<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 23, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------
KINNARD INVESTMENTS, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
MINNESOTA 6211 41-0972952
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of Classification Industrial Identification
incorporation or organization) Code) Number)
</TABLE>
920 SECOND AVENUE SOUTH
MINNEAPOLIS, MINNESOTA 55402
TELEPHONE: (612) 370-2700
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
WILLIAM F. FARLEY
KINNARD INVESTMENTS, INC.
920 SECOND AVENUE SOUTH
MINNEAPOLIS, MINNESOTA 55402
TELEPHONE: (612) 370-2700
(Name, address, including zip code and telephone number, including area code, of
agent for service)
------------------------
COPIES OF COMMUNICATIONS TO:
JAMES C. MELVILLE BRIAN D. WENGER
MARY S. GIESLER CHRISTOPHER C. CLEVELAND
Kaplan, Strangis and Kaplan, P.A. 90 Briggs and Morgan, Professional
South Seventh Street, Suite 5500 Association
Minneapolis, Minnesota 55402 80 South Eighth Street, Suite 2400
Telephone: (612) 375-1138 Minneapolis, Minnesota 55402
Telephone: (612) 334-8400
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
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<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED SECURITY(1) OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, par value $.02 per
share.............................. 2,800,000 $11.09 $6,490,194 $1,804.27
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
required by Section 6(b) of the Securities Act of 1933, as amended and
calculated pursuant to Rule 457(c), (f)(2) and (3), the registration fee was
computed based on (A) the book value per share of MIAC common stock on April
30, 1999 ($11.09), multiplied by 1,036,086 the aggregate number of shares of
MIAC common stock outstanding on June 23, 1999 or issuable pursuant to
outstanding options prior to the date the merger is expected to be
consummated, minus (B) $5,000,000 the minimum amount of cash to be paid by
the registrant in connection with the merger.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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KINNARD INVESTMENTS, INC. MI ACQUISITION CORPORATION
MERGER PROPOSED--YOUR VOTE IS VERY IMPORTANT
The Boards of Directors of Kinnard Investments, Inc. and MI Acquisition
Corporation have agreed to combine Kinnard and MIAC. In the proposed
combination, MIAC will merge with and into a subsidiary of Kinnard. As a result
of the merger, Kinnard will become the holding company of MIAC and MIAC's
subsidiaries. Each share of MIAC common stock that you hold will be converted
into the right to receive either $19.25 in cash, without interest, or 3.5 shares
of Kinnard common stock or, under certain circumstances, a combination of cash
and Kinnard common stock. Assuming the maximum cash consideration is elected,
MIAC shareholders will own approximately 26% of Kinnard after the merger is
completed. Each share of Kinnard common stock that you hold will remain
outstanding as a share of common stock of Kinnard. Kinnard's common stock trades
on the Nasdaq National Market under the symbol "KINN."
We can't complete the merger unless the shareholders of Kinnard approve the
issuance of shares of Kinnard common stock and the shareholders of MIAC approve
the merger agreement. Each of us will hold a special meeting of our shareholders
to vote on the merger proposals. YOUR VOTE IS VERY IMPORTANT. Whether or not you
plan to attend your shareholder meeting, please take the time to vote by
completing and mailing the enclosed proxy card to us. If you date and mail your
proxy card without indicating how you want to vote, your proxy will be counted
as a vote FOR the merger. MIAC shareholders please note that, if you don't
return your card, or if you don't instruct your broker how to vote any shares
held for you in your broker's name, the effect will be a vote against this
merger.
The dates, times and places of the meetings are as follows:
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FOR KINNARD SHAREHOLDERS: FOR MIAC SHAREHOLDERS:
Kinnard Financial Center 220 South Sixth Street
920 Second Avenue South Suite 300
Minneapolis, Minnesota 55402 Minneapolis, Minnesota 55402
September , 1999 September , 1999
</TABLE>
This document gives you detailed information about the merger we're proposing,
and it includes our merger agreement as an appendix. You can also obtain
information about Kinnard from publicly available documents Kinnard has filed
with the Securities and Exchange Commission. We encourage you to read this
entire document carefully. YOU SHOULD ALSO CONSIDER CAREFULLY THE "RISK FACTORS"
BEGINNING ON PAGE 9.
We are excited about this combination and join with the other members of our
Boards of Directors in recommending that you vote in favor of issuing the shares
and completing the merger.
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<S> <C>
William F. Farley James F. Dlugosch
Chairman and Chief Executive Officer Chairman and Chief Executive Officer
Kinnard Investments, Inc. MI Acquisition Corporation
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS HAVE APPROVED THE MERGER DESCRIBED IN THIS DOCUMENT OR THE KINNARD
COMMON STOCK TO BE ISSUED IN CONNECTION WITH THE MERGER, NOR HAVE THEY
DETERMINED IF THIS DOCUMENT IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Joint proxy statement/prospectus dated August , 1999 and
first mailed to shareholders on August , 1999.
<PAGE>
KINNARD INVESTMENTS, INC.
----------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER , 1999
------------------------
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Kinnard
Investments, Inc., a Minnesota corporation ("Kinnard"), will be held on
September , 1999 at 10:00 a.m. (local time) at 920 Second Avenue South,
Minneapolis, Minnesota (the "Kinnard Special Meeting"), for the following
purposes:
1. To consider and vote upon a proposal to issue (the "Issuance") shares of
common stock of Kinnard pursuant to the Agreement and Plan of Merger
dated as of May 16, 1999, among MI Acquisition Corporation, a Minnesota
corporation ("MIAC"), Kinnard and Peachtree Acquisition, Inc., a wholly
owned subsidiary of Kinnard ("Merger Subsidiary"), pursuant to which,
among other things, MIAC will merge with and into Merger Subsidiary upon
the terms and subject to the conditions set forth in the merger
agreement, as more fully described in the enclosed joint proxy
statement/prospectus.
2. To transact such other business as may properly come before the Kinnard
Special Meeting or any adjournments or postponements of the Kinnard
Special Meeting, including, without limitation, a motion to adjourn the
Kinnard Special Meeting to another time or place for the purpose of
soliciting additional proxies in order to approve the Issuance.
The Board of Directors has fixed the close of business on August , 1999 as the
record date for determining those shareholders entitled to vote at the Kinnard
Special Meeting and any adjournments or postponements of the Kinnard Special
Meeting. The affirmative vote of a majority of votes cast is required to approve
the Issuance.
By Order of the Board of Directors
George F. Stroebel, SECRETARY
August , 1999
THE BOARD OF DIRECTORS OF KINNARD UNANIMOUSLY RECOMMENDS THAT
SHAREHOLDERS VOTE FOR APPROVAL OF THE ISSUANCE.
WHETHER OR NOT YOU EXPECT TO ATTEND THE KINNARD SPECIAL MEETING IN PERSON,
PLEASE COMPLETE, SIGN AND RETURN THE PROXY CARD IN THE ENCLOSED ENVELOPE. NO
POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES. IF YOU ATTEND THE KINNARD
SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN IF YOU HAVE PREVIOUSLY
RETURNED YOUR PROXY CARD.
<PAGE>
MI ACQUISITION CORPORATION
----------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON SEPTEMBER , 1999
------------------------
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of MI Acquisition
Corporation, a Minnesota corporation ("MIAC"), will be held on September ,
1999 at 10:00 a.m. (local time) at 220 South Sixth Street, Suite 300,
Minneapolis, Minnesota (the "MIAC Special Meeting"), for the following purposes:
1. To consider and vote upon a proposal to adopt the Agreement and Plan of
Merger dated as of May 16, 1999, among MIAC, Kinnard Investments, Inc., a
Minnesota corporation ("Kinnard") and Peachtree Acquisition, Inc., a
wholly owned subsidiary of Kinnard ("Merger Subsidiary"), pursuant to
which, among other things, MIAC will merge with and into Merger
Subsidiary upon the terms and subject to the conditions set forth in the
merger agreement, as more fully described in the enclosed joint proxy
statement/prospectus.
2. To transact such other business as may properly come before the MIAC
Special Meeting or any adjournments or postponements of the MIAC Special
Meeting, including, without limitation, a motion to adjourn the MIAC
Special Meeting to another time or place for the purpose of soliciting
additional proxies in order to approve the merger agreement.
The Board of Directors has fixed the close of business on August , 1999 as the
record date for determining those shareholders entitled to vote at the MIAC
Special Meeting and any adjournments or postponements of the MIAC Special
Meeting. The affirmative vote of a majority of the outstanding shares of MIAC
common stock on the record date is required to approve the merger agreement.
By Order of the Board of Directors
Mary Jo Brenden, SECRETARY
August , 1999
THE BOARD OF DIRECTORS OF MIAC UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR
ADOPTION OF THE MERGER AGREEMENT.
WHETHER OR NOT YOU EXPECT TO ATTEND THE MIAC SPECIAL MEETING IN PERSON, PLEASE
COMPLETE, SIGN AND RETURN THE PROXY CARD IN THE ENCLOSED WHITE ENVELOPE. NO
POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES. IF YOU ATTEND THE MIAC
SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN IF YOU HAVE PREVIOUSLY
RETURNED YOUR PROXY CARD.
ALL MIAC SHAREHOLDERS ARE ALSO RECEIVING WITH THIS MAILING A FORM OF ELECTION ON
WHICH TO INDICATE YOUR PREFERENCE FOR RECEIVING CASH OR KINNARD COMMON STOCK IN
EXCHANGE FOR YOUR SHARES OF MIAC COMMON STOCK AND A LETTER OF TRANSMITTAL. YOUR
COMPLETED ELECTION FORM, TOGETHER WITH YOUR MIAC STOCK CERTIFICATES AND THE
LETTER OF TRANSMITTAL, MUST BE RETURNED IN THE ENCLOSED MANILA ENVELOPE NO LATER
THAN 5:00 P.M., MINNEAPOLIS TIME ON , 1999, WHICH IS THE ELECTION
DEADLINE DATE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
WHERE YOU CAN FIND MORE INFORMATION........................................................................ 1
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................................................ 1
QUESTIONS AND ANSWERS ABOUT THE MERGER..................................................................... 3
SUMMARY.................................................................................................... 5
The Companies.......................................................................................... 5
The Special Meetings................................................................................... 5
The Merger............................................................................................. 5
Our Reasons for the Merger............................................................................. 5
Our Recommendation to Shareholders..................................................................... 5
Record Date; Voting Power.............................................................................. 6
Votes Required......................................................................................... 6
Method of Electing Kinnard Stock or Cash............................................................... 6
Share Ownership of Management and Certain Shareholders................................................. 6
Federal Income Tax Considerations...................................................................... 6
Interests of Directors and Officers in the Merger that Differ from Your Interests...................... 6
Management and Operations After the Merger............................................................. 6
Listing of Kinnard Common Stock........................................................................ 7
What We Need to do to Complete the Merger.............................................................. 7
Termination of the Merger Agreement; Expenses.......................................................... 7
Termination Fee........................................................................................ 7
Regulatory Approvals................................................................................... 7
Dissenters' Rights..................................................................................... 7
Accounting Treatment................................................................................... 7
RISK FACTORS............................................................................................... 8
Integrating the operations of Kinnard and MIAC will be difficult....................................... 8
Sales of Kinnard common stock following the merger may adversely affect the price of Kinnard common
stock................................................................................................. 8
Potential for change in relative stock prices may negatively affect the price of Kinnard common
stock................................................................................................. 8
Adverse federal income tax treatment of the merger could result in taxable income for MIAC
shareholders.......................................................................................... 8
Employee retention or recruitment may be difficult following the merger................................ 9
Forward-looking statements may prove inaccurate........................................................ 9
SELECTED FINANCIAL DATA.................................................................................... 10
Selected Historical Consolidated Financial Data of Kinnard............................................. 10
Selected Historical Consolidated Financial Data of MIAC................................................ 11
Selected Unaudited Pro Forma Combined Financial Data................................................... 12
COMPARATIVE STOCK PRICES AND DIVIDENDS..................................................................... 13
COMPARATIVE UNAUDITED PER SHARE DATA....................................................................... 14
THE SHAREHOLDERS' MEETINGS................................................................................. 15
General................................................................................................ 15
Matters to be Considered at the Shareholders' Meetings................................................. 15
Record Date; Stock Entitled to Vote; Quorum............................................................ 15
Votes Required......................................................................................... 15
</TABLE>
i
<PAGE>
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<CAPTION>
PAGE
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<S> <C>
Voting of Proxies...................................................................................... 16
Revocability of Proxies................................................................................ 16
Solicitation of Proxies................................................................................ 16
THE MERGER................................................................................................. 17
General................................................................................................ 17
Background of the Merger............................................................................... 17
Reasons for the Merger and Board Recommendations....................................................... 18
Accounting Treatment................................................................................... 19
Form of the Merger..................................................................................... 19
Merger Consideration, Elections, Proration and Allocation Determination................................ 20
Exchange Procedures; Surrender of Certificates; Dissenting Shares...................................... 21
Treatment of Stock Options Outstanding Under MIAC Stock Plans.......................................... 23
Regulatory Approvals Required.......................................................................... 23
The Effective Time..................................................................................... 24
Stock Exchange Listing................................................................................. 24
Resale of Kinnard Common Stock Issued Pursuant to the Merger........................................... 24
Pre-Merger Dividend Policy............................................................................. 24
Post-Merger Dividend Policy............................................................................ 24
Certain Material Federal Income Tax Consequences....................................................... 25
Dissenters' Rights..................................................................................... 27
Interests of Certain Persons in the Merger............................................................. 30
Operations and Management After the Merger............................................................. 31
CERTAIN PROVISIONS OF THE MERGER AGREEMENT................................................................. 32
General................................................................................................ 32
Conditions to the Consummation of the Merger........................................................... 32
Representations and Warranties......................................................................... 34
Conduct of Business Pending the Merger................................................................. 35
No Solicitation of Transactions........................................................................ 37
Termination............................................................................................ 38
Termination Fee........................................................................................ 40
Amendment and Waiver................................................................................... 40
Expenses............................................................................................... 40
THE COMPANIES.............................................................................................. 41
Kinnard................................................................................................ 41
MIAC................................................................................................... 41
Stock Ownership of Directors; Executive Officers and Five Percent Shareholders......................... 41
MIAC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.................. 43
Overview............................................................................................... 43
Results of Operations.................................................................................. 43
Liquidity and Capital Resources........................................................................ 47
Year 2000 Readiness Disclosure......................................................................... 47
Market Risks........................................................................................... 48
DESCRIPTION OF KINNARD COMMON STOCK ISSUABLE IN THE MERGER................................................. 49
COMPARISON OF SHAREHOLDER RIGHTS........................................................................... 49
Authorized Capital Stock............................................................................... 49
Dissenters' Rights..................................................................................... 50
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Required Vote.......................................................................................... 50
Directors.............................................................................................. 50
Removal of Directors................................................................................... 51
Newly Created Directorships and Vacancies on the Board of Directors.................................... 51
Certain Business Combinations.......................................................................... 51
Indemnification of Directors, Officers and Employees................................................... 51
Buy-Sell Provisions.................................................................................... 52
EXPERTS.................................................................................................... 52
LEGAL MATTERS.............................................................................................. 53
SHAREHOLDER PROPOSALS...................................................................................... 53
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
Appendix A: Agreement and Plan of Merger between MI Acquisition Corporation, Kinnard Investments, Inc. and
Peachtree Acquisition, Inc. dated as of May 16, 1999.......................................... A-1
Appendix B: Sections 302A.471 and 302A.473 of the Minnesota Business Corporation Act...................... B-1
</TABLE>
iii
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Kinnard has filed a Registration Statement on Form S-4 to register with the
Securities and Exchange Commission the Kinnard common stock to be issued to
shareholders of MIAC in the merger. This document is a part of the Registration
Statement and constitutes a prospectus of Kinnard in addition to being a proxy
statement of Kinnard and MIAC for the Kinnard Special Meeting and the MIAC
Special Meeting. As allowed by SEC rules, this document does not contain all the
information you can find in the registration statement or the exhibits to the
registration statement.
Kinnard also files annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy this information at
the following locations of the SEC:
Public Reference Room New York Regional office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, NY 10049 Suite 1400
Chicago, IL 60661-2511
You may also obtain copies of this information by mail from the Public
Reference Section of the SEC, 450 Fifth Street, N.W. Room 1024, Washington, D.C.
20549, at prescribed rates, or from the worldwide web site maintained by the SEC
at HTTP://WWW.SEC.GOV. Information on the operation of the Public Reference Room
may be obtained by calling the SEC at 1-800-SEC-0330.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows Kinnard to "incorporate by reference" information into this
document. This means that Kinnard can disclose important information to you by
referring you to another document filed separately with the SEC. The information
that we incorporate by reference is considered to be a part of this document,
except for any information that is superseded by information that is included
directly in this document. This document incorporates by reference the documents
set forth below that Kinnard has previously filed with the SEC. These documents
contain important information about Kinnard and its financial condition.
<TABLE>
<CAPTION>
KINNARD SEC FILINGS PERIOD
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<S> <C>
Annual Report on Form 10-K........................................... Year ended December 31, 1998
Quarterly Report on Form 10-Q........................................ For the quarter ended March 31, 1999
1999 Notice of Annual Meeting and Proxy Statement.................... Dated April 16, 1999
Description of the Kinnard common stock set forth in Kinnard's
Registration Statement pursuant to Section 12 of the Securities
Exchange Act on Form 8-A on October 3, 1980, including any
amendment or report filed with the SEC for the purpose of updating
such description.
Current Report on Form 8-K........................................... Filed on June 4, 1999
</TABLE>
Kinnard also is incorporating by reference all additional documents that it
will file with the SEC between the date of this document and the date of the
Special Meeting of its shareholders.
Kinnard has supplied all information contained or incorporated by reference
in this document relating to Kinnard, as well as all pro forma financial
information, and MIAC has supplied all such information relating to MIAC.
1
<PAGE>
You can obtain any of the documents incorporated by reference in this
document through Kinnard or from the SEC through its web site at the address
described above. Documents incorporated by reference are available from Kinnard
without charge, excluding any exhibits to those documents unless the exhibit is
specifically incorporated by reference as an exhibit in this document. You may
obtain documents incorporated by reference in this document by requesting them
in writing or by telephone from the appropriate party at the following address:
Kinnard Investments, Inc.
Kinnard Financial Center
920 Second Avenue South
Minneapolis, Minnesota 55402
(612) 370-2700
If you would like to request documents from us, please do so by September
, 1999 to receive them before the Special Meetings.
WE HAVE NOT AUTHORIZED ANYONE TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION ABOUT THE MERGER THAT IS DIFFERENT FROM, OR IN ADDITION TO, THAT
CONTAINED IN THIS DOCUMENT OR IN ANY OF THE MATERIALS THAT WE'VE INCORPORATED
INTO THIS DOCUMENT. THEREFORE, IF ANYONE GIVES YOU INFORMATION OF THIS SORT, YOU
SHOULD NOT RELY ON IT. IF YOU ARE IN A JURISDICTION WHERE OFFERS TO EXCHANGE OR
SELL, OR SOLICITATIONS OF OFFERS TO EXCHANGE OR PURCHASE, THE SECURITIES OFFERED
BY THIS DOCUMENT OR THE SOLICITATION OF A PROXY IS UNLAWFUL, OR IF YOU ARE A
PERSON TO WHOM IT IS UNLAWFUL TO DIRECT THESE TYPES OF ACTIVITIES, THEN THE
OFFER PRESENTED IN THIS DOCUMENT DOES NOT EXTEND TO YOU. THE INFORMATION
CONTAINED IN THIS DOCUMENT SPEAKS ONLY AS OF THE DATE OF THIS DOCUMENT UNLESS
THE INFORMATION SPECIFICALLY INDICATES THAT ANOTHER DATE APPLIES.
2
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT DO I NEED TO DO NOW?
A: IF YOU ARE A KINNARD SHAREHOLDER:
Just indicate on your proxy card how you want to vote and sign, date and
return it as soon as possible. If you sign and send in your proxy and do not
indicate how you want to vote, your proxy will be voted in favor of issuing
common stock in connection with the merger.
IF YOU ARE AN MIAC SHAREHOLDER:
Indicate on your proxy card how you want to vote, and sign, date and return
it as soon as possible. If you sign and send in your proxy and do not
indicate how you want to vote, your proxy will be voted in favor of the
merger. If you do not return your proxy or if you do not vote or you abstain
at the meeting, it will have the effect of a vote not to approve the merger
agreement.
You also should make an election now as to whether you prefer to receive
cash or Kinnard stock for your MIAC shares. To review the election procedure
in greater detail, see pages 23-24 in this document.
IF YOU ARE EITHER A KINNARD SHAREHOLDER OR AN MIAC SHAREHOLDER:
You may attend your shareholders' meeting and vote your shares in person,
rather than completing and returning your proxy card. If you complete and
return your proxy card, you may revoke it at any time up to and including
the day of your shareholders' meeting by following the directions on page
18.
IN ORDER FOR THE MERGER TO BE COMPLETED, ALL THE PROPOSALS BEING SUBMITTED
TO SHAREHOLDERS OF KINNARD AND MIAC MUST BE APPROVED.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER
AUTOMATICALLY VOTE MY SHARES FOR ME?
A: No. Your broker will vote your shares only if you provide instructions to
your broker on how you want your shares voted.
Q: WHAT WILL MIAC SHAREHOLDERS RECEIVE IF THE MERGER IS COMPLETED?
A: For each share of MIAC common stock, MIAC shareholders will receive one of
the following:
- a cash payment of $19.25,
- 3.5 shares of Kinnard common stock, or
- under certain circumstances, a combination of cash and Kinnard common
stock.
Assuming the maximum cash consideration is elected, the former MIAC
shareholders will own approximately 26% of Kinnard's outstanding common
stock following the merger.
Q: WHAT MUST MIAC SHAREHOLDERS DO TO ELECT CASH OR STOCK?
A: Enclosed with this document each MIAC shareholder will receive a letter of
transmittal and an election form on which to indicate whether you want to
make a cash election or a stock election. The properly completed election
form, together with stock certificates for your shares of MIAC common stock
and the letter of transmittal, must be returned to the exchange agent by 5:00
p.m., Minneapolis, Minnesota time on , 1999. THE COMPLETED
ELECTION FORM, TOGETHER WITH YOUR MIAC STOCK CERTIFICATES AND LETTER OF
TRANSMITTAL, ARE TO BE RETURNED IN THE SEPARATE MANILA ENVELOPE ENCLOSED WITH
THIS DOCUMENT.
Q: WHAT WILL MIAC SHAREHOLDERS RECEIVE IF THE AMOUNT OF CASH ELECTED IS EITHER
LESS THAN THE MINIMUM OR GREATER THAN THE MAXIMUM AMOUNT OF CASH TO BE PAID
IN THE MERGER?
A: In general, the merger agreement provides that the cash consideration to be
paid in the merger will not be less than $5,000,000 nor more than $8,000,000.
If MIAC shareholders elect to receive cash in an aggregate amount that is
less than $5,000,000 or more than $8,000,000, the exchange agent will
allocate on a pro rata basis the cash and stock portion of the merger
consideration in accordance with the procedure set forth in the merger
3
<PAGE>
agreement. The proration of the cash consideration is described in more
detail in this document on pages 24-25.
Q: WHO CAN I CONTACT IF I HAVE MORE QUESTIONS ABOUT THE MERGER?
A: Kinnard Investments, Inc.
Kinnard Financial Center
920 Second Avenue South
Minneapolis, Minnesota 55402
Attention: Office of Corporate Development
Phone Number: (612) 370-2937
MI Acquisition Corporation
220 South Sixth Street
Suite 300
Minneapolis, Minnesota 55402
Attention: James F. Dlugosch
Phone Number: (612) 376-1500
Q: WHO CAN I CONTACT IF I WOULD LIKE ADDITIONAL COPIES OF THIS DOCUMENT?
A: Norwest Bank, N.A.
161 North Concord Exchange Street
South St. Paul, Minnesota 55075
Attention: Administration
Phone Number: 800-689-8788
4
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND DOES NOT
CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THE MERGER
FULLY AND FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL TERMS OF THE MERGER, YOU
SHOULD READ CAREFULLY THIS ENTIRE DOCUMENT AND THE DOCUMENTS TO WHICH WE HAVE
REFERRED YOU. SEE "WHERE YOU CAN FIND MORE INFORMATION" (PAGE 1). WE HAVE
INCLUDED PAGE REFERENCES PARENTHETICALLY TO DIRECT YOU TO A MORE COMPLETE
DESCRIPTION OF THE TOPICS PRESENTED IN THIS SUMMARY.
THE COMPANIES (PAGES 47)
KINNARD INVESTMENTS, INC.
Kinnard Financial Center
920 Second Avenue South
Minneapolis, Minnesota 55402
(612) 370-2937
Kinnard is a full service investment banking firm. It employs 286 people in 13
branch offices in 3 states. At March 31, 1999, Kinnard's total assets were
approximately $33.0 million, and its total shareholders' equity was
approximately $28.2 million.
MI ACQUISITION CORPORATION
220 South Sixth Street
Suite 300
Minneapolis, Minnesota 55402
(612) 376-1500
MIAC specializes primarily in fixed income investment banking, mortgage
financing, municipal bonds and insurance products. It employs 193 people in 9
offices in seven states. At April 30, 1999, MIAC's total assets were
approximately $36.0 million, and its total shareholders' equity was
approximately $10.4 million.
THE SPECIAL MEETINGS (PAGES 17-19)
KINNARD SHAREHOLDERS. The Kinnard special meeting will be held at 920 Second
Avenue South, Minneapolis, Minnesota, at 10:00 a.m. on September , 1999. At
the special meeting, shareholders of Kinnard will be asked to approve the
issuance of common stock in connection with the merger.
MIAC SHAREHOLDERS: The MIAC special meeting will be held at 220 South Sixth
Street, Suite 300, Minneapolis, Minnesota, at 10:00 a.m. on September , 1999.
At the special meeting, shareholders of MIAC will be asked to approve the merger
agreement.
THE MERGER (PAGES 20-36)
We propose a combination of our businesses through the merger of MIAC with and
into a wholly owned subsidiary of Kinnard. As a result of the merger, Kinnard
will become the holding company for MIAC and MIAC's subsidiaries.
THE MERGER AGREEMENT IS ATTACHED AS APPENDIX A TO THIS DOCUMENT. WE ENCOURAGE
YOU TO READ THE MERGER AGREEMENT. IT IS THE LEGAL DOCUMENT GOVERNING THE MERGER.
OUR REASONS FOR THE MERGER (PAGES 21-22)
Our companies are proposing to combine because we believe, among other things,
that
- - the merger is a strategic opportunity to leverage our complementary strengths
for the mutual benefit of our shareholders and customers
- - the combination of the two companies will allow us to reduce duplicate costs
- - the earnings potential of the combined company will exceed what either company
could accomplish alone.
OUR RECOMMENDATIONS TO SHAREHOLDERS (PAGES 21-22)
TO KINNARD SHAREHOLDERS:
The Kinnard Board believes the merger is fair to you and in your best interests,
and recommends that you vote "FOR" issuing Kinnard common stock in connection
with the merger.
TO MIAC SHAREHOLDERS:
The MIAC Board believes the merger is fair to you and in your best interests,
and recommends that you vote "FOR" approving the merger agreement.
5
<PAGE>
RECORD DATE; VOTING POWER (PAGES 17-18)
You are entitled to vote at your shareholders' meeting if you owned shares at
the close of business on August , 1999. You can cast one vote for each share
of stock that you owned at that time.
VOTES REQUIRED (PAGE 18)
KINNARD SHAREHOLDERS:
The affirmative vote of the majority of the votes cast is required to approve
issuing Kinnard common stock in connection with the merger.
MIAC SHAREHOLDERS:
The affirmative vote by shareholders owning at least a majority of the
outstanding MIAC common stock is required to approve the merger agreement.
METHOD OF ELECTING KINNARD STOCK OR CASH (PAGES 23-24)
Each MIAC shareholder is being asked to choose either a cash payment of $19.25
or 3.5 shares of Kinnard common stock for each share of MIAC common stock the
shareholder owns. Under certain circumstances, an MIAC shareholder will receive
a combination of both cash and Kinnard stock, regardless of the shareholder's
election.
For more information on how the process of electing cash or stock works, see
"The Merger-- Merger Consideration, Elections, Proration and Allocation
Determination" on pages 23-25 of this document.
SHARE OWNERSHIP OF MANAGEMENT AND CERTAIN SHAREHOLDERS (PAGES 48)
At the close of business on the record date, directors and executive officers of
Kinnard owned or were entitled to vote shares of Kinnard common stock,
which represented approximately [25%] of Kinnard's outstanding shares.
At the close of business on the record date, directors and executive officers of
MIAC owned and were entitled to vote shares of MIAC common stock which
represented approximately 84% of MIAC's outstanding shares.
FEDERAL INCOME TAX CONSIDERATIONS (PAGES 28-31)
We have received a tax opinion from our independent public accountants stating
that, as a general matter, MIAC shareholders should not recognize gain or loss
for federal income tax purposes as a result of the merger, except if they
receive cash pursuant to an election to receive cash merger consideration or for
fractional shares or pursuant to the exercise of dissenters' rights. Neither
MIAC, Kinnard nor its merger subsidiary should recognize any taxable income as a
result of the merger.
Kinnard shareholders should not be taxed as a result of the merger.
TAX MATTERS ARE VERY COMPLICATED AND THE TAX CONSEQUENCES TO YOU OF THE MERGER
WILL DEPEND ON THE FACTS OF YOUR OWN SITUATION. YOU SHOULD CONSULT YOUR TAX
ADVISORS FOR A FULL EXPLANATION OF THE TAX CONSEQUENCES TO YOU OF THE MERGER.
INTERESTS OF DIRECTORS AND OFFICERS IN THE MERGER THAT ARE DIFFERENT FROM YOUR
INTERESTS (PAGE 34)
Upon completion of the merger, options to purchase 7,400 shares of MIAC common
stock held by two executive officers and one director of MIAC will vest and will
be converted automatically into options to purchase Kinnard common stock.
Kinnard has agreed to provide non-employee directors of MIAC who hold options to
purchase 10,500 shares of MIAC common stock with a cash payment equal to the
difference between $19.25 per share and the exercise price of each such option.
See "The Merger--Interests of Certain Persons in the Merger" at page 34 and
"--Treatment of Stock Options Outstanding Under MIAC Stock Plans" at page 27 of
this document.
MANAGEMENT AND OPERATIONS AFTER THE MERGER (PAGE 35)
If we complete the merger, certain of MIAC's directors and members of its
existing senior management will be designated as members of the board of
directors and senior management of Kinnard. The Kinnard directors will include
James F. Dlugosch, who will also serve as the President and
6
<PAGE>
Chief Operating Officer of Kinnard's primary operating subsidiary, and two
additional nominees to be proposed by Mr. Dlugosch and then approved by
Kinnard's Board of Directors.
LISTING OF KINNARD COMMON STOCK
Kinnard will file an application to list the shares of Kinnard common stock to
be issued in the merger on the Nasdaq National Market under Kinnard's current
trading symbol "KINN."
WHAT WE NEED TO DO TO COMPLETE THE MERGER (PAGES 36-39)
The completion of the merger depends on a number of conditions being met. Where
law permits, Kinnard or MIAC could decide to complete the merger even though one
or more of these conditions have not been met. We cannot be certain when, or if,
the conditions to the merger will be satisfied or waived, or that the merger
will be completed.
TERMINATION OF THE MERGER AGREEMENT; EXPENSES (PAGES 44-46)
Our boards of directors can at any time mutually agree to terminate the merger
agreement, without completing the merger. Also, either board can decide, without
the consent of the other, to terminate the merger agreement upon the occurrence
of specified events.
If the merger is not completed, each party will pay its own expenses, except
that Kinnard will pay the registration fees required by the SEC.
TERMINATION FEE (PAGE 46)
If the merger agreement is terminated under circumstances relating to third
party offers, the withdrawal or modification of the recommendation of MIAC's
board of directors, or the failure of the MIAC shareholders to approve the
merger agreement, and within 12 months the stock or assets of MIAC are sold for
an amount greater than the merger consideration, MIAC will be obligated to pay
Kinnard a fee of $1,500,000. If MIAC terminates the merger agreement due to a
change of control of Kinnard, then Kinnard is obligated to pay MIAC a fee of
$1,500,000.
REGULATORY APPROVALS (PAGE 27)
The merger is subject to prior approval by domestic regulatory authorities. We
have filed, or soon will file, all of the required applications or notices with
the appropriate regulatory agencies.
As of the date of this document, we have not yet received the required
approvals. While we do not know any reason why we would not be able to obtain
the necessary approvals in a timely manner, we cannot be certain when or if we
will get them.
DISSENTERS' RIGHTS (PAGES 31-34)
Shareholders of MIAC who follow certain procedural requirements may be entitled
to receive cash in the amount of the fair value of their shares instead of the
shares of Kinnard common stock offered pursuant to the merger. The fair value of
shares of MIAC common stock would be determined pursuant to Minnesota law.
ANY MIAC SHAREHOLDER WHO WISHES TO EXERCISE DISSENTERS' RIGHTS MUST NOT VOTE IN
FAVOR OF THE MERGER AGREEMENT AND MUST COMPLY WITH ALL OF THE PROCEDURAL
REQUIREMENTS PROVIDED BY MINNESOTA LAW. A COPY OF THE DISSENTERS' RIGHTS STATUTE
IS ATTACHED AS APPENDIX B TO THIS DOCUMENT. WE ENCOURAGE YOU TO READ THE STATUTE
CAREFULLY AND TO CONSULT WITH LEGAL COUNSEL IF YOU DESIRE TO EXERCISE YOUR
DISSENTERS' RIGHTS.
ACCOUNTING TREATMENT (PAGE 22)
The merger will be accounted for under the purchase method of accounting.
7
<PAGE>
RISK FACTORS
IN DECIDING WHETHER TO VOTE IN FAVOR OF THE MERGER, KINNARD AND MIAC
SHAREHOLDERS SHOULD CONSIDER THE FOLLOWING FACTORS, IN ADDITION TO THE RISK
FACTORS IN DOCUMENTS INCORPORATED BY REFERENCE IN THIS DOCUMENT AND ANY OTHER
INFORMATION CONTAINED ELSEWHERE OR INCORPORATED BY REFERENCE IN THIS DOCUMENT.
INTEGRATING THE OPERATIONS OF KINNARD AND MIAC MAY BE DIFFICULT
The management of Kinnard and MIAC have entered into the merger agreement
with the expectation that the merger will be beneficial to the combined company.
See "THE MERGER--Reasons for the Merger and Board Recommendations--Kinnard's
Reasons for the Merger" and "--MIAC's Reasons for the Merger." Achieving the
anticipated benefits of the merger will depend in part upon whether the
integration of the two companies' businesses is accomplished in an efficient and
effective manner, and there can be no assurance that this will occur. For
instance, the successful combination of Kinnard and MIAC will be substantially
dependent on the integration of their respective information systems and there
can be no assurance that such integration will be accomplished smoothly or
successfully. Additionally, it may be necessary to address possible differences
in corporate cultures and management philosophies. The business of the combined
company may also be disrupted by employee uncertainty and lack of focus during
such integration. The inability of management to successfully integrate the
operations of the two companies could have a material adverse effect on the
business, results of operations and financial condition of Kinnard.
SALES OF KINNARD COMMON STOCK FOLLOWING THE MERGER MAY ADVERSELY AFFECT THE
PRICE OF KINNARD COMMON STOCK
There may be up to approximately 2.8 million new shares of Kinnard common
stock issued in the merger. Sales of substantial amounts of Kinnard's common
stock in the market could adversely affect the market price of Kinnard's common
stock and could impair its ability to raise additional capital by offering its
equity securities.
POTENTIAL FOR CHANGE IN RELATIVE STOCK PRICES MAY NEGATIVELY AFFECT MIAC
SHAREHOLDERS DUE TO THE FIXED MERGER CONSIDERATION
Upon completion of the merger, each share of MIAC common stock will be
converted into the right to receive either $19.25 in cash, without interest, or
3.5 shares of Kinnard common stock, or under certain circumstances, a
combination of cash and Kinnard common stock. These exchange ratios will not be
adjusted despite any increase or decrease in the price of either Kinnard or MIAC
common stock. The prices of Kinnard and MIAC common stock when the merger occurs
may vary from their prices at the date of this document and at the date of the
special meetings. Variations in the stock prices may be the result of changes in
the business or operations of either company or the prospects of their
businesses, changes in market assessments of the likelihood that the merger will
be consummated, the timing of the merger, as well as general market and economic
conditions. MIAC shareholders are urged to obtain current market quotations for
Kinnard common stock.
ADVERSE FEDERAL INCOME TAX TREATMENT OF THE MERGER COULD RESULT IN TAXABLE
INCOME FOR MIAC SHAREHOLDERS
The merger is conditioned on the receipt of the opinion of KPMG Peat Marwick
LLP, independent public accountants to both Kinnard and MIAC, that the merger
should be treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code. The opinion of KPMG is
not binding on the Internal Revenue Service or the courts. If the merger were
not treated as a reorganization within the meaning of Section 368(a) of the
Code, the merger would be treated as a taxable sale of assets by MIAC and MIAC
shareholders would incur federal income tax liability in
8
<PAGE>
connection with the exchange of their shares of MIAC common stock for Kinnard
common stock or cash. The taxable sale by MIAC would give rise to a material
federal income tax liability to MIAC that could have a material adverse effect
on the value of Kinnard following the merger.
EMPLOYEE RETENTION OR RECRUITMENT MAY BE DIFFICULT FOLLOWING THE MERGER
Kinnard and MIAC depend on retaining existing employees and attracting and
retaining additional qualified employees to meet their future needs. Both
companies face intense competition for qualified employees, particularly during
the present economic environment of low unemployment. No assurance can be given
that the combined company will not experience a loss of key personnel or that it
will be able to attract and retain qualified employees in the future or that
competition among potential employers will not result in increasing compensation
costs. An inability to retain existing employees or attract additional employees
may have a material adverse effect on results of operations.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
We have made forward-looking statements in this document and in documents
that we incorporate by reference, that are subject to risks and uncertainties.
Forward-looking statements include information concerning possible or assumed
future results of operations of Kinnard, MIAC or the combined company. The words
"believes," "expects," "anticipates" and similar words or expressions are
intended to identify forward-looking statements. Shareholders should note that
such statements are subject to certain risks, uncertainties and assumptions,
including those described in these risk factors. In the event one or more of
these risks or uncertainties materialized, or the underlying assumptions proved
incorrect, actual financial results of Kinnard, MIAC or the combined company
could differ materially from those expressed in our forward-looking statements.
9
<PAGE>
SELECTED FINANCIAL DATA
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF KINNARD
The selected historical consolidated financial data for Kinnard are based on
and derived from, and should be read in conjunction with, the historical
consolidated financial statements and the related notes thereto of Kinnard.
Kinnard's consolidated balance sheets at December 31, 1998 and 1997, and the
consolidated statements of operations, shareholders' equity and cash flows for
the years then ended were audited by KPMG Peat Marwick LLP, independent public
accountants, and are included in Kinnard's 1998 Annual Report on Form 10-K which
is incorporated by reference herein. Kinnard's consolidated statements of
operations, shareholders' equity and cash flows for the year ended December 31,
1996 and notes thereto were audited by Deloitte & Touche LLP, independent public
accountants, and are included in Kinnard's 1998 Annual Report on Form 10-K which
is incorporated by reference herein. The selected historical consolidated
financial data for Kinnard should be read in conjunction with Kinnard's Annual
Report. The selected historical consolidated financial data for Kinnard set
forth for the three months ended March 31, 1999 are unaudited; however, in the
opinion of Kinnard's management, the accompanying selected historical financial
data contain all adjustments, consisting only of normal recurring items,
necessary to present fairly the selected historical consolidated financial data
for such periods. The results of operations for the three months ended March 31,
1999 may not be indicative of the results of operations to be expected for a
full year. See "Incorporation of Certain Documents by Reference."
The comparison of selected historical consolidated financial information in
the table below is significantly affected by the disposition of PrimeVest
Financial Services, Inc. during 1996. On October 31, 1996, Kinnard realized a
gain of approximately $11.1 million on the sale. Revenues from PrimeVest
included in Kinnard's consolidated financial statements amounted to
approximately $27.2 in 1996, $19.6 in 1995, and $17.3 in 1994.
<TABLE>
<CAPTION>
AS OF AND
FOR
THE THREE
MONTHS
ENDED AS OF AND FOR THE
MARCH 31, YEAR ENDED DECEMBER 31,
----------- -----------------------------------------------------
1999 1998 1997 1996 1995 1994
----------- --------- --------- --------- --------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
KINNARD:
STATEMENT OF OPERATIONS DATA:
Total revenues....................... $ 11,818 $ 40,944 $ 49,846 $ 99,977 $ 75,333 $ 55,667
Total operating expenses............. 11,231 46,573 49,310 80,311 69,647 61,174
Income (loss) before income taxes.... 587 (5,629) 536 19,666 5,686 (5,507)
Net income (loss).................... 353 (3,376) 308 11,698 3,376 (3,210)
BALANCE SHEET DATA:
Cash and cash equivalents............ 839 2,689 3,886 14,031 5,766 2,750
Total assets......................... 33,025 36,364 43,972 47,141 45,897 31,617
Total liabilities.................... 4,861 6,858 8,400 11,112 20,592 10,542
Shareholders' equity................. 28,164 29,506 35,572 36,029 25,305 21,075
PER SHARE DATA:
Net income (loss)--Basic............. .07 (0.58) 0.05 1.93 0.54 (0.54)
Net income (loss)--Diluted........... .07 (0.58) 0.05 1.92 0.54 (0.54)
Dividends declared................... 0.00 0.00 0.00 0.00 0.00 0.10
Book value........................... 5.48 5.38 5.97 5.98 4.04 3.58
</TABLE>
10
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF MIAC
The selected historical consolidated financial data for MIAC are based on
and derived from, and should be read in conjunction with, the historical
consolidated financial statements and the related notes thereto of MIAC. MIAC's
consolidated balance sheets at October 31, 1998 and 1997, and the consolidated
statements of operations, shareholders' equity and cash flows for the years then
ended were audited by KPMG Peat Marwick LLP, independent public accountants, and
are included in MIAC's consolidated financial statements included herein. MIAC's
predecessor's consolidated statements of operations, shareholders' equity and
cash flows for the year ended October 31, 1996 were audited by Arthur Andersen
LLP, independent public accountants, and are included herein. The selected
historical consolidated financial data for MIAC should be read in conjunction
with MIAC's consolidated financial statements included herein. The selected
historical consolidated financial data for MIAC set forth for the six months
ended April 30, 1999 and for the three months ended January 31, 1999 are
unaudited; however, in the opinion of MIAC's management, the accompanying
selected historical financial data contain all adjustments, consisting only of
normal recurring items, necessary to present fairly the selected financial data
for such periods. The results of operations for these interim periods may not be
indicative of the results of operations to be expected for a full year.
The comparison of selected historical consolidated financial information in
the table below is significantly affected by the acquisition of Miller &
Schroeder, Inc. by MIAC on July 31, 1997. The periods presented below prior to
July 31, 1997 represent historical consolidated financial information of the
predecessor to MIAC. This business combination is discussed in the notes to the
consolidated financial statements of MIAC included in this document. See "Index
to Financial Statements."
<TABLE>
<CAPTION>
AS OF AND
AS OF AND FOR FOR
THE SIX MONTHS THE THREE
ENDED MONTHS ENDED AS OF AND FOR THE
APRIL 30, JANUARY 31, YEAR ENDED OCTOBER 31,
-------------- ------------ -------------------------------------------------------------------------------
1999 1999 1998 1997 1997 1996 1995 1994
-------------- ------------ ------- ----------- ------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (SUCCESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR) (PREDECESSOR)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MIAC:
STATEMENT OF OPERATIONS DATA:
Total revenues...... $18,669 $ 6,816 $35,415 $ 8,370(3) $20,830(2) $33,924 $30,473 $42,779
Total operating
expenses.......... 17,721 7,493 33,414 7,952(3) 25,520(2) 33,185 29,223 34,476
Income (loss) before
income taxes...... 948 (677) 2,001 418(3) (4,690)(2) 739 1,250 8,303
Net income (loss)... 526 (381) 1,096 244(3) (2,602)(2) 628 887 5,041
BALANCE SHEET DATA:
Cash and cash
equivalents....... 1,122 1,286 2,017 2,531 -- 2,426 2,376 4,329
Total assets........ 36,113 85,144 37,401 67,776 -- 55,191 72,252 50,648
Long-term debt...... 7,455 7,443 8,006 9,720 -- 8,645 8,313 9,089
Total liabilities... 25,699 75,638 28,014 59,617 -- 42,948 60,636 39,920
Shareholders'
equity............ 10,414 9,506 9,387 8,159 -- 12,243 11,616 10,728
PER SHARE DATA:
Net income
(loss)--Basic..... 0.56 (0.41) 1.22 .31(3) (1) (1) (1) (1)
Net income
(loss)--Diluted... 0.55 (0.41) 1.22 .31(3) (1) (1) (1) (1)
Dividends
declared.......... 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Book value.......... 11.09 10.12 10.00 9.32 (1) (1) (1) (1)
</TABLE>
- ------------------------------
(1) Per share information not included for MIAC's predecessor because its
capital structure was not comparable to MIAC's.
(2) Period from November 1, 1996 to July 31, 1997.
(3) Period from August 1, 1997 to October 31, 1997.
11
<PAGE>
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The selected unaudited pro forma combined financial data have been prepared
giving effect to the merger as a purchase. See "The Merger--Accounting
Treatment." The unaudited pro forma combined statement of operations data and
earnings per share data for the three months ended March 31, 1999 and for the
year ended December 31, 1998, assume that the merger had been consummated at the
beginning of each period presented. The selected unaudited pro forma combined
balance sheet data at March 31, 1999 assumes the merger had been consummated as
of that date. For deriving the pro forma combined financial data, the MIAC
balance sheet information is as of MIAC's fiscal quarter ended January 31, 1999
and its statement of operations information is for its fiscal quarter ended
January 31, 1999 and for the fiscal year ended October 31, 1998. The selected
unaudited pro forma combined statement of operations data, net income (loss) per
basic share and net income (loss) per diluted share reflect anticipated
reorganization or restructuring expenses directly resulting from the merger. The
information set forth in the unaudited pro forma combined financial data should
be read in connection with the unaudited pro forma combined financial statements
and notes thereto appearing elsewhere herein. See "Kinnard Unaudited Pro Forma
Combined Financial Statements." The pro forma amounts are not necessarily
indicative of the results of operations or the combined financial position that
would have resulted had the merger been consummated at the beginning of the
period indicated, nor are they necessarily indicative of future results of
operations or financial position.
<TABLE>
<CAPTION>
AS OF AND
FOR THE
THREE MONTHS FOR THE YEAR
ENDED ENDED
MARCH 31, DECEMBER 31,
------------ ------------
1999 1998
------------ ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues.................................. $ 18,546 $ 76,008
Total operating expenses........................ 18,312 78,391
Income (loss) before income taxes............... 234 (2,383)
Net income (loss)............................... 166 (1,533)
BALANCE SHEET DATA:
Cash and cash equivalents....................... 2,125 --
Total assets.................................... 116,797 --
Long term debt.................................. 2,443 --
Total liabilities............................... 79,149 --
Shareholders' equity............................ 37,648 --
PER SHARE DATA:
Net income (loss)--Basic........................ .02 (0.20)
Net income (loss)--Diluted...................... .02 (0.20)
Dividends declared.............................. 0.00 0.00
Book value...................................... 5.40 --
</TABLE>
12
<PAGE>
COMPARATIVE STOCK PRICES AND DIVIDENDS
KINNARD COMMON STOCK
Shares of common stock, par value $0.02 per share, of Kinnard trade on the
Nasdaq National Market under the symbol "KINN." The following table sets forth,
for the periods indicated, the high and low sales prices per share of Kinnard
common stock, as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
KINNARD COMMON STOCK
--------------------
HIGH LOW
--------- ---------
<S> <C> <C>
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
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
1999
First Quarter............................................ $ 6.75 $ 3.875
</TABLE>
On May 14, 1999, the last trading day before the announcement of the
proposed merger was made, the last sale price of Kinnard common stock as
reported on the Nasdaq National Market was $5.00 per share. On , 1999,
the last sale price of Kinnard common stock as reported on the Nasdaq National
Market was $ per share. Following the merger, Kinnard common stock will
continue to be quoted on the Nasdaq National Market. Holders of shares of MIAC
common stock are urged to obtain current market prices for Kinnard common stock.
