connection with Employee's employment or termination of employment
at Kinnard, including but not limited to claims of fraud in the inducement of
this contract, defamation, discrimination, or harassment, shall be submitted to
arbitration pursuant to the Federal Arbitration Act. If Employee asserts any
claims against Kinnard for which he or she seeks recovery of attorney fees, and
if Kinnard prevails in such arbitration or other legal proceeding, Employee
agrees to pay Kinnard the reasonable costs and attorney fees that Kinnard incurs
in defending against any claims brought against it. Such arbitration will be
<PAGE>
conducted before the National Association of Securities Dealers, Inc. ("NASD")
in accordance with the NASD Code of Arbitration Procedure, or if the NASD
refuses to accept jurisdiction, before the American Arbitration Association
("AAA") under the AAA's applicable Arbitration Rules. The award of the
arbitrator(s), or a majority of them, shall be final and judgment upon such
award may be entered in any court of competent jurisdiction. This arbitration
provision shall continue in force after the termination of employment.
9. Representations and Warranties. Employee hereby represents and warrants that
he has read this entire Agreement, and has had an opportunity to ask Kinnard
representatives questions about it. Employee further represents and warrants
that he has had an opportunity to consult with an attorney (at Employee's
expense) before signing this Agreement. Employee acknowledges that he was
informed before accepting employment that signing this Employment Agreement is a
condition of employment.
10. Miscellaneous. This Agreement contains the entire agreement of the parties
and replaces all prior oral and/or written agreements between the parties. Any
amendments or modifications to this Agreement are void unless in writing and
signed by the party against whom enforcement is sought. If any provision of this
Agreement shall be held to be invalid or unenforceable by any court, arbitration
panel, regulatory agency, or self-regulatory body, the remaining provisions
shall remain valid and enforceable. Any delay or failure to enforce any
provision of this agreement with respect to a particular event or time shall not
constitute a waiver of the right to enforce that or any other provision of this
Agreement.
11. Governing Law & Venue. This Agreement, and indeed the entire relationship
between Employee and Kinnard, shall be construed, interpreted, and enforced in
accordance with the laws of the State of Minnesota. Any arbitration or other
legal proceeding that may be brought by either party against the other shall be
venued in Minneapolis, Minnesota.
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement on the dates indicated below:
JOHN G. KINNARD AND COMPANY, INC.
Dated: February 23, 1998 By: /s/ William F. Farley
William F. Farley
CEO
Dated: February 23, 1998 By: /s/ George F. Stroebel
George F. Stroebel
EXHIBIT A for George Stroebel
This exhibit sets forth the Director of Corporate Development compensation for
Employee, commencing on or about March 1, 1998 and continuing as long as
Employee remains employed during the Initial Term of Employment described in
Paragraph 7 of the Employment Agreement, "Term of Employment".
A. Salary. A salary at a rate of one hundred eighty thousand dollars ($180,000)
per year, to be paid every other week.
B. Incentive Compensation. An annual discretionary bonus which is targeted at
seventy thousand dollars ($70,000) and is funded out of the KII profit pool
shall be paid at the end of the calendar year, to Employee.
C. Stock Options. Kinnard shall grant to Employee, as of the beginning date of
employment and the execution of the employment agreement, an option to purchase
twenty five thousand (25,000) shares of Kinnard Investments, Inc. ("KII") common
stock. This option grant is subject to approval by the KII Board of Directors.
The exercise price shall be equal to the closing price on the date the option is
granted, or if no sale of such stock shall have occurred on that date, on the
next preceding day on which there was a sale of stock. One-fifth of this
25,000-share option shall vest (that is, become exercisable) on the first
anniversary of the employment date and an additional 1/5 each on the second
through fifth anniversaries provided that Employee remains employed on such
anniversary date. All exercisable options shall expire at the close of business
on the sixth anniversary of the employment date.
<PAGE>
Vesting Date Percentage/Number of Shares
------------ ---------------------------
February 15, 1999 5,000 shares
February 15, 2000 5,000 shares
February 15, 2001 5,000 shares
February 15, 2002 5,000 shares
February 15, 2003 5,000 shares
D. Loan of Purchase Price for Stock. At the start of employment and the
execution of the employment agreement with Kinnard, Employee shall be granted
the right to borrow money from Kinnard to purchase twenty five thousand (25,000)
shares of Kinnard Investments, Inc. ("KII") common stock at the market price,
with interest on the loan to be charged at the cost of funds (broker call rate).
Employee shall sign a promissory note and a confession of judgment to secure
this loan. Interest will accrue and interest and principal will be due and
payable on the 5th anniversary of issuance, or when Employee is determined to
have violated the securities laws or Kinnard's internal rules, is the subject of
a bankruptcy petition, or if Employee's employment relationship with Kinnard is
terminated, whether voluntarily, or involuntarily, with or without cause. If,
for the reasons described in this paragraph, the balance on this loan were to
become due and payable, Employee authorizes Kinnard to withhold such amounts
from any compensation that might be due to the Employee. If Employee were to die
or become permanently disabled (as determined under Kinnard's policies) during
the term of the loan, the balance owed by Employee under the loan would be
forgiven.
E. Participation in Deferred Compensation Plan. Kinnard is currently reviewing
the addition of a deferred compensation plan (which would be created as a long
term investment program offered to "key" employees of Kinnard). If this program
is approved, the Employee shall be considered a participant in its first year of
implementation.
F. Vacation Employee shall be entitled to a total of 20 vacation days per
calendar year, with partial years prorated. Unused vacation time shall not be
carried forward from year to year.
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, No. 33-82102 and No.
333-48991 of Kinnard Investments, Inc. on Form S-8 of our report dated January
27, 1999 on the 1998 and 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, 1998.
/s/ KPMG Peat Marwick LLP
March 19, 1999
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-39874, No. 33-49720, No. 33-49722, No. 33-67830, No. 33-82102 and No.
333-48991 of Kinnard Investments, Inc. on Form S-8 of our report dated January
30, 1997 on the consolidated statement of operations, shareholders' equity, and
cash flows of Kinnard Investments, Inc. for the year ended December 31, 1996,
appearing in this Annual Report on Form 10-K of Kinnard Investments, Inc. and
its subsidiaries.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
March 19, 1999
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<ARTICLE> BD
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 2,689
<RECEIVABLES> 4,536
<SECURITIES-RESALE> 0
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<INSTRUMENTS-OWNED> 25,139
<PP&E> 1,888
<TOTAL-ASSETS> 36,364
<SHORT-TERM> 0
<PAYABLES> 6,601
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0
0
<COMMON> 110
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<TOTAL-LIABILITY-AND-EQUITY> 36,364
<TRADING-REVENUE> 16,493
<INTEREST-DIVIDENDS> 1,422
<COMMISSIONS> 14,684
<INVESTMENT-BANKING-REVENUES> 5,640
<FEE-REVENUE> 2,932
<INTEREST-EXPENSE> 0
<COMPENSATION> 31,360
<INCOME-PRETAX> (5,629)
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,376)
<EPS-PRIMARY> (0.58)
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</TABLE>