Kinnard does not currently pay dividends. Under the terms of the merger
agreement, Kinnard is prohibited from paying dividends on Kinnard common stock
prior to the effective time of the merger. See "The Merger--Pre-Merger Dividend
Policy." The payment of future dividends, if any, rests within the discretion of
the Kinnard Board of Directors and will depend upon its earnings, regulatory
capital requirements and financial conditions, as well as other relevant
factors.
On , 1999, there were approximately holders of record of
Kinnard common stock.
MIAC COMMON STOCK
MIAC has one class of common stock, par value $.01 per share. MIAC common
stock is not listed on any exchange or quoted in the over-the-counter market,
and no established "bid" or "ask" price is available. In the opinion of MIAC,
due to the lack of an active market for shares of MIAC common stock,
transactions in MIAC common stock of which MIAC is aware are not frequent enough
to constitute representative prices. The last sale of MIAC common stock of which
MIAC is aware was at $11.00 per share on March 30, 1999.
MIAC has not previously paid dividends. Under the terms of the merger
agreement, MIAC is prohibited from paying dividends on MIAC common stock prior
to the effective time of the merger. See "The Merger--Pre-Merger Dividend
Policy."
On August , 1999, the record date for the MIAC Special Meeting, there were
holders of record of MIAC common stock.
13
<PAGE>
COMPARATIVE UNAUDITED PER SHARE DATA
The following table shows information about the net income and book value
per share for Kinnard common stock on a historical basis and on an unaudited pro
forma basis, and certain equivalent historical per share data for MIAC common
stock.
The information in the following table is based on Kinnard's unaudited
consolidated financial statements for the period ended March 31, 1999 and
audited consolidated financial statements for the year ended December 31, 1998,
incorporated by reference to information that is presented in Kinnard's prior
SEC filings and this document and unaudited financial statements of MIAC for the
three months ended January 31, 1999 and the audited consolidated financial
statements of MIAC, including the notes thereto, for the year ended October 31,
1998. The audited consolidated financial statements of MIAC, including the notes
thereto, for the year ended October 31, 1998, are attached to this document. See
"Incorporation of Certain Documents by Reference" and "Index to Financial
Statements." The pro forma net income (loss) and book value per share amounts
for Kinnard represent its historical net income (loss), and shareholders'
equity, respectively, divided by its historical shares outstanding, as adjusted
for the estimated number of shares to be issued under the merger agreement. The
pro forma net income (loss) and book value per share amounts for MIAC represent
its historical net income (loss), and shareholders' equity, respectively,
divided by its historical shares outstanding, as adjusted for the share
conversion ratio of 3.5 to 1 provided by the merger agreement.
<TABLE>
<CAPTION>
YEAR ENDED
THREE MONTHS ENDED DECEMBER 31,
MARCH 31, 1999 1998
------------------- ---------------
<S> <C> <C>
KINNARD INVESTMENTS, INC.
Basic Net Income (Loss) Per Common Share:
Historical............................................... $ 0.07 $ (0.58)
Pro forma................................................ 0.05 (0.44)
Diluted Net Income (Loss) Per Common Share:
Historical............................................... 0.07 (0.58)
Pro forma................................................ 0.05 (0.44)
Dividends Per Common Share:
Historical............................................... 0.00 0.00
Pro forma................................................ 0.00 0.00
Book Value Per Common Share:
Historical............................................... 5.48 5.38
Pro forma................................................ 4.04 4.03
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED OCTOBER 31,
JANUARY 31, 1999 1998
----------------- ---------------
<S> <C> <C>
MI ACQUISITION CORPORATION
Basic Net Income (Loss) Per Common Share:
Historical................................................ $ (0.41) $ 1.22
Pro Forma................................................. (0.21) 0.60
Diluted Net Income (Loss) Per Common Share:
Historical................................................ (0.41) 1.22
Pro Forma................................................. (0.21) 0.60
Dividends Per Common Share:
Historical................................................ 0.00 0.00
Pro Forma................................................. 0.00 0.00
Book Value Per Common Share:
Historical................................................ 10.12 10.00
Pro Forma................................................. 5.19 5.13
</TABLE>
14
<PAGE>
THE SHAREHOLDERS' MEETINGS
GENERAL
This document is first being mailed by Kinnard and MIAC to holders of their
common stock on or about August , 1999, and is accompanied by the notices of
the special meetings of their shareholders and a form of proxy that is solicited
by their respective Boards of Directors for use at the special meetings.
The Kinnard Special Meeting will be held at 920 Second Avenue South,
Minneapolis, Minnesota at 10:00 a.m. on September , 1999.
The MIAC Special Meeting will be held at 220 South Sixth Street, Suite 300,
Minneapolis, Minnesota at 10:00 a.m. on September , 1999.
MATTERS TO BE CONSIDERED AT THE SHAREHOLDERS' MEETINGS
KINNARD. At the Kinnard Special Meeting, shareholders of Kinnard will be
asked to consider and vote upon (1) a proposal to issue additional shares of
Kinnard common stock in connection with the merger and (2) such other matters as
may properly come before the Kinnard Special Meeting. THE KINNARD BOARD BELIEVES
THE MERGER IS FAIR AND IN THE BEST INTERESTS OF KINNARD AND ITS SHAREHOLDERS AND
UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE ISSUANCE OF SHARES OF KINNARD
COMMON STOCK IN CONNECTION WITH THE MERGER.
MIAC. At the MIAC Special Meeting, shareholders of MIAC will be asked to
consider and vote upon (1) a proposal to approve the merger agreement and (2)
such other matters as may properly come before the MIAC Special Meeting. THE
MIAC BOARD BELIEVES THE MERGER IS FAIR AND IN THE BEST INTERESTS OF MIAC AND ITS
SHAREHOLDERS AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE PROPOSAL TO
APPROVE THE MERGER AGREEMENT.
RECORD DATE; STOCK ENTITLED TO VOTE; QUORUM
KINNARD. The Kinnard Board has fixed the close of business on August ,
1999 as the record date for the Kinnard Special Meeting. Only holders of record
of shares of Kinnard common stock on the Kinnard record date are entitled to
notice of and to vote at the Kinnard Special Meeting. On the Kinnard record
date, there were shares of Kinnard common stock outstanding and entitled
to vote at the Kinnard Special Meeting held by approximately shareholders
of record.
Each holder of record of Kinnard common stock on the Kinnard record date is
entitled to cast one vote per share on each proposal being presented at the
Kinnard Special Meeting. The presence, in person or by proxy, of holders of a
majority of the outstanding shares of Kinnard common stock entitled to vote is
necessary to constitute a quorum at the Kinnard Special Meeting. As of the
Kinnard record date, all executive officers and directors of Kinnard were
entitled in the aggregate to vote approximately 25% of the outstanding Kinnard
common stock.
MIAC. The MIAC Board has fixed the close of business on August , 1999 as
the record date for the MIAC Special Meeting. Only holders of record of shares
of MIAC common stock on the MIAC record date are entitled to notice of and to
vote at the MIAC Special Meeting. On the MIAC record date, there were
shares of MIAC common stock outstanding and entitled to vote at the MIAC Special
Meeting, held by shareholders of record.
Each holder of record of MIAC common stock on the MIAC record date is
entitled to cast one vote per share. The presence, in person or by proxy, of the
holders of a majority of the outstanding shares of MIAC common stock entitled to
vote is necessary to constitute a quorum at the MIAC Special Meeting. As of the
MIAC record date, all executive officers and directors of MIAC were entitled to
vote approximately 84% of the outstanding MIAC common stock.
VOTES REQUIRED
KINNARD. The affirmative vote of a majority of votes cast is required to
approve the issuance of shares of Kinnard common stock in connection with the
merger.
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MIAC. The affirmative vote of the holders of a majority of the outstanding
shares of MIAC common stock entitled to vote at the MIAC Special Meeting is
required to approve the merger agreement.
VOTING OF PROXIES
Shares represented by all properly executed proxies for Kinnard common stock
received in time for the Kinnard Special Meeting will be voted at the Kinnard
Special Meeting in the manner specified by the holders thereof. Shares
represented by all properly executed proxies for MIAC common stock received in
time for the MIAC Special Meeting will be voted at the MIAC Special Meeting in
the manner specified by the holders thereof. Proxies which do not contain voting
instructions will be voted FOR approval of the respective proposals at the
Kinnard Special Meeting and the MIAC Special Meeting.
It is not expected that any matters other than those referred to herein will
be brought before the Kinnard Special Meeting or the MIAC Special Meeting. If,
however, other matters are properly presented, the persons named as proxies will
vote in accordance with their judgment with respect to such matters.
Abstentions and broker non-votes will be included in the calculation of the
number of shares represented at the Special Meetings for purposes of determining
whether a quorum has been achieved. Neither abstentions nor broker non-votes are
counted in determining whether a matter has been approved. THEREFORE, SINCE
APPROVAL OF THE MERGER AGREEMENT REQUIRES THE AFFIRMATIVE VOTE OF THE HOLDERS OF
AT LEAST A MAJORITY OF THE OUTSTANDING SHARES OF MIAC COMMON STOCK, ABSTENTIONS
AND BROKER NON-VOTES WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE PROPOSALS
BEING SUBMITTED TO MIAC SHAREHOLDERS.
REVOCABILITY OF PROXIES
The grant of a proxy on the enclosed form of proxy does not preclude a
shareholder from voting in person.
A Kinnard shareholder may revoke a proxy at any time prior to its exercise
by delivering to the Secretary of Kinnard a duly executed proxy or revocation of
proxy bearing a later date or by voting in person at the Kinnard Special
Meeting. Attendance at the Kinnard Special Meeting will not of itself constitute
a revocation of a proxy.
An MIAC shareholder may revoke a proxy at any time prior to its exercise by
delivering to the Secretary of MIAC a duly executed proxy or revocation of proxy
bearing a later date or by voting in person at the MIAC Special Meeting.
Attendance at the MIAC Special Meeting will not of itself constitute revocation
of a proxy.
SOLICITATION OF PROXIES
Each of Kinnard and MIAC will bear the cost of the solicitation of proxies
from its own shareholders. Kinnard will bear the cost of printing this document
and all regulatory filing fees in connection with the filing of this document.
In addition to solicitation by mail, the directors, officers and employees of
each of Kinnard and MIAC may solicit proxies from shareholders of such company
by telephone or telegram, or in person, but will receive no additional
compensation for these services. Arrangements will also be made with brokerage
houses and other custodians, nominees and fiduciaries for the forwarding of
solicitation material to the beneficial owners of stock held of record by such
persons, and Kinnard will reimburse these custodians, nominees and fiduciaries
for their reasonable out-of-pocket expenses in connection with this
solicitation.
Norwest Bank Minnesota, N.A. will assist in the solicitation of proxies by
Kinnard and will receive customary fees for its services.
MIAC SHAREHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXY CARDS.
INSTEAD, MIAC SHAREHOLDERS SHOULD USE THE SEPARATE MANILA ENVELOPE WHICH WAS
MAILED WITH THIS DOCUMENT TO RETURN THEIR ELECTION FORM, THEIR MIAC STOCK
CERTIFICATES AND THE LETTER OF TRANSMITTAL.
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THE MERGER
THE FOLLOWING IS A SUMMARY OF THE MATERIAL TERMS AND PROVISIONS OF THE
MERGER AGREEMENT. YOU MAY READ THE ACTUAL PROVISIONS OF THE MERGER AGREEMENT BY
REFERRING TO APPENDIX A.
GENERAL
The Boards of Directors of Kinnard and MIAC have each approved the merger
agreement, which provides for the merger of MIAC with and into Peachtree
Acquisition, Inc., a wholly-owned subsidiary of Kinnard ("Merger Subsidiary").
The Merger Subsidiary will be the surviving corporation. As a result of the
merger, Kinnard will become the holding company for MIAC and MIAC's
subsidiaries, and will remain the holding company of Kinnard's current
subsidiaries. It is intended that the broker-dealer operations of Kinnard and
MIAC will be integrated under the name "Kinnard Miller & Schroeder."
BACKGROUND OF THE MERGER
The management of Kinnard and MIAC have, from time to time, considered the
possibility of expanding their businesses through acquisitions and strategic
combinations in view of the increasing consolidation within the investment
banking industry during the past several years and the impact of such
consolidation on smaller brokerage firms within that industry. In early March
1999, William F. Farley, Chairman and Chief Executive Officer of Kinnard
contacted James F. Dlugosch, President and Chief Executive Officer of MIAC to
arrange an informal meeting to discuss issues affecting their industry.
At the end of March 1999, Messrs. Farley and Dlugosch held a preliminary
meeting to discuss their companies and their respective businesses, their
perception of consolidation within the industry and the benefits of strategic
combinations. At that meeting, Mr. Farley suggested the exploration of a
possible business combination between Kinnard and MIAC. As a result of their
meeting, the companies preliminarily determined that a combination could be
beneficial to each of them and their respective shareholders in view of the
complementary characteristics of the companies' businesses, the accelerating
trend toward consolidation in the industry generally and the larger company that
would be created as a result of the combination. In order to facilitate further
discussions between the two companies, Kinnard and MIAC entered into a
confidentiality agreement on March 31, 1999.
On April 8, 1999, Messrs. Farley and Dlugosch met again to continue
discussions of a possible combination and to exchange further information
concerning their businesses and the timing of a combination. At that meeting,
Mr. Dlugosch confirmed MIAC's interest in pursuing a combination with Kinnard.
Over a period of several days in April, representatives and advisors of the
companies held a series of additional meetings to discuss the terms of the
proposed merger and management structure.
On April 15, 1999, Mr. Farley met with members of Kinnard's Executive
Committee to review his discussions with Mr. Dlugosch, price expectations, the
structure of the transaction and related management issues. At that meeting, Mr.
Farley received approval to make an offer to MIAC, subject to the completion of
due diligence. On the same day, a written offer was submitted to Mr. Dlugosch
that included a term sheet outlining the terms of the proposed combination. By
letter dated April 16, 1999, MIAC responded that the proposed exchange ratio and
cash purchase price of Kinnard's offer were inadequate. Certain senior officers
and directors of Kinnard and MIAC met on April 19 and April 21 to continue
negotiating the price and other terms of the proposed merger. On April 22, 1999,
Kinnard delivered to MIAC a revised term sheet providing for an exchange ratio
of 3.5 shares of Kinnard common stock, or cash of $19.25, for each share of MIAC
common stock.
On April 26, 1999, the MIAC Board met to discuss and review the Kinnard
proposal in detail.
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On April 27 and April 28, 1999, executive officers of Kinnard and MIAC met
to further discuss the terms and structure of the proposed transaction between
the two companies. Messrs. Farley and Dlugosch routinely briefed members of
their boards of directors and senior management as to the status of the
negotiations.
During the next two weeks, both companies conducted extensive due diligence
investigations of the other. At the same time, the legal advisors to the
companies began to negotiate and prepare a merger agreement and other documents
relating to the proposed transaction.
At a special meeting of the MIAC Board held on May 14, 1999, the MIAC Board
reviewed in detail the discussions held to date between Kinnard and MIAC, the
results of the due diligence investigations and the draft merger documentation.
After extensive deliberations, the MIAC Board approved the terms of the merger
agreement and determined that the merger was fair to and in the best interests
of MIAC and its shareholders.
At a special meeting of the Kinnard Board held on May 14, 1999, the Kinnard
Board reviewed in detail the material terms of the proposed combination and the
results of the due diligence investigations. Following detailed presentations by
Kinnard's legal and accounting advisors, the Kinnard Board determined that the
merger was in the best long-term interests of its shareholders and they
unanimously voted their approval of the merger and the terms of the merger
agreement.
On May 14, 15 and 16, 1999, the two companies and their respective legal
advisors completed the final merger agreement. During the afternoon of Sunday,
May 16, 1999, the parties executed the merger agreement and the parties
announced the proposed business combination on the morning of May 17, 1999.
REASONS FOR THE MERGER AND BOARD RECOMMENDATIONS
RECOMMENDATION OF THE KINNARD BOARD AND REASONS FOR THE MERGER. The Kinnard
Board believes that the merger is fair to, and in the best interests of, Kinnard
and the shareholders of Kinnard. Accordingly, the Kinnard Board unanimously
recommends that the shareholders of Kinnard vote for approval of the issuance of
shares of Kinnard common stock in connection with the merger.
In reaching its decision to approve the merger agreement and the
transactions contemplated in the merger agreement, the Kinnard Board consulted
with Kinnard's management, as well as its legal counsel and its financial
advisors, and considered a number of factors, including the following:
- The structure of the merger and the terms and conditions of the merger
agreement.
- The complementary nature of Kinnard's and MIAC's respective businesses
(including the markets they each serve and the products provided by each),
management, strategic objectives and competitive positions.
- The expectation that the merger would result in cost synergies for the
combined operations.
- The likelihood of the merger being approved by the appropriate regulatory
authorities.
- The improvement of the franchise value of Kinnard to its shareholders
through an enhanced distribution network and additional products and
services.
- The ability of the combined enterprise to compete in relevant equity and
fixed-income markets.
- Industry and economic conditions, including trends in the consolidation of
the financial services industry.
- The scale, scope and strength of the operations of the combined company
and the impact on its ability to attract and retain employees given the
competitive hiring practices within the investment banking industry.
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The foregoing discussion of information and factors considered and given
weight by the Kinnard Board is not intended to be exhaustive, but includes all
material factors considered by the Kinnard Board. In reaching its decision with
respect to the merger, the Kinnard Board did not find it practicable to, and did
not, quantify or otherwise attempt to assign relative weights to the foregoing
factors in reaching their determinations. In addition, individual members of the
Kinnard Board may have given differing weights to different factors.
RECOMMENDATION OF THE MIAC BOARD AND REASONS FOR THE MERGER. The MIAC Board
believes that the merger is advisable and fair to, and in the best interest of,
MIAC and its shareholders. MIAC's Board unanimously recommends that MIAC's
shareholders vote for the adoption of the merger agreement.
In making its determination to approve the merger, MIAC's Board considered,
with the assistance of management and its legal advisors, the following material
factors:
- The value and liquidity of the Kinnard common stock and the amount of cash
to be received by MIAC's shareholders in the merger.
- The strength of Kinnard's capital base.
- The belief that increasingly competitive market conditions will favor
larger broker-dealers, and that MIAC will be able to compete more
effectively in the securities industry as a result of the merger.
- The complementary products and market focus of MIAC and Kinnard and the
similarities of their respective customer bases.
- The addition of Kinnard's sales force and the opportunities for the
combined companies to cross-market products and services.
MIAC's Board and its individual members did not quantify or assign relative
values to the factors considered in approving and recommending the merger.
ACCOUNTING TREATMENT
The merger will be accounted for under the purchase method of accounting.
FORM OF THE MERGER
Subject to the terms and conditions of the merger agreement and in
accordance with the Minnesota Business Corporation Act (the "MBCA"), the merger
will be effected by merging MIAC with and into the Merger Subsidiary. The Merger
Subsidiary will be the surviving corporation in the merger and will continue its
corporate existence under the MBCA. At the effective time of the merger, the
separate corporate existence of MIAC will terminate. In the corporate structure
resulting from the merger, Kinnard will continue to be the holding company of
its current subsidiaries, including the Merger Subsidiary, which will hold all
shares of the corporations that at the effective time were subsidiaries of MIAC.
As a result of the merger, the Kinnard Articles and Bylaws immediately prior to
the merger will continue to be the Articles and Bylaws of Kinnard following the
merger. At the effective time, the Articles of Incorporation and the Bylaws of
the Merger Subsidiary will become the Articles of Incorporation and Bylaws of
MIAC.
The parties have agreed that Kinnard may at any time elect to modify the
structure of the merger so long as (1) there is no adverse federal income tax
consequence to Kinnard, Merger Subsidiary, MIAC, the surviving corporation or
any other relevant entities or to the shareholders of Kinnard, MIAC or the
surviving corporation as a result of such modification, (2) the consideration to
be received by the MIAC shareholders is not thereby changed or altered, and (3)
such modification will not delay or impede the consummation of the transactions
contemplated by the merger agreement.
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MERGER CONSIDERATION, ELECTIONS, PRORATION AND ALLOCATION DETERMINATION
MERGER CONSIDERATION. The merger agreement provides that, at the effective
time, each share of MIAC common stock (other than shares as to which dissenters'
rights have been asserted and duly perfected in accordance with the provisions
of the MBCA and shares held by MIAC, Kinnard or their respective subsidiaries)
will be converted into, at the election of each holder and subject to the
prorations described below, the right to receive one of the following (the
"Merger Consideration"):
- $19.25 in cash, without interest (the "Cash Consideration") or
- 3.5 shares (the "Exchange Ratio") of Kinnard common stock (the "Stock
Consideration").
Under certain circumstances, MIAC shareholders may receive a combination of Cash
Consideration and Stock Consideration. See "--Proration."
ELECTIONS. Kinnard has appointed Norwest Bank Minnesota, N.A., whose
address is 161 North Concord Exchange, P.O. Box 738, South St. Paul, Minnesota,
55075-0738, to act as the Exchange Agent (the "Exchange Agent") for the payment
of the Merger Consideration. Included with this document are materials asking
each holder of record of MIAC common stock (excluding shares of record held by
MIAC, Kinnard or their respective subsidiaries) to make an election as to the
consideration to be received for such holder's shares of MIAC common stock. Such
holders of MIAC common stock may:
- elect Stock Consideration (a "Stock Election") with respect to such
holder's MIAC common stock ("Stock Election Shares");
- elect Cash Consideration (a "Cash Election") with respect to such holder's
MIAC common stock ("Cash Election Shares"); or
- make a no election (a "No Election") with respect to such holder's MIAC
common stock ("No Election Shares").
A properly completed election form, together with the letter of transmittal and
your MIAC stock certificates, must be received by the Exchange Agent by 5:00
p.m., local Minneapolis Time on , 1999, the election deadline date.
A failure to properly make an election as described in this document will be
treated as a No-Election. Any shares for which dissenters' rights have been
perfected may not make a valid election.
Neither MIAC nor the MIAC Board of Directors makes any recommendation as to
whether shareholders should elect to receive the Cash Consideration or the Stock
Consideration in the merger.
NO GUARANTEE OF CHOSEN CONSIDERATION. Because the merger agreement provides
that the amount of cash to be included in the Merger Consideration will neither
be less than $5,000,000 nor greater than $8,000,000, no guarantee can be given
that either the election to receive cash or stock by any given shareholder of
MIAC can be fully honored. Rather, the election by each shareholder will be
subject to the proration and allocation procedures described below. See
"--Proration."
ELECTION PROCEDURES. All elections will be required to be made on an
election form. To make an effective election with respect to shares of MIAC
common stock, each holder of MIAC common stock must take the following actions
as instructed in the letter of transmittal and election form,
- complete properly and return the election form to the Exchange Agent,
- deliver with the election form the holder's certificates representing
shares of MIAC common stock, together with the letter of transmittal. In
the event of a lost MIAC stock certificate, deliver the documentation
specified in the letter of transmittal; and
- deliver such other documents as the Exchange Agent or Kinnard may
reasonably require.
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MIAC certificates should not be returned with the enclosed proxy, but should
be forwarded to the Exchange Agent with the letter of transmittal and election
form.
PRORATION. The merger agreement provides that the aggregate Cash
Consideration to be paid in the merger shall not be less than $5,000,000 (the
"Minimum Aggregate Cash Merger Consideration") and not more than $8,000,000,
minus cash paid to extinguish certain stock options and on account of the
Dissenting Shares, (the "Maximum Aggregate Cash Merger Consideration").
In the event the Cash Election Amount is greater than the Maximum Aggregate
Cash Merger Consideration, then all Stock Election Shares and all No-Election
Shares will be converted into the right to receive Stock Consideration, and the
Exchange Agent will on a pro rata basis select from among the Cash Election
Shares, a sufficient number of shares ("Stock Designee Shares") such that the
product of (A) the number of Cash Election Shares minus the number of Stock
Designee Shares, multiplied by (B) $19.25 equals as closely as practicable the
Maximum Aggregate Cash Merger Consideration and the Stock Designee Shares will
thus be converted into the right to receive Stock Consideration. The Cash
Election Shares not so selected as Stock Designee Shares will be converted into
the right to receive Cash Consideration.
In the event the total number of Cash Election Shares multiplied by the Cash
Consideration is less than the Minimum Aggregate Cash Merger Consideration, then
all Cash Election Shares will be converted into the right to receive Cash
Consideration and the Exchange Agent will on a pro rata basis select first from
among the No-Election Shares and second, if necessary, from among the Stock
Election Shares, a sufficient number of such shares ("Cash Designee Shares")
which when multiplied by the Cash Consideration equals as closely as practicable
the Minimum Aggregate Cash Merger Consideration and the Cash Designee Shares
will thus be converted into the right to receive Cash Consideration. The No
Election Shares and the Stock Election Shares not so selected will be converted
into the right to receive Stock Consideration.
In the event the Cash Election Amount is greater than the Minimum Aggregate
Cash Merger Consideration but less than the Maximum Aggregate Cash Merger
Consideration, then all Cash Election Shares will be converted into the right to
receive Cash Consideration and the Exchange Agent will on a pro rata basis
select from among the No-Election Shares, a sufficient number of Cash Designee
Shares such that the product of (A) the sum of the number of Cash Election
Shares plus the number of Cash Designee Shares, multiplied by (B) $19.25 equals
as closely as practicable the Maximum Aggregate Cash Merger Consideration and
the Cash Designee Shares will thus be converted into the right to receive Cash
Consideration. The No-Election Shares not so selected as Cash Designee Shares
and all Stock Election Shares will be converted into the right to receive Stock
Consideration.
ALLOCATION DETERMINATION. As soon as practicable after the election
deadline (but in no event later than five business days thereafter) the Exchange
Agent will determine the allocation of the cash portion and the stock portion of
the Merger Consideration in the manner described above and will notify Kinnard
of its determined allocation.
EXCHANGE PROCEDURES; SURRENDER OF CERTIFICATES; DISSENTING SHARES
EXCHANGE PROCEDURES. Promptly after the allocation determination, Kinnard
will deposit with the Exchange Agent for the benefit of the holders of shares of
MIAC common stock and for exchange in accordance with the terms of the merger
agreement, cash in an amount sufficient to pay the aggregate Cash Consideration
in accordance with the merger agreement (other than in respect of Dissenting
Shares) and certificates representing shares of Kinnard common stock (the
"Kinnard Certificates") for exchange (the cash and certificates so deposited
being the "Exchange Fund").
SURRENDER OF CERTIFICATES. As soon as practicable after the approval of the
merger by the shareholders of MIAC and Kinnard, a form of transmittal letter
will be mailed by the Exchange Agent to the holders of
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MIAC common stock who did not previously submit their MIAC certificates for
surrender. Upon surrender to the Exchange Agent of a certificate previously
representing shares of MIAC common stock, together with a duly executed letter
of transmittal, the holder of such certificate will receive in exchange (A) a
check in the amount equal to the cash, if any, which such holder has the right
to receive (including any cash in lieu of fractional shares of Kinnard common
stock) and (B) a Kinnard Certificate representing that number of whole shares of
Kinnard common stock to which such holder is entitled, if any, and the
surrendered certificate will immediately be canceled.
In the event of a transfer of ownership of shares which is not registered in
the transfer records of MIAC, the shares of Kinnard common stock may be issued
to a transferee if the certificate representing such shares is presented to the
Exchange Agent, accompanied by all documents required to evidence and effect
such transfer and by evidence that any applicable stock transfer taxes have been
paid. Until surrendered, each certificate previously representing shares of MIAC
common stock shall be deemed at any time after the effective time of the merger
to represent only the right to receive upon such surrender the Merger
Consideration with respect to the MIAC common stock the MIAC certificate
formerly represented in accordance with the terms of the merger agreement.
MIAC SHAREHOLDERS MUST FORWARD THEIR STOCK CERTIFICATES TO THE EXCHANGE
AGENT WITH THE SIGNED ELECTION FORM AND THE LETTER OF TRANSMITTAL IN THE MANILA
ENVELOPE; THE ENCLOSED PROXY IS TO BE RETURNED IN THE SEPARATE WHITE ENVELOPE
PROVIDED WITH THIS DOCUMENT.
NO FRACTIONAL SHARES. No fractional shares of Kinnard common stock will be
issued in the merger to holders of MIAC common stock. For each fractional share
that would otherwise be issued, Kinnard will pay, at the time the MIAC
certificates are surrendered, an amount of cash determined by multiplying such
fractional share interest by $19.25. No interest will be paid or accrued on the
cash in lieu of fractional shares.
DIVIDENDS AND DISTRIBUTIONS. Until the certificates representing MIAC
common stock are surrendered for exchange after the effective time of the
merger, no dividends or other distributions declared or made after the effective
time with respect to Kinnard common stock with a record date after the effective
time will be paid with respect to the shares of Kinnard common stock for which
their shares have been exchanged, and no cash payment in lieu of fractional
shares shall be paid to any such holder, until such certificate is surrendered.
Subject to the effect of applicable laws, following surrender of any MIAC
certificate, there will be paid to the holder of such certificate (1) the amount
of dividends or other distributions with a record date after the effective time
paid with respect to the whole shares of Kinnard common stock issued in exchange
for the shares represented by such certificate, and (2) at the appropriate
payment date, the amount of dividends or other distributions, with a record date
after the effective time, but prior to surrender and a payment date occurring
after surrender, payable with respect to such whole shares of Kinnard common
stock.
DISPOSITION OF UNDISTRIBUTED AMOUNTS IN EXCHANGE FUND. Any portion of the
Exchange Fund which remains undistributed to the shareholders of MIAC for six
months after the effective time will be delivered to Kinnard, upon demand, and
any shareholders of MIAC who have not as of the end of that six month period
complied with the procedures described above will then look only to Kinnard for
payment of their claim for the shares of Kinnard common stock, any cash in lieu
of fractional shares of Kinnard common stock and any dividends or distributions
with respect to Kinnard common stock.
None of Kinnard, MIAC, Merger Subsidiary, the Exchange Agent or any other
person will be liable to any holder of an MIAC certificate for any amount
properly delivered to a public official pursuant to any abandoned property,
escheat or similar laws.
Kinnard will be entitled to deduct and withhold from any cash consideration
payable pursuant to the merger agreement to any holder of an MIAC certificate
such amounts as Kinnard is required to deduct
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and withhold with respect to the making of such payment under the Internal
Revenue Code, or any provision of state, local or foreign tax law.
CLOSING OF MIAC RECORD BOOKS. At the effective time, the stock transfer
books of MIAC will be closed, and there will be no further registration of
transfers of shares of MIAC common stock. From and after the effective time, the
holders of MIAC certificates will cease to have any rights with respect to such
shares of MIAC common stock except as otherwise provided in the merger agreement
or by law. On or after the effective time, any MIAC certificates presented to
the Exchange Agent or Kinnard for any reason will be converted in accordance
with the terms of the merger agreement as described above.
DISSENTING SHARES. Notwithstanding anything in the merger agreement to the
contrary, holders of MIAC common stock that have, prior to any vote on the
merger, delivered a written demand for the fair value of their shares of MIAC
common stock in the manner provided under Minnesota law will have the rights as
set forth under Minnesota Statutes and such shares of MIAC common stock will not
be converted or exchangeable as provided above (all such shares of MIAC common
stock being "Dissenting Shares" and holders of such Dissenting Shares being
"Dissenting Shareholders"). Each Dissenting Shareholder who becomes entitled
under applicable law to payment for his or her shares of MIAC common stock will
receive payment for their shares from Kinnard (but only after the amount thereof
has been agreed upon or finally determined under applicable law). If any
Dissenting Shareholder fails to properly perfect, withdraws or otherwise loses
his or her right to appraisal and payment of his or her shares of MIAC common
stock, such Dissenting Shareholder forfeits the right to appraisal of such
shares and, at the effective time, such shares will be deemed converted into
No-Election Shares. See "The Merger--Merger Consideration, Elections, Proration
and Allocation Determination."
TREATMENT OF STOCK OPTIONS OUTSTANDING UNDER MIAC STOCK PLANS
EMPLOYEE OPTIONS. At the effective time, all employee stock options to
purchase shares of MIAC common stock under the MIAC 1997 Stock Option Plan,
which are then outstanding and unexercised, will be converted automatically into
options to purchase shares of Kinnard common stock. Kinnard will assume each
employee option subject to its terms, including the accelerated vesting of the
option which occurs in connection with the merger and the agreements governing
the option. From and after the effective time, the number of shares of Kinnard
common stock purchasable upon exercise of the employee options will be equal to
the number of shares of MIAC common stock that were purchasable thereunder
immediately prior to the effective time multiplied by the Exchange Ratio and
will be rounded to the nearest whole shares The exercise price per share for the
employee options will also be adjusted by dividing the per share exercise price
by the Exchange Ratio and rounding down to the nearest cent.
DIRECTOR OPTIONS. Each holder of an outstanding director stock option to
purchase shares of MIAC common stock under the MIAC 1998 Director Stock Option
Plan will receive within 5 business days after the closing a cash payment (less
applicable withholding taxes) in an amount equal to the difference between
$19.25 and the exercise price per share for the director option.
REGULATORY APPROVALS REQUIRED
Kinnard and MIAC have agreed to take all commercially reasonable actions
necessary to obtain all regulatory approvals required to consummate the
transactions contemplated by the merger agreement and intend to complete the
filing of applications and notifications to obtain such approvals of any
governmental or regulatory authority after the date of this document or have
completed the filing of such applications or notifications prior to such date.
The merger cannot proceed in the absence of the approvals of any government
authority. There can be no assurance that any necessary regulatory approval will
be obtained, or if obtained, there can be no assurance as to the timing thereof.
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<PAGE>
Approvals will be required from certain regulatory agencies in connection
with changes, as a result of the merger, in the ownership of certain businesses
that are controlled by MIAC. These agencies include certain state insurance,
banking, gaming and securities authorities. Certain other approvals or notices
also are required from or to the SEC and the NASD, and may be required from
certain other regulatory agencies.
Kinnard and MIAC are not aware of any other governmental approvals or
actions that are required to complete the merger except as described above.
Should any other approval or action be required, it is presently contemplated
that such approval or action would be sought.
THE EFFECTIVE TIME
The effective time of the merger will occur when the parties file Articles
of Merger with the Secretary of State of the State of Minnesota. The filing will
occur as promptly as practicable after the satisfaction or, if permissible,
waiver of the conditions to the merger as set forth in the merger agreement. The
merger agreement may be terminated by either party if, among other reasons, the
merger is not consummated on or before January 31, 2000. See "Certain Provisions
of the Merger Agreement--Conditions to Consummation of the Merger" and
"--Termination."
STOCK EXCHANGE LISTING
Kinnard will file an application to list the shares of Kinnard common stock
to be issued in connection with the merger on the Nasdaq National Market,
subject to official notice of issuance. The shares of Kinnard common stock are
traded under the symbol "KINN."
RESALE OF KINNARD COMMON STOCK ISSUED PURSUANT TO THE MERGER
The Kinnard common stock issued pursuant to the merger will be registered
under the Securities Act of 1933, as amended (the "Securities Act") and be
freely tradable under the Securities Act except for shares issued to any
shareholder of MIAC who may be deemed to be an "affiliate" of MIAC for purposes
of Rule 145 under the Securities Act. Each affiliate identified by MIAC will
enter into an agreement with Kinnard providing that such affiliate will be
subject to Rule 145(d) of the Securities Act, and will not transfer any Kinnard
common stock received in the merger except in compliance with the Securities
Act. This document does not cover resales of Kinnard common stock received by
any person who may be deemed to be an affiliate of MIAC. MIAC has concluded that
the only affiliates of MIAC are its directors and Mr. Tom S. Nelson.
PRE-MERGER DIVIDEND POLICY
Pursuant to the merger agreement, each of Kinnard and MIAC is prohibited
from declaring or paying any dividend on, or making any other distribution in
respect of, its outstanding shares of capital stock without the prior written
consent of the other party.
POST-MERGER DIVIDEND POLICY
Shareholders should note that future dividends, if any, will be determined
by the Kinnard Board of Directors in light of the earnings and financial
condition of Kinnard and its subsidiaries and other factors, including
applicable governmental regulations and policies. In that regard, Kinnard is a
legal entity separate and distinct from its subsidiaries, and the principal
sources of Kinnard's income are dividends and interest from such subsidiaries.
See also "The Merger--Pre-Merger Dividend Policy."
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<PAGE>
CERTAIN MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following summary discusses the principal federal income tax
consequences of the merger to a shareholder of MIAC. The summary is based upon
the Internal Revenue Code, applicable Treasury Regulations thereunder and
administrative rulings and judicial authority as of the date hereof. All of the
foregoing are subject to change, possibly retroactively, and any such change
could affect the continuing validity of the discussion. The discussion assumes
that holders of shares of MIAC common stock hold such shares as a capital asset,
and does not address the tax consequences that may be relevant to a particular
shareholder subject to special treatment under certain federal income tax laws,
such as dealers in securities, banks, insurance companies, tax-exempt
organizations, non-United States persons and shareholders who acquired shares of
MIAC common stock pursuant to the exercise of options or otherwise as
compensation or tax consequences arising under the laws of any state, locality
or foreign jurisdiction. No rulings have been or will be sought from the
Internal Revenue Service with respect to any tax matters relating to the merger.
Each holder of MIAC common stock is advised to consult his or her own tax
advisors as to the federal, state, local and foreign income and other tax
consequences of the merger.
GENERAL. The consummation of the merger is conditioned on the receipt by
Kinnard and MIAC of the opinion of KPMG Peat Marwick LLP substantially to the
effect that on the basis of facts, representations, assumptions and agreements
set forth or referred to in such opinion, the merger should be treated for
federal income tax purposes as a reorganization within the meaning of Section
368(a)(1)(A) and 368(a)(2)(D) of the Code and opining to the federal income tax
consequences thereof, and that each of Kinnard, MIAC and the Merger Subsidiary
should be a party to the reorganization within the meaning of Section 368(b) of
the Code. The opinions of KPMG represent the best judgment of KPMG, but are not
binding on the Internal Revenue Service (the "Service") or the courts.
The discussion below summarizes certain federal income tax consequences of
the merger to an MIAC shareholder, assuming that all parties to the merger
agreement have acted, and will act, in accordance with the terms of the merger
agreement and that the merger agreement will be consummated at the effective
time pursuant to the terms and conditions set forth in the merger agreement
without the waiver or modification of any such terms and conditions.
HOLDERS OF MIAC COMMON STOCK--GENERAL. As discussed below, the federal
income tax consequences of the merger to an MIAC shareholder depend on whether
such shareholder receives only cash, only shares of Kinnard common stock, or
some combination thereof, in exchange for such shareholder's shares of MIAC
common stock as well as for any shares of MIAC common stock that such
shareholder constructively owns, and may further depend on whether such
shareholder actually or constructively owns any shares of Kinnard common stock.
See "--Additional Considerations."
ONLY CASH RECEIVED. Except as described below (see "--Additional
Considerations"), an MIAC shareholder that receives solely cash in the merger in
exchange for such shareholder's shares of MIAC common stock, or that exercises
such shareholder's right to seek an appraisal of such shareholder's shares of
MIAC common stock, generally should recognize capital gain or loss measured by
the difference between the amount of cash received and the shareholder's tax
basis of the shares of MIAC common stock exchanged therefor. Gain or loss must
be calculated separately for each block of MIAC common stock held by a
shareholder. Shares of MIAC common stock that were acquired at the same time in
a single transaction will be considered a separate "block." Under current law,
in the case of individual taxpayers, capital gains are taxed at the favorable
long-term capital gains rate if the taxpayer's holding period for the investment
was more than one year.
ONLY KINNARD COMMON STOCK RECEIVED. Except as discussed below with respect
to cash received in lieu of a fractional share of Kinnard common stock, a
shareholder of MIAC that receives only shares of Kinnard common stock in the
exchange of such shareholder's shares of MIAC common stock should not recognize
gain or loss. Accordingly, (i) the shareholder's tax basis of the shares of
Kinnard common stock
25
<PAGE>
received in the merger should be the same as the shareholder's tax basis of the
shares of MIAC common stock exchanged therefor in the merger (adjusted, as
discussed below, with respect to fractional shares) and, (ii) the holding period
of Kinnard common stock received should include the holding period of shares of
MIAC common stock exchanged therefor.
CASH AND SHARES OF KINNARD COMMON STOCK RECEIVED. Except as discussed below
(see "--Additional Considerations") and with respect to cash received in lieu of
a fractional share of Kinnard common stock, an MIAC shareholder that receives
both cash and Kinnard common stock in the exchange for MIAC common stock should
recognize capital gain, if any, but not loss in such exchange. The amount of
gain, if any, recognized must be computed separately with respect to each block
of MIAC common stock surrendered in the merger. With respect to each block, gain
should be recognized in an amount equal to the lesser of (i) the amount of gain
realized (i.e., the excess of the amount of cash and the fair market value of
Kinnard common stock received that is allocable to such block over the tax basis
of such block) and (ii) the amount of cash received that is allocable to such
block. For purposes of such calculation, the aggregate amount of cash and
Kinnard common stock received by a shareholder generally should be allocated
proportionally among the shares of MIAC common stock surrendered in exchange
therefor pursuant to the merger. Such gain should be capital gain except as
discussed below (see "--Additional Considerations"). Under current law, in the
case of individual taxpayers, capital gains are taxed at the favorable long term
capital gains rate if the taxpayer's holding period for the investment was more
than one year.
The tax basis of the shares of Kinnard common stock received should be the
same as the tax basis of the shares of MIAC common stock exchanged, decreased by
the basis of any fractional share interest for which cash is received in the
merger, and further decreased by the amount of cash received (other than the
cash received for a fractional share interest), and increased by the amount of
gain recognized on the exchange (including any portion that is treated as a
dividend). The holding period of the shares of Kinnard common stock received
should include the holding period of the shares of MIAC common stock exchanged
therefor.
ADDITIONAL CONSIDERATIONS. In unusual circumstances, an MIAC shareholder
that (i) received cash in the merger and (ii) either constructively owns shares
of MIAC common stock that are exchanged for shares of Kinnard common stock in
the merger, or actually or constructively owns shares of Kinnard common stock
after the merger (other than shares of Kinnard common stock received in the
merger), should be required to treat any gain recognized as dividend income
(rather than capital gain, if any) up to the amount of cash received in the
merger if the receipt of cash by such shareholder has the effect of a
distribution of a dividend. However, in the case of an MIAC shareholder that
receives solely cash in the merger, the amount of any such dividend should not
be limited to the amount of such shareholder's gain. Whether the receipt of cash
has the effect of the distribution of a dividend will depend upon the
shareholder's particular circumstances. The Service has indicated in published
rulings that a distribution that results in any actual reduction in interest of
a small minority shareholder in a publicly held corporation generally should not
constitute a dividend if the shareholder exercises no control with respect to
corporate affairs. For these purposes, a shareholder is treated as owning the
stock owned by certain family members, stock subject to an option to acquire
such stock, stock owned by certain estates and trusts of which the shareholder
is a beneficiary and stock owned by certain affiliated entities. Because of the
complexity of these rules, each holder of MIAC common stock who receives either
solely cash or a combination of cash and Kinnard common stock in the merger, and
who believes these rules may apply to him or her, is particularly urged to
contact his or her own tax advisor.
FRACTIONAL SHARES. If a holder of shares of MIAC common stock receives cash
in lieu of a fractional share of Kinnard common stock in the merger, such cash
amount should be treated as received in exchange for a fractional share of
Kinnard common stock. Gain or loss recognized as a result of that exchange
should be equal to the cash amount received for the fractional share of Kinnard
common stock
26
<PAGE>
reduced by the proportion of the holder's tax basis in shares of MIAC common
stock exchanged and allocable to the fractional share of Kinnard common stock.
Such gain or loss should be capital gain or loss provided that the MIAC common
stock was held as a capital asset as of the effective time.
TREATMENT OF EMPLOYEE OPTION HOLDERS. No income, gain or loss should be
recognized by the employee option holders of nonqualified stock options or
incentive stock options granted under the MIAC employee stock option plan upon
the conversion of those options pursuant to the merger into nonqualified stock
options and incentive stock options to purchase Kinnard common stock.
TREATMENT OF DIRECTOR OPTION HOLDERS. Income should be recognized by the
director option holders of nonqualified stock options or incentive stock options
granted under the MIAC director stock option plan upon the exchange of those
options for cash pursuant to the merger. The director option holders generally
should recognize ordinary income equal to the cash received in exchange for
cancellation of those options.
BACKUP WITHHOLDING. The Exchange Agent will be required to withhold 31% of
any cash payments to which an MIAC shareholder or other payee is entitled
pursuant to the merger unless either (i) the shareholder or other payee provides
its social security number or employer identification number and certifies that
such number is correct, or (ii) an exemption from backup withholding applies
under the applicable law and regulations. Each shareholder and, if applicable,
each other payee should complete and sign the substitute Form W-9 included as
part of the transmittal letter that accompanies the election form, so as to
provide the information and certification necessary to avoid backup withholding,
unless an applicable exemption exists and is established in a manner
satisfactory to the Exchange Agent.
THE PRECEDING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF CERTAIN FEDERAL
INCOME TAX CONSEQUENCES OF THE MERGER AND DOES NOT PURPORT TO BE A COMPLETE
ANALYSIS OR DISCUSSION OF ALL POTENTIAL TAX EFFECTS RELEVANT THERETO. THUS, MIAC
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES TO THEM OF THE MERGER, INCLUDING TAX RETURN REPORTING REQUIREMENTS,
THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL AND OTHER APPLICABLE TAX
LAWS AND THE EFFECT OF ANY PROPOSED CHANGES IN THE TAX LAWS.
DISSENTERS' RIGHTS
THE FOLLOWING SUMMARY OF THE APPLICABLE PROVISIONS OF SECTIONS 302A.471 AND
302A.473 OF THE MINNESOTA BUSINESS CORPORATION ACT ("MBCA") IS NOT INTENDED TO
BE A COMPLETE STATEMENT OF SUCH PROVISIONS AND IS QUALIFIED IN ITS ENTIRETY, BY
REFERENCE TO SUCH SECTIONS, THE FULL TEXTS OF WHICH ARE ATTACHED AS APPENDIX B
TO THIS DOCUMENT. THESE SECTIONS SHOULD BE REVIEWED CAREFULLY BY ANY MIAC
SHAREHOLDER WHO WISHES TO EXERCISE DISSENTERS' RIGHTS OR WHO WISHES TO PRESERVE
THE RIGHT TO DO SO, SINCE FAILURE TO COMPLY WITH THE STATUTORY PROCEDURES
SUMMARIZED BELOW WILL RESULT IN THE LOSS OF DISSENTERS' RIGHTS. ANY HOLDER WHO
FORFEITS HIS OR HER DISSENTER'S RIGHTS BY FAILURE TO FOLLOW THESE PROCEDURES
WILL THEN RECEIVE THE MERGER CONSIDERATION DESCRIBED IN THIS DOCUMENT.
The merger agreement constitutes a plan of merger for which shareholder
approval is required under the Minnesota Business Corporation Act. Under
Sections 302A.471 and 302A.473 of the MBCA, holders of MIAC common stock will
have the right, by fully complying with the applicable provisions of Sections
302A.471 and 302A.473, to dissent with respect to the merger and to obtain
payment in cash of the "fair value" of their shares of MIAC common stock after
the merger is completed. The term "fair value" means the value of the shares of
MIAC common stock immediately before the effective time.
All references in Sections 302A.471 and 302A.473 and in this summary to a
"shareholder" are to a record holder of the shares of MIAC common stock as to
which dissenters' rights are asserted. A person having beneficial ownership of
shares of MIAC common stock that are held of record in the name of another
person, such as a broker, nominee, trustee or custodian, must act promptly to
cause the record holder to follow the steps summarized below properly and in a
timely manner in order to perfect whatever dissenters' rights such beneficial
owner may have.
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<PAGE>
Shareholders of record who desire to exercise their dissenters' rights under
the MBCA must satisfy all of the following conditions:
- BEFORE the MIAC Special Meeting, deliver a written notice of intent to
demand fair value for shares to the Secretary of MIAC, 220 South Sixth
Street, Suite 300, Minneapolis, Minnesota, 55402. The written demand
should specify the shareholder's name and mailing address, the number of
shares owned and that the shareholder intends to demand the value of his
or her shares. This written demand must be in addition to and separate
from any proxy or vote against the merger. Voting against, abstaining from
voting or failing to vote on the merger does not constitute a demand for
appraisal within the meaning of the MBCA.
- MIAC Shareholders that elect to exercise their dissenters' rights under
the MBCA must not vote for adoption of the merger. A shareholder's failure
to vote against the merger will not constitute a waiver of dissenters'
rights. However, if a shareholder returns a signed proxy but does not
specify a vote against adoption of the merger or direction to abstain, the
proxy will be voted for adoption of the merger, which will have the effect
of waiving that shareholder's dissenters' rights.
- MIAC shareholders may not assert dissenters' rights as to less than all of
the shares registered in such holder's name except where certain shares
are beneficially owned by another person but registered in such holder's
name. If a record owner, such as a broker, nominee, trustee or custodian,
wishes to dissent with respect to shares beneficially owned by another
person, such shareholder must dissent with respect to all of such shares
and must disclose the name and address of the beneficial owner on whose
behalf the dissent is made. A beneficial owner of shares of MIAC common
stock who is not the record owner of such shares may assert dissenters'
rights as to shares held on such person's behalf, provided that such
beneficial owner submits a written consent of the record owner to MIAC at
or before the time such rights are asserted.
After approval of the merger by the shareholders at the MIAC Special
Meeting, the surviving corporation will send a written notice to each
shareholder who filed a written demand for dissenters' rights. The notice will
contain the following information:
- the address to which the shareholder must send a demand for payment and
the stock certificates in order to obtain payment and the date by which
they must be received,
- a form to be used to certify the date on which the shareholder, or the
beneficial owner on whose behalf the shareholder dissents, acquired the
shares or an interest in them and to demand payment,
- a copy of Section 302A.471 of the MBCA and a copy of this summary
describing the procedures to be followed in asserting dissenters' rights.
In order to receive fair value for his or her shares, a dissenting
shareholder must, within 30 days after the date the notice from the surviving
corporation was given, send his or her stock certificates, and all other
information specified in the notice, to the address identified in such notice. A
dissenting shareholder will retain all rights as a shareholder until the
effective time. After a valid demand for payment and the related stock
certificates and other information are received, or after the effective time,
whichever is later, the surviving corporation will remit to each dissenting
shareholder who has complied with statutory requirements the amount that the
surviving corporation estimates to be the fair value of such shareholder's
shares, with interest commencing five days after the effective time at a rate
prescribed by statute. Remittance will be accompanied by the surviving
corporation's closing balance sheet and statement of income for a fiscal year
ending not more than 16 months before the effective time, together with the
latest available interim financial data, an estimate of the fair value of the
shareholder's shares and a brief description of the method used to reach the
estimate, a brief description of the procedure to be followed if such holder is
demanding supplemental payment and copies of Sections 302A.471 and 302A.473 of
the MBCA.
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<PAGE>
If the dissenting shareholder believes that the amount remitted by the
surviving corporation is less than the fair value of such holder's shares, plus
interest, the shareholder may give written notice to the surviving corporation
of such holder's own estimate of the fair value of the shares, plus interest,
within 30 days after the mailing date of the remittance and demand payment of
the difference. Such notice must be delivered to the executive offices of the
surviving corporation. A shareholder who fails to give such written notice
within this time period is entitled only to the amount remitted by the surviving
corporation.
Within 60 days after receipt of a demand for supplemental payment, the
surviving corporation must either pay the shareholder the amount demanded or
agreed to by such shareholder after discussion with the surviving corporation or
petition a court for the determination of the fair value of the shares, plus
interest. The petition must name as parties all shareholders who have demanded
supplemental payment and have not reached an agreement with the surviving
corporation. The court, after determining that the shareholder or shareholders
in question have complied with all statutory requirements, may use any valuation
method or combination of methods it deems appropriate to use, whether or not
used by the surviving corporation or the dissenting shareholder, and may appoint
appraisers to recommend the amount of the fair value of the shares. The court's
determination will be binding on all MIAC shareholders who properly exercised
dissenters' rights and did not agree with the surviving corporation as to the
fair value of the shares. Dissenting shareholders are entitled to judgment for
the amount by which the court-determined fair value per share, plus interest,
exceeds the amount per share, plus interest, remitted to the shareholders by the
surviving corporation. The shareholders shall not be liable to the surviving
corporation for any amounts paid by the surviving corporation which exceed the
fair value of the shares as determined by the court, plus interest. The costs
and expenses of such a proceeding, including the expenses and compensation of
any appraisers, will be determined by the court and assessed against the
surviving corporation, except that the court may, in its discretion, assess part
or all of those costs and expenses against any shareholder whose action in
demanding supplemental payment is found to be arbitrary, vexatious or not in
good faith. The court may award fees and expenses to an attorney for the
dissenting shareholders out of the amount, if any, awarded to such shareholders.
Fees and expenses of experts or attorneys may also be assessed against any
person who acted arbitrarily, vexatiously or not in good faith in bringing the
proceeding.
The surviving corporation may withhold the remittance of the estimated fair
value, plus interest, for any shares owned by any person who was not a
shareholder or who is dissenting on behalf of a person who was not a beneficial
owner on May 17, 1999, the date on which the proposed merger was first announced
to the public (the "Public Announcement Date"). The surviving corporation will
forward to any such dissenting shareholder who has complied with all
requirements in exercising dissenters' rights the notice and all other materials
sent after shareholder approval of the merger to all shareholders who have
properly exercised dissenters' rights, together with a statement of the reason
for withholding the remittance and an offer to pay the dissenting shareholder
the amount listed in the materials if the shareholder agrees to accept that
amount in full satisfaction. The shareholder may decline this offer and demand
payment by following the same procedure as that described for demand of
supplemental payment by shareholders who owned their shares as of the Public
Announcement Date. Any shareholder who did not own shares on the Public
Announcement Date and who fails properly to demand payment will be entitled only
to the amount offered by the surviving corporation. Upon proper demand by any
such shareholder, rules and procedures applicable in connection with receipt by
the surviving corporation of the demand for supplemental payment given by a
dissenting shareholder who owned shares on the Public Announcement Date will
also apply to any shareholder properly giving a demand but who did not own
shares of record or beneficially on the Public Announcement Date, except that
any such shareholder is not entitled to receive any remittance from the
surviving corporation until the fair value of the shares, plus interest, has
been determined pursuant to such rules and procedures.
Shareholders considering exercising dissenters' rights should bear in mind
that the fair value of their shares determined under Sections 302A.471 and
302A.473 of the MBCA could be more than, the same as
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<PAGE>
or, in certain circumstances, less than the consideration they would receive
pursuant to the merger agreement if they do not seek appraisal of their shares.
Cash received pursuant to the exercise of dissenters' rights may be subject
to federal or state income tax. See "The Merger--Certain Material Federal Income
Tax Consequences."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
ACCELERATED VESTING OF STOCK OPTIONS UNDER 1997 STOCK OPTION PLAN. MIAC's
1997 Stock Option Plan contains a provision which accelerates vesting of the
outstanding and unexercised options issued under the plan in the event of a
change of control of MIAC. Consequently, at the effective time, options to
purchase shares of MIAC common stock held by the executive officers and
directors of MIAC shown in the following table will vest and will be converted
automatically into options to purchase Kinnard common stock. See "The
Merger--Treatment of Stock Options Outstanding Under MIAC Stock Plans."
<TABLE>
<CAPTION>
NUMBER OF SECURITIES EXERCISE PRICE
UNDERLYING UNEXERCISED PER
NAME AND PRINCIPAL POSITION MIAC OPTIONS MIAC SHARE
- ------------------------------------------------------------------------ ----------------------- -----------------
<S> <C> <C>
James L. Morrell........................................................ 2,900 $ 10.00
Director
James F. Dlugosch....................................................... 2,500 $ 13.72
President, Chief Executive Officer and Director
Thomas S. Nelson........................................................ 2,000 $ 13.72
Executive Vice President, Chief Operating
Officer and Chief Financial Officer
</TABLE>
CASH PAYMENT FOR STOCK OPTIONS UNDER 1998 DIRECTOR STOCK OPTION
PLAN. Following the merger, Kinnard has agreed to provide each non-employee
director of MIAC who holds options issued under the 1998 Director Stock Option
Plan with a cash payment equal to the difference between $19.25 per share and
the exercise price of the options, as shown in the following table. See "The
Merger--Treatment of Stock Options Outstanding Under MIAC Stock Plans."
<TABLE>
<CAPTION>
NUMBER OF SECURITIES EXERCISE PRICE
UNDERLYING UNEXERCISED PER
NAME AND PRINCIPAL POSITION MIAC OPTIONS MIAC SHARE
- ------------------------------------------------------------------------ ----------------------- -----------------
<S> <C> <C>
James Arias............................................................. 1,250 $ 13.72
Director 500 $ 10.00
Donald M. Furman........................................................ 1,250 $ 13.72
Director 500 $ 10.00
James L. Morrell........................................................ 1,250 $ 13.72
Director 500 $ 10.00
John E. Peterson........................................................ 1,250 $ 13.72
Director 500 $ 10.00
William D. Sexton....................................................... 1,250 $ 13.72
Director 500 $ 10.00
Paul H. Tietz........................................................... 1,250 $ 13.72
Director 500 $ 10.00
</TABLE>
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<PAGE>
OPERATIONS AND MANAGEMENT AFTER THE MERGER
OPERATIONS. From and after the effective time, MIAC's subsidiaries will be
operating subsidiaries of Kinnard. The primary business operations conducted by
each of the companies will continue following the merger. It is intended that
the broker-dealer operations of Kinnard and MIAC will be integrated and that the
subsidiary will conduct business under the name "Kinnard Miller & Schroeder."
Mr. James F. Dlugosch will assume the position of President and Chief Operating
Officer for this operating subsidiary.
DIRECTORS. Kinnard's Board of Directors is currently comprised of eight
members. Following the adoption at Kinnard's annual meeting of shareholders held
on May 20, 1999, of an amendment to Kinnard's Bylaws, the Board is divided into
three classes. The following individuals currently serve as directors in the
designated classes. Class I directors are serving a term of one year expiring at
Kinnard's 2000 annual meeting; Class II directors are serving a term of two
years expiring at Kinnard's 2001 annual meeting; and Class III directors are
serving a term of three years expiring at Kinnard's 2002 annual meeting.
<TABLE>
<CAPTION>
NAME AGE PRESENT POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
CLASS III DIRECTORS:
William F. Farley.................................. 55 Chief Executive Officer, Chairman and Director
John H. Grunewald.................................. 62 Director
CLASS II DIRECTORS:
Andrew J. O'Connell................................ 44 Director
Ronald A. Erickson................................. 62 Director
Robert D. Potts.................................... 56 Director
CLASS I DIRECTORS:
John J. Fauth...................................... 53 Director
Stephen H. Fischer................................. 55 Director
Robert S. Spong.................................... 64 Director
</TABLE>
After the effective time, the number of Kinnard Board members will be
increased to eleven. James F. Dlugosch, a current member of MIAC's Board, and
two additional nominees proposed by Mr. Dlugosch that are subsequently approved
by Kinnard's Board of Directors, will be elected to fill the newly created
directorships and will stand for re-election as directors at the next annual
meeting of Kinnard shareholders.
EXECUTIVE OFFICERS. From and after the effective time, Kinnard's current
Chairman and Chief Executive Officer, William F. Farley, will continue as
Chairman and Chief Executive Officer of Kinnard.
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<PAGE>
CERTAIN PROVISIONS OF THE MERGER AGREEMENT
GENERAL
The Kinnard Board and the MIAC Board have approved the merger agreement,
which provides for the merger of Kinnard and MIAC, to be effected by the merger
of MIAC with and into Merger Subsidiary. The Merger Subsidiary will be the
surviving corporation. This section of the document describes certain aspects of
the proposed merger, including certain provisions of the merger agreement. The
description of the merger agreement contained in this document does not purport
to be complete and is qualified in its entirety by reference to the merger
agreement, a copy of which is attached to this document as Appendix A and is
incorporated herein by reference. All shareholders of Kinnard and MIAC are urged
to read carefully the merger agreement.
CONDITIONS TO THE CONSUMMATION OF THE MERGER
The obligations of Kinnard and MIAC to complete the merger are subject to
the satisfaction or waiver on or prior to the effective time of various
conditions which include, in addition to other customary closing conditions, the
following:
- the registration statement, of which this document is a part, being
declared effective under the Securities Act and no stop order suspending
the effectiveness will have been issued and no proceeding for that purpose
will have been initiated or threatened by the Securities and Exchange
Commission, and Kinnard shall also have received all other federal and
state securities permits and authorizations necessary to issue Kinnard
common stock pursuant to the merger agreement.
- the shareholders of Kinnard having approved the issuance of additional
shares of Kinnard common stock and the shareholders of MIAC having
approved the merger agreement;
- each of Kinnard and MIAC having executed and delivered Articles of Merger
for filing with the Minnesota Secretary of State;
- no statute, rule, regulation, executive order, decree, injunction or other
order (whether temporary, preliminary or permanent) having been enacted by
any federal or state governmental or regulatory authority or other agency
or commission, or federal or state court of competent jurisdiction, which
in effect restricts, prevents or prohibits completion of the transactions
contemplated by the merger agreement; and
- the shares of Kinnard common stock issuable to MIAC's shareholders
pursuant to the merger having been approved for listing on the Nasdaq
National Market, subject to the official notice of issuance.
The obligations of Kinnard to complete the merger are also subject to the
following additional conditions:
- the representations and warranties made by MIAC in the merger agreement
being true and correct in all material respects as of the effective time
of the merger if made at that time, except to the extent such
representations and warranties expressly relate to an earlier date;
- compliance by MIAC in all material respects with its obligations under the
merger agreement prior to or at the effective time;
- receipt of all consents and the delivery of all filings and notices to
governmental authorities and self regulatory organizations that regulate
the businesses of MIAC and its subsidiaries and are necessary to complete
the merger, with the exception of licenses necessary to continue MIAC's
gaming business, unless the failure to receive or make the same would not,
individually or in the aggregate, have a material adverse effect on MIAC
and its subsidiaries, taken as a whole; other than licenses necessary to
continue MIAC's gaming business,
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<PAGE>
- absence of any legal action preventing the completion of the transactions
contemplated in the merger agreement or that would require MIAC to dispose
of a significant portion of its businesses or making the completion of the
merger illegal;
- Briggs and Morgan, Professional Association, independent counsel of MIAC,
delivering to Kinnard its legal opinion regarding certain issues under
state corporate law;
- KPMG Peat Marwick LLP ("KPMG"), MIAC's independent public accountants,
deliver to Kinnard an opinion stating that:
- the merger will qualify as a reorganization within the meaning of
Section 368(a) of the Code;
- Kinnard and MIAC will each be party to a reorganization within the
meaning of Section 368(b) of the Code;
- no gain or loss will be recognized by any shareholder of MIAC upon
completion of the merger (except with respect to cash received in lieu
of a fractional share interest in Kinnard common stock, on account of
Dissenting Shares or on account of Cash Election Shares);
- the aggregate income tax basis of Kinnard common stock received by the
shareholders of MIAC pursuant to the merger will be the same as the
aggregate tax basis of MIAC common stock surrendered in exchange
therefor (reduced by any amount allocable to a fractional share
interest, Dissenting Shares or Cash Election Shares for which cash is
received); and
- no income, gain or loss will be recognized by holders of Employee
Options upon conversion of such options to acquire MIAC common stock
into options to acquire Kinnard common stock pursuant to the terms of
the merger agreement.
- receipt from each person who is identified as an affiliate of MIAC, a
signed affiliate letter regarding certain restrictions on the resale of
Kinnard common stock under Rule 145 of the Securities Act;
The obligations of MIAC to complete the merger is subject to following
additional conditions:
- the representations and warranties made by Kinnard in the merger agreement
being true and correct in all material respects as of the effective time
of the merger if made at that time, except to the extent such
representations and warranties expressly relate to an earlier date;
- compliance by Kinnard in all material respects with its obligations under
the merger agreement prior to or at the effective time;
- receipt of all consents and the delivery of all filings and notices to
governmental authorities and self regulatory organizations that regulate
the businesses of Kinnard and its subsidiaries and are necessary to
complete the merger, unless the failure to receive or make the same would
not, individually or in the aggregate, have a material adverse effect on
Kinnard and its subsidiaries, taken as a whole;
- absence of any legal action preventing the completion of the transactions
as contemplated in the merger agreement or making the completion of the
merger illegal;
- Kaplan, Strangis and Kaplan, P.A., independent counsel of Kinnard,
delivering to MIAC its legal opinion regarding certain issues under state
corporate law;
- KPMG, Kinnard's independent public accountants, delivering to MIAC an
opinion stating that:
- the merger will qualify as a reorganization within the meaning of
Section 368(a) of the Code;
- Kinnard and MIAC will each be party to a reorganization within the
meaning of Section 368(b) of the Code;
33
<PAGE>
- no gain or loss will be recognized by any shareholder of MIAC upon
completion of the merger (except with respect to cash received in lieu
of a fractional share interest in Kinnard common stock, on account of
Dissenting Shares or on account of Cash Election Shares);
- the aggregate income tax basis of Kinnard common stock received by the
shareholders of MIAC pursuant to the merger will be the same as the
aggregate tax basis of MIAC common stock surrendered in exchange
therefor (reduced by any amount allocable to a fractional share
interest, Dissenting Shares or Cash Election Shares for which cash is
received); and
- no income, gain or loss will be recognized by holders of Employee
Options upon conversion of such options to acquire MIAC common stock
into options to acquire Kinnard common stock pursuant to the terms of
the merger agreement.
- receipt by James Dlugosch, William Sexton and Kenneth Dawkins of complete
releases from Norwest Bank Minnesota, N.A. ("Norwest") of their
obligations or liability as guarantors or pledgors with respect to MIAC's
credit facility with Norwest.
No assurance can be provided as to if or when the approvals of any regulatory
authority necessary to consummate the merger will be obtained or whether all of
the other conditions precedent to the merger will be satisfied or waived by the
party permitted to do so. If the merger is not completed on or before January
31, 2000, the merger agreement may be terminated by either Kinnard or MIAC,
unless the failure to complete the merger by that date is due to a failure of
the party seeking to terminate the merger agreement to perform or observe
covenants and agreements of such party set forth in the merger agreement.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains representations and warranties of Kinnard, on
the one hand, and MIAC, on the other. These representations and warranties,
which do not survive the merger, relate to:
- the corporate organization and good standing of each party,
- the capitalization of each party;
- ownership of subsidiaries of each party and their good standing,
- corporate power to carry on their respective businesses;
- corporate authority to enter into, and the due authorization, execution
and delivery of, the merger agreement and the shareholder vote required to
approve the transactions contemplated by the merger agreement;
- absence of conflict with their respective articles of incorporation and
bylaws or certain other agreements to which each is a party or by which
their respective properties is affected;
- absence of consents or approvals or registrations with governmental
authorities or self regulatory agencies,
- proper registration with the Securities and Exchange Commission and other
regulatory authorities as a broker-dealer, investment advisor or insurance
agency, which registrations are filed currently and all periodic reports
relating thereto are accurate and complete in all material respects, and
the proper registration and licensure of registered representatives;
- documents filed by each of Kinnard and MIAC with the Securities and
Exchange Commission and the accuracy of the information contained therein;
- absence of undisclosed material liabilities since the date of the most
recent audited financial statements of each of Kinnard and MIAC;
34
<PAGE>
- absence of material adverse changes or events with respect to each of
Kinnard and MIAC;
- good and marketable title to all securities held by each of Kinnard and
MIAC;
- absence of pending or threatened litigation;
- filing of tax returns and payment of taxes;
- matters relating to material contracts and commitments;
- fulfillment of obligations by MIAC under participation agreements;
- possession of all right, title and interest to intellectual property
rights necessary to conduct their respective businesses,
- compliance with laws relating to employment,
- matters relating to employee benefit plans;
- compliance with applicable laws and possession of permits and licenses
necessary to conduct their businesses;
- environmental matters relating to their properties;
- no pending transactions to acquire or dispose of substantially all of
their respective properties and assets;
- risk management instruments;
- absence of brokers fees;
- maintenance of internal accounting controls;
- material compliance with customer contracts,
- investment advisory activities;
- insurance policies;
- absence of false or misleading information supplied by either party for
inclusion in the Registration Statement or the Joint Proxy
Statement/Prospectus or any other document filed with the SEC or any other
governmental authority or self-regulatory organization; and
- affiliate transactions of MIAC.
CONDUCT OF BUSINESS PENDING THE MERGER
Pursuant to the merger agreement, Kinnard and MIAC have each agreed that
prior to the effective time (and unless the prior written consent of the other
shall have been obtained) each of them and their respective subsidiaries will
operate their respective businesses in a manner that does not violate any law,
rules and regulations and is consistent with their past custom and practice.
MIAC has also agreed that prior to the effective time, and unless it has
obtained the prior written consent of Kinnard, neither it nor any of its
subsidiaries will:
- issue, sell or otherwise permit to become outstanding or authorize the
creation of, any additional share of capital stock of MIAC or any of its
subsidiaries (other than the issuance of MIAC common stock pursuant to the
employee stock options and the director stock options disclosed in the
MIAC Disclosure Schedule to the merger agreement) or any options,
warrants, conversion privileges or rights of any kind to acquire any
additional shares of such capital stock;
35
<PAGE>
- permit any additional shares of capital stock of MIAC or any of its
subsidiaries to become subject to new grants of employee or director stock
options, other rights or similar stock-based employee rights.
- sell, pledge, dispose of or encumber any of its Material assets, except in
the ordinary course of business;
- amend or propose to amend its Articles of Incorporation or Bylaws;
- directly or indirectly adjust, split, combine, redeem, reclassify,
purchase or otherwise acquire, any shares of its capital stock, or
declare, set aside or pay any dividend or other distribution payable in
cash, stock, property or otherwise with respect to any shares of capital
stock of MIAC or any of its subsidiaries;
- redeem, purchase or acquire or offer to acquire any shares of its capital
stock;
- acquire (by merger, exchange, consolidation, acquisition of stock or
assets or otherwise) any corporation, partnership, joint venture or other
business organization or division or material assets thereof;
- incur any indebtedness for borrowed money or issue any debt securities,
except the borrowing of working capital in the ordinary course of business
and consistent with past practice;
- declare or make any distributions or pay any dividends with respect to its
capital stock;
- enter into, amend or terminate any agreements, commitments or contracts
that, individually or in the aggregate with related agreements,
commitments or contracts, are Material to MIAC (except in the ordinary
course of business consistent with past practice); or
- (A) enter into, modify or renew any employment, consulting, severance or
similar agreements or arrangements with any director, officer or employee
other than employment or consulting agreements with respect to employees
or consultants who earn less than $100,000 per year, (B) grant any salary
increases, severance or termination pay to, any employees of MIAC or any
of its subsidiaries other than with respect to employees who earn less
than $100,000 per year, or (C) grant bonuses except pursuant to existing
employment agreements, compensation plans or otherwise in the ordinary
course of business consistent with past practice.
- except as required by law, adopt or amend any bonus, profit-sharing,
compensation, stock option, pension, retirement, deferred compensation,
severance, employment or other employee benefit plan, agreement, trust,
fund or arrangement for the benefit or welfare of any employee, officer or
director of MIAC or any of its subsidiaries;
- cancel or terminate their current insurance policies or cause any of the
coverage thereunder to lapse, unless simultaneously with such termination,
cancellation or lapse, replacement policies providing coverage equal to or
greater than the coverage under the canceled, terminated or lapsed
policies for substantially similar premiums are in full force and effect;
- implement or adopt any change in its accounting principles, practices or
methods, other than as may be required by generally accepted accounting
principles;
- change its methods of reporting income and deductions for federal income
tax purposes from those employed in the preparation of federal income tax
returns of MIAC for the taxable years ending October 31, 1998 and 1997,
except as required by changes in law or regulation;
- make or rescind any express or deemed election relating to taxes;
- settle or compromise any claim, action, suit, litigation, proceeding,
arbitration, investigation, audit or controversy relating to taxes; or
36
<PAGE>
- except as required by applicable law or regulation,
- implement or adopt any change in its risk management policies,
procedures or practices, which, individually or in the aggregate with
all such other changes, would be material;
- fail to use commercially reasonable means to avoid any material
increase in its aggregate exposure to risk from the general United
States securities markets; or
- materially restructure or materially change its investment securities
portfolio, through purchases, sales or otherwise, or the manner in
which the portfolio is classified or reported.
Kinnard has also agreed that prior to the effective time, and unless it has
obtained the prior written consent of MIAC, neither it nor any of its
subsidiaries will:
- sell, pledge, dispose of or encumber any of its material assets, except in
the ordinary course of business;
- declare or make any distributions or pay any dividends with respect to its
capital stock; or
- authorize any of, or commit or agree to take any of, the actions listed
above.
In addition, each of Kinnard and MIAC has agreed that, among other things,
that each will and will cause each of its subsidiaries to:
- use all commercially reasonable efforts to preserve intact its business
organization and goodwill, keep available the services of its officers and
employees as a group and maintain satisfactory relationships with
suppliers, distributors, customers and others having business
relationships with it;
- confer on a regular and frequent basis with representatives of the other
party to report operational matters and the general status of ongoing
operations;
- not intentionally take any action which would render, or which reasonably
may be expected to render, any representation or warranty made by it in
the merger agreement untrue at the Closing;
- cooperate with the other party in finalizing and communicating to its
employees severance, retention and transition arrangements; and
- use its reasonable efforts to cause the merger to qualify for a
reorganization under Section 368(a) of the Code.
NO SOLICITATION OF TRANSACTIONS
The merger agreement provides that MIAC and its subsidiaries will not
initiate, solicit or encourage (including by way of furnishing information or
assistance), or take any other action to facilitate, any inquiries or the making
of any proposal that constitutes, or may reasonably be expected to lead to any
Competing Transaction (as defined below) or negotiate with any person in
furtherance of such inquiries or to obtain a Competing Transaction, or agree to
or endorse any Competing Transaction, or authorize or permit any of its
officers, directors or employees or any investment banker, financial advisor,
attorney, accountant or other representative retained by it or any of its
subsidiaries to take any such action. Notwithstanding the foregoing, the Board
of Directors of MIAC is not prohibited from furnishing or permitting any of its
officers, directors, employees, investment bankers, financial advisors,
attorneys, accountants or other representatives to furnish information to and
may engage in such negotiations or discussions with, any person that requests
information as to MIAC if the Board of Directors of MIAC, after consultation
with independent legal counsel, determines in good faith that such action is
reasonably required for the Board of Directors of MIAC to comply with its
fiduciary duties imposed by law, and if prior to furnishing such information to
such person, MIAC receives from such person an executed confidentiality
agreement in reasonably customary form and provides Kinnard seven days' notice
of MIAC's intent to furnish such information.
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<PAGE>
For purposes of the merger agreement, a "Competing Transaction" means any of
the following involving MIAC or any of its subsidiaries:
- any merger, consolidation, share exchange, or other similar transactions;
- any sale, lease, exchange, mortgage, pledge, transfer or other disposition
of 10% or more of assets in a single transaction or series of
transactions, excluding from the calculation of such percentage any such
transactions undertaken in the ordinary course of business and consistent
with past practice;
- any sale of 10% or more of shares of capital stock (or securities
convertible or exchangeable into or otherwise evidencing, or any agreement
or instrument evidencing, the right to acquire capital stock);
- any tender offer or exchange offer for 10% or more of outstanding shares
of capital stock;
- any solicitation of proxies in opposition to approval by MIAC's
shareholders of the merger;
- any person shall have acquired beneficial ownership or the right to
acquire beneficial ownership of, or any "group" (as such term is defined
under Section 13(d) of the Exchange Act and the rules and regulations
promulgated thereunder) shall have been formed which beneficially owns or
has the right to acquire beneficial ownership of, 10% or more of the then
outstanding shares of capital stock; or
- any public announcement of a proposal, plan or intention to take any of
the actions listed above.
TERMINATION
The merger agreement may be terminated at any time prior to the effective
time by the applicable Board of Directors, whether before or after approval of
the matters presented in connection with the merger by the shareholders of
Kinnard or MIAC:
- by the mutual consent of the Boards of Directors of Kinnard and MIAC; or
- by Kinnard, on the one hand, or MIAC, on the other hand, at any time after
January 31, 2000 if any of the conditions to the terminating party's
obligation to consummate the merger have not been met and have not been
waived in writing by the terminating party except to the extent that such
failure arises or results from the knowing action or inaction of the
terminating party; or
- by Kinnard, on the one hand, or MIAC, on the other hand, at any time after
discovery of
- a material adverse effect with respect to the other party, the effects
of which event cannot be or has not been cured within 30 days of giving
written notice to the other party; or
- of the occurrence of an event which would be reasonably likely to
result in such a material adverse effect, in either case, the effects
of which event cannot be or has not been cured within 30 days of giving
written notice to the other party; or
- at any time prior to the Effective Date, by Kinnard, on the one hand, or
MIAC, on the other hand, in the event of a material breach by the other
party of any of the covenants or agreements contained in the merger
agreement, which breach cannot be or has not been cured within 30 days of
giving written notice to the breaching party of such breach; or
- either Kinnard, on the one hand, or by MIAC, on the other hand, in the
event the approval of any governmental authority required for consummation
of the merger or the transactions contemplated by the merger agreement
shall have been denied by final nonappealable action of such governmental
authority; or
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<PAGE>
- by Kinnard, if at any time prior to the MIAC Special Meeting, MIAC's Board
of Directors fails to make its recommendation of the merger, or withdraws
such recommendation or modifies or changes such recommendation in a manner
adverse to the interests of Kinnard; or
- by MIAC, if MIAC shall immediately thereafter enter into a definitive
agreement with a third party providing for an Acquisition Transaction (as
defined below) on terms determined, in good faith, by the MIAC Board,
after consultation with independent counsel and financial advisors to the
Board, to be such that termination of the merger agreement and entry into
such third-party agreement is required in order to discharge properly the
directors' duties in accordance with Minnesota Law; or
- by MIAC, within ten business days of receipt of written notice from
Kinnard that a Change of Control (as described below) has occurred.
"Acquisition Transaction" means a transaction or series of transactions
that, directly or indirectly, in substance constitutes a disposition of all or
substantially all of the assets or business of MIAC or its subsidiaries, taken
as a whole, whether by means of (1) a merger or consolidation, share exchange or
any similar transaction, (2) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition, or (3) a purchase or other acquisition (including
by way of a merger or consolidation, share exchange or otherwise) of securities
representing 50% or more of the voting power of MIAC or 50% or more of any of
its subsidiaries; provided, however, in each of the situations described in
clauses (1), (2) or (3), that the Acquisition Transaction shall represent
consideration having an aggregate value (reasonably determined) to MIAC or its
shareholders in excess of the consideration to be received in the merger.
A "Change of Control" shall be deemed to have occurred upon the occurrence
of the following: (1) Kinnard shall have entered into a definitive agreement for
a share exchange, reorganization, merger or consolidation of Kinnard, other than
a share exchange, reorganization, merger or consolidation of Kinnard in which
the holders of Kinnard common stock outstanding immediately prior to the share
exchange, reorganization, merger or consolidation hold, directly or indirectly,
at least 75% of the voting securities of the surviving corporation immediately
after such share exchange, reorganization, merger or consolidation; or (2) there
has been an acquisition in one or more transactions by an individual, entity or
group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act)
of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of more than 25% of the then outstanding shares of Kinnard common
stock; (3) individuals who at the date of this Agreement constituted the Board
of Directors of Kinnard (together with any new directors whose election by such
Board of Directors or whose nomination for election by the shareholders of
Kinnard has been approved by a majority of the directors that are still in
office who either were directors at the date of this Agreement or whose election
or recommendation for election was previously so approved) cease to constitute a
majority of the Board of Directors of Kinnard; or (4) Kinnard shall have entered
into a definitive agreement for the sale, exchange, transfer or disposition of
all or substantially all of the assets of Kinnard or John G. Kinnard and
Company, Incorporated.
In the event of termination of the merger agreement by either MIAC or
Kinnard, other than as a result of a breach by the non-terminating party or as
described under "The Merger--Termination Fee" below, each party will pay its own
expenses and the merger agreement will become void and there will be no
liability or obligation on the part of Kinnard or MIAC other than under certain
specified provisions of the merger agreement dealing with confidential treatment
of non-public information. In the event of termination of the merger agreement
by a material breach, in addition to other remedies at law or equity for breach,
the party to have breached will indemnify and reimburse the non-breaching
party's expenses under the merger agreement.
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<PAGE>
TERMINATION FEE
If the merger agreement is terminated under any of the following
circumstances:
- Kinnard terminates the merger agreement because of the failure of MIAC's
Board to recommend the merger or its withdrawal or modification of that
recommendation in a manner adverse to the interests of Kinnard,
- MIAC terminates the merger agreement and immediately after such
termination enters into a definitive agreement with a third party for an
Acquisition Transaction on terms determined in good faith by the MIAC
Board in consultation with legal counsel and other advisors to the Board
to be such that the termination of the merger agreement with the third
party is necessary to properly discharge the directors' duties under
Minnesota law, or
- the merger agreement is terminated by Kinnard solely due to the failure of
the holders of MIAC common stock to approve the merger at the MIAC Special
Meeting,
and, prior to or within 12 months after such a termination, MIAC enters into an
agreement to engage in an Acquisition Transaction (as described in the preceding
section), then MIAC will be obligated to pay Kinnard a fee equal to $1,500,000.
If such fee becomes payable under the circumstances described above, MIAC will
be obligated to pay the fee to Kinnard within two business days after the date
of entering into the agreement for an Acquisition Transaction.
If MIAC terminates the merger agreement within ten business days of
receiving written notice from Kinnard that a Change of Control (as described in
the preceding section) has occurred, then Kinnard shall pay to MIAC, within two
business days of receiving notice of such termination, a fee equal to
$1,500,000.
AMENDMENT AND WAIVER
At any time prior to the effective time, the merger agreement may be amended
by action taken or authorized by the respective Boards of Directors of Kinnard
and MIAC, except that after the merger agreement has been approved by the
shareholders of MIAC, no amendment may be entered into which would reduce the
Merger Consideration or change the consideration into which each share of MIAC
common stock is to be converted upon consummation of the merger without further
shareholder approval. In addition, at any time prior to the effective time,
either of the parties to the merger agreement may extend the time for the
performance of any of the obligations or other acts of the other party, waive
any inaccuracies in the representations and warranties of the other party
contained in the merger agreement or in any document delivered pursuant to the
merger agreement and waive compliance with any of the covenants, agreements,
conditions, representations or warranties contained in the merger agreement by
the other party.
EXPENSES
Whether or not the merger is consummated, all costs and expenses incurred in
connection with the merger agreement and the transactions contemplated thereby
shall be paid by the party incurring such expense.
40
<PAGE>
THE COMPANIES
KINNARD
Kinnard is a holding company, whose subsidiaries have been providing
financial products and services for over 50 years. The primary subsidiary, John
G. Kinnard and Company, Incorporated ("JGK") is a regional broker-dealer
headquartered in Minneapolis.
JGK 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, JGK 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. NoDakBONDSinc, a wholly-owned subsidiary of JGK, acts as a
fiscal agent in the state of North Dakota. JGK 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.
As of April 30, 1999, Kinnard employed 286 full-time employees and had 13
branch offices located in Minnesota, North Dakota and South Dakota.
The principal executive offices of Kinnard are located at 920 Second Avenue
South, Minneapolis, Minnesota, 55402 and its telephone number is (612) 370-2700.
MIAC
MIAC is a holding company that acquired all of the outstanding stock of
Miller & Schroeder, Inc. ("MSI") in July 1997. MSI is a Minnesota-based
investment banking firm with national experience in specialized debt finance,
including commercial loans, public finance, structured finance and gaming
finance. Since its inception in 1965, MSI has underwritten transactions in all
50 states with a total aggregate value of nearly $33 billion.
MSI has a strong municipal bond presence, an active loan participation
business, a growing corporate capital business, complete fixed income trading
services, a range of mutual funds available to its customers and over 40 sales
representatives covering retail and institutional markets. MSI operates through
four principal subsidiaries. Miller & Schroeder Financial, Inc. is a
broker-dealer which is registered with the SEC and various states and is a
member of the NASD. It specializes in the origination, underwriting, sales and
trading of securities issued by cities, counties and agencies of state and
federal governments. Miller & Schroeder Investments Corporation originates,
sells and services commercial loans. Miller & Schroeder Small Business Capital
Corporation holds insurance licenses of brokers and is approved as an SBA lender
and as a non-bank lender under the BIA loan guaranty program. Miller & Schroeder
Asset Management, Inc. is registered under the Investment Advisers Act of 1940
and manages primarily fixed income assets for private accounts.
As of April 30, 1999, MSI employed 193 full-time employees and had nine
offices located in California, Connecticut, Georgia, Illinois, Minnesota,
Washington and Wisconsin.
The principal executive offices of MIAC are located at 220 South Sixth
Street, Minneapolis, Minnesota 55402 and MIAC's telephone number is (612)
376-1500.
STOCK OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND FIVE PERCENT SHAREHOLDERS
KINNARD. For information concerning ownership of Kinnard common stock by
Directors, Executive Officers and five percent shareholders of Kinnard, see the
1999 Notice of Annual Meeting and Proxy Statement of Kinnard and the Kinnard
Annual Report on Form 10-K for the year ended December 31, 1998. See "Where You
Can Find More Information."
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MIAC. The following table sets forth, as of the record date, certain
information regarding the beneficial ownership of MIAC common stock by (1) each
person who is a beneficial owner of more than 5% of the outstanding MIAC common
stock, (2) each director of MIAC, (3) each executive officer of MIAC, and (4)
all directors and executive officers as a group. The address of the directors is
the executive offices of MIAC. Except as otherwise noted, the named beneficial
owner has sole voting and investment power of the shares of MIAC common stock
indicated.
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES PERCENT
- -------------------------------------------------------------------------------------- ----------------- -----------
<S> <C> <C>
James F. Dlugosch
Director, President and Chief Executive Officer..................................... 194,138(1) 20.1%
William D. Sexton
Director............................................................................ 157,908(2) 16.8%
James Arias
Director............................................................................ 107,908(3) 11.5%
John E. Peterson
Director............................................................................ 86,676(2) 9.2%
Thomas S. Nelson
Executive Vice President, Chief Operating
Officer and Chief Financial Officer................................................. 71,080(4) 7.5%
Kenneth E. Dawkins
Director and Executive Vice President............................................... 62,100(5) 6.6%
Donald M. Furman
Director............................................................................ 61,750(6) 6.6%
John M. Clarey
Director and Executive Vice President............................................... 58,387 6.2%
Paul H. Tietz
Director............................................................................ 35,250(7) 3.7%
James L. Morrell
Director............................................................................ 13,350(8) 1.4%
All directors and officers as a group (10 persons).............................. 848,547(9) 84.4%
</TABLE>
- ------------------------
(1) Includes 28,000 shares currently subject to options and 109,874 shares held
by Mr. Dlugosch's IRA account.
(2) Includes 1,750 shares which are currently subject to options for each of
Messrs. Sexton and Peterson.
(3) Includes 1,750 shares which are currently subject to options and 106,158
shares beneficially owned by Realco, Inc. Mr. Arias is the Chief Executive
Officer and a Director of Realco, Inc. and may be deemed to share voting and
dispositive power with respect to such shares. Mr. Arias disclaims
beneficial ownership with respect to these shares.
(4) Includes 12,500 shares currently subject to options and 29,290 shares held
of record by Mr. Nelson's spouse, Randee Nelson.
(5) Includes 7,500 shares currently subject to options and 54,600 shares held by
the Kenneth E. Dawkins Revocable Trust.
(6) Includes 1,750 shares which are currently subject to options and 60,000
shares held by the Donald and Ruth Furman Revocable Trust.
(7) Includes 1,750 shares which are currently subject to options and 17,500
shares held by Mr. Tietz's IRA account.
(8) Includes 8,850 shares currently subject to options.
(9) Includes 65,600 shares currently subject to options.
42
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
OVERVIEW
MIAC 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 MIAC's expenses are
fixed, which can result in earnings that vary significantly from period to
period.
In June 1997, MIAC was formed and capitalized with $4,000 representing
common stock equity. Operations did not formally commence until July 31, 1997 at
which time MIAC acquired all of the issued and outstanding common stock of MSI
for $13,930,415. The transaction has been accounted for as a purchase. The cash
purchase of outstanding MSI stock was partially financed by $6,500,000 of term
debt and the issuance of $6,729,000 of common stock equity. The excess of the
purchase price over the fair market value of identified net assets acquired of
$4,289,192 was allocated to goodwill. Goodwill is amortized on a straight-line
basis over a period of 20 years. During fiscal 1998, MIAC made purchase
accounting adjustments resulting in a net reduction to goodwill of $477,283.
As of August 1, 1997, MIAC commenced operations as a successor entity. The
comparability of the operating results of MSI and MIAC is substantially affected
by the acquisition.
RESULTS OF OPERATIONS
The following discussion of MIAC's results of operations is based upon
comparisons of (A) the historical results of operations of MIAC for the six
month period ended April 30, 1999 with the comparable period ended April 30,
1998, (B) the historical results of MIAC for the fiscal year ended October 31,
1998 with the combined historical results of MIAC and MSI for fiscal 1997 (the
year MIAC acquired MSI) and (C) the combined historical results of MIAC and MSI
for fiscal 1997 with the historical results of MSI for fiscal 1996.
43
<PAGE>
The following table sets forth a summary of changes in the major categories
of revenues and expenses for the six months ended April 30, 1999 as compared to
the six months ended April 30, 1998:
<TABLE>
<CAPTION>
PERIODS ENDED APRIL
30,
1999 VERSUS 1998
INCREASE (DECREASE)
--------------------
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Securities underwriting and sales................................... $ (1,580) (16%)
Loan origination fees............................................... 4,489 139%
Interest income..................................................... 418 46%
Other income........................................................ 449 47%
--------- ---------
Total revenues........................................................ 3,776 25%
--------- ---------
Expenses
Employee compensation:
Management and underwriting salaries.............................. 170 5%
Sales commissions................................................. 386 14%
Bonuses and incentive compensation................................ 814 72%
Office, clerical and support salaries............................. (19) (2%)
Benefits and other personnel costs................................ 175 15%
--------- ---------
Total employee compensation........................................... 1,526 16%
General and administrative............................................ 750 16%
Interest expense...................................................... (17) (2%)
--------- ---------
Total expenses........................................................ 2,259 15%
--------- ---------
Income before income taxes............................................ 1,517 NM
Income tax expense.................................................... 600 NM
--------- ---------
Net income............................................................ $ 917 NM
--------- ---------
--------- ---------
</TABLE>
44
<PAGE>
The following table sets forth a summary of changes in the major categories
of revenues and expenses from the prior years' results:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------------------------
<S> <C> <C> <C> <C>
1998 (MIAC) VERSUS 1997 (MIAC AND MSI)
1997 (MIAC AND MSI) VERSUS 1996 (MSI)
INCREASE (DECREASE) INCREASE (DECREASE)
-------------------- --------------------
(IN THOUSANDS)
Revenues:
Securities underwriting and sales................................. $ 5,952 33% $ (3,453) (16%)
Loan origination fees............................................. 1,730 30% (2,038) (26%)
Interest income................................................... (390) (17%) (450) (16%)
Other income...................................................... (1,076) (34%) 1,217 64%
--------- --------- --------- ---------
Total revenues...................................................... 6,216 21% (4,724) (14%)
--------- --------- --------- ---------
Expenses
Employee compensation:
Management and underwriting salaries............................ 10 0% 456 7%
Sales commissions............................................... 1,289 28% (584) (11%)
Bonuses and incentive compensation.............................. 971 32% (1,293) (30%)
Office, clerical and support salaries........................... (83) (3%) 230 11%
Benefits and other personnel costs.............................. 112 6% 95 5%
--------- --------- --------- ---------
Total employee compensation......................................... 2,299 12% (1,096) (6%)
General and administrative.......................................... (2,207) (17%) 1,649 15%
Interest expense.................................................... (149) (7%) (266) (11%)
--------- --------- --------- ---------
Total expenses...................................................... (57) 0% 287 1%
--------- --------- --------- ---------
Income (loss) before income taxes................................... 6,273 NM (5,011) NM
Income tax expense (benefit)........................................ 2,819 NM (2,025) NM
--------- --------- --------- ---------
Net income (loss)................................................... $ 3,454 NM $ (2,986) NM
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
SIX MONTH PERIOD ENDED APRIL 30, 1999 COMPARED TO SIX MONTH PERIOD ENDED
APRIL 30, 1998.
For the six months ended April 30, 1999, MIAC earned net income of $526,000
or $.55 per diluted share, on revenues of $18.7 million. This compares to a net
loss of $390,000 or ($.44) per diluted share on revenues of $14.9 million for
the same period in 1998.
Securities underwriting and sales decreased $1.6 million or 16% from the
prior period as a result of decreased municipal bond offerings and retail
transactions.
Loan origination fees increased by $4.5 million or 139% from 1998 due to an
increase in the number of loan closings.
Interest income increased $418,000 or 46% and other income increased
$449,000 or 47% from the prior period as a result of receiving payments on an
investment previously written off.
Management and underwriting salaries increased $170,000 or 5% from the prior
period due to the acquisition of Miller & Schroeder Asset Management, Inc.
Sales commission expense increased by $386,000 or 14% from the prior period,
as did incentive compensation by $814,000 or 72%. Variable compensation, such as
commissions paid to investment executives and incentive compensation paid to
originations employees increased as a result of higher revenues. Benefits and
other personnel costs increased $175,000 as expected with the overall increase
in employee compensation.
45
<PAGE>
General and administrative expenses increased $750,000 or 16% from prior
period. The increase was also due to the acquisition of Miller & Schroeder Asset
Management, Inc. and an increase of direct issue expenses on originated
products.
FISCAL YEAR ENDED OCTOBER 31, 1998 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
1997.
For the twelve months ended October 31, 1998, MIAC earned net income of $1.1
million or $1.22 per share, on revenues of $35.4 million. This compares to a net
loss of $2.4 million on revenues of $29.2 million for the same period in 1997.
Securities underwriting and sales increased $6.0 million or 33% from the
prior year as a result of increased municipal bond offerings and retail
transactions.
Loan origination fees increased by $1.7 million or 30% from 1997 due to an
increase in the number of loan closings.
Interest income decreased 17% primarily as a result of declines in
securities inventory balances and higher turnover of secondary products.
Correspondingly, interest expense was down 7% for the same reasons.
Other income decreased $1.1 million or 34% from the prior year as rental
income declined due to the gain on sale of rental property in 1997.
Sales commission expense increased by $1.3 million or 28% from the prior
year, as did incentive compensation by $971,000 or 32%. Variable compensation,
such as commissions paid to investment executives and incentive compensation
paid to originations employees increased as a result of higher revenues.
Benefits and other personnel costs increased $112,000 as expected with the
overall increase in employee compensation.
General and administrative expenses decreased $2.2 million or 17% from prior
year. MIAC closed several offices and enacted more stringent expense controls
after the acquisition of MSI, all of which resulted in the positive expense
variance.
FISCAL YEAR ENDED OCTOBER 31, 1997 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
1996.
For the twelve months ended October 31, 1997, MIAC lost $2.4 million on
revenues of $29.2 million. This compares to earnings of $628,000 on revenues of
$33.9 million for the same period in 1996.
Securities underwriting and sales decreased $3.5 million or 16% from the
prior year as a result of decreased municipal bond offerings and retail
transactions.
Loan origination fees decreased $2.0 million or 26% from 1996 due to a lower
volume of loan closings.
Interest income decreased 16% as a result of an overall decrease in amount
of securities underwritings and inventory balances. Correspondingly, interest
expense decreased 11%.
Other income increased $1.2 million or 64% from prior year due to a gain on
sale of rental property.
Salaries for management and underwriting increased $456,000 or 7% along with
salaries for office support by $230,000 or 11%. MIAC made severance payments to
various employees after MIAC acquired MSI on July 31, 1997. Benefits and other
personnel costs increased along with the salary increases and additional
employees.
Sales commission expense decreased $584,000 or 11% from the prior year as
did incentive compensation by $1.3 million or 30%. Variable compensation, such
as commissions paid to investment executives and incentive compensation
decreased as a result of lower revenues.
General and administrative expenses increased $1.6 million or 15% from 1996
primarily due to the write off of various notes receivable.
46
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. A large portion of MIAC's assets are cash and assets
readily convertible to cash. The portion of MIAC's security investments and
inventory that are readily marketable are stated at quoted market values.
Inventories are generally maintained to facilitate customer transactions
rather than for market speculation. For 1998 and the first six months of 1999,
investment securities decreased by $21.6 million and increased by $210,000,
respectively. Based on MIAC's current liquidity position, available bank line,
and operating plans, MIAC anticipates that it has sufficient resources to meet
the cash requirements of its operations in the foreseeable future.
As a securities broker-dealer, MIAC's subsidiary, Miller & Schroeder
Financial, Inc. ("MSF"), is required by SEC regulations to meet certain
liquidity and capital standards. As of April 30, 1999, MIAC has been in
compliance with these regulations.
FINANCING ACTIVITIES. MSF has financing arrangements with several financial
institutions and may borrow up to an aggregate of $51 million. MSF's trading
securities and certain assets are pledged as collateral under these
arrangements. Amounts borrowed under these arrangements fluctuate daily based on
the timing of customer and broker-dealer trades and issues underwritten by MSF.
The terms and expiration dates of these facilities are periodically
renegotiated. At April 30, 1999, $1,600,000 was outstanding and $49,400,000 was
available on these facilities. MSF is expected to maintain agreed-upon
compensating balances with the financial institutions. MSF's interest rates on
these borrowings fluctuate with the daily federal funds rate.
MIAC's subsidiary, Miller & Schroeder Investments Corporation ("MSIC"), has
a $5 million credit facility with a financial institution and may draw up to $10
million on MSF's credit facility. At April 30, 1999, MSIC had $1,100,000
outstanding on these credit facilities. MSIC may borrow funds under terms of the
demand note to finance loan participation notes up to predefined amounts, with
the underlying notes pledged as collateral.
Another MIAC subsidiary has a $1 million credit facility with a financial
institution which is secured by notes receivable, and may draw up to $4 million
on MSF's credit facility. At April 30, 1999, $1,344,000 was outstanding on these
facilities.
MIAC has a revolving line of credit with a financial institution which
requires quarterly installments. At April 30, 1999, MIAC had $1,960,000
outstanding. Also, MIAC has a note payable with the same financial institution
which is collateralized by marketable securities. The outstanding balance was
$2,000,000 as of April 30, 1999.
EFFECTS OF INFLATION. Because MIAC's assets are to a large extent liquid in
nature, they are not significantly affected by inflation. Increases in certain
MIAC 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 MIAC's
financial position and results of operations.
YEAR 2000 READINESS DISCLOSURE
The term Y2K is used to describe general problems that may result from
improper processing of dates and date-sensitive calculations by computers or
other machinery as the Year 2000 is approached and reached. This problem stems
from the fact that many of the world's computer hardware and software
applications have historically used only the last two digits to refer to a year.
As a result, many of these computer programs do not or will not properly
recognize a year that begins with "20" instead of the familiar "19". If not
corrected, many computer applications could fail or create erroneous results.
The following information was prepared to comply with the guidelines for Y2K
disclosure that the SEC issued in an Interpretative Release, effective August 3,
1998.
47
<PAGE>
STATE OF READINESS. Y2K readiness presents corporate-wide challenges for
all companies. MIAC recognizes the importance of the Y2K issue and its impact on
information technology and non-information technology systems. As a result, MIAC
is actively managing efforts to plan, allocate resources, and monitor progress
to achieve Y2K readiness. MIAC relies on third parties for information services
and depends on the Y2K readiness of such parties.
MIAC 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. During the assessment stage, all
internal and external systems with a Y2K problem were identified. In fiscal 1997
and 1998 all non-compliant systems and software were upgraded or replaced. In
addition, MIAC is self-clearing and relies on a third-party service bureau to
provide computer systems for booking all customer and broker-dealer
securities-related transactions. The third-party service bureau completed its
systems upgrade to be Y2K compliant in June 1998. MIAC has been informed by all
of its third party information service providers that they are Y2K compliant.
In conjunction with the Securities Industry Association, MIAC participated
in industry-wide testing of system interdependencies in 1999. MIAC's third-party
service bureau reported that its industry-wide testing passed with no material
exceptions.
COSTS TO ADDRESS Y2K ISSUES. MIAC's capital budget does not specifically
identify expenditures related to the Y2K, although many items in the capital
budget relate to upgrading or replacing applications that are not Y2K compliant.
During fiscal 1998, MIAC's technology budget was $745,000, with $335,000 related
to Y2K issues. The budget for fiscal 1999 is $50,000 with the major expense
being the required audit for the BD-Y2K filing with the SEC. The budget for
fiscal 2000 is less than $10,000.
RISKS OF Y2K NON-COMPLIANCE. MIAC recognizes that Y2K issues constitute a
material known uncertainty. MIAC also recognizes the importance of ensuring that
Y2K issues will not adversely affect its operations. MIAC believes that the
processes described above will be effective to manage the risks associated with
the problem. However, there can be no assurance that MIAC's Y2K remediation
efforts will be fully effective.
The failure of MIAC's technology systems relating to a Y2K problem would
likely have a material adverse effect on MIAC's business, results of operations,
and financial condition. This effect could include disruption of normal business
transactions, such as the settlement, execution, processing, and recording of
trades in securities, commodities, currencies, and other assets. The Y2K problem
could also increase MIAC's exposure to risk and its need for liquidity.
Additionally, the failure of securities exchanges, clearing agencies and other
financial institutions to resolve their own processing issues in a timely manner
could have a material adverse effect on MIAC's business, results of operations,
and financial condition.
CONTINGENCY PLANS. MIAC recognizes the need for Y2K contingency plans in
the event that remediation is not fully successful or that the remediation
efforts of critical third parties are not completed. MIAC's contingency plans
may include selection of alternate vendors or service providers and changing
business practices so that a particular system is not needed. In the case of
securities exchanges and clearinghouses, risk mitigation could include the
re-routing of business. MIAC has developed a written contingency plan to provide
for continuity under various scenarios. The contingency plan will be updated and
modified during 1999 as MIAC takes additional progress in addressing the Y2K
issue.
MARKET RISKS
The primary market risk exposure of MIAC is the impact that market and
interest rate volatility may have on the value of financial securities and
underwriting commitments. MIAC 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.
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.
48
<PAGE>
DESCRIPTION OF KINNARD COMMON STOCK ISSUABLE IN THE MERGER
THE FOLLOWING DESCRIPTION OF KINNARD COMMON STOCK ISSUABLE IN THE MERGER IS
A SUMMARY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE TERMS OF SUCH
SECURITY, WHICH IS INCORPORATED BY REFERENCE HEREIN AND IS SET FORTH IN FULL IN
ARTICLE 3 OF KINNARD'S ARTICLES OF INCORPORATION. THE DESCRIPTION CONTAINED IN
THIS DOCUMENT IS SUBJECT IN ALL RESPECTS TO THE MBCA AND KINNARD'S ARTICLES OF
INCORPORATION.
THE FOLLOWING DESCRIPTION OF KINNARD COMMON STOCK SHOULD BE READ CAREFULLY
BY MIAC SHAREHOLDERS SINCE, AT THE EFFECTIVE TIME, MIAC SHAREHOLDERS MAY RECEIVE
PART OR ALL OF THE MERGER CONSIDERATION IN THE FORM OF SHARES OF KINNARD COMMON
STOCK.
GENERAL. Kinnard has one class of common stock, the Kinnard common stock.
Of the 12,000,000 shares of Kinnard common stock authorized, shares were
outstanding as of , 1999. Of the 1,000,000 shares of Kinnard
preferred stock with a par value of $ per share authorized, none were
issued and outstanding as of , 1999.
DIVIDEND RIGHTS. Dividends on Kinnard common stock will be payable out of
the assets of Kinnard legally available therefor as, if and when declared by the
Kinnard Board of Directors. No share of Kinnard common stock is entitled to any
preferential treatment with respect to dividends.
VOTING RIGHTS. Each holder of Kinnard common stock will be entitled at each
shareholders' meeting of Kinnard, as to each matter to be voted upon, to cast
one vote, in person or by proxy, for each share of Kinnard common stock
registered in his or her name on the stock transfer books of Kinnard. Such
voting rights are not cumulative.
RIGHTS UPON LIQUIDATION. Subject to the rights of holders of any Kinnard
preferred stock which may be issued from time to time, in the event of
liquidation, dissolution or winding up of Kinnard, whether voluntary or
involuntary, the holders of Kinnard common stock will be entitled to receive all
assets of Kinnard remaining for distribution to its shareholders, on a pro rata
basis.
MISCELLANEOUS. Shares of Kinnard common stock are not convertible into
shares of any other class of capital stock. Shares of Kinnard common stock are
not and will not be entitled to any preemptive or subscription rights. The
issued and outstanding shares of Kinnard common stock are fully paid and
nonassessable (except as otherwise provided under the MBCA).
COMPARISON OF SHAREHOLDER RIGHTS
The following is a summary of the material differences between the rights of
MIAC shareholders on the one hand, and the rights of Kinnard shareholders, on
the other. As Kinnard and MIAC are both incorporated under the laws of the State
of Minnesota, differences in the rights of shareholders of Kinnard and MIAC
arise from differences between the provisions of Kinnard's Articles of
Incorporation and Bylaws and those of MIAC. Shareholders of MIAC, whose rights
are governed by MIAC's Articles of Incorporation, Bylaws and the MBCA will, on
consummation of the merger, become shareholders of Kinnard. Their rights as
Kinnard shareholders will then be governed by Kinnard's Articles of
Incorporation and Bylaws and by the MBCA. This summary does not purport to be a
complete discussion of, and is qualified in its entirety by reference to, the
Kinnard Articles of Incorporation, the Kinnard Bylaws, the MIAC Articles of
Incorporation, the MIAC Bylaws and the MBCA.
AUTHORIZED CAPITAL STOCK
MIAC. Under MIAC's Articles of Incorporation, MIAC is authorized to issue
up to 90,000,000 shares of common stock, par value $.01 per share, and
10,000,000 shares of preferred stock, par value $.01 per share. The holders of
common stock have one vote per share on all matters to come before the
shareholders. The Board of Directors may divide the preferred stock into series
and establish the relative rights and preferences of preferred stock issued in
the future as specified in MIAC's Articles of
49
<PAGE>
Incorporation without shareholder action and issue such stock in series. As of
the date hereof, no shares of any series of MIAC preferred stock are issued and
outstanding.
KINNARD. Under Kinnard's Articles of Incorporation, Kinnard is authorized
to issue 12,000,000 shares of common stock, par value $0.02 per share and
1,000,000 shares of preferred stock, without par value, and 12,000,000
undesignated shares. All shares of Kinnard common stock are identical in rights
and have one vote. For a description of Kinnard common stock, see "Description
of Kinnard Common Stock Issuable in the Merger." The Board of Directors may
divide the preferred stock into series and establish the relative rights and
preferences of preferred stock issued in the future as specified in Kinnard's
Articles of Incorporation without shareholder action and issue such stock in
series. As of the date hereof, no shares of any series of Kinnard preferred
stock are issued and outstanding.
DISSENTERS' RIGHTS
MIAC. Under the MBCA, shareholders have the right, in some circumstances,
to dissent from certain corporate transactions by demanding payment in cash for
their shares equal to the fair value of the shares as determined by agreement
with the corporation or by a court. The MBCA, in general, affords dissenters'
rights in the event of certain amendments to the articles of incorporation that
materially and adversely affect the rights or preferences of the shares of the
dissenting shareholder, the sale or other disposition of substantially all
corporate assets, or certain mergers and statutory share exchanges involving the
corporation, regardless of whether the shares of the corporation are listed on a
national securities exchange or widely held. Shareholders of MIAC have the right
to dissent from the merger. See "The Merger--Dissenters' Rights."
KINNARD. Shareholders of Kinnard have the same dissenters' rights under the
MCBA as described in the preceding paragraph. Shareholders of Kinnard do not
have the right to dissent from the merger.
REQUIRED VOTE
MIAC. Under the MBCA, MIAC's Articles of Incorporation generally can be
amended if the proposed amendment is approved by MIAC's Board of Directors and
by holders of a majority of the voting power of the shares of MIAC common stock
present and entitled to vote at a meeting. Under the MBCA, the affirmative vote
of a majority of the voting power of all shares of MIAC common stock is required
to approve mergers and certain other extraordinary transactions.
KINNARD. Under the MBCA, Kinnard's Articles of Incorporation generally can
be amended if the proposed amendment is approved by Kinnard's Board of Directors
and by holders of a majority of the voting power of the shares of Kinnard common
stock present and entitled to vote at a meeting. Under the MBCA, the affirmative
vote of a majority of the voting power of all shares of Kinnard common stock is
required to approve mergers and certain other extraordinary transactions.
DIRECTORS
MIAC. MIAC's Board of Directors consists of a single class of directors,
each of whom serves for one year or until his or her successor is elected and
qualified. MIAC's Board of Directors consists of nine directors.
KINNARD. The Board of Directors of Kinnard is divided into three classes as
nearly equal in number as possible, with the directors in each class serving for
staggered three-year terms. At each annual meeting of Kinnard's shareholders,
the successors to the class of directors whose term expires at the time of such
meeting are elected by a majority of the votes cast, assuming a quorum is
present. Kinnard's Board of Directors consists of eight directors.
50
<PAGE>
REMOVAL OF DIRECTORS
MIAC. Under the MBCA, a director may be removed, with or without cause, by
the shareholders, or by a majority of the remaining directors if the director
was named by the board to fill a vacancy and the shareholders have not elected
directors in the interval between the time of appointment to fill a vacancy and
the time of the removal.
KINNARD. Under the MBCA, a director may be removed, with or without cause,
by the shareholders, or by a majority of the remaining directors if the director
was named by the board to fill a vacancy and the shareholders have not elected
directors in the interval between the time of appointment to fill a vacancy and
the time of the removal. Under Kinnard's Bylaws, if, in an election of directors
by the shareholders, a current director does not receive sufficient votes in the
election to fill the position, the current director is automatically removed as
a director at the conclusion of the meeting in which the election occurred and
the directorship remains vacant until otherwise filled.
NEWLY CREATED DIRECTORSHIPS AND VACANCIES ON THE BOARD OF DIRECTORS
MIAC. Under the MBCA, unless a corporation's articles of incorporation or
by-laws provide otherwise, (i) a vacancy on a corporation's board of directors
resulting from the death, resignation, removal or disqualification of a director
may be filled by the vote of a majority of directors then in office, although
less than a quorum, (ii) a newly created directorship resulting from an increase
in the number of directors may be filled by the vote of a majority of the
directors serving at the time of the increase and (iii) in either case, any
director so elected shall hold office only until a qualified successor is
elected at the next regular or special meeting of shareholders. MIAC's Articles
of Incorporation and Bylaws follow these provisions.
KINNARD. The Kinnard Bylaws provide that vacancies on the Kinnard Board may
be filled by the affirmative vote of a majority of the remaining directors, even
though less than a quorum, except that vacancies on the board resulting from
newly created directorships may only be filled by the affirmative vote of
two-thirds of the directors serving at the time of the increase. The Kinnard
Bylaws further provide that any director so elected shall only hold office until
a qualified successor is elected at the next regular or special meeting of
shareholders.
CERTAIN BUSINESS COMBINATIONS
MIAC. MIAC's Articles of Incorporation and Bylaws do not contain any
supermajority voting provisions relating to the approval by holders of MIAC
common stock of mergers or other business combinations. Minnesota has enacted
legislation aimed at regulating takeovers of certain corporations and protecting
shareholders of such corporations in connection with certain business
combinations. The two primary provisions of this nature, namely, the business
combination provision and the control share acquisition provision, are not
applicable to MIAC.
KINNARD. Kinnard's Articles of Incorporation and Bylaws do not contain any
supermajority voting provisions relating to the approval by holders of Kinnard
common stock of mergers or other business combinations. Minnesota has enacted
legislation aimed at regulating takeovers of certain corporations and protecting
shareholders of such corporations in connection with certain business
combinations. The Kinnard Articles provide that the Control Share Acquisition
statute of the MBCA does not apply to Kinnard.
INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES
MIAC. Unless limited by the articles of incorporation or bylaws of a
corporation, the MBCA provides for mandatory indemnification of a director,
officer, employee or committee member against certain liabilities and expenses
if such person (i) acted in good faith; (ii) received no improper personal
51
<PAGE>
benefit; (iii) in the case of a criminal proceeding, had no reasonable cause to
believe the conduct was unlawful; and (iv) depending upon the capacity in which
such person was serving, either believed the conduct was in the best interests
of the corporation or believed that the conduct was not opposed to the best
interests of the corporation. MIAC's Articles and Bylaws authorize
indemnification consistent with the requirements under the MBCA.
KINNARD. Kinnard's Articles authorize the indemnification of executive
officers and directors of Kinnard consistent with the description of the
indemnification provisions in the MBCA as described in the preceding paragraph.
The Kinnard Bylaws limit indemnification of other employees and agents to the
extent determined by an officer of Kinnard who is charged with the
responsibility of monitoring litigation and other disputes whose final
determination is subject to review by the Kinnard Board upon petition by the
employee or agent seeking indemnification.
BUY-SELL PROVISIONS
MIAC. MIAC's Bylaws contain buy-sell provisions which require each
shareholder to offer to MIAC and its other shareholders the right to purchase
shares owned by such person to any voluntary or involuntary transfer of shares
by such person.
KINNARD. Kinnard shareholders are not subject to any similar provision.
EXPERTS
The consolidated financial statements of Kinnard as of December 31, 1998 and
1997 and for each of the years in the two-year period then ended, included in
Kinnard's 1998 Annual Report on Form 10-K and incorporated by reference in this
Joint Proxy Statement/Prospectus, have been audited by KPMG Peat Marwick LLP,
independent certified public accountants, as set forth in their report and
incorporated by reference herein. Such consolidated financial statements are
incorporated by reference herein in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The consolidated statements of operations, shareholders' equity and cash
flows of Kinnard for the year ended December 31, 1996 included in Kinnard's 1998
Annual Report on Form 10-K and incorporated by reference in this Joint Proxy
Statement/Prospectus, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report, which is incorporated herein by reference,
and have been so incorporated in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The consolidated financial statements of MIAC as of October 31, 1998 and for
the year then ended, as of October 31, 1997 and for the periods from August 1,
1997 to October 31, 1997 (successor period) and November 1, 1996 to July 31,
1997 (predecessor period), have been audited by KPMG Peat Marwick LLP,
independent certified public accountants, as set forth in their report included
herein. Such consolidated financial statements are included in this Joint Proxy
Statement/Prospectus in reliance upon the authority of such firm as experts in
accounting and auditing.
The financial statements for the year ended October 31, 1996 for MSI
included in this registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said report.
Kinnard and MIAC have retained KPMG Peat Marwick LLP to render an opinion on
the federal income tax consequences of the merger and in connection therewith,
KPMG reviewed the discussion herein entitled "The Merger--Certain Material
Federal Income Tax Consequences." Such opinion has been included in the
registration statement in reliance upon the authority of said firm as experts in
tax matters.
52
<PAGE>
LEGAL MATTERS
The validity of the shares issued in connection with the merger and certain
other matters will be passed upon for Kinnard by Kaplan, Strangis and Kaplan,
P.A., Minneapolis, Minnesota. Certain legal matters will be passed upon for MIAC
by Briggs and Morgan, Professional Association, Minneapolis, Minnesota.
SHAREHOLDER PROPOSALS
If the merger is consummated, shareholders of MIAC will become shareholders
of Kinnard. Pursuant to Rule 14a-8 promulgated under the Exchange Act, Kinnard
shareholders may present proper proposals for inclusion in Kinnard's proxy
statement for consideration at the next annual meeting of its shareholders by
submitting their proposals to Kinnard in a timely manner. Shareholders proposals
intended for inclusion in Kinnard's proxy statement for its 2000 Annual Meeting
of Shareholders must be received by the Secretary of Kinnard not later than
December 17, 1999 for inclusion in the proxy statement for such meeting. If
Kinnard receives notice of a shareholder proposal after March 2, 2000, persons
named as proxies for its 2000 Annual Meeting of Shareholders will have the
discretionary authority to vote on such proposal.
As of the date of this document, the Kinnard and MIAC Boards of Directors
each know of no matters that will be represented for consideration at the
Kinnard special meeting of shareholders or the MIAC special meeting of
shareholders, other than as described in this document. If any other matters
properly come before either of such special meetings or any adjournments or
postponements thereof and be voted upon, the enclosed proxies will be deemed to
confer discretionary authority on the individuals named as proxies therein to
vote the shares represented by such proxies as to any such matters. The
individuals named as proxies intend to vote or not to vote in accordance with
the recommendation of the respective managements of Kinnard and MIAC.
53
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
UNAUDITED PRO FORMA INFORMATION
Unaudited Pro Forma Combined Financial Data--Narrative Overview...................... F-2
Unaudited Pro Forma Combined Balance Sheet as of March 31, 1999...................... F-3
Unaudited Pro Forma Combined Statement of Operations for the three months ended March
31, 1999........................................................................... F-4
Unaudited Pro Forma Combined Statement of Operations for the year ended December 31,
1998............................................................................... F-5
Notes to Unaudited Pro Forma Combined Financial Statements........................... F-6
MIAC INFORMATION
Unaudited Consolidated Financial Statements:
Consolidated Balance Sheets as of April 30, 1999 (unaudited) and December 31,
1998............................................................................ F-7
Consolidated Statements of Operations for the six months ended April 30, 1999 and
1998 (unaudited)................................................................ F-8
Consolidated Statements of Cash Flows for the six months ended April 30, 1999 and
1998 (unaudited)................................................................ F-9
Notes to Consolidated Financial Statements for the six months ended April 30,
1999 and 1998 (unaudited)....................................................... F-10
Audited Consolidated Financial Statements:
Independent Auditors' Reports.................................................... F-11
Consolidated Balance Sheets as of October 31, 1998 and 1997...................... F-13
Consolidated Statements of Operations for the year ended October 31, 1998, the
period from August 1, 1997 to October 31, 1997 (successor period), November 1,
1996 to July 31, 1997 (predecessor period) and the year ended October 31,
1996............................................................................ F-14
Consolidated Statements of Shareholders' Equity for the year ended October 31,
1998, the period from August 1, 1997 to October 31, 1997 (successor period),
November 1, 1996 to July 31, 1997 (predecessor period) and the year ended
October 31, 1996................................................................ F-15
Consolidated Statements of Cash Flows for the year ended October 31, 1998, the
period from August 1, 1997 to October 31, 1997 (successor period), November 1,
1996 to July 31, 1997 (predecessor period) and the year ended October 31,
1996............................................................................ F-16
Notes to Consolidated Financial Statements....................................... F-17
</TABLE>
F-1
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following unaudited pro forma combined balance sheet as of March 31,
1999 combines historical consolidated balance sheets of Kinnard and MIAC as if
the merger had been effective on Kinnard's first fiscal quarter-end of March 31,
1999, after giving effect to certain adjustments described in the accompanying
notes to the unaudited pro forma consolidated financial information. The MIAC
balance sheet information used in the pro forma presentation is as of MIAC's
fiscal quarter-end of January 31, 1999.
The unaudited pro forma combined statements of operations for the three
months ended March 31, 1999 and for the year ended December 31, 1998, present
the combined results of operations of Kinnard and MIAC as if the merger had been
effective at the beginning of each period presented. The MIAC statement of
operations information presented is for its' fiscal quarter ended January 31,
1999 and its fiscal year ended October 31, 1998.
The unaudited pro forma combined financial information and accompanying
notes reflect the application of the purchase method of accounting for the
merger. The total cost of the acquisition is estimated to be approximately $21.2
million, of which approximately $14.9 million represents goodwill. Under this
method of accounting, Kinnard records at fair value the acquired assets less
liabilities assumed of MIAC. The difference between the cost of the enterprise
and the sum of the fair value of assets less liabilities assumed is recorded as
goodwill which will be amortized over 25 years. The reported pro forma results
of operations of Kinnard includes the operations of MIAC after acquisition,
based on the cost to Kinnard. The pro forma results of operations include direct
costs and the other restructuring expenses associated with the acquisition which
are estimated to approximate $2.8 million ($1.8 million after-tax). The terms of
the merger agreement allow MIAC shareholders to elect to receive either cash or
Kinnard stock. The merger agreement provides that the total cash consideration
will not be less than $5 million or greater than $8.0 million. For purposes of
the pro forma combined financial statement presentation, Kinnard has assumed
that the maximum cash consideration of $8.0 million will be paid and that
1,830,000 common shares of Kinnard will be issued with a value of approximately
$8.9 million. Included in the cost of the acquisition and reflected in the pro
forma combined balance sheet is an amount of $1.5 million which represents the
approximate fair value of Kinnard vested stock options that will be issued under
the merger agreement in exchange for vested MIAC stock options outstanding.
Concurrent with the closing date of the acquisition, Kinnard anticipates
recording a nonrecurring after-tax charge against income of approximately
$900,000. The anticipated charge, which is reflected in the pro forma combined
balance sheet, relates to costs resulting from the transaction.
The unaudited pro forma combined financial statements are based on the
historical financial statements of Kinnard and MIAC and are qualified in their
entirety by, and should be read in conjunction with, these financial statements
and the notes thereto. The unaudited pro forma combined financial statements are
not necessarily indicative of the results of operations or the combined
financial position that would have resulted had the Merger been consummated at
the beginning of the period indicated, nor are they necessarily indicative of
future results of operations or financial position.
F-2
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
KINNARD MIAC(1) ADJUSTMENTS COMBINED
------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Cash and cash equivalents................................... $ 839 $ 1,286 $ 2,125
Receivables from brokers.................................... 1,524 12 1,536
Receivable from customers................................... 2,897 2,897
Miscellaneous receivables................................... 3,363 3,486 6,849
Trading securities.......................................... 8,923 21,025 29,948
Loan participation notes held for sale...................... 48,525 48,525
Fixed assets, net........................................... 1,674 1,259 2,933
Investment in securities.................................... 14,973 (13,000)(2) 1,973
Other assets................................................ 304 1,209 1,513
Income tax receivable....................................... 1,165 685 1,850
Deferred tax asset.......................................... 260 500 940(4) 1,700
Goodwill.................................................... 4,260 10,688(6) 14,948
------- ------- ----------- ---------
TOTAL ASSETS................................................ $33,025 $85,144 (1,372) $116,797
------- ------- ----------- ---------
------- ------- ----------- ---------
Short-term borrowings....................................... 40,322 $ 40,322
Due to broker-dealers....................................... 532 532
Payable to customers........................................ 1,556 1,556
Securities sold not yet purchased........................... 368 83 451
Accounts payable and accrued expenses....................... 4,493 25,702 2,750(8) 32,945
Term debt................................................... 7,443 (5,000)(2) 2,443
Merger provision payable.................................... 900(11) 900
------- ------- ----------- ---------
TOTAL LIABILITIES........................................... 4,861 75,638 (1,350) 79,149
------- ------- ----------- ---------
Common stock................................................ 103 9 27(10) 139
Paid-in-capital............................................. 7,577 8,537 1,811(10) 17,925
Retained earnings........................................... 20,484 960 (960)(10) 19,584
(900)(11)
------- ------- ----------- ---------
TOTAL STOCKHOLDERS' EQUITY.................................. 28,164 9,506 (22) 37,648
------- ------- ----------- ---------
TOTAL LIABILITIES AND EQUITY................................ $33,025 $85,144 (1,372) $116,797
------- ------- ----------- ---------
------- ------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma combined
financial statements
F-3
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
KINNARD MIAC(1) ADJUSTMENTS COMBINED
--------- ----------- --------------- -----------
<S> <C> <C> <C> <C>
Commission income................................................. $ 4,177 $ 3,117 $ 7,294
Principal transactions............................................ 5,049 54 5,103
Investment account................................................ 672 672
Investment banking................................................ 562 1,304 1,866
Interest income................................................... 393 558 (88)(3) 863
Other income...................................................... 965 1,783 2,748
--------- ----------- --- -----------
TOTAL REVENUE..................................................... 11,818 6,816 (88) 18,546
--------- ----------- --- -----------
Employee compensation............................................. 7,630 4,656 (250)(9) 12,036
Floor brokerage and clearance..................................... 965 172 1,137
Communications.................................................... 198 379 577
Occupancy and equipment........................................... 1,437 490 (116)(9) 1,811
Interest expense.................................................. 471 471
Goodwill amortization............................................. 63 88(7) 151
Other operating................................................... 1,001 1,262 (134)(9) 2,129
--------- ----------- --- -----------
TOTAL EXPENSES.................................................... 11,231 7,493 (412) 18,312
--------- ----------- --- -----------
INCOME (LOSS) BEFORE TAXES........................................ 587 (677) 234
INCOME TAXES (BENEFIT)............................................ 234 (296) 130(5) 68
--------- ----------- --- -----------
NET INCOME (LOSS)................................................. $ 353 $ (381) 194 $ 166
--------- ----------- --- -----------
--------- ----------- --- -----------
Earnings (loss) per share:
Basic......................................................... $ 0.07 $ (0.41) $ 0.02
Diluted....................................................... $ 0.07 $ (0.41) $ 0.02
Shares:
Basic......................................................... 5,362 939 7,194
Diluted....................................................... 5,381 939 7,433
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma combined
financial statements
F-4
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
KINNARD MIAC(1) ADJUSTMENTS COMBINED
------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Commission income........................................... $14,684 $13,112 $27,796
Principal transactions...................................... 16,453 1,279 17,732
Investment account.......................................... (187) (187)
Investment banking.......................................... 5,640 12,970 18,610
Interest income............................................. 1,422 1,958 (351)(3) 3,029
Other income................................................ 2,932 6,096 9,028
------- ------- ----------- ---------
TOTAL REVENUE............................................... 40,944 35,415 (351) 76,008
------- ------- ----------- ---------
Employee compensation....................................... 31,360 20,983 (1,000)(9) 51,343
Floor brokerage and clearance............................... 3,413 637 4,050
Communications.............................................. 910 1,673 2,583
Occupancy and equipment..................................... 5,554 2,091 (463)(9) 7,182
Interest expense............................................ 2,022 2,022
Goodwill amortization....................................... 248 403(7) 651
Other operating............................................. 5,336 5,761 (537)(9) 10,560
------- ------- ----------- ---------
TOTAL EXPENSES.............................................. 46,573 33,415 (1,597) 78,391
------- ------- ----------- ---------
INCOME (LOSS) BEFORE TAXES.................................. (5,629) 2,000 (2,383)
INCOME TAXES (BENEFIT)...................................... (2,253) 904 499(5) (850)
------- ------- ----------- ---------
NET INCOME (LOSS)........................................... $(3,376) $ 1,096 747 $(1,533)
------- ------- ----------- ---------
------- ------- ----------- ---------
Earnings (loss) per share:
Basic................................................... $ (0.58) $ 1.22 $ (0.20)
Diluted................................................. $ (0.58) $ 1.22 $ (0.20)
Shares:
Basic................................................... 5,825 899 7,657
Diluted................................................. 5,825 899 7,657
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma combined
financial statements
F-5
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
NOTE 1. The MIAC financial information included herein is as of and for its fiscal
quarter ended January 31, 1999 and for its fiscal year ended October 31,
1998.
NOTE 2. Investment in securities are assumed to be reduced by $13,000,000, comprised
of $8,000,000 for cash paid to MIAC shareholders and retirement of
$5,000,000 in term debt. Kinnard has assumed that MIAC shareholders will
elect the maximum cash consideration amount under the terms of the merger
agreement.
NOTE 3. Interest income is reduced in the pro forma combined statement of operations
to reflect the reduction of investment in securities used to pay MIAC
shareholders, net of interest expense from reduction of term debt.
NOTE 4. Deferred taxes receivable has been increased to reflect the tax effects of
certain acquisition related expenses.
NOTE 5. Income tax expense adjustments reflect the tax effects of anticipated cost
savings from the merger.
NOTE 6. Adjustments to the goodwill balance represent the estimated amount of goodwill
to be recorded from the merger net of the elimination of the existing
goodwill previously recorded by MIAC.
NOTE 7. Adjustment represents amortization of goodwill amount from the merger over 25
years net of the elimination of the prior MIAC goodwill amortization.
NOTE 8. Accounts payable and accrued expenses have been increased to reflect direct
acquisition and other capitalizable merger costs.
NOTE 9. Reductions of expenses due to anticipated costs savings from the merger.
NOTE 10. Adjustments to shareholders' equity reflect the issuance of Kinnard shares to
effect the merger; the elimination of the MIAC equity balances upon
completion of the merger; and the fair value of vested Kinnard options
issued in exchange for MIAC vested options outstanding.
NOTE 11. Adjustment to accrue merger costs which reflects the anticipated after-tax
nonrecurring charge for costs resulting from the merger.
</TABLE>
F-6
<PAGE>
MI ACQUSITION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30, OCTOBER 31,
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... 1,121,6$00 2,016,691
Receivables:
Customers................................................. 2,086,549 1,114,183
Brokers, dealers and clearing organizations............... 1,939,040 68,617
Officers' and employees' notes and advances............... 166,183 128,944
Notes receivable.......................................... 2,082,473 1,906,634
Other receivables......................................... 1,442,753 2,278,984
------------ ------------
Total receivables........................................... 7,716,998 5,497,362
Securities inventory........................................ 17,103,477 17,712,874
Loan participation notes held for sale...................... 2,871,901 4,948,907
Office equipment and leasehold improvements, at cost, less
accumulated depreciation and amortization of $4,744,300 in
1999 and $4,681,390 in 1998............................... 1,201,827 1,291,618
Deferred taxes.............................................. 397,406 548,230
Goodwill, net of amortization............................... 4,196,881 4,323,473
Other....................................................... 1,502,472 1,061,855
------------ ------------
Total assets................................................ 36,112,5$62 37,401,010
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand notes payable........................................ 4,403,8$13 10,463,755
Accounts payable:
Customers................................................. 764,120 1,134,376
Brokers, dealers and clearing organizations............... 3,483,162 883,543
Operating................................................. 6,043,602 2,634,092
------------ ------------
Total accounts payable...................................... 10,290,884 4,652,011
Securities sold not purchased............................... 86,607 --
Accrued liabilities......................................... 3,462,521 4,751,366
Income taxes................................................ -- 140,548
Term debt................................................... 7,455,373 8,006,229
------------ ------------
Total liabilities........................................... 25,699,198 28,013,909
------------ ------------
Commitments and contingencies
Shareholders' equity:
Common stock, $.01 par value, 90,000,000 shares
authorized; 938,950 issued and outstanding in 1999 and
1998.................................................... 9,390 9,390
Preferred stock, $.01 par value, 10,000,000 shares
authorized; none issued and outstanding in 1999 and
1998.................................................... -- --
Additional paid-in capital................................ 8,537,053 8,537,053
Retained earnings......................................... 1,866,921 1,340,658
Less: Note receivable from shareholder.................. -- (500,000)
------------ ------------
Total shareholders' equity.................................. 10,413,364 9,387,101
------------ ------------
Total liabilities and shareholders' equity.................. 36,112,5$62 37,401,010
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
MI ACQUISITION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED APRIL
30,
-----------------------
1999 1998
----------- ----------
(UNAUDITED)
<S> <C> <C>
Revenues:
Securities underwriting and sales................................... $ 8,209,408 9,789,200
Loan origination fees............................................... 7,726,095 3,237,586
Interest income..................................................... 1,331,554 913,403
Other income........................................................ 1,401,832 952,565
----------- ----------
Total revenues........................................................ 18,668,889 14,892,754
----------- ----------
Expenses:
Employee compensation:
Management and underwriting salaries.............................. 3,482,659 3,312,628
Sales commissions................................................. 3,240,483 2,854,176
Bonuses and incentive compensation................................ 1,940,306 1,126,343
Office, clerical and support salaries............................. 1,157,127 1,176,016
Benefits and other personnel costs................................ 1,309,064 1,134,480
----------- ----------
Total employee compensation........................................... 11,129,639 9,603,643
General and administrative............................................ 5,585,700 4,835,245
Interest expense...................................................... 1,005,687 1,022,930
----------- ----------
Total expenses........................................................ 17,721,026 15,461,818
----------- ----------
Income (loss) before income taxes..................................... 947,863 (569,064)
Income tax expense (benefit).......................................... 421,600 (178,600)
----------- ----------
Net income............................................................ $ 526,263 (390,464)
----------- ----------
Earnings (loss) per share:
Basic............................................................... $ 0.56 (0.44)
Diluted............................................................. $ 0.55 (0.44)
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
MI ACQUISITION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED APRIL
30,
----------------------
1999 1998
---------- ----------
(UNAUDITED)
<S> <C> <C>
Operating activities:
Net income (loss).................................................. $ 526,263 (390,464)
Adjustments to reconcile net income (loss) to net cash provided for
operating activities:
Depreciation................................................... 211,611 173,926
Amortization of goodwill....................................... 126,592 116,911
Receivables.................................................... (2,219,636) 4,196,467
Securities inventory........................................... 609,397 22,400,845
Loan participation notes held for sale......................... 2,077,006 5,755,237
Deferred taxes................................................. 150,824 --
Other assets................................................... (440,617) (258,895)
Accounts payable............................................... 5,638,873 2,938,705
Accrued liabilities............................................ (1,288,845) (596,362)
Income taxes................................................... (140,548) (192,237)
Securities purchased under agreement to resell................. -- (1,003,750)
Securities sold, not yet purchased............................. 86,607 1,182,639
---------- ----------
Net cash provided for operating activities......................... 5,337,527 34,323,022
Investing activities:
Purchase of CHB.................................................. -- (774,395)
Payments for office equipment and leasehold improvements, net.... (121,820) (309,788)
---------- ----------
Net cash used for investing activities............................. (121,820) (1,084,183)
---------- ----------
Financing activities:
Repayments under demand notes payable, net....................... (6,059,942) (30,421,056)
Net payments of term debt........................................ (550,856) (1,565,146)
Stock issued in connection with purchase of CHB.................. -- 235,000
Repurchase of shares............................................. (60,500) --
Proceeds for stock issued........................................ 560,500 --
---------- ----------
Net cash used for financing activities............................. (6,110,798) (31,751,202)
---------- ----------
Net (decrease) increase in cash and cash equivalents............... (895,091) 1,487,637
Cash and cash equivalents, beginning of period..................... 2,016,691 2,531,179
---------- ----------
Cash and cash equivalents, end of period........................... 1,121,600 4,018,816
---------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest....................................................... $ 965,089 1,051,654
Income taxes................................................... 481,526 2,935
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
MI ACQUISITION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with the instructions for Form S-4 and do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements and should be read in
conjunction with the consolidated financial statements and related notes for the
year ended October 31, 1998 which are also included in the Form S-4 filing. In
the opinion of management, all adjustments necessary for a fair presentation of
such interim consolidated financial statements have been included. All such
adjustments are of a normal recurring nature. The results of operations for the
six-month period ended April 30, 1999, are not necessarily indicative of results
for subsequent periods.
(2) COMPUTATION OF EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
SIX MONTHS ENDED APRIL
30,
----------------------
1999 1998
---------- ----------
(UNAUDITED)
<S> <C> <C>
Basic earnings (loss) per share:
Net earnings (loss)................................................................... $ 526,263 (390,464)
---------- ----------
Average number of common and common equivalent shares outstanding:
Average common shares outstanding..................................................... 938,950 883,225
---------- ----------
Basic earnings (loss) per share........................................................... $ 0.56 (0.44)
---------- ----------
---------- ----------
Diluted earnings (loss) per share:
Net earnings (loss)................................................................... $ 526,263 (390,464)
---------- ----------
Average number of common and common equivalent shares outstanding:
Average common shares outstanding..................................................... 938,950 883,225
Stock options......................................................................... 17,695 n/a
---------- ----------
956,645 883,225
---------- ----------
Diluted earnings (loss) per share......................................................... $ 0.55 (0.44)
---------- ----------
</TABLE>
F-10
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
MI Acquisition Corporation:
We have audited the accompanying consolidated balance sheets of MI Acquisition
Corporation and subsidiaries as of October 31, 1998 and 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year ended October 31, 1998, and the period from August 1, 1997 to October
31, 1997 (successor period). We have also audited the consolidated statements of
operations, shareholders' equity and cash flows of Miller & Schroeder, Inc. and
subsidiaries (predecessor) for the period from November 1, 1996 to July 31, 1997
(predecessor period). These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MI Acquisition
Corporation and subsidiaries as of October 31, 1998 and 1997, and the results of
their operations and their cash flows for the year ended October 31, 1998, the
successor period from August 1, 1997 to October 31, 1997 and the predecessor
period from November 1, 1996 to July 31, 1997, in conformity with generally
accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, effective July
31, 1997, an investor group acquired all of the outstanding stock of Miller &
Schroeder, Inc. in a business combination accounted for as a purchase. As a
result of the acquisition, the consolidated financial information for the
periods after the acquisition is presented on a different cost basis than that
for the periods before the acquisition and, therefore, is not comparable.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Minneapolis, Minnesota
December 30, 1998
F-11
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Miller & Schroeder, Inc.:
We have audited the accompanying consolidated statements of operations and
shareholders' equity and cash flows of Miller & Schroeder, Inc. (a Minnesota
corporation) and Subsidiaries for the year ended October 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 financial statements referred to above present fairly, in
all material respects, the results of their operations and their cash flows of
Miller & Schroeder, Inc. and Subsidiaries for the year ended October 31, 1996,
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
Minneapolis, Minnesota,
December 20, 1996
F-12
<PAGE>
MI ACQUISITION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents............................................................ $ 2,016,691 2,531,179
Receivables:
Customers.......................................................................... 1,114,183 3,233,956
Brokers, dealers and clearing organizations........................................ 68,617 779,829
Officers' and employees' notes and advances........................................ 128,944 159,661
Income tax receivable.............................................................. -- 336,288
Notes receivable................................................................... 1,906,634 2,971,825
Receivable from prior ownership group.............................................. -- 1,241,000
Other receivables.................................................................. 2,278,984 1,258,551
------------- ------------
Total receivables.................................................................... 5,497,362 9,981,110
Securities inventory................................................................. 17,712,874 39,293,882
Loan participation notes held for sale............................................... 4,948,907 8,917,141
Office equipment and leasehold improvements, at cost, less accumulated depreciation
and amortization of $4,681,390 in 1998 and $4,168,876 in 1997...................... 1,291,618 833,555
Deferred taxes....................................................................... 548,230 825,220
Goodwill, net of amortization........................................................ 4,323,473 4,235,576
Other................................................................................ 1,061,855 1,158,801
------------- ------------
Total assets......................................................................... $ 37,401,010 67,776,464
------------- ------------
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand notes payable................................................................. $ 10,463,755 42,543,000
Accounts payable:
Customers.......................................................................... 1,134,376 722,939
Brokers, dealers and clearing organizations........................................ 883,543 87,659
Operating.......................................................................... 2,634,092 2,098,350
------------- ------------
Total accounts payable............................................................... 4,652,011 2,908,948
Accrued liabilities.................................................................. 1,826,531 2,041,868
Accrued compensation and benefits.................................................... 2,924,835 2,403,292
Income taxes......................................................................... 140,548 --
Term debt............................................................................ 8,006,229 9,719,605
------------- ------------
Total liabilities.................................................................... 28,013,909 59,616,713
------------- ------------
Commitments and contingencies (note 9)
Shareholders' equity:
Common stock, $.01 par value, 90,000,000 shares authorized; 938,950 and 875,850
issued and outstanding in 1998 and 1997, respectively; preferred stock, $.01 par
value, 10,000,000 shares......................................................... 9,390 8,759
Preferred stock, $.01 par value, 10,000,000 shares authorized; none issued and
outstanding in 1998 and 1997..................................................... -- --
Additional paid-in capital......................................................... 8,537,053 7,906,684
Retained earnings.................................................................. 1,340,658 244,308
Less: Note receivable from shareholder (note 11)................................. (500,000) --
------------- ------------
Total shareholders' equity........................................................... 9,387,101 8,159,751
------------- ------------
Total liabilities and shareholders' equity........................................... $ 37,401,010 67,776,464
------------- ------------
------------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-13
<PAGE>
MI ACQUISITION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
PERIOD
FOR THE PERIOD FROM
FROM AUGUST 1, NOVEMBER 1, FOR THE
FOR THE 1997 TO 1996 TO YEAR ENDED
YEAR ENDED OCTOBER 31, JULY 31, OCTOBER 31,
OCTOBER 31, 1997 1997 1996
1998 (SUCCESSOR) (PREDECESSOR) (PREDECESSOR)
------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues:
Securities underwriting and sales.................. $ 23,821,848 6,186,578 11,683,310 21,323,083
Loan origination fees.............................. 7,585,732 1,275,489 4,580,194 7,893,354
Interest income.................................... 1,957,519 513,718 1,833,815 2,797,980
Other income....................................... 2,050,089 393,517 2,732,970 1,909,234
------------- -------------- ------------- ------------
Total revenues....................................... 35,415,188 8,369,302 20,830,289 33,923,651
------------- -------------- ------------- ------------
Expenses:
Employee compensation:
Management and underwriting salaries............. 6,582,929 1,527,193 5,045,824 6,117,265
Sales commissions................................ 5,959,824 1,208,095 3,463,082 5,255,519
Bonuses and incentive compensation............... 4,003,277 1,340,000 1,692,084 4,325,000
Office, clerical and support salaries............ 2,307,778 594,250 1,796,909 2,160,784
Benefits and other personnel costs............... 2,129,441 436,052 1,581,147 1,922,274
------------- -------------- ------------- ------------
Total employee compensation.......................... 20,983,249 5,105,590 13,579,046 19,780,842
General and administrative........................... 10,409,470 2,369,013 10,247,110 10,967,051
Interest expense..................................... 2,021,719 477,091 1,693,665 2,437,138
------------- -------------- ------------- ------------
Total expenses....................................... 33,414,438 7,951,694 25,519,821 33,185,031
------------- -------------- ------------- ------------
Income (loss) before income taxes.................... 2,000,750 417,608 (4,689,532) 738,620
Income tax expense (benefit)......................... 904,400 173,300 (2,087,500) 111,000
------------- -------------- ------------- ------------
Net income (loss).................................... $ 1,096,350 244,308 (2,602,032) 627,620
------------- -------------- ------------- ------------
------------- -------------- ------------- ------------
Earnings (loss) per share:
Basic................................................ $ 1.22 0.31 NM NM
Diluted.............................................. 1.22 0.31 NM NM
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<PAGE>
MI ACQUISITION CORPORATION AND SUBSIDIARIES
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR YEAR ENDED OCTOBER 31, 1998, FOR THE PERIOD FROM AUGUST 1, 1997 TO
OCTOBER 31, 1997 (SUCCESS OR PERIOD), FOR THE PERIOD FROM NOVEMBER 1, 1996 TO
JULY 31, 1997 (PREDECESSOR PERIOD AND FOR THE YEAR ENDED OCTOBER 31 , 1996
<TABLE>
<CAPTION>
ADDITIONAL LESS: NOTE TOTAL
COMMON PAID-IN RETAINED RECEIVABLE SHAREHOLDER'S
SHARES STOCK CAPITAL EARNINGS (NOTE 11) EQUITY
---------- ---------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balances, October 31, 1995............. 990,625 $ 99,063 6,000,000 5,516,406 -- 11,615,469
Net income........................... -- -- -- 627,620 -- 627,620
---------- ---------- ----------- ----------- ----------- ------------
Balances, October 31, 1996............. 990,625 99,063 6,000,000 6,144,026 -- 12,243,089
Net loss-predecessor................. -- -- -- (2,602,032) -- (2,602,032)
Elimination of equity balances....... (990,625) (99,063) (6,000,000) (3,541,994) -- (9,641,057)
Issuance of stock of successor*...... 752,500 7,525 6,721,475 -- -- 6,729,000
---------- ---------- ----------- ----------- ----------- ------------
Balances, July 31,1997................. 752,500 7,525 6,721,475 -- -- 6,729,000
Stock issued......................... 123,350 1,234 1,185,209 -- -- 1,186,443
Net income--successor................ -- -- -- 244,308 -- 244,308
---------- ---------- ----------- ----------- ----------- ------------
Balances, October 31, 1997............. 875,850 8,759 7,906,684 244,308 -- 8,159,751
Stock issued......................... 73,500 735 734,265 -- (500,000) 235,000
Stock redeemed....................... (10,400) (104) (103,896) -- -- (104,000)
Net income........................... -- -- -- 1,096,350 -- 1,096,350
---------- ---------- ----------- ----------- ----------- ------------
Balances, October 31, 1998............. 938,950 $ 9,390 8,537,053 1,340,658 (500,000) 9,387,101
---------- ---------- ----------- ----------- ----------- ------------
---------- ---------- ----------- ----------- ----------- ------------
</TABLE>
- ------------------------
* Issuance of stock occurred on closing date of acquisition but prior to the
commencement of successor operations.
See accompanying notes to consolidated financial statements.
F-15
<PAGE>
MI ACQUISITION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE PERIOD FROM
FROM AUGUST 1, NOVEMBER 1, FOR THE
FOR THE 1997 TO 1996 TO YEAR ENDED
YEAR ENDED OCTOBER 31, JULY 31, OCTOBER 31,
OCTOBER 31, 1997 1997 1996
1998 (SUCCESSOR) (PREDECESSOR) (PREDECESSOR)
------------ -------------- -------------- -------------
<S> <C> <C> <C> <C>
Operating activities:
Net income (loss)........................................... $ 1,096,350 244,308 (2,602,032) 627,620
Adjustments to reconcile net income (loss) to net cash
provided (used) for operating activities:
Depreciation.............................................. 404,742 25,500 392,803 504,769
Amortization of goodwill.................................. 248,151 53,616 -- --
Receivables............................................... 3,242,748 (1,073,885) 1,550,917 844,495
Securities inventory...................................... 21,581,008 (21,017,439) 3,901,176 24,962,557
Loan participation notes held for sale.................... 3,968,234 (659,527) (3,447,535) (1,679,774)
Deferred taxes............................................ 276,990 -- (1,306,500) --
Other assets.............................................. 96,946 1,636,760 185,393 236,933
Accounts payable.......................................... 1,743,063 (2,222,017) (1,520,838) 2,274,714
Accrued liabilities....................................... 306,206 (411,493) 596,345 190,976
Income taxes.............................................. 140,548 -- -- --
Securities sold, not yet purchased........................ -- (11,565) (3,416,982) 2,137,793
------------ -------------- -------------- -------------
Net cash provided (used) for operating activities........... 33,104,986 (23,435,742) (5,667,253) 30,100,083
Investing activities:
Purchase of CHB........................................... (813,331) -- -- --
Payments for office equipment and leasehold improvements,
net..................................................... (862,805) (32,809) (89,526) (260,459)
Sale of rental property................................... -- -- 3,752,709 --
Additions to rental property.............................. -- -- (12,500) (31,356)
Goodwill adjustments (note 2)............................. 477,283 -- -- --
Acquisition of Predecessor, net........................... 1,241,000 -- (15,171,415)* --
------------ -------------- -------------- -------------
Net cash (used) provided for investing activities........... 42,147 (32,809) (11,520,732) (291,815)
------------ -------------- -------------- -------------
Financing activities:
(Repayments) borrowings under demand notes payable, net... (32,079,245) 20,966,842 7,710,738 (27,991,180)
Net borrowings (payments) of term debt.................... (1,713,376) (487,756) (4,937,658) 332,005
Stock issued in connection with purchase of CHB........... 235,000 -- -- --
Proceeds (payments) for stock issued (redeemed)........... (104,000) 1,186,443 6,729,000* --
Issuance of long-term debt in connection with acquisition
of Predecessor.......................................... -- -- 6,500,000* --
(Decrease) increase in securities sold under agreements to
repurchase.............................................. -- -- (6,119,626) 5,367,826
Decrease (increase) in securities purchased under
agreement to resell..................................... -- -- 9,213,802 (7,467,002)
------------ -------------- -------------- -------------
Net cash (used) provided for financing activities........... (33,661,621) 21,665,529 19,096,256 (29,758,351)
------------ -------------- -------------- -------------
Net increase (decrease) in cash and cash equivalents........ (514,488) (1,803,022) 1,908,271 49,917
Cash and cash equivalents, beginning of period.............. 2,531,179 4,334,201 2,425,930 2,376,013
------------ -------------- -------------- -------------
Cash and cash equivalents, end of period.................... $ 2,016,691 2,531,179 4,334,201 2,425,930
------------ -------------- -------------- -------------
------------ -------------- -------------- -------------
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest................................................ $ 2,105,641 472,000 1,752,119 2,562,921
Income taxes............................................ $ 702,887 (1,228,329) 46,788 1,318,217
</TABLE>
- ------------------------------
* Occurred on closing date of acquisition but prior to the commencement of
successor operations.
See accompanying notes to consolidated financial statements.
F-16
<PAGE>
MI ACQUISITION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MI Acquisition Corporation (MIAC and successor) and subsidiaries (the
Company) is a closely-held entity that provides investment banking and advisory
services; securities sales, trading, and underwriting services; and services
pertaining to the origination, financing, and sales of loan participation notes.
MIAC is the parent company of Miller and Schroeder, Inc. (MSI and predecessor)
which in turn is the parent company of: Miller & Schroeder Financial, Inc.
(MSF), Miller & Schroeder Investments Corporation (MSIC), Miller & Schroeder
Small Business Capital Corporation (SBCC), Pooled Loan Marketing Corporation
(PLMC), Miller & Schroeder Capital Corporation (MSCC), Miller & Schroeder
Mortgage Corporation (MSMC), and C.H. Brown (CHB).
In June 1997, MIAC was formed and capitalized with $4,000 representing
common stock equity. Operations of MIAC did not commence until after July 31,
1997 at which time MIAC acquired all of the issued and outstanding common stock
of MSI (see note 2). The acquisition of MSI was accounted for using the purchase
method of accounting. The accompanying consolidated statements of operations for
the period from November 1, 1996 to July 31, 1997 and for the year ended October
31, 1996 were prepared on a historical cost basis in accordance with generally
accepted accounting principles and have been labeled, "predecessor". The
accompanying consolidated financial statements of the Company as of October 31,
1998 and 1997, and for the year ended October 31, 1998 and for the period from
August 1, 1997 to October 31, 1997 have been prepared in conformity with the
purchase method of accounting. As a result of the acquisition, the consolidated
financial information for the periods after the acquisition is presented on a
different cost basis than that for the periods before the acquisition and,
therefore, is not comparable.
MSF is a registered broker-dealer in securities under the Securities
Exchange Act of 1934 and underwrites municipal and corporate securities. MSF
also markets and trades fixed income and equity securities.
The primary business of MSIC is the origination, financing, and sale of loan
participation notes and lease transactions which are collateralized by real
estate and/or equipment. These transactions are sold through arrangements made
by MSF in the form of nonrecourse loan participation notes. These sales are made
to unaffiliated institutional and other investors. MSIC is also the servicing
agent for loan participation notes of $639 million and $488 million at October
31, 1998 and 1997, respectively.
All material intercompany balances and transactions have been eliminated in
consolidation. Certain 1997 and 1996 amounts have been reclassified to conform
with the 1998 presentation.
The following is a summary of significant accounting policies followed by
the Company:
(a) CASH AND CASH EQUIVALENTS
For financial reporting purposes, the Company considers all investments with
original maturities of three months or less to be cash equivalents. Included in
cash at October 31, 1998 and 1997 is $1,200,000 and $400,155, respectively,
segregated in a special bank account for the exclusive benefit of customers
under Rule 15c3-3 of the Securities and Exchange Commission. Amounts required to
be segregated, however, at October 31, 1998 and 1997, were $810,712 and none,
respectively.
(b) REPURCHASE AND RESALE TRANSACTIONS
Transactions involving purchases of securities under agreements to resell
(reverse repurchase agreements) or sales of securities under agreements to
repurchase (repurchase agreements) are accounted for as
F-17
<PAGE>
MI ACQUISITION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
financing transactions and are recorded at the contract amount plus accrued
interest at which the securities will be subsequently resold or reacquired.
(c) SECURITIES TRANSACTIONS AND LOAN PARTICIPATION NOTES HELD FOR SALE
Securities inventories are carried at estimated current market values. The
difference between cost and market value is included in revenues from profits on
securities trading.
Loan participation notes held for sale are carried at the lower of aggregate
cost or market value. These loan participation notes were sold subsequent to
October 31, 1998 and 1997 at prices that approximated their carrying values.
Purchases and sales of securities (including sales of loan participations)
are recorded on a settlement date basis. The difference between trade date basis
and settlement date basis accounting did not have a material effect on the
Company's financial position or results of operations.
(d) OFFICE EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Office equipment and leasehold improvements are stated at net book value.
Equipment is depreciated on a straight-line or accelerated basis over estimated
useful lives of five to seven years. Leasehold improvements are amortized using
the straight-line method over the lesser of the respective lease term or
estimated useful life of the improvements.
(e) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(f) STOCK-BASED COMPENSATION
The Company accounts for stock option grants using APB Opinion No. 25 (APB
No. 25) and, accordingly, does not recognize compensation expense related to
option grants. The Company, however, applies the disclosure provisions of
Statement of Financial Accounting Standards No. 123 (SFAS No. 123), ACCOUNTING
FOR STOCK-BASED COMPENSATION.
(g) EARNINGS PER SHARE
Basic earnings per share is based upon the weighted average number of common
shares outstanding during the reporting period. Diluted earnings per share takes
into account the effect of potentially dilutive securities using the treasury
stock method. Given the differing capital structure and basis of accounting of
the predecessor company, the Company believes that presentation of historical
earnings per share for the predecessor periods prior to July 31, 1997 would not
be meaningful.
F-18
<PAGE>
MI ACQUISITION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The components of earnings per share are:
<TABLE>
<CAPTION>
AUGUST 1, 1997
TO
1998 OCTOBER 31, 1997
------------ ----------------
<S> <C> <C>
Net income.................................................... $ 1,096,350 $ 244,308
------------ --------
------------ --------
Weighted average common shares outstanding.................... 899,193 785,003
------------ --------
------------ --------
Basic earnings per share...................................... $ 1.22 $ .31
------------ --------
------------ --------
Diluted earnings per share.................................... $ 1.22 $ .31
------------ --------
------------ --------
</TABLE>
(2) ACQUISITIONS
As of the close of business on July 31, 1997 MIAC acquired all of the issued
and outstanding common stock of MSI for $13,930,415. The transaction has been
accounted for as a purchase. The cash purchase of outstanding MSI stock was
partially financed by $6,500,000 of term debt and the issuance of $6,729,000 of
common stock equity. The excess of the purchase price over the fair market value
of identified net assets acquired of $4,289,192 was allocated to goodwill.
Goodwill is amortized on a straight-line basis over a period of 20 years. During
fiscal 1998, the Company made purchase accounting adjustments resulting in a net
reduction to goodwill of $477,283.
In February 1998, MIAC acquired all of the issued and outstanding common
stock of CHB for $813,331 including the assumption of net liabilities of
$542,864. The purchase was partially financed by the issuance of $235,000 of
common stock. The excess of the purchase price over the fair market value of
identified net assets acquired of $813,331 was allocated to goodwill. Goodwill
is amortized on a straight-line basis over a period of 20 years.
(3) SECURITIES INVENTORY AND LOAN PARTICIPATION NOTES HELD FOR SALE
Securities positions at October 31 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
Municipal securities............................................. $ 16,189,420 35,928,422
U.S. Government and Government agency securities................. 3,021 1,996,487
Other............................................................ 1,520,433 1,368,973
------------- ------------
Total............................................................ $ 17,712,874 39,293,882
------------- ------------
------------- ------------
</TABLE>
Loan participation notes held for sale at October 31, 1998 and 1997 totaling
$4,948,907 and $8,917,141, respectively, represent the unsold portions of real
estate mortgage and equipment loan financings with interest rates ranging from
7.28% to 10.5%.
(4) NOTES RECEIVABLE
Notes receivable at October 31, 1998 and 1997, consist of $102,233 and
$667,155, respectively, of short-term notes and $1,804,401 and $2,304,670 of
long-term notes, respectively. The long-term notes are
F-19
<PAGE>
MI ACQUISITION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) NOTES RECEIVABLE (CONTINUED)
collateralized by real estate, have maturity dates ranging from 2001 through
2005 and have interest rates ranging from 9.414% to 12.43%. The short-term notes
relate to temporary advances to issuers.
(5) FUNDS HELD IN ESCROW
In connection with MSIC acting as a loan servicing agent, funds for real
estate taxes, insurance, and certain reserve accounts, including amounts for
construction participations, are collected and held in escrow in accordance with
loan documents. Funds held in escrow as of October 31, 1998 and 1997 were
$20,231,657 and $10,287,231, respectively. These funds are not included in the
Company's balance sheets.
(6) FINANCING ARRANGEMENTS
(a) DEMAND NOTES PAYABLE
MSF has financing arrangements with several financial institutions and may
borrow up to an aggregate of $51 million. MSF's trading securities and certain
assets are pledged as collateral under these arrangements. Amounts borrowed
under these arrangements fluctuate daily based on the timing of customer and
broker-dealer trades and issues underwritten by MSF. The terms and expiration
dates of these facilities are periodically renegotiated. At October 31, 1998 and
1997, $5,875,000 and $34,215,000 were outstanding and $45,125,000 and
$12,785,000 were available on these facilities, respectively. MSF is expected to
maintain agreed-upon compensating balances with the financial institutions.
MSF's interest rates on these borrowings fluctuate with the daily federal funds
rate. The rates in effect at October 31, 1998 and October 31, 1997, ranged from
6.925% to 7.0% and 6.9875% to 7.38%, respectively.
MSIC has a $5 million credit facility with a financial institution, and may
draw up to $10 million on MSF's credit facility. At October 31, 1998 and 1997,
MSIC had $4,500,000 and $6,838,000 outstanding on these credit facilities,
respectively. MSIC may borrow funds under terms of the demand note to finance
loan participation notes up to predefined amounts, with the underlying notes
pledged as collateral. Interest accrues at the financial institution's base rate
plus 1% (9.0% at October 31, 1998 and 9.5% at October 31, 1997).
SBCC has a $1 million credit facility with a financial institution which is
secured by notes receivable, and may draw up to $4 million on MSF's credit
facility. At October 31, 1998, there was no outstanding balance on these
facilities and at October 31, 1997, $1,490,000 was outstanding. Interest accrues
at the financial institution's federal funds rate plus 1.5% (7.0% at October 31,
1998 and 7.38% at October 31, 1997).
MSCC has a note payable to a limited partnership of $88,755 at October 31,
1998 that is payable on demand. Interest accrues on this note at 7.25%.
F-20
<PAGE>
MI ACQUISITION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) FINANCING ARRANGEMENTS (CONTINUED)
(b) TERM DEBT
Term debt outstanding as of October 31 consisted of:
<TABLE>
<CAPTION>
1998 1997
------------ ----------
<S> <C> <C>
Pollution Control Financing Certificates collateralized by certain notes receivable
guaranteed by the Small Business Administration:
9%, due in annual installments through October 2001.................................. $ 1,575,000 2,015,000
12.25%, due in March 2005............................................................ 182,000 182,000
Notes payable, 8.5%, due in monthly installments through February 2000, collateralized
by equipment......................................................................... 14,789 24,835
Notes payable, (8.45% to 9.20% & 10.375% at 10/31/98 & 10/31/97, respectively), due in
monthly installments through June 2003, collateralized by certain furniture and
office equipment..................................................................... 1,105,192 197,774
Notes payable, prime rate plus 1% (9.0% and 9.5% at October 31, 1998 and 1997,
respectively), due in monthly installments through October 2001, collateralized by
note receivable...................................................................... 599,992 799,996
Note payable to shareholder of the Company, 6.5%, due in annual installments through
January 2003......................................................................... 289,256 --
Revolving line of credit, prime rate plus 1% (9.0% and 9.5% at October 31, 1998 and
1997, respectively), due in quarterly installments through September 2002............ 2,240,000 4,500,000
Notes payable, federal funds rate plus 1.5% (7.0% and 7.38% at October 31, 1998 and
1997, respectively), due September 2002 or on demand, collateralized by marketable
securities........................................................................... 2,000,000 2,000,000
------------ ----------
$ 8,006,229 9,719,605
------------ ----------
------------ ----------
</TABLE>
The revolving line of credit is collateralized by all assets of the Company.
The Company is required to meet certain operating, capital, coverage, and debt
related covenants under these agreements.
Maturities of term debt outstanding at October 31, 1998 are as follows:
<TABLE>
<S> <C>
1999............................................................ $ 1,824,272
2000............................................................ 1,663,075
2001............................................................ 1,479,573
2002............................................................ 2,520,904
2003............................................................ 336,405
Thereafter...................................................... 182,000
------------
$ 8,006,229
------------
------------
</TABLE>
F-21
<PAGE>
MI ACQUISITION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) INCOME TAXES
The Company files combined state income tax returns, except in certain
states where separate returns are filed, and files a consolidated federal income
tax return.
The Company accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are determined based on the estimated future
tax effects or differences between the financial statement basis and tax basis
of assets and liabilities using the provisions of enacted laws.
The income tax provision reflected in the accompanying consolidated
statements of operations consists of:
<TABLE>
<CAPTION>
1998 1997* 1997** 1996**
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Current:
Federal....................................................... $ 897,000 (266,000) (2,259,401) 184,000
State......................................................... 32,000 (35,700) (95,000) 215,000
Deferred........................................................ (24,600) 475,000 266,901 (288,000)
---------- ---------- ----------- ----------
$ 904,400 173,300 (2,087,500) 111,000
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
</TABLE>
- ------------------------
* Successor period (August 1, 1997 to October 31, 1997)
** Predecessor period (November 1, 1995 to July 31, 1997).
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. In order to fully realize the deferred tax
asset, the Company will need to generate sufficient future taxable income. Based
upon the levels of historical taxable income, projections of future taxable
income, and the ability to carry losses back, management believes it is more
likely than not that the Company will realize the benefits of the deferred tax
asset as of October 31, 1998 and 1997.
The effective tax rate is calculated using the provision for income taxes.
The difference between the U.S. Federal Statutory rate and the effective tax
rate is as follows:
<TABLE>
<CAPTION>
1998 1997* 1997** 1996**
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Statutory tax rate........................................................ 34.00% 34.00% (34.00)% 34.00%
Effect of items on tax rate and provision amounts:
Tax exempt income....................................................... (5.87)% (8.44)% (1.63)% (24.61)%
Non deductible goodwill................................................. 4.22% 4.37% 0.00% 0.00%
Other................................................................... 5.13% 3.42% (3.51)% (3.90)%
State taxes............................................................. 7.72% 8.14% (5.38)% 9.55%
--------- --------- --------- ---------
Effective tax rate........................................................ 45.20% 41.49% (44.52)% 15.04%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- ------------------------
* Successor period (August 1, 1997 to October 31, 1997)
** Predecessor period (November 1, 1995 to July 31, 1997).
F-22
<PAGE>
MI ACQUISITION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) NET CAPITAL REQUIREMENTS
As a broker-dealer, MSF is subject to the Securities and Exchange Commission
Uniform Net Capital Rule (Rule 15c3-1), which requires the maintenance of
minimum net capital. MSF has elected to use the alternative method, permitted by
the Rule, which requires that MSF maintain minimum net capital, as defined,
equal to the greater of $250,000 or 2% of aggregate debit balances arising from
customer transactions, as defined. At October 31, 1998 and 1997, MSF's net
capital, as defined, of $6,896,998 and $5,578,565, respectively, was 588% and
168% of aggregate debit balances and was $6,646,998 and $5,328,565,
respectively, in excess of the minimum net capital required.
(9) COMMITMENTS AND CONTINGENCIES
(a) UNDERWRITING COMMITMENTS
In the ordinary course of business, MSF enters into underwriting
commitments. Transactions relating to such underwriting commitments that were
open at October 31, 1998 and 1997, have subsequently settled and had no material
affect on the financial statements.
(b) OPERATING LEASES
The Company has operating lease commitments expiring at various dates for
its offices and certain equipment. Rental expense was $1,292,821 and $346,328
for fiscal 1998 and for the period from August 1, 1997 to October 31, 1997
(successor periods) and $934,953 and $1,226,000 for the period from November 1,
1996 to July 31, 1997 and for the year ended October 31, 1996 (predecessor
periods), respectively. Future minimum payments under operating leases are as
follows:
<TABLE>
<S> <C>
Fiscal year
1999............................................................ $ 1,407,825
2000............................................................ 989,537
2001............................................................ 865,091
2002............................................................ 849,619
2003............................................................ 543,445
Thereafter...................................................... 2,014,957
</TABLE>
(c) EMPLOYEE BENEFIT PLAN
MSF has a 401(k) plan that allows employees to contribute a portion of their
compensation. MSF's expense related to this plan was $285,990 and $2,119 for the
year ended October 31, 1998 and for the period from August 1, 1997 to October
31, 1997 (successor periods) and $127,000 and $167,000 for the period from
November 1, 1996 to July 31, 1997 and for the year ended October 31, 1996
(predecessor periods), respectively.
(d) CONTINGENCIES
In the normal course of business, the Company, from time to time, becomes
involved in claims and litigation that may ultimately result in a liability to
the Company. It is the opinion of management that facts known at the present
time do not indicate that the ultimate resolution of any such claims or
litigation would have a material effect on the Company's operations or its
financial position.
F-23
<PAGE>
MI ACQUISITION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) COMMITMENTS AND CONTINGENCIES (CONTINUED)
(e) OTHER
As of October 31, 1998 and 1997, MSIC had committed to advance $47,440,244
and $61,274,043, respectively, in construction loans. Concurrent with this
commitment, MSIC has entered into commitments to sell these loans in the form of
nonrecourse loan participation notes.
(10) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the ordinary course of business, the Company's securities activities
involve execution, settlement, and financing of various securities transactions
as principal and agent. These activities may expose the Company to credit and
market risks in the event customers, other brokers and dealers, banks,
depositories, or clearing organizations are unable to fulfill contractual
obligations. Such risks may be increased by volatile trading markets.
The Company records customer securities transactions on a settlement date
basis. The Company is therefore exposed to off-balance-sheet risk of loss on
unsettled transactions in the event customers and other counterparties are
unable to fulfill contractual obligations.
The Company also may assume short positions in its inventory. These
transactions result in off-balance-sheet market risk as the Company's ultimate
obligation to satisfy the short sale may exceed the amount recognized in the
balance sheets.
The Company also may lend money subject to reverse repurchase agreements.
All positions are collateralized, primarily with U.S. Government or U.S.
Government agency securities. The Company's policy is to take physical
possession of securities purchased under agreements to resell. Such transactions
may expose the Company to risk in the event such borrowers do not repay the
loans and the value of collateral held is less than that of the underlying
receivable. These agreements provide the Company with the right to maintain the
relationship between market value of the collateral and the receivable.
The Company does not believe that it has any significant concentrations of
credit risk.
(11) STOCK OPTION PLANS
Effective August 1, 1997, the Company maintains two fixed stock compensation
plans, the MI Acquisition Corporation Stock Option Plan and the Director Stock
Option Plan, which are used to provide stock incentives to key employees and
outside directors of the Company. Each Plan authorizes the grant of incentive
and/or non-qualified options with an exercise price equal to the fair value of
the common stock as of the grant date. Vesting periods for the options range
from immediately to five years and expire ten years from the date of grant. At
October 31, 1998 and 1997, 158,912 and 300,000 shares of common stock,
respectively, were available for grant under the Stock Option Plan and 47,000
and 0 shares were available for grant under the Director Stock Option Plan.
The Company applies APB No. 25 and related Interpretations in accounting for
its stock option plan. Accordingly, no compensation expense has been recognized
in the consolidated financial statements for stock option grants. Had
compensation expense been determined based on the fair value of the options at
grant date consistent with SFAS No. 123, the Company's consolidated net income
of $1,096,350 for the year ended October 31, 1998 and $244,308 for the period
from August 1, 1997 to October 31, 1997, would have been $985,921 and $228,708,
respectively.
F-24
<PAGE>
MI ACQUISITION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) STOCK OPTION PLANS (CONTINUED)
The company granted 50,000 options during the year ended October 31, 1997 to
a director of the company in connection with the MSI acquisition. These options
were exercised effective August 1, 1998 and 50,000 shares were issued at a price
of $10 per share. The Company recorded a loan to the director for this
subscription. At October 31, 1998 the outstanding balance of this note
receivable was $500,000.
The weighted average per-share fair value of options granted during fiscal
1998 and 1997 was $1.87 and $.52, respectively. The fair value of each option
granted is estimated on the date of grant using the Minimum Value Method with
the following weighted average assumptions used for grants in 1998 and 1997;
dividend yields of 0%; expected volatility of 0%; risk-free interest rate of
4.22% in 1998 and 5.46% in 1997; and expected life of 5 years in 1998 and 1 year
in 1997. Pro forma amounts may not be indicative of future results.
The following table summarizes the activity related to the Company's stock
options for the year ended October 31, 1998 and for the period from August 1,
1997 to October 31, 1997:
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Options outstanding at beginning of period.............................. 50,000 $ 10.00 -- $ --
Granted............................................................... 144,088 10.00 50,000 10.00
Exercised............................................................. (50,000) 10.00 -- --
Canceled, forfeited or expired........................................ -- -- -- --
--------- ----------- --------- -----------
Options outstanding at end of period.................................... 144,088 10.00 50,000 10.00
--------- ----------- --------- -----------
--------- ----------- --------- -----------
</TABLE>
The options outstanding at October 31, 1998 and 1997 have a weighted average
remaining contractual life of nine and three years, respectively.
F-25
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
MI ACQUISITION CORPORATION,
KINNARD INVESTMENTS, INC.
AND
PEACHTREE ACQUISITION, INC.
MAY 16, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE I THE MERGER..................................................................... A-1
1.1 The Merger.................................................................... A-1
1.2 Effect of the Merger.......................................................... A-1
1.3 Effective Time................................................................ A-1
1.4 Articles of Incorporation..................................................... A-1
1.5 Bylaws........................................................................ A-1
1.6 Directors..................................................................... A-2
1.7 Officers...................................................................... A-2
1.8 Taking of Necessary Action; Further Action.................................... A-2
1.9 Closing....................................................................... A-2
1.10 Reservation of Right to Revise Structure...................................... A-2
ARTICLE II MERGER CONSIDERATION; EXCHANGE................................................ A-2
2.1 Conversion of Securities...................................................... A-2
2.2 Elections by Holders of Company Common Stock.................................. A-3
2.3 Proration..................................................................... A-4
2.4 Procedure for Exchange........................................................ A-5
2.5 Dissenting Shares............................................................. A-6
2.6 No Fractional Shares.......................................................... A-6
2.7 Distributions with Respect to Unexchanged Shares.............................. A-6
2.8 No Liability.................................................................. A-7
2.9 Lost Certificates............................................................. A-7
2.10 Closing of Stock Transfer Books; Rights as Shareholders....................... A-7
2.11 Anti-Dilution Provisions...................................................... A-7
2.12 Stock Options................................................................. A-7
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY................................ A-8
3.1 Corporation Organization and Authority........................................ A-8
3.2 Capitalization................................................................ A-9
3.3 Subsidiaries.................................................................. A-10
3.4 Corporate Power............................................................... A-11
3.5 Corporate Authority; Vote Required............................................ A-11
3.6 Noncontravention.............................................................. A-11
3.7 Regulatory Filings and Consents............................................... A-12
3.8 Registrations................................................................. A-12
3.9 Reports; Financial Statements................................................. A-12
3.10 Absence of Undisclosed Material Liabilities................................... A-13
3.11 No Material Adverse Effect.................................................... A-13
3.12 Securities.................................................................... A-13
3.13 Litigation.................................................................... A-13
3.14 Tax Matters................................................................... A-14
3.15 Contracts and Commitments..................................................... A-15
3.16 Participation Agreements...................................................... A-16
3.17 Title to Property............................................................. A-17
3.18 Intellectual Property Rights.................................................. A-17
3.19 Employees..................................................................... A-17
3.20 Employee Benefit Plans........................................................ A-17
3.21 Compliance with Laws, Permits and Licenses.................................... A-19
3.22 Environmental Matters......................................................... A-20
</TABLE>
A-i
<PAGE>
<TABLE>
<S> <C> <C>
3.23 No Pending Transactions....................................................... A-20
3.24 Risk Management Instruments................................................... A-21
3.25 Brokerage..................................................................... A-21
3.26 Accounting Controls........................................................... A-21
3.27 Contracts with Clients........................................................ A-21
3.28 Investment Advisory Activities................................................ A-21
3.29 Insurance Policies............................................................ A-21
3.30 Registration Statement........................................................ A-22
3.31 Affiliate Transactions........................................................ A-22
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT...................................... A-22
4.1 Organization and Qualification................................................ A-22
4.2 Capitalization................................................................ A-22
4.3 Subsidiaries.................................................................. A-23
4.4 Corporate Power............................................................... A-24
4.5 Corporate Authority; Vote Required............................................ A-24
4.6 Noncontravention.............................................................. A-24
4.7 Regulatory Filings and Consents............................................... A-24
4.8 Registrations................................................................. A-24
4.9 SEC Reports................................................................... A-25
4.10 No Material Adverse Effect.................................................... A-26
4.11 Securities.................................................................... A-26
4.12 Litigation.................................................................... A-26
4.13 Tax Matters................................................................... A-26
4.14 Parent Material Contracts..................................................... A-27
4.15 Intellectual Property Rights.................................................. A-28
4.16 Employees..................................................................... A-28
4.17 Employee Benefit Plans........................................................ A-28
4.18 Compliance with Laws, Permits and Licenses.................................... A-29
4.19 Environmental Matters......................................................... A-30
4.20 Risk Management Instruments................................................... A-30
4.21 Brokerage..................................................................... A-31
4.22 Accounting Controls........................................................... A-31
4.23 Investment Advisory Activities................................................ A-31
4.24 Insurance Policies............................................................ A-31
4.25 Registration Statement........................................................ A-31
4.26 No Pending Transactions....................................................... A-31
4.27 Contracts with Clients........................................................ A-31
ARTICLE V COVENANTS OF THE COMPANY....................................................... A-32
5.1 Conduct of the Business....................................................... A-32
5.2 Regulatory Filings............................................................ A-34
5.3 Conditions.................................................................... A-34
5.4 No Solicitation............................................................... A-34
5.5 Notice of Certain Matters..................................................... A-34
5.6 Affiliates; Tax Treatment..................................................... A-35
5.7 Delivery of Shareholder List.................................................. A-35
5.8 Satisfaction of Related Party Agreements...................................... A-35
ARTICLE VI COVENANTS OF PARENT........................................................... A-35
6.1 Conduct of the Business....................................................... A-35
6.2 Regulatory Filings............................................................ A-36
</TABLE>
A-ii
<PAGE>
<TABLE>
<S> <C> <C>
6.3 Conditions.................................................................... A-36
6.4 Notice of Certain Matters..................................................... A-36
6.5 Funds......................................................................... A-37
ARTICLE VII ADDITIONAL COVENANTS......................................................... A-37
7.1 Joint Proxy Statement/Prospectus; Registration Statement; Listing on Nasdaq;
Shareholder Meetings.......................................................... A-37
7.2 Benefit Plans................................................................. A-38
7.3 Agreement to Defend........................................................... A-38
7.4 Access to Books and Records................................................... A-38
7.5 Satisfaction of Conditions.................................................... A-39
7.6 Expenses...................................................................... A-39
7.7 Certain Director Positions.................................................... A-39
ARTICLE VIII CONDITIONS OF MERGER........................................................ A-39
8.1 Conditions to Obligation of Each Party to Effect the Merger................... A-39
8.2 Additional Conditions to Obligations of Parent................................ A-40
8.3 Additional Conditions to Obligations of the Company........................... A-41
ARTICLE IX TERMINATION................................................................... A-43
9.1 Reasons for Termination....................................................... A-43
9.2 Effects of Termination........................................................ A-44
9.3 Prompt Notice................................................................. A-45
ARTICLE X OTHER PROVISIONS............................................................... A-45
10.1 Survival...................................................................... A-45
10.2 Governing Law................................................................. A-45
10.3 Assignment.................................................................... A-45
10.4 Amendment and Waiver.......................................................... A-45
10.5 Notices....................................................................... A-45
10.6 Counterparts.................................................................. A-46
10.7 Headings...................................................................... A-46
10.8 Entire Agreement.............................................................. A-46
10.9 Public Announcements.......................................................... A-46
10.10 No Third Party Beneficiary.................................................... A-46
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
- ---------------
<S> <C>
Exhibit 5.6 Form of Affiliate Letter
Exhibit 5.8 Related Party Agreements to be Satisfied
Exhibit 8.2(f) Matters to be Addressed in Opinion of Company's Counsel
Exhibit 8.3(f) Matters to be Addressed in Opinion of Parent's Counsel
</TABLE>
A-iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated May 16, 1999, is by
and among MI Acquisition Corporation (the "Company"), Kinnard Investments, Inc.
(the "Parent") and Peachtree Acquisition, Inc. ("Merger Subsidiary").
RECITALS
A. The Company is a Minnesota corporation, having its principal place of
business in Minneapolis, Minnesota.
B. Parent is a Minnesota corporation, having its principal place of
business in Minneapolis, Minnesota.
C. The Merger Subsidiary is a Minnesota corporation, having its principal
place of business in Minneapolis, Minnesota. The Merger Subsidiary is a
wholly-owned subsidiary of Parent that has been organized for the purpose of
effecting the Merger in accordance with this Agreement.
D. Subject to the terms and conditions contained in this Agreement, the
parties to this Agreement intend to effect the Merger of the Company with and
into the Merger Subsidiary, with the Merger Subsidiary being the corporation
surviving the Merger.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained herein, and subject to the conditions
contained herein, and in order to set forth the terms and conditions of the
Merger, the manner of effecting the Merger, and certain other provisions
relating thereto, the parties hereto hereby agree as follows:
ARTICLE I
THE MERGER
1.1 THE MERGER. At the Effective Time (as defined in Section 1.3), the
Company shall merge with and into the Merger Subsidiary, and the separate
corporate existence of the Company shall thereupon cease (the "Merger"). The
Merger Subsidiary shall be the surviving corporation in the Merger (sometimes
referred to herein as the "Surviving Corporation").
1.2 EFFECT OF THE MERGER. The Merger shall have the effects set forth in
the Minnesota Business Corporation Act ("MBCA"). Without limiting the generality
of the foregoing, the Surviving Corporation shall succeed to and possess all of
the properties, interests, rights, privileges, powers, franchises, immunities
and purposes, and become subject to all the debts, liabilities, obligations,
restrictions, disabilities, penalties and duties, of the Company.
1.3 EFFECTIVE TIME. The consummation of the Merger shall be effected as
promptly as practicable after the satisfaction or waiver of the conditions set
forth in Article VIII, and the parties hereto will cause articles of merger
relating to the Merger (the "Articles of Merger") to be executed, delivered,
filed and recorded with the Secretary of State of the State of Minnesota in
accordance with the MBCA. The Merger shall become effective immediately upon the
date and time of the filing of such Articles of Merger with the Secretary of
State of the State of Minnesota or on such later date or time as specified in
the Articles of Merger (the "Effective Time").
1.4 ARTICLES OF INCORPORATION. The articles of incorporation of the
Surviving Corporation (the "Articles of Incorporation") shall be the articles of
incorporation of the Merger Subsidiary as in effect immediately prior to the
Effective Time, until duly amended in accordance with the terms thereof and the
MBCA.
1.5 BYLAWS. The Bylaws of the Surviving Corporation shall be the bylaws of
the Merger Subsidiary as in effect immediately prior to the Effective Time,
until duly amended in accordance with the terms thereof and the aforementioned
Articles of Incorporation.
A-1
<PAGE>
1.6 DIRECTORS. The directors of the Surviving Corporation shall be the
directors of the Merger Subsidiary immediately prior to the Effective Time, and
such directors, together with any additional directors as may thereafter be
elected, shall hold such office until such time as their successors shall be
duly elected and qualified.
1.7 OFFICERS. The officers of the Surviving Corporation shall be the
officers of the Merger Subsidiary immediately prior to the Effective Time,
together with any additional officers as may be agreed upon prior to the
Effective Time by Parent and the Company or as may be appointed thereafter.
1.8 TAKING OF NECESSARY ACTION; FURTHER ACTION. If at any time after the
Effective Time the Surviving Corporation shall consider that any further
assignments or assurances in law or any other acts are necessary or desirable to
(i) vest, perfect or confirm, of record or otherwise, in the Surviving
Corporation its rights, title or interest in, to or under any of the rights,
properties or assets of the Company acquired or to be acquired by the Surviving
Corporation as a result of, or in connection with, the Merger, or (ii) otherwise
carry out the purposes of this Agreement, the Company and its proper officers
and directors shall be deemed to have granted to the Surviving Corporation an
irrevocable power of attorney to execute and deliver all such proper deeds,
assignments and assurances in law and to do all acts necessary or proper to
vest, perfect or confirm title to and possession of such rights, properties or
assets in the Surviving Corporation and otherwise to carry out the purposes of
this Agreement; and the proper officers and directors of the Surviving
Corporation are fully authorized in the name of the Company or otherwise to take
any and all such action.
1.9 CLOSING. The closing of the transactions contemplated by this
Agreement (the "Closing") will take place at the offices of Kaplan, Strangis and
Kaplan, P.A., 5500 Norwest Center, 90 South Seventh Street, Minneapolis,
Minnesota, or at such other location as the parties shall mutually agree, and
will be effective at the Effective Time. The date on which the Closing occurs
shall be referred to herein as the "Closing Date."
1.10 RESERVATION OF RIGHT TO REVISE STRUCTURE. At Parent's election, the
acquisition of the Company as contemplated by this Agreement may be
alternatively structured in any form of reorganization as Parent may direct;
provided, that (i) there is no adverse change in the federal income tax
consequences to Parent, the Merger Subsidiary, the Company, the Surviving
Corporation or any other relevant entities or to the shareholders of the
Company, the Merger Subsidiary or the Surviving Corporation as a result of such
modification, (ii) the consideration to be received by the shareholders of the
Company is not changed or altered, and (iii) such modification will not delay or
impede the consummation of the transactions contemplated by this Agreement. In
the event of such an election, the parties agree to execute an appropriate
amendment to this Agreement in order to reflect such election.
ARTICLE II
MERGER CONSIDERATION; EXCHANGE
2.1 CONVERSION OF SECURITIES. At the Effective Time, by virtue of the
Merger and without any further action on the part of any shareholder:
(a) each share, if any, of the common stock, $.01 par value of the
Company (the "Company Common Stock") that is owned by the Company, any
subsidiary of the Company, the Parent or any subsidiary of the Parent or
Dissenting Shares (as defined in Section 2.5) shall automatically be
cancelled and retired and shall cease to exist, and, except as set forth in
Section 2.5 with respect to Dissenting Shares, no exchange or payment shall
be made with respect thereto; and
(b) each share of the Company Common Stock (other than shares of the
Company Common Stock cancelled as set forth in Section 2.1(a)) issued and
outstanding immediately prior to the
A-2
<PAGE>
Effective Time shall be converted into, at the election of the holder
thereof, one of the following (as adjusted pursuant to this Article II) (the
"Merger Consideration"):
(i) the right to receive $19.25 in cash, without interest (the "Cash
Consideration"), or
(ii) the right to receive 3.5 shares (the "Exchange Ratio") of the
common stock, $.02 par value of Parent (the "Parent Common Stock") (such
shares of Parent Common Stock are hereinafter referred to as the "Stock
Consideration").
2.2 ELECTIONS BY HOLDERS OF COMPANY COMMON STOCK.
(a) ELECTIONS. Each person who, at the Effective Time, is a record
holder of shares of Company Common Stock (other than holders of shares of MI
Acquisition Common Stock cancelled as set forth in Section 2.1(a)) shall be
entitled, with respect to the Merger Consideration to be received for each
share of Company Common Stock held by such holder, to (i) elect to receive
the Stock Consideration (a "Stock Election") with respect to such holder's
Company Common Stock ("Stock Election Shares"), (ii) elect to receive the
Cash Consideration (a "Cash Election") with respect to such holder's Company
Common Stock ("Cash Election Shares"), or (iii) make no election (a "No
Election") with respect to such holder's Company Common Stock ("No-Election
Shares").
(b) METHOD OF ELECTION. Prior to the mailing of the Joint Proxy
Statement/Prospectus (as defined in Section 7.1) Parent shall appoint a bank
or trust company designated by Parent and reasonably acceptable to the
Company to act as the exchange agent (the "Exchange Agent") for the payment
of the Merger Consideration. Parent shall mail, with the Joint Proxy
Statement/Prospectus, the following to each holder of record of shares of
Company Common Stock as of the record date for the Company Meeting
(excluding any shares of Company Common Stock (other than Dissenting Shares)
cancelled pursuant to Section 2.1(a)):
(i) a letter of transmittal (the "Letter of Transmittal") which
shall specify that delivery shall be effected and risk of loss and title
shall pass with respect to certificates formerly representing Company
Common Stock (the "Company Certificates") only upon delivery of such
Company Certificates to the Exchange Agent and shall be in such form as
and have such other provisions as Parent shall specify,
(ii) instructions for use in effecting the surrender of Company
Certificates (the "Surrender Instructions"), and
(iii) an election form (the "Election Form") permitting holders to
make a Cash Election, a Stock Election or No Election with respect to
such shares.
(c) ELECTION CHANGES OR REVOCATIONS. Any Cash Election, Stock Election
or No Election shall have been validly made only if the Exchange Agent shall
have actually received a properly completed and executed Election Form (with
the signature or signatures thereof guaranteed to the extent required
therein) together with Company Certificates covered by the Election Form by
the Election Deadline described in Section 2.2(d). A Dissenting Shareholder
(as defined in Section 2.5(d)) may not make a valid election. An Election
Form will be properly completed only if accompanied by all Company
Certificates representing the shares of Company Common Stock covered thereby
or in the event of a lost Company Certificate, the holder has complied with
the lost certificate procedure specified in the Letter of Transmittal. Any
holder of Company Common Stock that has made an election by submitting an
Election Form to the Exchange Agent may at any time prior to the Election
Deadline change such holder's election by submitting a revised Election Form
properly completed and signed that is received by the Exchange Agent prior
to the Election Deadline. Any holder of Company Common Stock may at any time
prior to the Election Deadline revoke such holder's election by written
notice to the Exchange Agent received by the close of business on the day
prior to the Election Deadline. Any shares of Company Common Stock with
respect to which the holder shall not, as of the
A-3
<PAGE>
Election Deadline, have made such an election by submission to and receipt
by the Exchange Agent of an effective, properly completed Election Form or
with respect to which the holder shall have revoked an election shall be
deemed to be No-Election Shares.
(d) ELECTION DEADLINE. The Election Deadline shall be 5:00 p.m., local
Minneapolis, Minnesota time on the last business day prior to the date of
the Company Meeting.
(e) RULES GOVERNING ELECTIONS, PRORATIONS AND ALLOCATIONS. Parent
shall have the right to make rules, not inconsistent with the terms of this
Agreement, governing the validity of the Election Forms, the manner and
extent to which Cash Elections, Stock Elections and No Elections are to be
taken into account for the determinations prescribed in this Article II, the
issuance and delivery of Parent Certificates (as defined in Section 2.4(b))
in payment of the Stock Consideration, and the payment of Cash Consideration
for shares of Company Common Stock converted into the right to receive cash
as a result of the Merger. Subject to the terms of this Agreement and the
Election Form, the Exchange Agent shall have reasonable discretion to
determine whether any election, revocation or change has been timely and
properly made and to disregard immaterial defects in an Election Form, and
any good faith decisions of the Exchange Agent regarding such matters shall
be binding and conclusive.
2.3 PRORATION.
(a) The Merger Consideration shall include cash of not less than
$5,000,000 and not more than (i) $8,000,000 minus (ii) cash paid to
extinguish certain stock options and on account of the Dissenting Shares. As
more fully set forth below, the aggregate amount of cash to be paid to
holders of shares of Company Common Stock (other than shares of Company
Common Stock cancelled as set forth in Section 2.1(a)) (i) shall not be less
than $5,000,000 (the "Minimum Aggregate Cash Merger Consideration") and (ii)
shall not exceed $8,000,000, minus the sum of (A) the aggregate amount
payable with respect to Director Stock Options (as defined in Section 2.10)
outstanding at the Effective Time, and (B) the product of the number of
Dissenting Shares multiplied by $19.25 (the "Maximum Aggregate Cash Merger
Consideration").
(b) In the event that the product of the total number of Cash Election
Shares multiplied by $19.25 (such product shall be referred to hereinafter
as the "Cash Election Amount") is less than the Minimum Aggregate Cash
Merger Consideration, then:
(i) all Cash Election Shares shall be converted into the right to
receive Cash Consideration,
(ii) the Exchange Agent will select, on a pro rata basis, first from
among the No-Election Shares and then, if necessary, from among the Stock
Election Shares, a sufficient number of such shares ("Cash Designee
Shares") such that the product of (A) the sum of the number of Cash
Election Shares plus the number of Cash Designee Shares, multiplied by
(B) $19.25 equals as closely as practicable the Minimum Aggregate Cash
Merger Consideration and the Cash Designee Shares shall be converted into
the right to receive Cash Consideration, and
(iii) the No-Election Shares and the Stock Election Shares not so
selected as Cash Designee Shares shall be converted into the right to
receive Stock Consideration.
(c) In the event that the Cash Election Amount is greater than the
Maximum Aggregate Cash Merger Consideration, then:
(i) all Stock Election Shares and all No-Election Shares shall be
converted into the right to receive Stock Consideration,
(ii) the Exchange Agent will select, on a pro rata basis, from among
the Cash Election Shares, a sufficient number of such shares ("Stock
Designee Shares") such that the product of (A) the number of Cash
Election Shares minus the number of Stock Designee Shares, multiplied
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by (B) $19.25 equals as closely as practicable the Maximum Aggregate Cash
Merger Consideration and the Stock Designee Shares shall be converted
into the right to receive Stock Consideration, and
(iii) any Cash Election Shares not so selected as Stock Designee
Shares shall be converted into the right to receive Cash Consideration.
(d) In the event that the Cash Election Amount is greater than the
Minimum Aggregate Cash Merger Consideration but less than the Maximum
Aggregate Cash Merger Consideration, then:
(i) all Cash Election Shares shall be converted into the right to
receive Cash Consideration,
(ii) the Exchange Agent will select, on a pro rata basis, from among
the No-Election Shares, a sufficient number of Cash Designee Shares such
that the product of (A) the sum of the number of Cash Election Shares
plus the number of Cash Designee Shares, multiplied by (B) $19.25 equals
as closely as practicable the Maximum Aggregate Cash Merger Consideration
and the Cash Designee Shares shall be converted into the right to receive
Cash Consideration, and
(iii) any No-Election Shares not so selected as Cash Designee Shares
and all Stock Election Shares shall be converted into the right to
receive Stock Consideration.
2.4 PROCEDURE FOR EXCHANGE.
(a) ALLOCATION DETERMINATION. As soon as practicable after the
Election Deadline (but in no event later than five business days after the
Election Deadline) the Exchange Agent shall determine the allocation of the
cash portion and the stock portion of the Merger Consideration in accordance
with Section 2.3 above and shall notify Parent of its determined allocation
(the "Allocation Determination").
(b) DEPOSIT OF EXCHANGE FUND. Promptly after the Allocation
Determination, Parent shall deposit (or cause to be deposited) with the
Exchange Agent, for the benefit of the holders of shares of Company Common
Stock, for exchange in accordance with this Article II, (i) cash in an
amount sufficient to pay the aggregate Cash Consideration in accordance with
this Article II (other than in respect of Dissenting Shares) and (ii)
certificates representing shares of Parent Common Stock (the "Parent
Certificates") for exchange in accordance with this Article II) (the cash
and certificates deposited pursuant to clauses (i) and (ii) being
hereinafter referred to as the "Exchange Fund"). To the extent not
immediately required for payment on surrendered shares of Company Common
Stock, cash in the Exchange Fund shall be invested by the Exchange Agent, as
directed by Parent (as long as such directions do not impair the rights of
holders of Company Common Stock) in direct obligations of the United States
of America, obligations for which the faith and credit of the United States
of America is pledged to provide for the payment of principal and interest,
commercial paper rated of the highest investment quality by Moody's
Investors Service, Inc. or Standard & Poor's Ratings Group, or certificates
of deposit issued by a commercial bank having at least $5 billion in assets,
and any net earnings with respect thereto shall be paid to Parent as and
when requested by Parent.
(c) SURRENDER OF CERTIFICATES; EXCHANGE. As soon as practicable after
the Effective Time, the Exchange Agent will mail a Letter of Transmittal and
Surrender Instructions to each holder of record of shares of Company Common
Stock immediately prior to the Effective Time (excluding any shares of
Company Common Stock cancelled pursuant to Section 2.1(a)) that did not
previously submit the Company Certificates representing such shares to the
Exchange Agent with a properly completed Letter of Transmittal. From and
after the Effective Time, each holder of a Company Certificate shall, upon
surrender of such certificate for cancellation to the Exchange Agent,
together with the Letter of Transmittal, duly executed, and such other
documents as Parent or the Exchange Agent shall reasonably request, be
entitled to receive promptly after the Allocation Determination has been
made in exchange therefor (A) a check in the amount equal to the cash, if
any, which such holder has the
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right to receive pursuant to the provisions of this Article II (including any
cash in lieu of fractional shares of Parent Common Stock), and (B) a Parent
Certificate representing that number of shares of Parent Common Stock, if any,
which such holder has the right to receive pursuant to this Article II (in each
case less the amount of any required withholding taxes), and Company Certificate
so surrendered shall forthwith be canceled. Until surrendered as contemplated by
this Section 2.2(c), each Company Certificate shall be deemed at any time after
the Effective Time to represent only the right to receive the Merger
Consideration with respect to the shares of Company Common Stock formerly
represented thereby in accordance with this Article II. If any Parent
Certificate is to be issued in a name other than that in which Company
Certificate surrendered in exchange therefor is registered, it shall be a
condition of such issuance that the person requesting such issuance shall pay
any transfer or other tax required by reason of the issuance of a Parent
Certificate in a name other than that of the registered holder of Company
Certificate surrendered, or shall establish to the satisfaction of Parent or its
agent that such tax has been paid or is not applicable.
(d) TERMINATION OF EXCHANGE FUND Any portion of the Exchange Fund
(including the proceeds of any investments thereof and any shares of Parent
Common Stock) that remains unclaimed by the former shareholders of the
Company for six months after the Effective Time shall be delivered to
Parent. Any former shareholder of the Company who has not theretofore
complied with this Article II shall thereafter look only to the Surviving
Corporation and Parent for payment of the applicable Merger Consideration,
cash in lieu of fractional shares and unpaid dividends and distributions on
Parent Common Stock deliverable in respect of each share of Company Common
Stock such shareholder holds as determined pursuant to this Agreement, in
each case without any interest thereon.
2.5 DISSENTING SHARES. Notwithstanding anything in this Agreement to the
contrary, holders of Company Common Stock that have, prior to any vote on the
Merger, delivered a written demand for the fair value of their shares of Company
Common Stock in the manner provided in Section 302A.473 of the MBCA, shall have
such rights, if any, as they may have pursuant to Section 302A.471 of the MBCA
and such shares of Company Common Stock shall not be converted or exchangeable
as provided in Section 2.2 (all such shares of Company Common Stock are
hereinafter called "Dissenting Shares"). The Company shall give Parent prompt
notice upon receipt by the Company of any written notice from any shareholder of
the Company asserting dissenters' rights (each a "Dissenting Shareholder"). The
Company agrees that prior to the Effective Time, it will not, except with the
prior written consent of Parent, voluntarily make any payment with respect to,
or settle or offer to settle, any demand for fair value under Section 302A.473
of the MBCA. Each Dissenting Shareholder who becomes entitled, pursuant to the
provisions of applicable law, to payment for his or her shares of Company Common
Stock pursuant to Sections 302A.471 and 302A.473 of the MBCA shall receive
payment therefor from Parent (but only after the amount thereof shall be agreed
upon or finally determined pursuant to the provisions of applicable law). If any
Dissenting Shareholder shall fail to perfect or shall effectively withdraw or
lose his or her right to appraisal and payment of his or her shares of Company
Common Stock, such Dissenting Shareholder shall forfeit the right to appraisal
of such shares and, at the Effective Time, such shares shall thereupon be deemed
converted into No-Election Shares.
2.6 NO FRACTIONAL SHARES. No fractional shares of Parent Common Stock, and
no certificates representing such fractional shares, shall be issued pursuant to
the Merger. In lieu of the issuance of any fractional share of Parent Common
Stock pursuant to the Merger, cash adjustments shall be paid to holders in
respect of any fractional share of Parent Common Stock that would otherwise be
issuable, and the amount of such cash adjustment, without interest, shall be
equal to the product obtained by multiplying such fractional share interest of
such holder (after taking into account all fractional share interests then held
by such holder) by $19.25.
2.7 DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No dividends or
other distributions declared or made after the Effective Time with respect to
Parent Common Stock with a record date after the
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Effective Time shall be paid to the holder of any unsurrendered certificate with
respect to the shares of Company Common Stock represented thereby, and no cash
payment in lieu of fractional shares shall be paid to any such holder pursuant
to this Agreement, until the holder of such certificate shall surrender such
certificate in accordance with this Agreement. Subject to the effect of
applicable laws, following surrender of any such certificate, there shall be
paid to the holder of the certificates representing whole shares of Parent
Common Stock issued in exchange therefor, without interest, (i) promptly, the
amount of any cash payable with respect to a fractional share of Parent Common
Stock to which such holder is entitled pursuant to this Agreement and the amount
of dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares of Parent Common Stock, and
(ii) at the appropriate payment date, the amount of dividends or other
distributions, with a record date after the Effective Time but prior to
surrender and a payment date occurring after surrender, payable with respect to
such whole shares of Parent Common Stock.
2.8 NO LIABILITY. None of the Parent, the Company, the Surviving
Corporation, the Exchange Agent or any other person shall be liable to any
former holder of shares of Company Common Stock for any amount properly
delivered to a public official pursuant to any abandoned or unclaimed property,
escheat or similar laws.
2.9 LOST CERTIFICATES. In the event any Company Certificate shall have
been lost, stolen or destroyed upon the making of an affidavit of that fact by
the person to the Exchange Agent claiming such Company Stock Certificate to be
lost, stolen or destroyed and, if required by Parent, the posting by such person
of a bond in such reasonable amount as Parent may direct as indemnity against
any claim that may be made against it with respect to such Company Certificate,
the Exchange Agent shall issue in exchange for such lost, stolen or destroyed
Company Certificate the applicable Merger Consideration, cash in lieu of
fractional shares, and unpaid dividends and distributions on shares of Parent
Common Stock, as provided in this Article II, deliverable in respect thereof
pursuant to this Agreement.
2.10 CLOSING OF STOCK TRANSFER BOOKS; RIGHTS AS SHAREHOLDERS. At the
Effective Time, the stock transfer books of the Company shall be closed and
there shall be no further registration of transfers of shares of Company Common
Stock thereafter on the records for the Company. From and after the Effective
Time, the holders of certificates evidencing ownership of shares of Company
Common Stock outstanding immediately prior to the Effective Time shall cease to
have any rights with respect to such shares except as otherwise provided herein
or by law. On or after the Effective Time, any Company Certificates presented to
the Exchange Agent or Parent for any reason shall be converted in accordance
with this Article II.
2.11 ANTI-DILUTION PROVISIONS. In the event that Parent changes (or
establishes a record date for changing) the number of shares of Parent Common
Stock issued and outstanding prior to the Effective Time as a result of a stock
split, stock dividend, recapitalization or similar transaction with respect to
the outstanding Parent Common Stock and the record date therefore shall be prior
to the Effective Time, the Exchange Ratio for the Stock Consideration shall be
proportionately adjusted.
2.12 STOCK OPTIONS.
(a) At the Effective Time, all employee stock options (the "Employee
Options") to purchase shares of Company Common Stock under the Company's
1997 Stock Option Plan (the "Employee Option Plan"), which are then
outstanding and unexercised, shall cease to represent a right to acquire
shares of Company Common Stock and shall be converted automatically into
options to purchase shares of Parent Common Stock, and Parent shall assume
each such Employee Option subject to the terms thereof, including but not
limited to the accelerated vesting of such options which shall occur in
connection with or by virtue of the Merger as and to the extent required by
the Employee Option Plan and agreements governing such Employee Options;
provided, however, that from and after the Effective Time, (i) the number of
shares of Parent Common Stock purchasable upon exercise of such Employee
Option shall be equal to the number of shares of Company Common Stock that
were
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purchasable under such Employee Option immediately prior to the Effective
Time multiplied by the Exchange Ratio, and rounding to the nearest whole
share, and (ii) the per share exercise price under each such Employee Option
shall be adjusted by dividing the per share exercise price of each such
Employee Option by the Exchange Ratio, and rounding down to the nearest
cent. The terms of each Employee Option shall, in accordance with its terms,
be subject to further adjustment as appropriate to reflect any stock split,
stock dividend, recapitalization or other similar transaction with respect
to Parent Common Stock on or subsequent to the Effective Time.
Notwithstanding the foregoing, each Employee Option which is intended to be
an "incentive stock option" (as defined in Section 422 of the Internal
Revenue Code, as amended (the "Code")) shall be adjusted in accordance with
the requirements of Section 424 of the Code. Accordingly, with respect to
any incentive stock options, fractional shares shall be rounded down to the
nearest whole number of shares and where necessary the per share exercise
price shall be rounded down to the nearest cent.
(b) At the Effective Time, all director stock options (the "Director
Options") to purchase shares of Company Common Stock under the Company's
1998 Director Stock Option Plan (the "Director Option Plan"), which are then
outstanding and unexercised, whether vested or unvested, shall automatically
become immediately vested and each holder of a Director Option shall receive
within five business days after the Closing Date from the Surviving
Corporation a cash payment (less applicable withholding taxes) in an
aggregate amount equal to the difference between $19.25 less the applicable
exercise price per share with respect to such Director Option as expressly
stated in the applicable stock option agreement or agreements (the "Option
Consideration"). The Company shall take such other actions (including,
without limitation, giving requisite notices to holders of Director Options
advising them of such accelerated vesting and rights pursuant to this
Section 2.12(b) and obtaining any requisite consents from the holders of
such Director Options) as are necessary to fully advise holders of Directors
Options of the rights under this Agreement and the Director Options, to
facilitate their timely exercise of such rights and to effectuate the
provisions of this Section 2.12(b). From and after the Effective Time, other
than as expressly set forth in this Section 2.12(b), no holder of a Director
Option shall have any other rights in respect thereof other than to receive
payment for his or her Director Options equal to the Option Consideration,
and the Company shall take all necessary actions to terminate effective as
of the Effective Time the Director Option Plan and any agreements or similar
arrangements with respect thereto.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Merger Subsidiary that,
except as set forth in the Disclosure Schedule delivered by the Company to
Parent and Merger Subsidiary on or prior to the execution of this Agreement,
which identifies exceptions by specific section references (the "Company
Disclosure Schedule"):
3.1 CORPORATION ORGANIZATION AND AUTHORITY.
(a) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Minnesota.
(b) (i) The Company has all requisite governmental authorizations,
certificates, licenses, consents and approvals required to carry on its
business as presently conducted, except where the failure to possess
such authorizations, certificates, licenses, consents and approvals does
not or would not reasonably be expected to have a Material Adverse
Effect (as defined in Section 3.1(b)(ii)) on the Company. The Company is
licensed or qualified to do business and is in good standing in each
jurisdiction in which the character of the properties owned or leased by
it or the nature of the business transacted by it requires it to be so
licensed or qualified except where the failure to be so licensed or
qualified does not or would not reasonably be expected to
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have a Material Adverse Effect on the Company. The copies of the
Articles of Incorporation and Bylaws of the Company, as amended to date,
previously furnished by the Company to the Parent, are complete and
correct and such instruments, as so amended, are in full force and
effect as of the date hereof.
(ii) For purposes of this Agreement, "Material Adverse Effect" means
any change, effect or event that individually or in the aggregate when
taken together with all related changes, effects or events (A) is, with
respect to Parent or the Company (or, in the case of the Company, the
Surviving Corporation after the Merger), as the case may be, materially
adverse to the business, financial condition, assets, properties,
operations or results of operations, of such entity and its Subsidiaries
(as defined in Section 3.3(f)) in each case taken as a whole, (B) does or
is reasonably likely to impair materially the ability of the Company,
Parent or the Merger Subsidiary, respectively, to timely perform its
obligations under this Agreement or otherwise to threaten materially or
to impede materially the consummation of the Merger and the transactions
contemplated by this Agreement, or (C) in the case of the Company, is
materially adverse to the ability of the Surviving Corporation to conduct
the business of the Company or the Company Subsidiaries to conduct their
respective businesses, in each case as presently conducted, after the
Closing Date; provided, however, that "Material Adverse Effect" shall not
be deemed to include any effects of (i) changes in laws, regulations or
interpretations thereof by any court, administrative agency or commission
or other federal, state or local governmental authority or
instrumentality ("Governmental Authority"), (ii) changes in generally
accepted accounting principles, (iii) events or conditions generally
affecting the securities industry or rising from changes in general
business or economic conditions that do not have a disproportionate
effect on such entity, (iv) the resignation or other termination of
employment, after the date of this Agreement, of any employees of (A) the
Company or Company Subsidiaries responsible for the production of,
individually or in the aggregate, less than $3.5 million of gross
revenues of the Company and its Subsidiaries for fiscal year 1998 on a
consolidated basis or (B) the Parent or Parent Subsidiaries responsible
for the production of, individually or in the aggregate, less than $3.5
million of gross revenues of the Parent and its Subsidiaries for fiscal
year 1998 on a consolidated basis, and (v) actions or omissions to act
required by this Agreement or having the prior written consent of the
other parties hereto.
(iii) For purposes of this Agreement, "Material" means, with respect
to any fact, circumstance, event or thing relating to Parent, the Company
or the Surviving Corporation, as the case may be, that such fact,
circumstance, event or thing is material to (A) the business, financial
condition, assets, properties, operations or results of operations of
such entity and its Subsidiaries, in each case taken as a whole, (B) the
ability of the Company, Parent, or the Merger Subsidiary to timely
perform its obligations under this Agreement or otherwise to consummate
the transactions contemplated under this Agreement, or (C) the ability of
the Surviving Corporation to conduct the business of the Company or the
Company Subsidiaries to conduct their respective businesses, in each case
as presently conducted, after the Closing Date.
3.2 CAPITALIZATION. The authorized capital stock of the Company consists
of (i) 3,000,000 shares of Company Common Stock, and (ii) 100,000 shares of
preferred stock, par value $.01 per share (the "Company Preferred Stock"). As of
the date of this Agreement, (a) 938,950 shares of Company Common Stock were
issued and outstanding, (b) no shares of Company Preferred Stock were issued and
outstanding, (c) 300,000 shares of Company Common Stock were reserved for
issuance pursuant to outstanding Employee Options heretofore granted under the
Employee Option Plan, and (d) 50,000 shares of Company Common Stock were
reserved for issuance pursuant to outstanding Director Options heretofore
granted under the Directors Option Plan. Section 3.2 of the Company Disclosure
Schedule sets forth a schedule showing (i) each outstanding Employee Option and
Director Option and the date it was granted, (ii) the number of shares of
Company Common Stock subject thereto, and (iii) the exercise price thereof.
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All of the outstanding shares of Company Common Stock are, and all shares of
Company Common Stock which may be issued pursuant to the exercise of outstanding
Employee Options or outstanding Director Options will be, when issued in
accordance with the respective terms thereof, duly authorized, validly issued,
fully paid and nonassessable, issued in material compliance with all applicable
federal and state securities laws and not issued in violation of any preemptive
or similar rights. Except as provided in this Section 3.2, no shares of the
capital stock of the Company are reserved for issuance for any purpose. There
are no bonds, debentures, notes or other indebtedness having general voting
rights (or convertible and the securities having such rights)("Voting Debt") of
the Company issued and outstanding. There are no other shares of capital stock
or other equity securities, instruments or other rights of the Company
authorized, issued or outstanding and no other options, warrants, rights to
subscribe (including any preemptive rights), calls, agreements, arrangements or
commitments of any character whatsoever to which the Company is a party or may
be bound requiring the issuance, transfer or sale of any shares of capital
stock, Voting Debt or other equity interests of the Company or any securities or
rights convertible into or exchangeable or exercisable for any such shares or
equity interests, and there are no contracts, commitments, understandings or
arrangements by which the Company is or may become bound to issue additional
shares of its capital stock, options, warrants or rights or to purchase, redeem
or acquire any shares of its capital stock or securities convertible into or
exchangeable or exercisable for any such shares or other securities.
3.3 SUBSIDIARIES.
(a) The Company has fully and accurately disclosed in Schedule 3.3 of
the Company Disclosure Schedule all the Company's Subsidiaries and the
states in which such Subsidiaries are organized. Each of the Company's
Subsidiaries has been duly organized and is validly existing and in good
standing under the laws of the state in which it is organized, and is duly
licensed or qualified to do business and is in good standing in each
jurisdiction in which the character of the properties owned or leased by it
or the nature of the business transacted by it or the conduct of its
business requires it to be so licensed or qualified except where the failure
to be so licensed or qualified has not had and would not reasonably be
expected to have a Material Adverse Effect on the Company.
(b) No capital stock of any of the Company Subsidiaries are or may
become required to be issued (other than to the Company or a wholly owned
Subsidiary of the Company) by reason of any options, warrants, rights to
subscribe to, calls or commitments of any character whatsoever relating to,
or securities or rights convertible into or exchangeable or exercisable for,
shares of capital stock of any of such Subsidiaries and there are no
contracts, commitments, understandings or arrangements by which the Company
or any of its Subsidiaries is or may be bound to issue, redeem, purchase or
sell shares of any Subsidiary capital stock or securities convertible into
or exchangeable or exercisable for any such shares or interests.
(c) The copies of the organizational documents, as amended to date, of
all Subsidiaries of the Company previously furnished to Parent are complete
and correct and such instruments, as so amended, are in full force and
effect as of the date hereof.
(d) All of the outstanding shares of capital stock of each of the
Company's Subsidiaries have been duly authorized and validly issued, were
not issued in violation of any subscription or preemptive right, are fully
paid and nonassessable and subject to no preemptive or other similar rights,
and are owned by the Company or a Subsidiary of the Company free and clear
of any lien, charge, mortgage, pledge, security interest, restriction, claim
or encumbrance of any nature whatsoever ("Liens"), other than any
restriction on transfer under any applicable securities laws.
(e) Except for the stock of the Company Subsidiaries directly or
indirectly owned by the Company, warrants received in the ordinary course of
business as an underwriter or as otherwise disclosed in Schedule 3.3 of the
Company Disclosure Schedule, neither the Company nor any Company Subsidiary
owns any stock, partnership interest, joint venture interest or any other
security
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issued by any other corporation, organization or entity, except readily
marketable securities owned by the Company or a Company Subsidiary in the
ordinary course of business.
(f) As used in this Agreement, the word "Subsidiary," with respect to
any party to this Agreement, means any corporation, partnership, joint
venture or other organization, whether incorporated or unincorporated, of
which: (i) such party or any other Subsidiary of such party is a general
partner; (ii) voting power to elect a majority of the Board of Directors or
others performing similar functions with respect to such corporation,
partnership, joint venture or other organization is held by such party or by
any one or more of its Subsidiaries, or by such party and any one or more of
its Subsidiaries.
3.4 CORPORATE POWER. The Company and each of its Subsidiaries has all
requisite corporate power and authority to carry on their respective business as
it is now being conducted and to own, lease and operate their respective
properties and assets.
3.5 CORPORATE AUTHORITY; VOTE REQUIRED.
(a) The Company has the requisite corporate power and authority to
execute and deliver this Agreement, to perform its obligations hereunder and
to consummate the transactions contemplated hereby. The execution, delivery
and performance of this Agreement by the Company and the consummation of the
transactions contemplated hereby have been duly and validly authorized by
all necessary corporate action and no other corporate proceedings on the
part of the Company are necessary to authorize the execution, delivery and
performance of this Agreement or to consummate the transactions contemplated
hereby (other than, with respect to the Merger, the approval and adoption of
this Agreement by the holders of a majority of the voting power of all the
outstanding shares of Company Common Stock (the "Requisite Company
Shareholder Vote") in accordance with the MBCA and the Company's Articles of
Incorporation and Bylaws and the filing of the appropriate merger documents
required by the MBCA). This Agreement has been duly and validly executed and
delivered by the Company and constitutes a legal, valid and binding
obligation of the Company, enforceable in accordance with its terms.
(b) The Company has taken all action necessary, if any, in order to
exempt this Agreement and the transactions contemplated hereby from, and
this Agreement and the transactions contemplated hereby are exempt from, the
requirements of any "moratorium," "control share," "fair price" or other
anti-takeover laws and regulations (collective, "Takeover Laws") of the
State of Minnesota.
3.6 NONCONTRAVENTION.
(a) The execution and delivery of this Agreement by the Company does
not, and the performance of this Agreement by the Company will not conflict
with or violate the Articles of Incorporation, Bylaws or equivalent
organizational documents of the Company or any of its Subsidiaries.
(b) Subject to the approval by the shareholders of the outstanding
Company Common Stock, receipt of the required regulatory approvals, the
required filings under federal and state securities and insurance laws and
approvals of NYSE and any other applicable exchange of the Merger and the
other transactions contemplated hereby and except as do not or would not
reasonably be expected to have a Material Adverse Effect on the Company, the
execution, delivery and performance of this Agreement and the consummation
of the Merger do not and will not constitute a breach of or a default under,
or give rise to rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a Lien on any of the
properties or assets of the Company or any of its Subsidiaries pursuant to,
any note, bond, mortgage, indenture, contract, agreement, lease, license,
permit, franchise or other instrument or obligation to which the Company or
any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries or any of their respective properties is bound or affected.
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3.7 REGULATORY FILINGS AND CONSENTS. Except for the consents, approvals,
notifications, filings and registration set forth in Section 3.7 of the Company
Disclosure Schedule or where the failure to obtain such consents and approvals
or make such filings or registration does not or would not reasonably be
expected to have a Material Adverse Effect on the Company, no consents or
approvals of, notifications to, or filings or registrations with, (i) any court,
administrative agency or commission or any other federal, state or local
authority or instrumentality, domestic or foreign (collectively, "Governmental
Authority"), (ii)(A) the National Association of Securities Dealers, Inc.
("NASD"), New York Stock Exchange ("NYSE"), the American Stock Exchange
("AMEX"), Chicago Board of Trade ("CBOT"), the Securities Investor Protection
Corporation ("SIPC"), the Municipal Securities Rulemaking Board (the "MSRB") or
(B) other commission, board, bureau, agency, or body that is not a Governmental
Authority but is charged with the regulation and supervision or regulation of
brokers, dealers, investment advisors, securities underwriting or trading, stock
exchanges, commodities exchanges, insurance companies or agents, investment
companies, investment advisors or lending or gaming activities and to the
jurisdiction of which the Company or any of its Subsidiaries are subject
(collectively, "Self-Regulatory Agencies") or (iii) pursuant to any applicable
laws, regulation or orders are required to be made or obtained by the Company or
any of its Subsidiaries in connection with the execution, delivery or
performance by the Company of this Agreement or to consummate the Merger.
3.8 REGISTRATIONS.
(a) Except as does not or would not reasonably be expected to have a
Material Adverse Effect on the Company, the Company and any Company
Subsidiary required to be registered as a broker dealer, investment adviser
or insurance agency, with the Securities and Exchange Commission (the
"SEC"), any securities commission or similar authority or insurance
authority of any state or foreign jurisdiction or any Self Regulatory
Organization are duly registered as such and such registrations are in full
force and effect. All such registrations as currently filed, and all
periodic reports required to be filed with respect thereto, are accurate and
complete in all material respects.
(b) Except as does not or would not reasonably be expected to have a
Material Adverse Effect on the Company, all of the Company and the Company's
Subsidiaries' respective officers and employees who are required to be
licensed or registered to conduct the business of the Company or such
Subsidiary as presently conducted are duly licensed or registered in each
state or foreign jurisdiction in which such licensing or regulation is so
required (collectively, the "Company Registered Representatives"). To the
knowledge of the Company, none of the Company Registered Representatives is
or has been, since August 1, 1997, subject to any disciplinary or other
regulatory compliance proceeding.
3.9 REPORTS; FINANCIAL STATEMENTS.
(a) Since August 1, 1997 the Company and each Company Subsidiary has (i)
filed all forms, reports, statements and other documents required to be
filed with the SEC including, without limitation, all FOCUS reports and all
amendments and supplements to all such reports (the "Company SEC Reports"),
(ii) filed all forms, reports, statements and other documents required to be
filed with any Governmental Authorities including, without limitation, state
authorities regulating the purchase and sale of securities, and (iii) filed
all trade reports, filings, amendments to forms and other documents required
by any Self Regulatory Organization (all such forms, reports, statements and
other documents in clauses (i), (ii) and (iii) of this Section 3.9(a) being
collectively referred to as the "Company Reports") except where the failure
to file such Company Reports has not had or would not reasonably be expected
to have a Material Adverse Effect on the Company. The Company has made
available to Parent copies of each of the Company Reports and will promptly
provide copies of each Company Report filed after the date of this
Agreement. The Company Reports previously filed did not at the time they
were filed (after giving effect to any amendments filed before the date
hereof) and the Company Reports filed in the future will not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were or will be
made, not misleading.
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(b) The Company has delivered to Parent (i) copies of its audited
consolidated balance sheets as at October 31, 1998 and 1997 and the related
consolidated statements of operations, cash flows and shareholders' equity
for the fiscal year ended October 31, 1998 and the period from August 1,
1997 to October 31, 1997 (including the related notes and schedules thereto
and reports of independent auditors) (the "Audited Reports"), (ii) an
unaudited consolidated balance sheet of the Company as at March 31, 1999
(the "Latest Balance Sheet") and the related consolidated statements of
operations, cash flows and shareholder equity for the five months then ended
(the "Interim Financial Reports"), and (iii) copies of the reports of the
Company and its Subsidiaries filed with the SEC (the "SEC Reports") pursuant
to Section 17 of the Exchange Act and Rule 17a-5 thereunder for the fiscal
years ended October 31, 1998 and October 31, 1997 and the quarter ended
January 31, 1999 (collectively and with all future Audited Reports, Interim
Financial Reports and SEC Reports, the "Company Financial Statements"). The
Company will promptly provide Parent with copies of the Company Financial
Statements with respect to periods after the dates set forth above when
available. The Company Financial Statements (as of the dates thereof and for
the periods covered thereby) are or, if delivered in the future, will be in
accordance with the books and records of the Company, which books and
records are complete and accurate in all material respects and fairly
present in all material respects the financial position of the entity or
entities to which they relate as of the date and for the periods presented,
in each case in accordance with generally accepted accounting principles
("GAAP") consistently applied during the periods involved, as to the Audited
Reports and the Interim Financial Reports, and in accordance with regulatory
accounting principles, as to the SEC Reports and subject to normal and
recurring year-end audit adjustments in the case of unaudited statements.
3.10 ABSENCE OF UNDISCLOSED MATERIAL LIABILITIES. All of the obligations
or liabilities, claims or expenses of any nature (whether absolute, accrued,
contingent, unliquidated or otherwise, whether due or to become due, whether
known or unknown, and regardless of when asserted) arising out of transactions
or events heretofore entered into, or any action or inaction, including Taxes
(as defined in Section 3.14) with respect to or based upon transactions or
events heretofore occurring that are required to be reflected, disclosed or
reserved against in audited consolidated financial statements in accordance with
GAAP ("Liabilities") have, in the case of the Company and its Subsidiaries, been
so reflected, disclosed or reserved against in the Latest Balance Sheet, and the
Company and its Subsidiaries have no other Liabilities except: (a) Liabilities
incurred since the date of the Latest Balance Sheet (the "Latest Balance Sheet
Date") in the normal and ordinary course of business consistent with past
practices (none of which is an uninsured Liability for breach of contract,
breach of warranty, tort, or other claim or lawsuit), (b) as otherwise disclosed
in the Company Disclosure Schedule, or (c) Liabilities incurred pursuant to this
Agreement or in connection with the transactions contemplated under this
Agreement.
3.11 NO MATERIAL ADVERSE EFFECT. Since October 31, 1998, the business of
the Company and its Subsidiaries has been conducted in the ordinary and usual
course, consistent with past practice, and there has been no event, occurrence,
development or state of circumstances or facts which has had or would reasonably
be expected to have a Material Adverse Effect on the Company.
3.12 SECURITIES. Each of the Company and its Subsidiaries has good and
marketable title to all securities held by it (except securities sold under
repurchase agreements or held in any fiduciary or agency capacity), free and
clear of any Lien, except to the extent such securities are pledged in the
ordinary course of business consistent with prudent business practices to secure
the obligations of each of the Company or its Subsidiaries.
3.13 LITIGATION.
(a) No action, suit, proceeding, order, investigation, claim or
arbitration proceeding is pending or, to the knowledge of the Company,
threatened against the Company or any of its Subsidiaries, or their
respective properties, businesses, employees or agents, at law or in equity,
or before or by any
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court, arbitrator, mediator or Self Regulatory Organization or Governmental
Authority except for those that would not have or would not reasonably be
expected to have a Material Adverse Effect on the Company.
(b) Neither the Company nor any of its Subsidiaries or their respective
properties, businesses, employees or agents is a party to or is subject to
any order, decree, agreement, memorandum of understanding or similar
arrangement restriction with, or a commitment letter or similar submission
to, any Self Regulatory Organization or Governmental Authority except for
those that do not or would not reasonably be expected to have a Material
Adverse Effect on the Company. Neither the Company nor any of its
Subsidiaries has been advised by any such Self Regulatory Organization or
Governmental Authority that it is contemplating issuing or requesting (or is
considering the appropriateness of issuing or requesting) any such order,
decree, agreement, memorandum or understanding, commitment letter or similar
submission.
(c) Section 3.13 of the Company Disclosure Schedule sets forth, as of
the date of this Agreement, a true and complete list of all claims, actions,
suits or proceedings by private parties against the Company or the Company
Subsidiaries (i) arising out of any state of facts relating to the
origination or sale of investment products or services by the Company, its
Subsidiaries or any employees thereof (including, without limitation, equity
or debt securities, mutual funds, insurance contracts, annuities,
partnership and limited partnership interests, interests in real estate,
debt origination, loan participations, investment banking services,
securities underwritings, or investment advisory services in which the
Company or any of its Subsidiaries participated in any manner), or (ii) that
could reasonably be expected to involve individually an amount in excess of
$50,000 or collectively an aggregate amount in excess of $100,000.
3.14 TAX MATTERS.
(a) Each of the Company and any Subsidiary and any affiliated, combined
or unitary group of which the Company or any Subsidiary is or was a member,
and any Company Employee Plans (as defined in Section 3.20 hereof), as the
case may be (each, a "Company Tax Affiliate" and, collectively, the "Company
Tax Affiliates"), has: (i) timely filed (or has had timely filed on its
behalf) all returns, declarations, reports, estimates, information returns,
and statements ("Tax Returns") required to be filed or sent by it in respect
of any "Taxes" (as defined in subsection (f) below) or required to be filed
or sent by it by any taxing authority having jurisdiction and such Tax
Returns are true, correct and complete in all material respects; (ii) timely
and properly paid (or has had paid on its behalf) all Taxes shown to be due
and payable on such Tax Returns; (iii) paid or arranged for payment by or on
behalf of it or reflected on its books as an accrued Tax liability, either
current or deferred all Material Taxes of the Company or any Subsidiary
which will be due and payable, whether now or hereafter, for any period
ending on, ending on and including, or ending prior to the Closing Date;
(iv) complied in all material respects with all applicable laws, rules, and
regulations relating to the withholding of Taxes and the payment thereof
(including, without limitation, withholding of Taxes under Sections 1441 and
1442 of the Code or similar provisions under any foreign laws), and timely
and properly withheld from individual employee wages or payments to any
independent contractor, creditor, shareholder or other third party and paid
over to the proper governmental authorities all amounts required to be so
withheld and paid over under all applicable laws.
(b) There are no Liens for Taxes upon any assets of the Company, any
Company Subsidiary or of any Company Tax Affiliate, except Liens for Taxes
not yet due.
(c) No deficiency for any Taxes has been proposed, asserted or assessed
against the Company, its Subsidiaries or the Company Tax Affiliates that has
not been resolved and paid in full. No waiver, extension or comparable
consent given by the Company, the Subsidiaries or the Company Tax Affiliates
regarding the application of the statute of limitations with respect to any
Taxes or Tax Returns is outstanding, nor is any request for any such waiver
or consent pending. There has been no
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tax audit or other administrative proceeding or court proceeding with regard
to any Taxes or Company Tax Returns for the Company's 1995, 1996 or 1997 tax
years, nor is the Company or any Subsidiary under Tax audit or other
proceeding, nor has there been any notice to the Company or any Subsidiary
by any taxing authority regarding any such Tax, audit or other such
proceeding, or, to the knowledge of the Company or any Company Subsidiary,
is any such Tax audit or other proceeding threatened with regard to any
Taxes or Company Tax Returns. Neither the Company nor any Subsidiary has any
knowledge of any unresolved questions, claims or disputes concerning the
liability for Taxes of the Company, the Subsidiaries or the Company Tax
Affiliates which would exceed the estimated reserves established on its
books and records. The Company Tax Returns for all taxable years of the
Company or any Company Subsidiary are closed by the applicable statute of
limitations for all taxable years prior to the Company's 1995 tax year.
(d) Neither the Company, any Subsidiary nor any Company Tax Affiliate is
a party to any agreement, contract or arrangement that would result,
separately or in the aggregate, in the payment of any "excess parachute
payments" within the meaning of Section 280G of the Code and the
consummation of the transactions contemplated by this Agreement will not be
a factor causing payments to be made by the Company, any Company Subsidiary,
any Company Tax Affiliate or the Surviving Corporation that are not
deductible (in whole or in part) under Section 280G of the Code.
(e) Except as disclosed in Schedule 3.14 of the Disclosure Schedule,
neither the Company nor any Company Subsidiary (i) is a party to any
agreement providing for the allocation or sharing of taxes or (ii) is
required to include in income any adjustment by reason of a voluntary change
in accounting method initiated by the Company or any Company Subsidiary (nor
does the Company or any Company Subsidiary have any knowledge that any
taxing authority has proposed any such adjustment or change of accounting
method).
(f) For purposes of this Agreement, the term "Taxes" means all taxes,
charges, fees, levies, or other assessments, however denominated and whether
imposed by a taxing authority within or without the United States,
including, without limitation, all net income, gross income, gross receipts,
sales, use, ad valorem, transfer, franchise, profits, license, withholding,
payroll, employment, social security, unemployment, excise, estimated,
severance, stamp, occupation, property, or other taxes, customs duties,
fees, assessments, or charges of any kind whatsoever, including, together
with all interest and penalties thereon, and additions to tax or additional
amounts imposed by any taxing authority whether arising before, on or after
the Effective Date.
3.15 CONTRACTS AND COMMITMENTS.
(a) Except as disclosed in Section 3.15, Section 3.16, Section 3.17 or
Section 3.20 of the Company Disclosure Schedule, neither the Company nor any
Company Subsidiary is a party to any of the following contracts, agreements
or arrangements, whether written or oral (the "Company Material
Agreements"):
(i) pension, profit-sharing, retirement, hospitalization, group
insurance, medical expense reimbursement, death benefit, disability,
deferred compensation, fringe benefit, stock option, stock purchase,
stock bonus, incentive compensation, bonus, or any other employee benefit
plan;
(ii) collective bargaining agreement or other contract with any
labor union, or any contract, whether written or oral (excluding any oral
contract that is terminable-at-will under the laws of the relevant
jurisdiction), for the employment of any officer, individual employee, or
other person or entity on a full-time, part-time, consulting or other
basis, or any agreement relating to loans to officers, directors or
affiliates;
(iii) contract or agreement related to the voting of the shares of
the Company or any of its Subsidiaries or the election of directors of
the Company or any Company Subsidiary;
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(iv) agreement or indenture relating to the borrowing of money or to
the mortgaging, pledging or otherwise placing a lien on any asset or
group of assets of the Company or any Company Subsidiary other than in
the ordinary course of business and consistent with past practice;
(v) guarantee of any obligation, except for guarantees of the
obligations of wholly owned Subsidiaries, other than in the ordinary
course of business and consistent with past practice;
(vi) contract or agreement (A) prohibiting it from freely engaging
or competing in any business anywhere in the world, or (B) entered into,
other than in the ordinary course of business and consistent with past
practice, restricting the right of the Company or any Company Subsidiary
to use or disclose any information in its possession;
(vii) partnership, joint venture, or other similar contract
arrangement;
(viii) underwriting, agency, dealer, sales representative or other
similar agreements relating to public offerings or private placements of
partnership interests or insurance products, in each case, other than in
the ordinary course of business;
(ix) any contract relating to the acquisition or disposition of any
business of the Company or a Company Subsidiary (whether by merger, sale
of stock, sale of assets or otherwise) entered into after August 1, 1997;
(x) any other contract which creates future payment obligations in
excess of $100,000 in the aggregate and which by its terms does not
terminate or is not terminable without penalty upon notice of 90 days or
less other than loan commitments made in the ordinary course of business
which the Company reasonably anticipates will be funded through loan
participations under which third parties other than the Company or any
Company Subsidiary would fulfill such future payment obligations; or
(xi) any other contract not entered into in the ordinary course of
business that is Material to the Company.
(b) The Company has furnished to Parent true and complete copies of each
of the Company Material Agreements (or, if oral, a written summary of such
Company Material Agreements).
(c) Except as disclosed in Section 3.15 of the Company Disclosure
Schedule:
(i) The Company and each of its Subsidiaries have performed all
material obligations required to be performed by them and are not in
material default under or in material breach of nor in receipt of any
claim of material default or breach under any Company Material Agreement
to which either is a party or is bound thereby;
(ii) to the knowledge of the Company, no event has occurred which
with the passage of time or the giving of notice or both would result in
such a material default or breach under any Company Material Agreement.
(d) To the knowledge of the Company, no employee of the Company or any
Company Subsidiary is a party to a contract other than with the Company or a
Company Subsidiary (A) prohibiting him or her from freely engaging or
competing in any business anywhere in the world, or (B) entered into other
than in the ordinary course of business and consistent with past practice,
restricting his or her right to use or disclose any information in his or
her possession.
3.16 PARTICIPATION AGREEMENTS.
(a) All issued and outstanding participation agreements, loan
participation notes or similar arrangements to which the Company or any
Company Subsidiary is a party or under which the Company or any Company
Subsidiary has any liability (the "Participation Agreements") were entered
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into in the ordinary course of business of the Company or the Company
Subsidiary which is a party to or liable under such Participation
Agreements.
(b) The Company and the Company Subsidiaries have performed all material
obligations required to be performed by them and are not in material default
under or material breach of nor in receipt of any claim of any material
breach or default under any Participation Agreements.
(c) The Company has no knowledge of any breach by any third party of any
material obligation to be required to be performed by it or any material
default under any Participation Agreement.
(d) Each agreement evidencing a Participation Agreement provides that
neither the Company nor any Company Subsidiary has made any guaranty of
payment of the debt that is the subject of the Participation Agreement and
that the participant shall not have recourse to the Company or any Company
Subsidiary for repayment of such debt. Neither the Company nor any Company
Subsidiary has waived any material provision thereof in a manner that would
increase the liability of the Company or any Company Subsidiary thereunder.
3.17 TITLE TO PROPERTY.
(a) The Company does not own any real property. The real property
demised by the leases (the "Leases") described under the caption "Leases" in
Section 3.17 of the Company Disclosure Schedule together constitute all of
the real property used or occupied by the Company (collectively, the "Real
Property").
(b) The Leases are in full force and effect, and the lessee therein has
valid and existing leasehold interests under each such Lease for the term
set forth therein. The Company has delivered to Parent complete and accurate
copies of each of the Leases and none of such Leases has been modified in
any respect, except to the extent that such modifications are disclosed by
the copies delivered to Parent. The lessee under each of the Leases is not
in default which would, and no circumstances exist which, if not remedied,
would either with or without notice or the passage of time or both, result
in a termination, under any of such Leases.
3.18 INTELLECTUAL PROPERTY RIGHTS. Except as disclosed in Section 3.18 of
the Company Disclosure Schedule, there are no Material trademarks, service
marks, trade names, corporate names, copyrights, trade secrets or other
intellectual property rights owned or licensed by the Company or any of its
Subsidiaries or necessary to the conduct of the businesses of the Company or its
Subsidiaries as now conducted. The Company or one of its Subsidiaries owns and
possesses all right, title and interest, or a valid license, in and to the
intellectual property rights set forth in such Section 3.18.
3.19 EMPLOYEES. The Company and each of its Subsidiaries are in compliance
in all material respects with all Material laws relating to the employment of
labor, including provisions thereof relating to wages, hours, equal opportunity
and collective bargaining, and is current in the payment of employee-related
obligations. There are no Material workers' compensation claims pending against
the Company or any of its Subsidiaries.
3.20 EMPLOYEE BENEFIT PLANS.
(a) Section 3.20 of the Company Disclosure Schedule discloses each
"employee benefit plan", as defined in Section 3(3) of Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), which (i) is subject to
any provision of ERISA, and (ii) is maintained, administered or contributed
to by the Company or any Company ERISA Affiliate (as defined below) and
covers any employee or former employee of the Company or any ERISA Affiliate
or under which the Company or any ERISA Affiliate has any liability. Such
plans are hereinafter referred to collectively as the "Company Employee
Plans." For purposes of this Section 3.20, "Company ERISA Affiliate" means
any person which is treated as a single employer with the Company under
Section 414 of the Code. The only Company Employee Plans which individually
or collectively would constitute an "employee
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pension benefit plan" as defined in Section 3(2) of ERISA (the "Company
Pension Plans") are identified as such in Section 3.20 of the Company
Disclosure Schedule.
(b) No Company Employee Plan constitutes a "multiemployer plan", as
defined in Section 4001(a)(3) of ERISA (a "Multiemployer Plan"), and no
Company Employee Plan is maintained in connection with any trust described
in Section 501(c)(9) of the Code. No Company Employee Plan is a defined
benefit plan or a money purchase pension plan and no Company Employee Plan
is subject to Title IV of ERISA. Nothing done or omitted to be done and no
transaction or holding of any asset under or in connection with any Company
Employee Plan has or would reasonably subject the Company or any Company
Subsidiary, or any officer or director of the Company or any Company
Subsidiary, to any Material liability under Title I of ERISA or liable for
any Material amount of tax pursuant to Section 4972 or Sections 4974 through
4980B, inclusive, of the Code.
(c) Each Company Pension Plan which is intended to be qualified under
Section 401(a) of the Code is so qualified and has been so qualified during
the period from its adoption to date, and each trust forming a part thereof
is exempt from tax pursuant to Section 501(a) of the Code. The Company has
furnished to Parent copies of the most recent Internal Revenue Service
determination letters with respect to the Company Pension Plans. Except as
disclosed in Section 3.20 of the Company Disclosure Schedule, each Company
Employee Plan has been maintained in substantial compliance with its terms
and with the requirements prescribed by any and all statutes, orders, rules
and regulations, including but not limited to ERISA and the Code, which are
applicable to such Plans.
(d) Section 3.20 of the Company Disclosure Schedule lists each
employment, severance or other similar contract, arrangement or policy and
each plan or arrangement (written or oral) providing for insurance coverage
(including any self-insured arrangements), workers' compensation, disability
benefits, supplemental unemployment benefits, vacation benefits, retirement
benefits or for deferred compensation, profit-sharing, bonuses, stock
options, stock appreciation or other forms of incentive compensation or
post-retirement insurance, compensation or benefits which (i) is not a
Company Employee Plan, (ii) is entered into, maintained or contributed to,
as the case may be, by the Company or any Company ERISA Affiliates and (iii)
covers any employee or former employee of the Company or any Company ERISA
Affiliates. Such contracts, plans and arrangements as are described above,
copies and descriptions (including descriptions of the number and level of
employees covered thereby) of all of which have been furnished previously to
Parent, are hereinafter referred to collectively as the "Company Benefit
Arrangements." Each Company Benefit Arrangement has been maintained in
substantial compliance with its terms and with the requirements prescribed
by any and all statutes, orders, rules and regulations which are applicable
to such Company Benefit Arrangement. Except as set forth in Section 3.20 of
the Company Disclosure Schedule and except as provided by law, the
employment of all persons presently employed or retained by the Company or
any of its Subsidiary is terminable at will.
(e) The Company and the Company ERISA Affiliates have no post-retirement
health and medical benefits for retired employees. No condition exists that
would prevent Parent or any affiliate of Parent from amending or terminating
any Company Employee Plan or Company Benefit Arrangement, other than any
limitations imposed under ERISA or the Code.
(f) With respect to all Company Employee Plans, all contributions which
are due have either been made or properly accrued.
(g) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) result in any
payment (including, without limitation, severance, unemployment
compensation, golden parachute or otherwise) becoming due to any director or
any employee of the Company or any of its Subsidiaries under any Company
Benefit Arrangement or otherwise from the Company or any of its
Subsidiaries, (ii) increase any benefits otherwise payable under any Company
Benefit Arrangement or (iii) result in any acceleration of the time of
payment or vesting of any such benefit.
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3.21 COMPLIANCE WITH LAWS, PERMITS AND LICENSES. Except as set forth in
Section 3.21 of the Company Disclosure Schedule, each of the Company and its
Subsidiaries, and their respective officers and employees:
(a) in the conduct of its business (including without limitation, its
municipal securities and lending activities), is in compliance with all
applicable federal, state, local and foreign statutes, laws, regulations,
ordinances, rules, judgments, orders or decrees applicable thereto or to the
employees conducting such businesses, and the rules of all Self Regulatory
Organizations applicable thereto except where the failure to be in
compliance does not have or would not reasonably be expected to have a
Material Adverse Effect;
(b) has all permits, licenses, authorizations, orders and approvals of,
and has made all filings, applications and registrations with, all
Governmental Authorities and Self Regulatory Organizations that are required
in order to permit them to own and operate their businesses as presently
conducted and that are Material to the business of the Company; all such
permits, licenses, certificates of authority, orders and approvals are in
full force and effect and, to its knowledge, no suspension or cancellation
of any of them is threatened or reasonably likely; and all such filings,
applications and registrations are current;
(c) Since August 1, 1997, has received no notification or communication
from any Governmental Authority or Self Regulatory Organization (i)
asserting that any of them is not in compliance with any of the statutes,
rules, regulations or ordinances which such Governmental Authority or Self
Regulatory Organization enforces, or has otherwise engaged in any unlawful
business practice, (ii) threatening to revoke any license, franchise,
permit, seat on any stock or commodities exchange, or governmental
authorization, (iii) requiring any of them (including any of the Company's
or its Subsidiaries' directors or controlling persons) to enter into a cease
and desist order, agreement, or memorandum of understanding (or requiring
the board of directors thereof to adopt any resolution or policy) or (iv)
restricting or disqualifying the activities of the Company or any of its
Subsidiaries (except for restrictions generally imposed by rule, regulation,
or administrative policy on broker-dealers generally);
(d) is not aware of any pending or threatened investigation, review or
disciplinary proceedings by any Governmental Authority or Self Regulatory
Organization against the Company, any of its Subsidiaries or any officer,
director or employee thereof;
(e) other than Miller & Schroeder Asset Management and Miller &
Schroeder Small Business Capital Corporation, is not required to be
registered as an investment company, investment advisor, commodity trading
advisor, commodity pool operator, futures commission merchant, introducing
broker, insurance agent, or transfer agent under any United States federal,
state, local or foreign statutes, laws, rules or regulations. No
broker-dealer Subsidiary acts as the "sponsor" of a "broker-dealer trading
program", as such terms are defined in Rule 17a-23 under the Exchange Act.
(f) is not, nor, to the knowledge of the Company is, any "affiliated
person" (as defined in the Investment Company Act of 1940, as amended and
the rules and regulations promulgated thereunder (the "Investment Company
Act")) thereof, ineligible pursuant to Section 9(a) or 9(b) of the
Investment Company Act to serve as an investment advisor (or in any other
capacity contemplated by the Investment Company Act) to an Investment
Company (as defined in the Investment Company Act). Neither the Company, nor
any "associated person" (as defined in the Investment Advisors Act of 1940,
as amended and the rules and regulations promulgated thereunder (the
"Investment Advisors Act")) thereof, is ineligible pursuant to Section 203
of the Investment Advisors Act to serve as an investment advisor or as an
associated person to a registered investment advisor; and
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(g) is not, nor is any affiliate of any of them, subject to a "statutory
disqualification" as defined in Section 3(a)(39) of the Securities Exchange
Act of 1934, as amended and the rules and regulations promulgated thereunder
(the "Exchange Act").
3.22 ENVIRONMENTAL MATTERS.
(a) For purposes of this Agreement:
(i) "Environmental Laws" means any federal, state or local law,
regulation, order, decree, permit, authorization, common law or agency
requirement with force of law relating to: (a) the protection or
restoration of the environment, health or safety as enacted or amended
prior to the date hereof (in each case as relating to the environment) or
natural resources; or (b) the handling, use, presence, disposal, release
or threatened release of any Hazardous Substance.
(ii) "Hazardous Substance" means any hazardous or toxic substance,
material or waste, including those substances, materials and wastes
listed in the United States Department of Transportation Hazardous
Materials Table (49 CFR Section 172.101), or by the United States
Environmental Protection Agency as hazardous substances (40 CFR Par 302)
and amendments thereto, petroleum products or other such substances,
materials and wastes that are or become regulated under any applicable
local, state or federal law, including petroleum compounds, lead,
asbestos and polychlorinated biphenyls.
(b) Except as set forth in Section 3.22 of the Company Disclosure
Schedule:
(i) The Company and its Subsidiaries have complied in all material
respects at all times with applicable Environmental Laws.
(ii) No property (including buildings and any other structures)
currently or formerly owned, used or operated (or which the Company or
any of its Subsidiaries would be deemed to have owned, used or operated
under any Environmental Law) by the Company or any of its Subsidiaries or
in which the Company or any of its Subsidiaries (whether as fiduciary or
otherwise) has a Lien, has been contaminated with, or has had any release
of, any Hazardous Substance in such form or substance so as to create any
liability for the Company or its Subsidiaries.
(iii) Neither the Company nor any of its Subsidiaries is subject to
liability for any Hazardous Substance disposal or contamination on any
other third-party property.
(iv) Since August 1, 1997, the Company and its Subsidiaries have not
received any notice, demand letter, claim or request for information
alleging any violation of, or liability of the Company under, any
Environmental Law.
(v) The Company and its Subsidiaries are not subject to any order,
decree, injunction or other agreement with any Governmental Authority or
any third party relating to any Environmental Law.
(c) The Company has made available to Parent copies of all environmental
reports, studies, sampling data, correspondence, filings and other
environmental information in its possession or reasonably available to it
relating to the Company or one of its Subsidiaries or any currently or
formerly owned, used or operated property or any property in which the
Company or one of its Subsidiaries (whether as fiduciary or otherwise) has
held a Lien.
3.23 NO PENDING TRANSACTIONS. Except for this Agreement, as of the date of
this Agreement, neither the Company nor any of its Subsidiaries is a party to or
bound by any agreement, undertaking or commitment (i) to merge or consolidate
with, or acquire all or substantially all of the property and assets of, any
other corporation or person or (ii) to sell, lease or exchange all or
substantially all of its property and assets to any other corporation or person.
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3.24 RISK MANAGEMENT INSTRUMENTS. All interest rate swaps, caps, floors,
collars, option agreements, futures and forward contracts, and other similar
risk management arrangements, whether entered into for the Company's own
accounts, or for the account of one or more of its Subsidiaries or their
customers, were entered into in the ordinary course of business (i) in
accordance with prudent business practices and all applicable laws, rules,
regulations and regulatory policies in all material respects, and (ii) with
counterparties believed to be financially responsible at the time; and each of
them constitutes the valid and legally binding obligation of the Company or one
of its Subsidiaries, enforceable in accordance with its terms and are in full
force and effect. Neither the Company nor its Subsidiaries, nor to the Company's
knowledge, any other party thereto, is in breach of any of its obligations under
any such agreement or arrangement. The Company Financial Statements disclose the
value of such agreements and arrangements on a mark- to-market basis in
accordance with generally accepted accounting principles and since October 31,
1998 there has not been a change in such value that, individually or in the
aggregate, has had or would reasonably be expected to have a Material Adverse
Effect on the Company.
3.25 BROKERAGE. No third party shall be entitled to receive any brokerage
commissions, finders' fees or similar compensation in connection with the
transactions contemplated by this Agreement based on any arrangement or
agreement binding upon the Company or any of its Subsidiaries.
3.26 ACCOUNTING CONTROLS. Each of the Company and its Subsidiaries has
devised and maintained systems of internal accounting controls sufficient to
provide reasonable assurances, in the judgment of the Board of Directors of the
Company, that (a) all material transactions are executed in accordance with
management's general or specific authorization, (b) all material transactions
are recorded as necessary to permit the preparation of financial statements in
conformity with generally accepted accounting principles consistently applied
with respect to broker-dealers or any other criteria applicable to such
statements, (c) access to the material property and assets of each of the
Company and its Subsidiaries is permitted only in accordance with management's
general or specific authorization, and (d) the recorded accountability for items
is compared with the actual levels at reasonable intervals and appropriate
action is taken with respect to any differences.
3.27 CONTRACTS WITH CLIENTS. The Company and its Subsidiaries are in
material compliance with the terms of each contract with any customer to whom
the Company or such Subsidiary provides services under any contract ("Company
Client"), and each such contract is in full force and effect with respect to the
applicable Company Client. Except as disclosed in Section 3.27 of the Company
Disclosure Schedule, there are no Material disputes pending or threatened with
respect to any former Company Client. The Company has made available to Parent
true and complete copies of all advisory, sub-advisory and similar agreements
with any Company Client. Except to the extent that it does not or would not
reasonably be expected to have a Material Adverse Effect on the Company, each
extension of credit by the Company or any of its Subsidiaries to any Company
Client (i) is in full compliance with Federal Reserve Board Regulation T or any
substantially similar regulation of any Governmental Authority and, (ii) is
fully secured, and the Company or such Subsidiary has a first priority perfected
security interest in the collateral securing such extension of credit.
3.28 INVESTMENT ADVISORY ACTIVITIES. Except for Miller & Schroeder Small
Business Capital Corporation and Miller and Schroeder Asset Management, Inc.,
none of the Company or its Subsidiaries is or has been during the past five
years an "investment adviser" within the meaning of the Investment Advisers Act
required to be registered, licensed or qualified as an investment advisor under
the Investment Advisers Act or subject to any liability or disability by reason
of any failure to be so registered, licensed or qualified.
3.29 INSURANCE POLICIES. All of the Company's and its Subsidiaries'
insurance and umbrella policies insuring the Company and its Subsidiaries and
their directors, officers, agents, properties and businesses, are valid and in
full force and effect and without any premium past due, and there are not
claims, singly or in the aggregate, under such policies which are in excess of
the limitations of coverage set forth in such policies. Except as set forth on
Section 3.29 of the Company Disclosure Schedule, neither the Company
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nor any Company Subsidiary has received notice of default under, or intended
cancellation or non-renewal of, any Material policies of insurance which insure
the properties, business or liability of the Company or any Company Subsidiary.
3.30 REGISTRATION STATEMENT. None of the information supplied or to be
supplied by the Company for inclusion in (a) the Registration Statement (as
defined in Section 7. 1), (b) the Joint Proxy Statement/ Prospectus (as defined
in Section 7.1), or (c) any other document to be filed with the SEC or other
Governmental Authority or Self Regulatory Organization in connection with the
transactions contemplated hereby, at the respective times such documents are
filed and, in the case of the Registration Statement, when it becomes effective
and at the Effective Time, and with respect to the Prospectus, when mailed and
at the time of the Company Meeting (as provided in Section 7.1(b)), shall be
false or misleading with respect to any material fact, or omit to state any
material fact necessary in order to make the statements therein not misleading.
3.31 AFFILIATE TRANSACTIONS. Except as set forth on Section 3.31 of the
Company Disclosure Schedule, neither the Company nor any of the Company
Subsidiaries, nor any directors, officers or employees of the Company or of any
Company Subsidiary or any of their spouses or any entity controlled by any one
or more of them is presently or has been since October 31, 1998 (i) a party to
any transaction or agreement with the Company or any Company Subsidiary
(including but not limited to, any contract, agreement, commitment or other
arrangement providing for the furnishing of services, or the rental of real or
personal property, or any loan agreement, note or borrowing arrangement or other
arrangement); (ii) entitled to receive any fee or other payment of consideration
in connection with this Agreement or the consummation of the transactions
contemplated hereby; or (iii) the direct or indirect owner of any interest
(other than an investment in a publicly-held corporation, not exceeding 1% of
the outstanding capital stock of such corporation) in any corporation, firm,
association or business organization which is a present or potential competitor
of, customer of or supplier of products or services to the Company or any
Company Subsidiary, nor does any such person receive income from any source
other than the Company or any Company Subsidiary which relates to the business
of, or should properly accrue to, the Company or any Company Subsidiary.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to the Company that, except as set forth in
the Disclosure Schedule delivered by Parent to the Company on or prior to the
execution of this Agreement, which identifies exceptions by specific section
reference (the "Parent Disclosure Schedule"):
4.1 ORGANIZATION AND QUALIFICATION. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Minnesota. Parent has all requisite governmental authorizations, certificates,
licenses, consents and approvals required to carry on its business as presently
conducted, except where the failure to possess such authorizations,
certificates, licenses, consents and approvals does not or would not reasonably
be expected to have a Material Adverse Effect on Parent. Parent is licensed or
qualified to do business and is in good standing in each jurisdiction in which
the character of the properties owned or leased by it or the nature of the
business transacted by it requires it to be licensed or qualified except where
the failure to be so licensed or qualified has not had or would not reasonably
be expected to have a Material Adverse Effect on Parent.
4.2 CAPITALIZATION. The authorized capital stock of Parent consists of (i)
7,500,000 shares of Parent Common Stock, (ii) 1,000,000 shares of preferred
stock (the "Parent Preferred Stock"), and (iii) 16,500,000 shares of
undesignated stock (the "Parent Undesignated Stock"). As of April 23, 1999, (a)
5,127,915 shares of Parent Common Stock were issued and outstanding, (b) no
shares of Parent Preferred Stock were issued and outstanding, (c) no shares of
Parent Undesignated Stock were issued and outstanding and (d) 689,351 shares of
Parent Common Stock were reserved for issuance under Parent's Employee Stock
Purchase Plan,
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(e) 1,205,583 shares of Parent Common Stock were reserved for issuance under
Parent's 1990 and 1997 Stock Option Plan and (f) 364,104 shares of Parent Common
Stock were reserved for issuance under outstanding warrants to purchase shares
of Parent Common Stock. All of the outstanding shares of Parent Common Stock are
duly authorized, validly issued, fully paid and nonassessable, issued in
material compliance with all applicable federal and state securities laws and
not issued in violation of any preemptive or similar rights. Except as provided
in this Section 4.2, no shares of the capital stock of Parent are reserved for
issuance for any purpose. Parent has no Voting Debt issued and outstanding.
There are no other shares of capital stock or other equity securities,
instruments or other rights of Parent authorized, issued or outstanding and no
other options, warrants, rights to subscribe (including any preemptive rights),
calls, agreements, arrangements or commitments of any character whatsoever to
which Parent is a party or may be bound requiring the issuance, transfer or sale
of any shares of capital stock, Voting Debt or other equity interests of Parent
or any securities or rights convertible into or exchangeable or exercisable for
any such shares or equity interests, and there are no contracts, commitments,
understandings or arrangements by which Parent is or may become bound to issue
additional shares of its capital stock, options, warrants or rights or to
purchase, redeem or acquire any shares of its capital stock or securities
convertible into or exchangeable or exercisable for any such shares or other
securities. The shares of Parent Common Stock to be issued in exchange for
Company Common Stock in the Merger, when issued in accordance with the terms of
this Agreement, will be duly authorized, validly issued, fully paid and
nonassessable.
4.3 SUBSIDIARIES.
(a) Parent has fully and accurately disclosed in Schedule 4.3 of the
Parent Disclosure Schedule all Parent's Subsidiaries and the states in which
such Subsidiaries are organized. Each of Parent's Subsidiaries has been duly
organized and is validly existing and in good standing under the laws of the
state in which it is organized, and is duly licensed or qualified to do
business and is in good standing in each jurisdiction in which the character
of the properties owned or licensed by it or the nature of the business
transacted by it or the conduct of its business requires it to be so
licensed or qualified except where the failure to be so licensed or
qualified has not had or would not reasonably be expected to have a Material
Adverse Effect on Parent.
(b) No capital stock of any of Parent's Subsidiaries are or may become
required to be issued (other than to Parent or a wholly owned Subsidiary of
Parent) by reason of any options, warrants, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exchangeable or exercisable for, shares of capital stock
of any of such Subsidiaries and there are no contracts, commitments,
understandings or arrangements by which Parent or any of its Subsidiaries is
or may be bound to issue, redeem, purchase or sell shares of any Subsidiary
capital stock or securities convertible into or exchangeable or exercisable
for any such shares or interests.
(c) The copies of the organizational documents, as amended to date, of
all Subsidiaries of Parent previously furnished to Parent are complete and
correct and such instruments, as so amended, are in full force and effect as
of the date hereof.
(d) All of the outstanding shares of capital stock of each of Parent's
Subsidiaries have been duly authorized and validly issued, were not issued
in violation of any subscription or preemptive right, are fully paid and
nonassessable and subject to no preemptive or other similar rights, and are
owned by Parent or a Subsidiary of the Company free and clear of any Lien,
other than any restriction on transfer under any applicable securities laws.
(e) Except for the stock of the Parent's Subsidiaries directly or
indirectly owned by the Parent, warrants received in the ordinary course of
business as an underwriter or as otherwise disclosed in Schedule 4.3 of the
Parent Disclosure Schedule, neither the Parent nor any Parent Subsidiary
owns any stock, partnership interest, joint venture interest or any other
security issued by any other corporation, organization or entity, except
readily marketable securities owned by the Parent or a Parent Subsidiary in
the ordinary course of business.
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4.4 CORPORATE POWER. Parent and each of its Subsidiaries has all requisite
corporate power and authority to carry on its business as it is now being
conducted and to own, lease and operate its properties and assets.
4.5 CORPORATE AUTHORITY; VOTE REQUIRED.
(a) Each of Parent and Merger Subsidiary has the requisite corporate
power and authority to execute and deliver this Agreement, to perform its
obligations hereunder and to consummate the transactions contemplated
hereby. The execution, delivery and performance of this Agreement by Parent
and Merger Subsidiary and the consummation of the transactions contemplated
hereby have been duly and validly authorized by all necessary corporate
action and no other corporate proceedings on the part of Parent or Merger
Subsidiary are necessary to authorize the execution, delivery and
performance of this Agreement or to consummate the transactions contemplated
hereby (other than the approval of the issuance of Parent Common Stock as
Stock Consideration by the holders of a majority of the voting power of all
the outstanding shares of Parent Common Stock (the "Requisite Parent
Shareholder Vote") and the filing of the appropriate merger documents
required by the MBCA). This Agreement has been duly and validly executed and
delivered by each of Parent and Merger Subsidiary and constitutes a legal,
valid and binding obligation of each of them, enforceable in accordance with
its terms.
4.6 NONCONTRAVENTION.
(a) The execution and delivery of this Agreement by the Parent does not,
and the performance of this Agreement by the Parent will not conflict with
or violate the Articles of Incorporation, Bylaws or equivalent
organizational documents of the Parent or any of its Subsidiaries.
(b) Subject to the approval by the shareholders of the outstanding
Parent Common Stock, receipt of the required regulatory approvals, the
required filings under federal and state securities and insurance laws and
approvals of NYSE and any other applicable exchange of the Merger and the
other transactions contemplated hereby and except as do not or would not
reasonably be expected to have a Material Adverse Effect on the Parent, the
delivery and performance of this Agreement and the consummation of the
Merger do not and will not constitute a breach of or a default under, or
give rise to rights of termination, amendment, acceleration or cancellation
of, or result in the creation of a Lien on any of the properties or assets
of the Parent or any of its Subsidiaries pursuant to, any note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise
or other instrument or obligation to which the Parent or any of its
Subsidiaries is a party or by which the Parent or any of its Subsidiaries or
any of their respective properties is bound or affected.
4.7 REGULATORY FILINGS AND CONSENTS. Except for the consents, approvals,
notifications, filings and registration set forth in Section 4.7 of the Parent
Disclosure Schedule or where the failure to obtain such consents and approvals
or make such filings or registration does not or would not reasonably be
expected to have a Material Adverse Effect on Parent, no consents or approvals
of, notifications to, or filings or registrations with, (i) any Governmental
Authority, (ii)(A) the NASD, the NYSE, the AMEX, the CBOT, the SIPC or the MSRB,
or (B) any Self Regulatory Agency, or (iii) pursuant to any applicable laws,
regulation or orders are required to be made or obtained by Parent or any of its
Subsidiaries in connection with the execution, delivery or performance by Parent
of this Agreement or to consummate the Merger.
4.8 REGISTRATIONS.
(a) Except as does not or would not reasonably be expected to have a
Material Adverse Effect on the Parent, the Parent and any Parent Subsidiary
required to be registered as a broker dealer, investment adviser or
insurance agency, with the SEC, any securities commission or similar
authority or insurance authority of any state or foreign jurisdiction or any
Self Regulatory Organization are duly registered as such and such
registrations are in full force and effect. All such registrations as
currently
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filed, and all periodic reports required to be filed with respect thereto,
are accurate and complete in all material respects.
(b) Except as does not or would not reasonably be expected to have a
Material Adverse Effect on the Parent, all of the Parent and the Parent's
Subsidiaries' respective officers and employees who are required to be
licensed or registered to conduct the business of the Parent or such
Subsidiary as presently conducted are duly licensed or registered in each
state or foreign jurisdiction in which such licensing or regulation is so
required (collectively, the "Parent Registered Representatives"). To the
knowledge of the Parent, none of the Parent Registered Representatives is or
has been, since August 1, 1997, subject to any disciplinary or other
regulatory compliance proceeding.
4.9 SEC REPORTS.
(a) Since August 1, 1997, Parent and each Parent Subsidiary has (i)
filed all forms, reports, statements and documents with the SEC required to
be filed by it pursuant to the federal securities laws and the SEC rules and
regulations thereunder along with all amendments and supplements to all such
documents, all of which have complied as of their respective filing dates,
or in the case of registration statements, their respective effective dates,
in all material respects with all applicable requirements of the Securities
Act and the Exchange Act and the rules and regulations promulgated
thereunder (collectively, the "Parent SEC Reports"), (ii) filed all forms,
reports, statements and other documents required to be filed with any
Governmental Authorities, including, without limitation, state authorities
regulating the purchase and sale of securities, and (iii) filed all trade
reports, filings, amendments to forms and other documents required by any
Self Regulatory Organization (all such forms, reports, statements and other
documents in clauses (i), (ii) and (iii) of this Section 4.9(a) being
collectively referred to as the "Parent Reports") except where the failure
to file such Parent Reports has not had or would not reasonably be expected
to have a Material Adverse Effect on the Parent. Parent has made available
to the Company copies of each of the Parent Reports and will promptly
provide copies of each Parent Report filed after the date of this Agreement.
None of such Parent Reports previously filed, at the time filed, or in the
case of registration statements, their respective effective dates (after
giving effect to any amendments filed before the date hereof), contained and
the Parent Reports filed in the future will not contain any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(b) The consolidated balance sheets and related consolidated statements
of income, stockholders' equity and cash flows (including the related notes
and schedules thereto) of Parent included in Parent SEC Reports complied (or
if included in Parent SEC Reports filed after the date of this Agreement,
will comply) as to form, at the time filed, in all material respects with
the published rules and regulations of the SEC with respect thereto at the
time filed (the "Parent Financial Statements"), were prepared (or if
included in Parent SEC Reports filed after the date of this Agreement, will
be prepared) in accordance with GAAP applied on a consistent basis during
the periods involved and include all adjustments consisting of normal
recurring accruals necessary (in the case of unaudited interim financial
statements) are in accordance with the books and records of Parent, which
books and records are complete and accurate in all material respects and
present fairly the consolidated financial position of Parent as of their
respective dates, and the consolidated income and cash flows for the periods
presented therein, all in conformity with GAAP applied on a consistent
basis, except as otherwise noted therein or as permitted under the Exchange
Act.
(c) Neither Parent nor any of its Subsidiaries is a party to or bound by
any contract, arrangement, commitment or understanding which is a material
contract (as defined in Item 601(b)(10) of Regulation S-K of the SEC) to be
performed after the date of this Agreement that has not been filed or
incorporated by reference in Parent SEC Reports filed prior to the date of
this Agreement. Such material contracts are hereinafter referred to as the
"Parent Material Contracts."
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(d) Except as and to the extent set forth in the Consolidated Statement
of Financial Condition of Parent and its Subsidiaries as of March 31, 1999
(the "Parent Balance Sheet"), neither Parent nor its Subsidiaries have any
Liabilities except: (a) liabilities incurred since the date of Parent
Balance Sheet in the normal and ordinary course of business consistent with
past practices (none of which is an uninsured liability for breach of
contract, breach of warranty, tort, or other claim or lawsuit) or (b) as
otherwise disclosed in Section 4.9 of the Parent Disclosure Schedule, or (c)
Liabilities incurred pursuant to this Agreement or in connection with the
transactions contemplated by this Agreement.
4.10 NO MATERIAL ADVERSE EFFECT. Since December 31, 1998, and except as
disclosed in the Parent SEC Reports, the business of the Parent and its
Subsidiaries has been conducted in the ordinary and usual course, consistent
with past practice, and there has been no event, occurrence, development or
state of circumstances or facts which has had or would reasonably be expected to
have a Material Adverse Effect on the Parent.
4.11 SECURITIES. Each of the Parent and its Subsidiaries has good and
marketable title to all securities held by it (except securities sold under
repurchase agreements or held in any fiduciary or agency capacity), free and
clear of any Lien, except to the extent such securities are pledged in the
ordinary course of business consistent with prudent business practices to secure
the obligations of each of the Parent or its Subsidiaries.
4.12 LITIGATION.
(a) No action, suit, proceeding, order, investigation, claim or
arbitration proceeding is pending or, to the knowledge of the Parent,
threatened against the Parent or any of its Subsidiaries, or their
respective properties, businesses, employees or agents, at law or in equity,
or before or by any court, arbitrator, mediator or Self Regulatory
Organization or Governmental Authority except for those that would not have
or would not reasonably be expected to have a Material Adverse Effect on the
Parent.
(b) Neither the Parent nor any of its Subsidiaries or their respective
properties, businesses, employees or agents is a party to or is subject to
any order, decree, agreement, memorandum of understanding or similar
arrangement restriction with, or a commitment letter or similar submission
to, any Self Regulatory Organization or Governmental Authority except for
those that do not or would not reasonably be expected to have a Material
Adverse Effect on the Parent. Neither the Parent nor any of its Subsidiaries
has been advised by any such Self Regulatory Organization or Governmental
Authority that it is contemplating issuing or requesting (or is considering
the appropriateness of issuing or requesting) any such order, decree,
agreement, memorandum or understanding, commitment letter or similar
submission.
(c) Section 4.12 of the Parent Disclosure Schedule sets forth, as of the
date of this Agreement, a true and complete list of all claims, actions,
suits or proceedings by private parties against the Parent or the Parent
Subsidiaries (i) arising out of any state of facts relating to the
origination or sale of investment products or services by the Parent, its
Subsidiaries or any employees thereof (including, without limitation, equity
or debt securities, mutual funds, insurance contracts, annuities,
partnership and limited partnership interests, interests in real estate,
debt origination, loan participations, investment banking services,
securities underwritings, or investment advisory services in which the
Parent or any of its Subsidiaries participated in any manner), or (ii) that
could reasonably be expected to involve individually an amount in excess of
$50,000 or collectively an aggregate amount in excess of $100,000.
4.13 TAX MATTERS.
(a) Each of the Parent and any Subsidiary and any affiliated, combined
or unitary group of which the Parent or any Subsidiary is or was a member,
and any Parent Employee Plans (as defined in Section 4.17 hereof), as the
case may be (each, a "Parent Tax Affiliate" and, collectively, the "Parent
Tax Affiliates"), has: (i) timely filed (or has had timely filed on its
behalf) all Tax Returns, required to
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be filed or sent by it in respect of any Taxes or required to be filed or
sent by it by any taxing authority having jurisdiction (the "Parent Tax
Returns") and such Tax Returns are true, correct and complete in all
material respects; (ii) timely and properly paid (or has had paid on its
behalf) all Taxes shown to be due and payable on such Tax Returns; (iii)
paid or arranged for payment by or on behalf of it or reflected on its books
as an accrued Tax liability, either current or deferred all Material Taxes
of the Parent or any Subsidiary which will be due and payable, whether now
or hereafter, for any period ending on, ending on and including, or ending
prior to the Closing Date; (iv) complied in all material respects with all
applicable laws, rules, and regulations relating to the withholding of Taxes
and the payment thereof (including, without limitation, withholding of Taxes
under Sections 1441 and 1442 of the Code or similar provisions under any
foreign laws), and timely and properly withheld from individual employee
wages or payments to any independent contractor, creditor, shareholder or
other third party and paid over to the proper governmental authorities all
amounts required to be so withheld and paid over under all applicable laws.
(b) There are no Liens for Taxes upon any assets of the Parent, any
Parent Subsidiary or of any Parent Tax Affiliate, except Liens for Taxes not
yet due.
(c) No deficiency for any Taxes has been proposed, asserted or assessed
against the Parent, its Subsidiaries or the Parent Tax Affiliates that has
not been resolved and paid in full. No waiver, extension or comparable
consent given by the Parent, the Subsidiaries or the Parent Tax Affiliates
regarding the application of the statute of limitations with respect to any
Taxes or Parent Tax Returns is outstanding, nor is any request for any such
waiver or consent pending. There has been no tax audit or other
administrative proceeding or court proceeding with regard to any Taxes or
Parent Tax Returns for the Parent's 1996, 1997 or 1998 tax years, nor is the
Parent or any Subsidiary under Tax audit or other proceeding, nor has there
been any notice to the Parent or any Subsidiary by any taxing authority
regarding any such Tax, audit or other such proceeding, or, to the knowledge
of the Parent or any Parent Subsidiary, is any such Tax audit or other
proceeding threatened with regard to any Taxes or Parent Tax Returns.
Neither the Parent nor any Subsidiary has any knowledge of any unresolved
questions, claims or disputes concerning the liability for Taxes of the
Parent, the Subsidiaries or the Tax Affiliates which would exceed the
estimated reserves established on its books and records. The Tax Returns for
all taxable years of the Parent or any Parent Subsidiary are closed by the
applicable statute of limitations for all taxable years prior to the
Parent's 1996 tax year.
(d) Neither the Parent, any Subsidiary nor any Parent Tax Affiliate is a
party to any agreement, contract or arrangement that would result,
separately or in the aggregate, in the payment of any "excess parachute
payments" within the meaning of Section 280G of the Code and the
consummation of the transactions contemplated by this Agreement will not be
a factor causing payments to be made by the Parent, any Parent Subsidiary,
any Parent Tax Affiliate or the Surviving Corporation that are not
deductible (in whole or in part) under Section 280G of the Code.
(e) Except as disclosed in Schedule 4.13 of the Parent Disclosure
Schedule, neither the Parent nor any Parent Subsidiary (i) is a party to any
agreement providing for the allocation or sharing of taxes or (ii) is
required to include in income any adjustment by reason of a voluntary change
in accounting method initiated by the Parent or any Parent Subsidiary (nor
does the Parent or any Parent Subsidiary have any knowledge that any taxing
authority has proposed any such adjustment or change of accounting method).
4.14 PARENT MATERIAL CONTRACTS. Except as disclosed in Section 4.14 of the
Parent Disclosure Schedule:
(a) the Parent and each of its Subsidiaries have performed all material
obligations required to be performed by them and are not in material default
under or in material breach of nor in receipt of any claim of material
default or breach under any Parent Material Contract to which either is a
party or is bound thereby; and
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(b) to the knowledge of the Parent, no event has occurred which with the
passage of time or the giving of notice or both would result in such a
material default or breach under any Parent Material Contract.
4.15 INTELLECTUAL PROPERTY RIGHTS. The Parent or one of its Subsidiaries
owns and possesses all right, title and interest, or a valid license, in and to
the intellectual property rights necessary to the conduct of the business of the
Parent or its Subsidiaries as now conducted.
4.16 EMPLOYEES. The Parent and each of its Subsidiaries are in compliance
in all material respects with all Material laws relating to the employment of
labor, including provisions thereof relating to wages, hours, equal opportunity
and collective bargaining, and is current in the payment of employee-related
obligations. There are no Material workers' compensation claims pending against
the Parent or any of its Subsidiaries.
4.17 EMPLOYEE BENEFIT PLANS.
(a) For purposes of this Section 4.17, each "employee benefit plan", as
defined in Section 3(3) of Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), which (i) is subject to any provision of ERISA, and
(ii) is maintained, administered or contributed to by the Parent or any
Parent ERISA Affiliate (as defined below) and covers any employee or former
employee of the Parent or any Parent ERISA Affiliate or under which the
Parent or any Parent ERISA Affiliate has any liability is hereinafter
referred to collectively as the "Parent Employee Plans." For purposes of
this Section 4.17, "Parent ERISA Affiliate" means any person which is
treated as a single employer with the Parent under Section 414 of the Code
and any Parent Employee Plans which individually or collectively would
constitute an "employee pension benefit plan" as defined in Section 3(2) of
ERISA are referred to herein as the "Parent Pension Plans".
(b) No Parent Employee Plan constitutes a Multiemployer Plan, and no
Parent Employee Plan is maintained in connection with any trust described in
Section 501(c)(9) of the Code. No Parent Employee Plan is a defined benefit
plan or a money purchase pension plan and no Parent Employee Plan is subject
to Title IV of ERISA. Nothing done or omitted to be done and no transaction
or holding of any asset under or in connection with any Parent Employee Plan
has or would reasonably subject the Parent or any Parent Subsidiary, or any
officer or director of the Parent or any Parent Subsidiary, to any Material
liability under Title I of ERISA or liable for any Material amount of tax
pursuant to Section 4972 or Sections 4974 through 4980B, inclusive, of the
Code.
(c) Each Parent Pension Plan which is intended to be qualified under
Section 401(a) of the Code is so qualified and has been so qualified during
the period from its adoption to date, and each trust forming a part thereof
is exempt from tax pursuant to Section 501(a) of the Code. The Parent has
furnished or made available to the Company copies of the most recent
Internal Revenue Service determination letters with respect to the Parent
Pension Plans. Except as disclosed in Section 4.17 of the Parent Disclosure
Schedule, each Parent Employee Plan has been maintained in substantial
compliance with its terms and with the requirements prescribed by any and
all statutes, orders, rules and regulations, including but not limited to
ERISA and the Code, which are applicable to such Plans.
(d) Each employment, severance or other similar contract, arrangement or
policy and each plan or arrangement (written or oral) providing for
insurance coverage (including any self-insured arrangements), workers'
compensation, disability benefits, supplemental unemployment benefits,
vacation benefits, retirement benefits or for deferred compensation,
profit-sharing, bonuses, stock options, stock appreciation or other forms of
incentive compensation or post-retirement insurance, compensation or
benefits which (i) is not an Parent Employee Plan, (ii) is entered into,
maintained or contributed to, as the case may be, by the Parent or any
Parent ERISA Affiliates and (iii) covers any employee or former employee of
the Parent or any Parent ERISA Affiliates are hereinafter referred to
collectively as the "Parent Benefit Arrangements." Each Parent Benefit
Arrangement has been
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maintained in substantial compliance with its terms and with the
requirements prescribed by any and all statutes, orders, rules and
regulations which are applicable to such Parent Benefit Arrangement.
(e) Parent and the Parent ERISA Affiliates have no post-retirement
health and medical benefits for retired employees. No condition exists that
would prevent the Company or any affiliate of the Company from amending or
terminating any Parent Employee Plan or Parent Benefit Arrangement, other
than any limitations imposed under ERISA or the Code.
(f) With respect to all Parent Employee Plans, all contributions which
are due have either been made or properly accrued.
(g) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby will (i) result in any
payment (including, without limitation, severance, unemployment
compensation, golden parachute or otherwise) becoming due to any director or
any employee of the Parent or any of its Subsidiaries under any Parent
Benefit Arrangement or otherwise from the Parent or any of its Subsidiaries,
(ii) increase any benefits otherwise payable under any Parent Benefit
Arrangement or (iii) result in any acceleration of the time of payment or
vesting of any such benefit.
4.18 COMPLIANCE WITH LAWS, PERMITS AND LICENSES. Except as set forth in
Section 4.18 of the Parent Disclosure Schedule, each of the Parent and its
Subsidiaries, and their respective officers and employees:
(a) in the conduct of its business, is in compliance with all applicable
federal, state, local and foreign statutes, laws, regulations, ordinances,
rules, judgments, orders or decrees applicable thereto or to the employees
conducting such businesses, and the rules of all Self Regulatory
Organizations applicable thereto except where the failure to be in
compliance does not have or would not reasonably be expected to have a
Material Adverse Effect;
(b) has all permits, licenses, authorizations, orders and approvals of,
and has made all filings, applications and registrations with, all
Governmental Authorities and Self Regulatory Organizations that are required
in order to permit them to own and operate their businesses as presently
conducted and that are Material to the business of the Parent; all such
permits, licenses, certificates of authority, orders and approvals are in
full force and effect and, to its knowledge, no suspension or cancellation
of any of them is threatened or reasonably likely; and all such filings,
applications and registrations are current;
(c) Since August 1, 1997, has received no notification or communication
from any Governmental Authority or Self Regulatory Organization (i)
asserting that any of them is not in compliance with any of the statutes,
rules, regulations or ordinances which such Governmental Authority or Self
Regulatory Organization enforces, or has otherwise engaged in any unlawful
business practice, (ii) threatening to revoke any license, franchise,
permit, seat on any stock or commodities exchange, or governmental
authorization, (iii) requiring any of them (including any of the Parent's or
its Subsidiaries' directors or controlling persons) to enter into a cease
and desist order, agreement, or memorandum of understanding (or requiring
the board of directors thereof to adopt any resolution or policy) or (iv)
restricting or disqualifying the activities of the Parent or any of its
Subsidiaries (except for restrictions generally imposed by rule, regulation,
or administrative policy on broker-dealers generally);
(d) is not aware of any pending or threatened investigation, review or
disciplinary proceedings by any Governmental Authority or Self Regulatory
Organization against the Parent, any of its Subsidiaries or any officer,
director or employee thereof;
(e) other than John G. Kinnard and Company, Incorporated ("JGK"), is not
required to be registered as an investment company, investment advisor,
commodity trading advisor, commodity pool operator, futures commission
merchant, introducing broker, insurance agent, or transfer agent under any
United States federal, state, local or foreign statutes, laws, rules or
regulations. No broker-dealer Subsidiary acts as the "sponsor" of a
"broker-dealer trading program", as such terms are defined in Rule 17a-23
under the Exchange Act.
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(f) is not, nor, to the knowledge of the Parent is, any "affiliated
person" (as defined in the Investment Company Act) thereof, ineligible
pursuant to Section 9(a) or 9(b) of the Investment Company Act to serve as
an investment advisor (or in any other capacity contemplated by the
Investment Company Act) to an Investment Company (as defined in the
Investment Company Act). Neither the Parent, nor any "associated person" (as
defined in the Investment Advisors Act) thereof, is ineligible pursuant to
Section 203 of the Investment Advisors Act to serve as an investment advisor
or as an associated person to a registered investment advisor; and
(g) is not, nor is any affiliate of any of them, subject to a "statutory
disqualification" as defined in Section 3(a)(39) of the Exchange Act.
4.19 ENVIRONMENTAL MATTERS.
(a) Except as set forth in Section 4.19 of the Parent Disclosure
Schedule:
(i) The Parent and its Subsidiaries have complied in all material
respects at all times with applicable Environmental Laws.
(ii) No property (including buildings and any other structures)
currently or formerly owned, used or operated (or which the Parent or any
of its Subsidiaries would be deemed to have owned, used or operated under
any Environmental Law) by the Parent or any of its Subsidiaries or in
which the Parent or any of its Subsidiaries (whether as fiduciary or
otherwise) has a Lien, has been contaminated with, or has had any release
of, any Hazardous Substance in such form or substance so as to create any
liability for the Parent or its Subsidiaries.
(iii) Neither the Parent nor any of its Subsidiaries is subject to
liability for any Hazardous Substance disposal or contamination on any
other third-party property.
(iv) Since August 1, 1997, the Parent and its Subsidiaries have not
received any notice, demand letter, claim or request for information
alleging any violation of, or liability of the Parent under, any
Environmental Law.
(v) The Parent and its Subsidiaries are not subject to any order,
decree, injunction or other agreement with any Governmental Authority or
any third party relating to any Environmental Law.
(c) The Parent has made available to the Company copies of all
environmental reports, studies, sampling data, correspondence, filings and
other environmental information in its possession or reasonably available to
it relating to the Parent or one of its Subsidiaries or any currently or
formerly owned, used or operated property or any property in which the
Parent or one of its Subsidiaries (whether as fiduciary or otherwise) has
held a Lien.
4.20 RISK MANAGEMENT INSTRUMENTS. All interest rate swaps, caps, floors,
collars, option agreements, futures and forward contracts, and other similar
risk management arrangements, whether entered into for the Parent's own
accounts, or for the account of one or more of its Subsidiaries or their
customers, were entered into in the ordinary course of business (i) in
accordance with prudent business practices and all applicable laws, rules,
regulations and regulatory policies in all material respects, and (ii) with
counterparties believed to be financially responsible at the time; and each of
them constitutes the valid and legally binding obligation of the Parent or one
of its Subsidiaries, enforceable in accordance with its terms and are in full
force and effect. Neither the Parent nor its Subsidiaries, nor to the Parent's
knowledge, any other party thereto, is in breach of any of its obligations under
any such agreement or arrangement. The Parent Financial Statements disclose the
value of such agreements and arrangements on a mark- to-market basis in
accordance with generally accepted accounting principles and since December 31,
1998 there has not been a change in such value that, individually or in the
aggregate, resulted in or would reasonably be expected to result in a Material
Adverse Effect on the Parent.
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4.21 BROKERAGE. No third party shall be entitled to receive any brokerage
commissions, finders' fees or similar compensation in connection with the
transactions contemplated by this Agreement based on any arrangement or
agreement binding upon the Parent or any of its Subsidiaries.
4.22 ACCOUNTING CONTROLS. Each of the Parent and its Subsidiaries has
devised and maintained systems of internal accounting controls sufficient to
provide reasonable assurances, in the judgment of the Board of Directors of the
Parent, that (a) all material transactions are executed in accordance with
management's general or specific authorization, (b) all material transactions
are recorded as necessary to permit the preparation of financial statements in
conformity with generally accepted accounting principles consistently applied
with respect to broker-dealers or any other criteria applicable to such
statements, (c) access to the material property and assets of each of the Parent
and its Subsidiaries is permitted only in accordance with management's general
or specific authorization, and (d) the recorded accountability for items is
compared with the actual levels at reasonable intervals and appropriate action
is taken with respect to any differences.
4.23 INVESTMENT ADVISORY ACTIVITIES. Except for JGK, none of the Parent or
its Subsidiaries is or has been during the past five years an "investment
adviser" within the meaning of the Investment Advisers Act required to be
registered, licensed or qualified as an investment advisor under the Investment
Advisers Act or subject to any liability or disability by reason of any failure
to be so registered, licensed or qualified.
4.24 INSURANCE POLICIES. All of the Parent's and its Subsidiaries'
insurance and umbrella policies insuring the Parent and its Subsidiaries and
their directors, officers, agents, properties and businesses, are valid and in
full force and effect and without any premium past due, and there are not
claims, singly or in the aggregate, under such policies which are in excess of
the limitations of coverage set forth in such policies. Neither the Parent nor
any Parent Subsidiary has received notice of default under, or intended
cancellation or non-renewal of, any Material policies of insurance which insure
the properties, business or liability of the Parent or any Parent Subsidiary.
4.25 REGISTRATION STATEMENT. None of the information supplied or to be
supplied by the Parent for inclusion in (a) the Registration Statement (as
defined in Section 7.1), (b) the Joint Proxy Statement/ Prospectus (as defined
in Section 7.1), or (c) any other document to be filed with the SEC or other
Governmental Authority or Self Regulatory Organization in connection with the
transactions contemplated hereby, at the respective times such documents are
filed and, in the case of the Registration Statement, when it becomes effective
and at the Effective Time, and with respect to the Prospectus, when mailed and
at the time of the Parent Meeting (as provided in Section 7.1(c)), shall be
false or misleading with respect to any material fact, or omit to state any
material fact necessary in order to make the statements therein not misleading.
4.26 NO PENDING TRANSACTIONS. Except for this Agreement, as of the date of
this Agreement, neither Parent nor any of its Subsidiaries is a party to or
bound by any agreement, undertaking or commitment (i) to merge or consolidate
with, or acquire all or substantially all of the property and assets of, any
other corporation or person or (ii) to sell, lease or exchange all or
substantially all of its property and assets to any other corporation or person.
4.27 CONTRACTS WITH CLIENTS. Parent and its Subsidiaries are in material
compliance with the terms of each contract with any customer to whom Parent or
such Subsidiary provides services under any contract ("Parent Client"), and each
such contract is in full force and effect with respect to the applicable Parent
Client. There are no Material disputes pending or threatened with respect to any
former Parent Client. Except to the extent that it does not or would not
reasonably be expected to have a Material Adverse Effect on Parent, each
extension of credit by Parent or any of its Subsidiaries to any Parent Client
(i) is in full compliance with Federal Reserve Board Regulation T or any
substantially similar regulation of any Governmental Authority and, (ii) is
fully secured, and Parent or such Subsidiary has a first priority perfected
security interest in the collateral securing such extension of credit.
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ARTICLE V
COVENANTS OF THE COMPANY
5.1 CONDUCT OF THE BUSINESS. Except as set forth on Schedule 5.1, hereof,
the Company will, and will cause each of its Subsidiaries to, observe each term
set forth in this Section 5.1 and agrees that, from the date hereof until the
Effective Time, unless otherwise consented to by Parent (which consent shall not
be unreasonably withheld or delayed) in writing signed by either William Farley
or George Stroebel:
(a) The business of the Company and its Subsidiaries shall be conducted
only in, and the Company and its Subsidiaries shall not take any action
except in, the ordinary course of their respective businesses and in
accordance in all material respects with all applicable laws, rules and
regulations and their past custom and practice;
(b) The Company and its Subsidiaries shall not, directly or indirectly,
do any of the following:
(i) issue, sell or otherwise permit to become outstanding or
authorize the creation of, any additional share of capital stock of the
Company or any of its Subsidiaries (other than the issuance of Company
Common Stock pursuant to the Employee Options and the Director Options
disclosed on Section 3.2 of the Company Disclosure Schedule) or any
options, warrants, conversion privileges or rights of any kind to acquire
any additional shares of such capital stock;
(ii) permit any additional shares of capital stock of the Company or
any of its Subsidiaries to become subject to new grants of employee or
director stock options, other rights or similar stock-based employee
rights.
(iii) sell, pledge, dispose of or encumber any of its Material
assets, except in the ordinary course of business;
(iv) amend or propose to amend its Articles of Incorporation or
Bylaws;
(v) directly or indirectly adjust, split, combine, redeem,
reclassify, purchase or otherwise acquire, any shares of its capital
stock, or declare, set aside or pay any dividend or other distribution
payable in cash, stock, property or otherwise with respect to any shares
of capital stock of the Company or any of its Subsidiaries;
(vi) redeem, purchase or acquire or offer to acquire any shares of
its capital stock;
(vii) acquire (by merger, exchange, consolidation, acquisition of
stock or assets or otherwise) any corporation, partnership, joint venture
or other business organization or division or material assets thereof;
(viii) incur any indebtedness for borrowed money or issue any debt
securities, except the borrowing of working capital in the ordinary
course of business and consistent with past practice;
(ix) declare or make any distributions or pay any dividends with
respect to its capital stock;
(x) enter into, amend or terminate any agreements, commitments or
contracts that, individually or in the aggregate with related agreements,
commitments or contracts, are Material to the Company (except in the
ordinary course of business consistent with past practice); or
(xi) authorize any of, or commit or agree to take any of, the
foregoing actions.
(c) Neither the Company nor any of its Subsidiaries shall, directly or
indirectly, (i) enter into, modify or renew any employment, consulting,
severance or similar agreements or arrangements with any director, officer
or employee other than employment or consulting agreements with respect to
employees or consultants who earn less than $100,000 per year, (ii) grant
any salary increases, severance or termination pay to, any employees of the
Company or any the Company Subsidiary other than with respect to employees
who earn less than $100,000 per year, or (iii) grant bonuses except
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pursuant to existing employment agreements, compensation plans or otherwise
in the ordinary course of business consistent with past practice.
(d) Except as required by law, neither the Company nor any Subsidiary
shall adopt or amend any bonus, profit-sharing, compensation, stock option,
pension, retirement, deferred compensation, severance, employment or other
employee benefit plan, agreement, trust, fund or arrangement for the benefit
or welfare of any employee, officer or director of the Company or any
Subsidiary;
(e) Neither the Company nor any Subsidiary shall cancel or terminate
their current insurance policies or cause any of the coverage thereunder to
lapse, unless simultaneously with such termination, cancellation or lapse,
replacement policies providing coverage equal to or greater than the
coverage under the canceled, terminated or lapsed policies for substantially
similar premiums are in full force and effect;
(f) The Company will, and will cause each of its Subsidiaries to:
(i) use all commercially reasonable efforts to preserve intact the
business organization and goodwill of the Company and its Subsidiaries,
keep available the services of their respective officers and employees as
a group and maintain satisfactory relationships with suppliers,
distributors, customers and others having business relationships with the
Company;
(ii) confer on a regular and frequent basis with representatives of
Parent to report operational matters and the general status of ongoing
operations;
(iii) not intentionally take any action which would render, or which
reasonably may be expected to render, any representation or warranty made
by them in this Agreement untrue at the Closing; and
(iv) cooperate with Parent in finalizing and communicating to the
Company's employees severance, retention and transition arrangements;
(g) The Company shall not and shall not permit a Company Subsidiary to:
(i) implement or adopt any change in its accounting principles,
practices or methods, other than as may be required by generally accepted
accounting principles;
(ii) change its methods of reporting income and deductions for
federal income tax purposes from those employed in the preparation of
federal income tax returns of the Company for the taxable years ending
October 31, 1998 and 1997, except as required by changes in law or
regulation;
(iii) make or rescind any express or deemed election relating to
Taxes; or
(iv) settle or compromise any claim, action, suit, litigation,
proceeding, arbitration, investigation, audit or controversy relating to
Taxes.
(h) Except as required by applicable law or regulation, the Company
shall not and shall not permit any Company Subsidiary to:
(i) implement or adopt any change in its risk management policies,
procedures or practices, which, individually or in the aggregate with all
such other changes, would be material;
(ii) fail to use commercially reasonable means to avoid any material
increase in its aggregate exposure to risk from the general United States
securities markets; or
(iii) materially restructure or materially change its investment
securities portfolio, through purchases, sales or otherwise, or the
manner in which the portfolio is classified or reported.
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5.2 REGULATORY FILINGS. The Company shall, as promptly as practicable
after the execution of this Agreement, make or cause to be made all filings and
submissions under the Hart-Scott-Rodino Antitrust Improvements, as amended (the
"HSR Act") and any other laws or regulations applicable to the Company whether
to a Governmental Authority, Self Regulatory Agency or otherwise for the
consummation of the transactions contemplated on its part herein. The Company
will coordinate and cooperate with Parent in exchanging such information, will
not make any such filing without providing to Parent a final copy thereof for
its review and consent at least two full business days in advance of the
proposed filing, and will provide such reasonable assistance as Parent may
request in connection with all of the foregoing.
5.3 CONDITIONS. The Company shall take, and shall cause the Company
Subsidiaries to take, all commercially reasonable actions necessary or desirable
to cause the conditions set forth in Article VIII hereof to be satisfied and to
consummate the transactions contemplated herein as soon as reasonably possible
after the satisfaction thereof (but in any event within three business days of
such date).
5.4 NO SOLICITATION. Unless and until this Agreement shall have been
terminated pursuant to Section 9.1 hereof, the Company shall not and shall not
permit any Subsidiary to initiate, solicit or encourage (including by way of
furnishing information or assistance), or take any other action to facilitate,
any inquiries or the making of any proposal that constitutes, or may reasonably
be expected to lead to, any Competing Transaction (as such term is defined
below), or negotiate with any person in furtherance of such inquiries or to
obtain a Competing Transaction, or agree to or endorse any Competing
Transaction, or authorize or permit any of its officers, directors or employees
or any investment banker, financial advisor, attorney, accountant or other
representative retained by it or any Subsidiary to take any such action;
provided, however, that the Company's Board of Directors may provide (or
authorize the provision of) information to, and may engage in (or authorize)
such negotiations or discussions with, any person, directly or through
representatives, if (i) the Board of Directors, after having consulted with
independent counsel, has determined in good faith that providing such
information or engaging in such negotiations or discussions is reasonably
required in order to properly discharge the directors' fiduciary duties in
accordance with the applicable laws of the State of Minnesota, (ii) prior to
furnishing such information to such person or engaging in such negotiations or
discussions, the Company provides Parent with at least seven days' notice to the
effect that it is furnishing information to, or entering into negotiations or
discussions with, such person, and (iii) prior to furnishing such information to
such person, the Company has received from such person an executed
confidentiality agreement in customary form. For purposes of this Agreement,
"Competing Transaction" shall means any of the following involving the Company
or its Subsidiaries: (i) any merger, consolidation, share exchange or other
similar transactions; (ii) any sale, lease, exchange, mortgage, pledge, transfer
or other disposition of ten percent or more of assets in a single transaction or
series of transactions, excluding from the calculation of the percentage
hereunder any such transactions undertaken in the ordinary course of business
and consistent with past practice; (iii) any sale of ten percent or more of
shares of capital stock (or securities convertible or exchangeable into or
otherwise evidencing, or any agreement or instrument evidencing, the right to
acquire capital stock); (iv) any tender offer or exchange offer for ten percent
or more of outstanding shares of capital stock; (v) any solicitation of proxies
in opposition to approval by the Company's shareholders of the Merger; (vi) any
person shall have acquired beneficial ownership or the right to acquire
beneficial ownership of, or any "group" (as such term is defined under Section
13(d) of the Exchange Act and the rules and regulations promulgated thereunder)
shall have been formed which beneficially owns or has the right to acquire
beneficial ownership of, 10% or more of the then outstanding capital stock of
the Company; or (vii) any public announcement of a proposal, plan or intention
to do any of the foregoing.
5.5 NOTICE OF CERTAIN MATTERS. The Company shall promptly notify Parent in
writing:
(a) of any Material governmental, administrative or Self Regulatory
Organization complaints, investigations or hearings (or communications
indicating that the same may be contemplated);
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(b) if the Company shall discover that any representation or warranty
made by it in this Agreement was when made, or has subsequently become,
untrue in any respect;
(c) of any notice or other communication from any third party relating
to, a material default or event which, with notice or lapse of time or both,
would become a material default, received by the Company or any of its
Subsidiaries subsequent to the date of this Agreement and prior to the
Effective Time, under any Material agreement, indenture or instrument to
which the Company or any of its Subsidiaries is a party or is subject;
(d) of any notice or other communication from any third party alleging
that the consent of such third party is or may be required in connection
with the transactions contemplated by this Agreement; and
(e) of any Material Adverse Effect of the Company or the occurrence of
an event which, so far as reasonably can be foreseen at the time of its
occurrence, does or would reasonably be expected to have any such Material
Adverse Effect.
5.6 AFFILIATES; TAX TREATMENT. Within thirty (30) days after the date of
this Agreement, (a) the Company shall deliver to Parent a letter identifying all
persons who are then "affiliates" of the Company, including, without limitation,
all directors and executive officers of the Company for purposes of Rule 145
promulgated under the Securities Act and (b) the Company shall advise the
persons identified in such letter of the resale restrictions imposed by
applicable securities laws, and shall use reasonable efforts to obtain from each
person identified in such letter a written agreement, substantially in the form
attached hereto as Exhibit 5.6. The Company shall use reasonable efforts to
obtain from any person who becomes an affiliate of the Company after the
Company's delivery of the letter referred to above, and on or prior to the
Effective Time, a written agreement substantially in the form attached hereto as
Exhibit 5.6 as soon as practicable after attaining such status. The Company will
use its reasonable best efforts to cause the Merger to qualify for a
reorganization under Section 368(c) of the Code.
5.7 DELIVERY OF SHAREHOLDER LIST. The Company shall deliver to Parent or
its designee, from time to time prior to the Effective Time, a true and complete
list setting forth the names and addresses of the shareholders of the Company,
their holdings of stock as of the latest practicable date, and such other
shareholder information as Parent may reasonably request.
5.8 SATISFACTION OF RELATED PARTY AGREEMENTS. The Company will have
terminated or otherwise obtained the release of the Company and the Company
Subsidiaries from, without any payment by the Company or a Company Subsidiary,
those items listed on Exhibit 5.8.
ARTICLE VI
COVENANTS OF PARENT
6.1 CONDUCT OF THE BUSINESS. Except as set forth on Schedule 6.1, hereof,
the Parent will, and will cause each of its Subsidiaries to, observe each term
set forth in this Section 6.1 and agrees that, from the date hereof until the
Effective Time, unless otherwise consented to by the Company (which consent
shall not be unreasonably withheld or delayed):
(a) The business of the Parent and its Subsidiaries shall be conducted
only in, and the Parent and its Subsidiaries shall not take any action
except in, the ordinary course of their respective businesses and in
accordance in all material respects with all applicable laws, rules and
regulations and their past custom and practice;
(b) The Parent and its Subsidiaries shall not, directly or indirectly,
do any of the following:
(i) sell, pledge, dispose of or encumber any of its Material assets,
except in the ordinary course of business;
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(ii) declare or make any distributions or pay any dividends with
respect to its capital stock; or
(iii) authorize any of, or commit or agree to take any of, the
foregoing actions.
(c) The Parent will, and will cause each of its Subsidiaries to:
(i) use all commercially reasonable efforts to preserve intact the
business organization and goodwill of the Parent and its Subsidiaries,
keep available the services of their respective officers and employees as
a group and maintain satisfactory relationships with suppliers,
distributors, customers and others having business relationships with the
Parent;
(ii) confer on a regular and frequent basis with representatives of
the Company to report operational matters and the general status of
ongoing operations;
(iii) not intentionally take any action which would render, or which
reasonably may be expected to render, any representation or warranty made
by them in this Agreement untrue at the Closing;
(iv) cooperate with the Company in finalizing and communicating to
the Parent's employees severance, retention and transition arrangements;
and
(v) use its reasonable best efforts to cause the Merger to qualify
for a reorganization under Section 368(c) of the Code.
6.2 REGULATORY FILINGS. Parent shall, as promptly as practicable after the
execution of this Agreement, make or cause to be made all filings and
submissions under the HSR Act and any other laws or regulations applicable to
Parent whether to a Governmental Authority, Self-Regulatory Agency or otherwise
for the consummation of the transactions contemplated on its part herein. Parent
will coordinate and cooperate with the Company in exchanging such information,
will not make any such filing without providing to the Company a final copy
thereof for its review and consent at least two full business days in advance of
the proposed filing, and will provide such reasonable assistance as the Company
may request in connection with all of the foregoing.
6.3 CONDITIONS. Parent shall take all commercially reasonable actions
necessary or desirable to cause the conditions set forth in Article VIII to be
satisfied and to consummate the transactions contemplated herein as soon as
reasonably possible after the satisfaction thereof (but in any event within
three business days of such date).
6.4 NOTICE OF CERTAIN MATTERS. Parent shall promptly notify the Company:
(a) of any Material governmental, administrative or Self Regulatory
Organization complaints, investigations or hearings (or communications
indicating that the same may be contemplated);
(b) if Parent shall discover that any representation or warranty made by
it in this Agreement was when made, or has subsequently become, untrue in
any respect;
(c) of any notice or other communication from any third party relating
to, a material default or event which, with notice or lapse of time or both,
would become a material default, received by Parent subsequent to the date
of this Agreement and prior to the Effective Time, under any material
agreement, indenture or instrument to which Parent is a party or is subject,
(d) of any notice or other communication from any third party alleging
that the consent of such third party is or may be required in connection
with the transactions contemplated by this Agreement, and
(e) of any Material Adverse Effect with respect to Parent as an entirety
or the occurrence of an event which, so far as reasonably can be foreseen at
the time of its occurrence, does or would reasonably be expected to have in
any such Material Adverse Effect.
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6.5 FUNDS. At the Effective Time, the Parent will have the funds necessary
to consummate the Merger and to pay the aggregate Cash Consideration in
accordance with the terms of this Agreement.
ARTICLE VII
ADDITIONAL COVENANTS
7.1 JOINT PROXY STATEMENT/PROSPECTUS; REGISTRATION STATEMENT; LISTING ON
NASDAQ; SHAREHOLDER MEETINGS.
(a) Parent and the Company will make all commercially reasonable efforts
to jointly prepare and file, as soon as practicable, with the Securities and
Exchange Commission (the "SEC") under the Exchange Act, a joint proxy
statement with respect to the shareholder meetings of Parent and the Company
referred to in Sections 7.1(b) and (c) (the "Joint Proxy
Statement/Prospectus"). In connection therewith, as soon as practicable
after the date hereof, Parent shall file with the SEC, and shall use its
best efforts to have declared effective by the SEC, a Registration Statement
on Form S-4 (the "Registration Statement") to register under the Securities
Act of 1933, as amended (the "Securities Act"), the shares of Parent Common
Stock to be issued in the Merger, which Registration Statement shall
incorporate the Joint Proxy Statement/Prospectus. Parent does not undertake
to file post-effective amendments to Registration Statement or to file a
separate registration statement to register the sale of Parent Common Stock
by affiliates of the Company pursuant to Rule 145 promulgated under the
Securities Act. The Company will furnish to Parent all information
concerning the Company and its Subsidiaries required to be set forth in the
Registration Statement and Parent will provide the Company and its counsel
the opportunity to review and approve such information as set forth in the
Registration Statement. Parent and the Company will each render to the other
its full cooperation in preparing, filing, prosecuting the filing of, and
amending the Registration Statement such that it comports at all times with
the requirements of the Securities Act and the Exchange Act. Specifically,
but without limitation, each will promptly advise the other if at any time
before the Effective Time any information provided by it for inclusion in
the Registration Statement appears to have been, or shall have become,
incorrect or incomplete and will furnish the information necessary to
correct such misstatements or omissions. As promptly as practicable after
the effective date of the Registration Statement, the Company will mail to
its shareholders (i) a notice of the Company's shareholders meeting
described in Section 7.1(b) below and the Joint Proxy Statement/Prospectus,
and (ii) as promptly as practicable after approval thereof by the Company,
such other supplementary proxy materials as may be necessary to make the
Joint Proxy Statement/Prospectus comply with the requirements of the
Securities Act and the Exchange Act. Except as provided above and except
with the prior written consent of Parent, the Company will not mail or
otherwise furnish or publish to shareholders of the Company any proxy
solicitation material or other material relating to the Merger that
constitute a "prospectus" within the meaning of the Securities Act. As
promptly as practicable after the effective date of the Registration
Statement, Parent will mail to its shareholders (i) a notice of the
Company's shareholders meeting described in Section 7.1(c) below and the
Joint Proxy Statement/Prospectus, and (ii) as promptly as practicable such
other supplementary proxy materials as may be necessary to make the Joint
Proxy Statement/Prospectus comply with the requirements of the Securities
Act and the Exchange Act. Parent shall comply, prior to the Effective Time,
with all applicable requirements of "Blue Sky" and federal and state
securities laws in connection with the Merger and the issuance of Parent
Common Stock in connection therewith. In addition, Parent shall promptly
file all appropriate applications with the Nasdaq National Market to have
Parent Common Stock to be issued in the Merger approved for listing on the
Nasdaq Stock Market's National Market upon notice of issuance.
(b) The Company and its directors in their capacity as directors shall:
(a) cause the Company's shareholders meeting (the "Company Meeting") to be
duly called and held as soon as practicable to consider and vote upon the
Merger and any related matters in accordance with the applicable provisions
of applicable law, (b) submit this Agreement to the Company's shareholders
together with
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a recommendation for approval by the Board of Directors of the Company, and
(c) use their best efforts to obtain the approval and adoption of the Merger
by the requisite percentage of the Company's shareholders; provided,
however, the Company's Board of Directors may fail to make the
recommendation or to seek to obtain the requisite shareholder approval or to
withdraw, modify or change any such recommendation, if such Board of
Directors determines in good faith, after consultation with independent
counsel, that such actions are required in order to discharge properly the
director's fiduciary duty under the MBCA.
(c) Parent and its officers and directors shall: (a) cause Parent's
shareholders meeting (the "Parent Meeting") to be duly called and held as
soon as practicable to consider and vote upon the issuance of the shares of
Parent Common Stock to be issued as Stock Consideration in accordance with
the Merger Agreement and any related matters in accordance with the
applicable provisions of applicable law with the recommendation for approval
by the Board of Directors of Parent, and (b) use their best efforts to
obtain the approval and adoption of the issuance of such shares by the
requisite percentage of Parent's shareholders.
7.2 BENEFIT PLANS. As of the Effective Time and until the transition to the
Parent's benefit plans, Parent will cause the Surviving Corporation and its
subsidiaries to maintain for employees of the Company and its Subsidiaries who
as of the Effective Time become employed by the Surviving Corporation, Parent or
any of its subsidiaries (the "Covered Employees"), for so long as they are so
employed employee pension and welfare plans, programs and arrangements,
including severance plans (collectively, "Designated Benefits"), that are no
less favorable in the aggregate than the Designated Benefits currently enjoyed
by such Covered Employees prior to the Effective Time. In addition, to the
extent an employee benefit plan, program or arrangement maintained or
contributed to by Parent and its subsidiaries is made available to Covered
Employees, the prior service with the Company and the Company Subsidiaries of
each such Covered Employee will be treated as if it were service rendered to
Parent or its subsidiaries, as the case may be, solely for purposes of
eligibility to participate and for vesting thereunder, but not for the purpose
of benefit accrual. Following the Effective Time, Parent shall, or shall cause
the Surviving Corporation to, cause any and all pre-existing condition
limitations (to the extent such limitations did not apply to a pre-existing
condition under a plan of the Company and its subsidiaries) and eligibility
waiting periods under any health plans to be waived with respect to Covered
Employees who, immediately prior to the Effective Time, participated in a health
plan maintained by the Company and its subsidiaries, and their eligible
dependents and to recognize and credit any amounts incurred towards any
deductible, maximum out-of-pocket expenditures or co-payments under such health
plans. Parent shall honor, pursuant to the terms of the Employee Plans and
Benefit Arrangements, and to the extent consistent with applicable law and the
Merger Agreement, all employee benefit obligations to current employees of the
Company and its subsidiaries under such plans and arrangements. As soon as
reasonably practicable after the Effective Time, Parent shall cause the
Company's 401(k) Plan to be merged with Parent's 401(k) Plan.
7.3 AGREEMENT TO DEFEND. In the event any claim, action, suit or proceeding
arising out of the Merger is commenced, whether before or after the Effective
Time, the parties hereto agree to cooperate and use their best efforts to defend
against and respond thereto.
7.4 ACCESS TO BOOKS AND RECORDS.
(a) Between the date hereof and the Closing Date, each party shall
afford to the other party hereto and its authorized representatives full
access at all reasonable times and upon reasonable notice to the offices,
properties, books, records, officers, employees and other items of such
first party, and otherwise provide such assistance as is reasonably
requested by the other party hereto.
(b) In the event that the transactions contemplated by this Agreement
are not consummated for any reason, both parties agree to abide by the terms
of that certain Confidentiality Agreement, dated March 31, 1999 between
Parent and Miller & Schroeder, Inc., with respect to the "Information" (as
defined therein) of either party obtained by the other party thereunder.
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7.5 SATISFACTION OF CONDITIONS. Each of the parties hereto will use all
commercially reasonable efforts to satisfy those conditions set forth in Article
VIII hereof which are to be satisfied by it.
7.6 EXPENSES.
(a) Except as provided in Section 9.2 below, all Expenses (as defined
below) incurred by Parent and the Company shall be borne solely and entirely
by the party which has incurred the same.
(b) "Expenses" as used in this Agreement shall include all out-of-pocket
expenses (including without limitation, all fees and expenses of counsel,
accountants, investment bankers, experts and consultants to the party and
its affiliates) incurred by a party or on its behalf in connection with or
related to the authorization, preparation and execution of this Agreement,
the solicitation of shareholder approvals and all other matters related to
the closing of the transactions contemplated hereby.
7.7 CERTAIN DIRECTOR POSITIONS. Parent agrees to cause James Dlugosch to be
elected or appointed as a director of Parent at the Effective Time. It is the
intention of the parties that the size of the Board of Directors of Parent
following the Effective Time to be increased by three directors and that, in
connection with such increase, and thereafter until the first annual meeting of
Shareholders of Parent following the Effective Time that Mr. Dlugosch and two
additional persons proposed by Mr. Dlugosch and approved by Parent's Board of
Directors who are or become shareholders of Parent on account of the Merger and
who are not employed by the Company Subsidiary shall serve as directors of
Parent.
ARTICLE VIII
CONDITIONS OF MERGER
8.1 CONDITIONS TO OBLIGATION OF EACH PARTY TO EFFECT THE MERGER. The
respective obligations of each party to effect the Merger shall be subject to
the satisfaction at or prior to the Effective Time of the following conditions:
(a) EFFECTIVENESS OF THE REGISTRATION STATEMENT. The Registration
Statement shall have been declared effective by the SEC under the Securities
Act. No stop order suspending the effectiveness of the Registration
Statement shall have been issued by the SEC and no proceedings for that
purpose shall, on or prior to the Effective Time, have been initiated or, to
the knowledge of Parent or the Company, threatened by the SEC. Parent shall
have received all other federal or state securities permits and other
authorizations necessary to issue Parent Common Stock in exchange for the
Company Common Stock and to consummate the Merger.
(b) SHAREHOLDER APPROVALS. This Agreement and the Merger shall have been
approved and adopted by the Requisite Company Shareholder Vote and the
issuance of the shares of Parent Common Stock to be issued as Stock
Consideration shall have been approved by the Requisite Parent Shareholder
Vote.
(c) ARTICLES OF MERGER. Each of Parent and the Company shall have
executed and delivered the Articles of Merger in accordance with Section 1.3
hereof.
(d) NASDAQ LISTING. The shares of Parent Common Stock that are to be
issued to the shareholders of the Company upon consummation of the Merger
shall have been authorized for listing on the Nasdaq Stock Market's National
Market, subject to notice of issuance.
(e) NO ORDER. No federal or state governmental or regulatory authority
or other agency or commission, or federal or state court of competent
jurisdiction, shall have enacted, issued, promulgated, enforced or entered
any statute, rule, regulation, executive order, decree, injunction or other
order (whether temporary, preliminary or permanent) which is in effect
restricting, preventing or prohibiting consummation of the transactions
contemplated by this Agreement.
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8.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF PARENT. The obligations of
Parent to effect the Merger are also subject to the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties
made by the Company in or pursuant to this Agreement shall be true and
correct in all material respects (except that where any statement in a
representation or warranty expressly includes a statement of materiality,
such statement shall be true and correct in all respects) at and as of the
Effective Time with the same effect as though such representations and
warranties had been made or given at and as of the Effective Time (without
taking into account any disclosures by the Company of discoveries, events or
occurrences arising on or after the date hereof), except that any such
representation or warranty made as of a specified date (other than the date
hereof) shall only need to have been true on such date.
(b) COVENANTS. The Company shall have performed and complied in all
material respects with all of their obligations under this Agreement which
were to be performed or complied with by it prior to or at the Effective
Time.
(c) REQUIRED CONSENTS AND REGULATORY APPROVALS. All consents of
Governmental Authorities and Self Regulatory Organizations, and all filings
with and notifications of Governmental Authorities or Self-Regulatory
Organizations which regulate the business of the Company or its
Subsidiaries, or in which the Company or a Subsidiary is a member, necessary
on the part of the Company, or its Subsidiaries or affiliates, to the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby and, with the exception of licenses
necessary to continue the Company's gaming business, to permit the continued
operation of the business of the Company and its Subsidiaries without a
Material Adverse Effect with respect to the Company and its Subsidiaries
shall have been obtained or effected.
(d) ABSENCE OF CERTAIN LITIGATION. At the Effective Time:
(i) there shall be no injunction, restraining order or order of any
nature issued by any court of competent jurisdiction which directs that
this Agreement or any material transaction contemplated hereby shall not
be consummated as herein provided or compels or would compel Parent to
dispose of or discontinue a significant portion of the business conducted
by Parent and its Subsidiaries or of the business conducted by the
Company and its Subsidiaries as a result of the Merger or consummation of
the transactions contemplated hereby; and
(ii) there shall be no suit, action or other proceeding by the
United States (or any agency thereof) or by any State (or any agency
thereof) pending before any court or governmental agency wherein such
complainant seeks the prohibition of the consummation of the Merger or
asserts the illegality of the Merger.
(e) DELIVERY OF CLOSING DOCUMENTS. At or prior to the Effective Time,
the Company shall have delivered to Parent all of the following:
(i) a certificate of the President and the Chief Financial Officer
of the Company, dated as of the Closing Date, stating that the conditions
precedent set forth in Sections 8.2(a) and 8.2(b) hereof have been
satisfied;
(ii) copies of the Governmental Authority and Self Regulatory
Organization consents and approvals and of the authorizations referred to
in Section 8.2(c) hereof; and
(iii) a copy, dated as of a date not more than five business days in
advance of the Closing Date, of
(x) the Articles of Incorporation of the Company, certified by
the Secretary of State of the State of Minnesota,
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(y) a Certificate of Good Standing from the Secretary of State of
the State of Minnesota evidencing the good standing of the Company in
such jurisdiction, and
(z) Executed resignations from such directors and officers in
their capacities as directors or officers, and not as employees, of
the Company or the Company Subsidiaries as Parent shall request with
no resulting liability or expense to the Company, its Subsidiaries,
Parent or Merger Subsidiary.
(f) OPINION OF COUNSEL. Parent shall have received from Briggs and
Morgan, Professional Association or other independent counsel for the
Company reasonably satisfactory to Parent, an opinion dated the Effective
Time, in form and substance reasonably satisfactory to Parent, covering the
matters set forth in Exhibit 8.2(f) hereto, which opinion shall be based on
such assumptions and containing such qualifications and limitations as are
appropriate and reasonably satisfactory to Parent.
(g) TAX OPINION. Parent shall have received from KPMG Peat Marwick LLP
("KPMG"), an opinion to the effect that:
(i) the Merger will qualify as a reorganization within the meaning
of Section 368(a) of the Code;
(ii) the Company and Parent will each be party to a reorganization
within the meaning of Section 368(b) of the Code;
(iii) no gain or loss will be recognized by any shareholder of the
Company upon consummation of the Merger (except with respect to cash
received in lieu of a fractional share interest in Parent Common Stock,
on account of Dissenter Shares or on account of Cash Election Shares);
(iv) the aggregate income tax basis of Parent Common Stock received
by the shareholders of the Company pursuant to the Merger will be the
same as the aggregate tax basis of Company Common Stock surrendered in
exchange therefor (reduced by any amount allocable to a fractional share
interest, Dissenting Shares or Cash Election Shares for which cash is
received); and
(v) No income, gain or loss to holders of Employee Options upon
conversion of such options to acquire Company Common Stock into options
to acquire Parent Common Stock pursuant to Section 2.12(b) of this
Agreement.
(i) AFFILIATES AGREEMENTS. Parent shall have received from each person
who is identified as an "affiliate" of the Company a signed affiliate letter
in the form attached as Exhibit 5.6.
8.3 ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligations of
the Company to effect the Merger is also subject to the following conditions:
(a) REPRESENTATIONS AND WARRANTIES TRUE AT EFFECTIVE TIME. The
representations and warranties made by Parent in or pursuant to this
Agreement shall be true and correct in all material respects (except that
where any statement in a representation or warranty expressly includes a
statement of materiality, such statement shall be true and correct in all
respects) on and as of the Effective Time with the same effect as though
such representations and warranties had been made or given on and as of the
Effective Time (without taking into account any disclosures by Parent of
discoveries, events or occurrences arising on or after the date hereof),
except that any such representation or warranty made as of a specified date
(other than the date hereof) shall only need to have been true on such date.
(b) COVENANTS. Parent shall have performed and complied in all material
respects with all of its obligations under this Agreement which are to be
performed or complied with by it prior to or at the Effective Time.
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(c) REQUIRED CONSENTS AND REGULATORY APPROVALS. All consents of
Governmental Authorities and Self Regulatory Organizations, and all filings
with and notifications of Governmental Authorities or Self Regulatory
Organizations which regulate the business of the Parent or its Subsidiaries,
or in which the Parent or a Subsidiary is a member, necessary on the part of
the Parent, or its Subsidiaries or affiliates, to the execution and delivery
of this Agreement and the consummation of the transactions contemplated
hereby and to permit the continued operation of the business of the Parent
and its Subsidiaries without a Material Adverse Effect with respect to the
Parent and its Subsidiaries shall have been obtained or effected.
(d) ABSENCE OF CERTAIN LITIGATION. At the Effective Time:
(i) there shall be no injunction, restraining order or order of any
nature issued by any court of competent jurisdiction which directs that
this Agreement or any material transaction contemplated hereby shall not
be consummated as herein provided; and
(ii) there shall be no suit, action or other proceeding by the
United States (or any agency thereof) or by any State (or any agency
thereof) pending before any court or governmental agency wherein such
complainant seeks the prohibition of the consummation of the Merger or
asserts the illegality of the Merger.
(e) DELIVERY OF CLOSING DOCUMENTS. At or prior to the Effective Time,
Parent shall have delivered to the Company all of the following:
(i) a certificate of the Chief Executive Officer and the Secretary
of Parent, dated as of the date of the Effective Time, stating that the
conditions precedent set forth in Sections 8.3(a) and 8.3(b) hereof have
been satisfied; and
(ii) copies of the Governmental Authority and Self Regulatory
Organization consents and approvals and of the authorizations referred to
in Section 8.3(c) hereof; and
(iii) a copy, dated as of a date not more than five business days in
advance of the Closing Date, of a Certificate of Good Standing of Parent
certified by the Secretary of State of the State of Minnesota.
(f) OPINION OF COUNSEL. The Company shall have received from Kaplan,
Strangis and Kaplan, P.A. or other independent counsel for Parent reasonably
satisfactory to the Company, an opinion dated the Effective Time, in form
and substance reasonably satisfactory to the Company, covering the matters
set forth in Exhibit 8.3(f), which opinions shall be based on such
assumptions and contain such qualifications and limitations as are
appropriate and reasonably satisfactory to the Company.
(g) TAX OPINION. The Company shall have received from KPMG an opinion to
the effect that:
(i) the Merger will qualify as a reorganization within the meaning
of Section 368(a) of the Code;
(ii) the Company and Parent will each be party to a reorganization
within the meaning of Section 368(b) of the Code;
(iii) no gain or loss will be recognized by any shareholder of the
Company upon consummation of the Merger (except with respect to cash
received in lieu of a fractional share interest in Parent Common Stock,
on account of Dissenters Shares or on account of Cash Election Shares);
(iv) the aggregate income tax basis of Parent Common Stock received
by the shareholders of the Company pursuant to the Merger will be the
same as the aggregate tax basis of Company Common Stock surrendered in
exchange therefor (reduced by any amount allocable to a fractional share
interest, Dissenting Shares or Cash Election Shares for which cash is
received); and
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(v) No income, gain or loss to holders of Employee Options upon
conversion of such options to acquire Company Common Stock into options
to acquire Parent Common Stock pursuant to Section 2.12(b) of this
Agreement.
(h) James Dlugosch, William Sexton and Kenneth Dawkins shall have
received from Norwest Bank Minnesota, N.A. ("Norwest") full and complete
releases of their obligations or liability as guarantors or pledgors with
respect to the Company's credit facility with Norwest effective no later
than the Effective Time.
ARTICLE IX
TERMINATION
9.1 REASONS FOR TERMINATION. This Agreement may be terminated at any time
prior to the Effective Time, notwithstanding the adoption of this Agreement by
the security holders of the Company or the approval of the issuance of Parent
Common Stock as Stock Consideration by the security holders of Parent, with the
effects set forth in Section 9.2 hereof:
(a) By the mutual consent of the Boards of Directors of Parent and the
Company; or
(b) By Parent at any time after January 31, 2000 (or such later date as
shall have been agreed to in writing by the parties) if any of the
conditions provided for in Sections 8.1 or 8.2 of this Agreement have not
been met and have not been waived in writing by Parent except to the extent
that such failure arises or results from the knowing action or inaction of
Parent or Parent Subsidiaries; or
(c) By Parent, on the one hand, or the Company, on the other hand, at
any time after discovery of
(i) a Material Adverse Effect with respect to the Company, or
Parent, respectively, the effects of which event cannot be or has not
been cured within 30 days of giving written notice to the other party; or
(ii) of the occurrence of an event which would be reasonably likely
to result in such a Material Adverse Effect, in either case, the effects
of which event cannot be or has not been cured within 30 days of giving
written notice to the other party; or
(d) By the Company at any time after January 31, 2000 (or such later
date as shall have been agreed to in writing by the parties) if any of the
conditions provided for in Sections 8.1 or 8.3 of this Agreement have not
been met and have not been waived in writing by the Company except to the
extent that such failure arises or results from the knowing action or
inaction of Company or Company Subsidiaries; or
(e) At any time prior to the Effective Date, by Parent, on the one hand,
or the Company, on the other hand, in the event of a material breach by the
other party of any of the covenants or agreements contained herein, which
breach cannot be or has not been cured within 30 days of giving written
notice to the breaching party of such breach; or
(f) Either Parent, on the one hand, or by the Company, on the other
hand, in the event the approval of any Governmental Authority required for
consummation of the Merger or the transactions contemplated by this
Agreement shall have been denied by final nonappealable action of such
Governmental Authority; or
(g) by Parent, if at any time prior to the Company Meeting, the
Company's Board of Directors shall have failed to make its recommendation
referred to in Section 7.1(b), or withdrawn such recommendation or modified
or changed such recommendation in a manner adverse to the interests of
Parent; or
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(h) by the Company, if the Company shall immediately thereafter enter
into a definitive agreement with a third party providing for an Acquisition
Transaction (as such term is defined below) on terms determined, in good
faith, by the Board of Directors of the Company, after consultation with
independent counsel and financial advisors to the Board, to be such that
termination of this Agreement and entry into such third-party agreement is
required in order to discharge properly the directors' duties in accordance
with Minnesota Law; or
(i) by the Company, within ten business days of receipt of written
notice from Parent that a Change of Control (as described below) has
occurred.
"Acquisition Transaction" means a transaction or series of transactions
that, directly or indirectly, in substance constitutes a disposition of all or
substantially all of the assets or business of the Company or its Subsidiaries,
taken as a whole, whether by means of (i) a merger or consolidation, share
exchange or any similar transaction, (ii) any sale, lease, exchange, mortgage,
pledge, transfer or other disposition, or (iii) a purchase or other acquisition
(including by way of a merger or consolidation, share exchange or otherwise) of
securities representing 50% or more of the voting power of the Company or 50% or
more of any of its Subsidiaries; provided, however, in each of the situations
described in clauses (i), (ii) or (iii), that the Acquisition Transaction shall
represent consideration having an aggregate value (reasonably determined) to the
Company or its shareholders in excess of the consideration to be received in the
Merger.
A "Change of Control" shall be deemed to have occurred upon the occurrence
of the following: (i) Parent shall have entered into a definitive agreement for
a share exchange, reorganization, merger or consolidation of Parent, other than
a share exchange, reorganization, merger or consolidation of Parent in which the
holders of Parent Common Stock outstanding immediately prior to the share
exchange, reorganization, merger or consolidation hold, directly or indirectly,
at least 75% of the voting securities of the surviving corporation immediately
after such share exchange, reorganization, merger or consolidation; or (ii)
there has been an acquisition in one or more transactions by an individual,
entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the
Exchange Act) of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of more than 25% of the then outstanding
shares of Parent Common Stock; (iii) individuals who at the date of this
Agreement constituted the Board of Directors of Parent (together with any new
directors whose election by such Board of Directors or whose nomination for
election by the shareholders of the Parent has been approved by a majority of
the directors that are still in office who either were directors at the date of
this Agreement or whose election or recommendation for election was previously
so approved) cease to constitute a majority of the Board of Directors of the
Parent; or (iv) Parent shall have entered into a definitive agreement for the
sale, exchange, transfer or disposition of all or substantially all of the
assets of the Parent or JGK.
9.2 EFFECTS OF TERMINATION.
(a) If the Merger is not consummated as the result of termination of
this Agreement caused otherwise than by breach of a party hereto, the
Company and Parent each shall pay its own Expenses and this Agreement shall
immediately terminate and neither the Company nor Parent shall have any
liability under this Agreement for damages or otherwise.
(b) If termination of this Agreement shall have been caused by breach of
this Agreement by any party hereto, then, in addition to other remedies at
law or equity for breach of this Agreement, the party so found to have
breached this Agreement shall indemnify and reimburse the other party for
its expenses.
(c) Anything to the contrary notwithstanding, if this Agreement (a) is
terminated by Parent pursuant to Section 9.1(g) or by the Company pursuant
to Section 9.1(h) or by Parent solely due to the failure of the Company's
shareholders to approve the Merger at the Company Meeting, and (b) prior
thereto or within twelve months after such termination the Company shall
have entered into an agreement to engage in an Acquisition Transaction, then
the Company shall pay Parent a fee equal to
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$1,500,000. Such fee shall be paid to Parent within two business days after
the date of entering into such agreement for an Acquisition Transaction.
(d) Anything to the contrary notwithstanding, if this Agreement is
terminated by the Company pursuant to Section 9.1(i), then Parent shall pay
to the Company, within two business days of receiving notice of such
termination, a fee equal to $1,500,000.
9.3 PROMPT NOTICE. In the event of termination of this Agreement by any
party as above provided in Paragraph 9.1, prompt written notice shall be given
to the other parties hereto.
ARTICLE X
OTHER PROVISIONS
10.1 SURVIVAL. No representations, warranties, agreements and covenants
contained in this Agreement shall survive the Effective Time or termination of
this Agreement, except that (a) the agreements of the parties contained in
Article II, Article IX and this Article X shall survive the Effective Time and
(b) if this Agreement is terminated prior to the Effective Time, the agreements
of the parties contained in Sections 7.4(b) and 9.2 and in this Article X shall
survive such termination.
10.2 GOVERNING LAW. This Agreement shall be construed and interpreted
according to the laws of the State of Minnesota applicable to contracts made and
to be performed entirely within such state.
10.3 ASSIGNMENT. Neither this Agreement nor any right hereunder may be
assigned by any party hereto.
10.4 AMENDMENT AND WAIVER. The parties may, by written agreement:
(a) extend the time for the performance of any of the obligations or
other acts of the parties hereto,
(b) waive any inaccuracies in the representations or warranties
contained in this Agreement or in any document delivered pursuant to this
Agreement, and
(c) waive compliance with or modify, amend or supplement any of the
covenants, agreements, representations or warranties contained in this
Agreement or waive or modify performance of any of the obligations of any of
the parties hereto; provided that, after adoption of this Agreement by
shareholders of the Company, no amendment may be made which reduces the
Merger Consideration or effects any change which would materially adversely
affect such shareholders, without further approval.
10.5 NOTICES. All notices, requests, demands, and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered by hand, or when sent by facsimile, telecopier or other means of
electronic transmission (with receipt confirmed), or the fourth business day
after having been deposited in the U.S. mails, if sent by registered,
first-class mail, return receipt requested, addressed as follows (or to such
other address as a party may designate by notice to the others):
(a) If to Parent:
Kinnard Investments, Inc.
920 Second Avenue South
Minneapolis, Minnesota 55402
Attention: George F. Stroebel
Facsimile: (612) 370-2557
with a copy to:
Kaplan, Strangis and Kaplan, P.A.
5500 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402
Attention: James C. Melville, Esq.
Facsimile: (612) 375-1143
A-45
<PAGE>
(b) If to the Company:
MI Acquisition Corporation
220 South Sixth Street
Suite 300
Minneapolis, Minnesota 55402
Attention: Chief Executive Officer
and
Attention: Chief Financial Officer
Facsimile: (612) 376-1410
with copies to:
Briggs and Morgan, Professional Association
2400 IDS Center
80 South Eighth Street
Minneapolis Minnesota 55402
Attention: Brian D. Wenger, Esq.
Facsimile: (612) 334-8650
10.6 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
10.7 HEADINGS. The headings in the Articles and Sections of this Agreement
are inserted for convenience only and shall not constitute a part hereof.
10.8 ENTIRE AGREEMENT. This Agreement, including the Disclosure Schedule and
Exhibits referred to herein and any documents executed by the parties
simultaneously herewith and the Confidentiality Agreement dated March 31, 1999
between Parent and Miller & Schroeder, Inc., constitutes the entire
understanding and agreement of the parties hereto and supersedes all other prior
agreements and understandings, written or oral, between the parties with respect
to the subject matter hereof.
10.9 PUBLIC ANNOUNCEMENTS. The Company shall not make any public announcement
or statement with respect to the Merger, this Agreement or any related
transaction without the approval of Parent, which approval will not be
unreasonably withheld. In the event Parent determines to make any public
announcements concerning the proposed Merger, Parent agrees to notify the
Company of Parent's intention to make such announcement and provide the Company
with the text of the announcement in advance of its release to the public.
10.10 NO THIRD PARTY BENEFICIARY. This Agreement is made and entered into
solely for the benefit of the parties hereto and, except for the right to
receive the Merger Consideration payable pursuant to Article II and the right to
indemnification under Section 8.2, no individual or entity not a signatory
hereto shall have any rights under or with respect to any term of this Agreement
or against any party hereto or, after the Merger, the Surviving Corporation.
Nothing contained in this Agreement shall create or continue any right of
employment of any employee of Parent or the Company.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
A-46
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
KINNARD INVESTMENTS, INC.
By: /s/ William F. Farley
Its: Chief Executive Officer
MI ACQUISITION CORPORATION
By: /s/ James F. Dlugosch
Its: Chief Executive Officer
PEACHTREE ACQUISITION, INC.
By: /s/ William F. Farley
Its: Chief Executive Officer
A-47
<PAGE>
APPENDIX B
SECTIONS 302A.471 AND 302A.473 OF THE MINNESOTA
BUSINESS CORPORATION ACT--DISSENTERS' APPRAISAL RIGHTS
302A.471. Rights of dissenting shareholders.
Subdivision 1. Actions creating rights. A shareholder of a corporation may
dissent from, and obtain payment for the fair value of the shareholder's shares
in the event of, any of the following corporate actions:
(a) An amendment of the articles that materially and adversely affects the
rights or preferences of the shares of the dissenting shareholder in that it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the redemption of
the shares, including a provision respecting a sinking fund for the redemption
or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of the shares to
acquire shares, securities other than shares, or rights to purchase shares or
securities other than shares;
(4) excludes or limits the right of a shareholder to vote on a matter, or to
cumulate votes, except as the right may be excluded or limited through the
authorization or issuance of securities of an existing or new class or series
with similar or different voting rights; except that an amendment to the
articles of an issuing public corporation that provides that section 302A.671
does not apply to a control share acquisition does not give rise to the right to
obtain payment under this section;
(b) A sale, lease, transfer, or other disposition of all or substantially
all of the property and assets of the corporation, but not including a
transaction permitted without shareholder approval in section 302A.661,
subdivision 1, or a disposition in dissolution described in section 302A.725,
subdivision 2, or a disposition pursuant to an order of a court, or a
disposition for cash on terms requiring that all or substantially all of the net
proceeds of disposition be distributed to the shareholders in accordance with
their respective interests within one year after the date of disposition;
(c) A plan of merger, whether under this chapter or under chapter 322B, to
which the corporation is a party, except as provided in subdivision 3;
(d) A plan of exchange, whether under this chapter or under chapter 322B, to
which the corporation is a party as the corporation whose shares will be
acquired by the acquiring corporation, if the shares of the shareholder are
entitled to be voted on the plan; or
(e) Any other corporate action taken pursuant to a shareholder vote with
respect to which the articles, the bylaws, or a resolution approved by the board
directs that dissenting shareholders may obtain payment for their shares.
Subdivision 2. Beneficial owners. (a) A shareholder shall not assert
dissenters' rights as to less than all of the shares registered in the name of
the shareholder, unless the shareholder dissents with respect to all the shares
that are beneficially owned by another person but registered in the name of the
shareholder and discloses the name and address of each beneficial owner on whose
behalf the shareholder dissents. In that event, the rights of the dissenter
shall be determined as if the shares as to which the shareholder has dissented
and the other shares were registered in the names of different shareholders.
(b) The beneficial owner of shares who is not the shareholder may assert
dissenters' rights with respect to shares held on behalf of the beneficial
owner, and shall be treated as a dissenting shareholder under the terms of this
section and section 302A.473, if the beneficial owner submits to the corporation
at the time of or before the assertion of the rights a written consent of the
shareholder.
B-1
<PAGE>
Subdivision 3. Rights not to apply. (a) Unless the articles, the bylaws,
or a resolution approved by the board otherwise provide, the right to obtain
payment under this section does not apply to a shareholder of the surviving
corporation in a merger, if the shares of the shareholder are not entitled to be
voted on the merger.
(b) If a date is fixed according to section 302A.445, subdivision 1, for the
determination of shareholders entitled to receive notice of and to vote on an
action described in subdivision 1, only shareholders as of the date fixed, and
beneficial owners as of the date fixed who hold through shareholders, as
provided in subdivision 2, may exercise dissenters' rights.
Subdivision 4. Other rights. The shareholders of a corporation who have a
right under this section to obtain payment for their shares do not have a right
at law or in equity to have a corporate action described in subdivision 1 set
aside or rescinded, except when the corporate action is fraudulent with regard
to the complaining shareholder or the corporation.
302A.473. Procedures for asserting dissenters' rights.
Subdivision 1. Definitions. (a) For purposes of this section, the terms
defined in this subdivision have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action referred to in section 302A.471, subdivision 1 or the
successor by merger of that issuer.
(c) "Fair value of the shares" means the value of the shares of a
corporation immediately before the effective date of the corporate action
referred to in section 302A.471, subdivision 1.
(d) "Interest" means interest commencing five days after the effective date
of the corporate action referred to in section 302A.471, subdivision 1, up to
and including the date of payment, calculated at the rate provided in section
549.09 for interest on verdicts and judgments.
Subdivision 2. Notice of action. If a corporation calls a shareholder
meeting at which any action described in section 302A.471, subdivision 1 is to
be voted upon, the notice of the meeting shall inform each shareholder of the
right to dissent and shall include a copy of section 302A.471 and this section
and a brief description of the procedure to be followed under these sections.
Subdivision 3. Notice of dissent. If the proposed action must be approved
by the shareholders, a shareholder who is entitled to dissent under section
302A.471 and who wishes to exercise dissenters' rights must file with the
corporation before the vote on the proposed action a written notice of intent to
demand the fair value of the shares owned by the shareholder and must not vote
the shares in favor of the proposed action.
Subdivision 4. Notice of procedure; deposit of shares. (a) After the
proposed action has been approved by the board and, if necessary, the
shareholders, the corporation shall send to all shareholders who have complied
with subdivision 3 and to all shareholders entitled to dissent if no shareholder
vote was required, a notice that contains:
(1) The address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertificated shares that will apply
after the demand for payment is received;
(3) A form to be used to certify the date on which the shareholder, or the
beneficial owner on whose behalf the shareholder dissents, acquired the shares
or an interest in them and to demand payment; and
(4) A copy of section 302A.471 and this section and a brief description of
the procedures to be followed under these sections.
B-2
<PAGE>
(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply with
any restrictions on transfer of uncertificated shares within 30 days after the
notice required by paragraph (a) was given, but the dissenter retains all other
rights of a shareholder until the proposed action takes effect.
Subdivision 5. Payment; return of shares. (a) After the corporate action
takes effect, or after the corporation receives a valid demand for payment,
whichever is later, the corporation shall remit to each dissenting shareholder
who has complied with subdivisions 3 and 4 the amount the corporation estimates
to be the fair value of the shares, plus interest, accompanied by:
(1) The corporation's closing balance sheet and statement of income for a
fiscal year ending not more than 16 months before the effective date of the
corporate action, together with the latest available interim financial
statements;
(2) An estimate by the corporation of the fair value of the shares and a
brief description of the method used to reach the estimate; and
(3) A copy of section 302A.471 and this section, and a brief description of
the procedure to be followed in demanding supplemental payment.
(b) The corporation may withhold the remittance described in paragraph (a)
from a person who was not a shareholder on the date the action dissented from
was first announced to the public or who is dissenting on behalf of a person who
was not a beneficial owner on that date. If the dissenter has complied with
subdivisions 3 and 4, the corporation shall forward to the dissenter the
materials described in paragraph (a) a statement of the reason for withholding
the remittance, and an offer to pay to the dissenter the amount listed in the
materials if the dissenter agrees to accept that amount in full satisfaction.
The dissenter may decline the offer and demand payment under subdivision 6.
Failure to do so entitles the dissenter only to the amount offered. If the
dissenter makes demand, subdivisions 7 and 8 apply.
(c) If the corporation fails to remit payment within 60 days of the deposit
of certificates or the imposition of transfer restrictions on uncertificated
shares, it shall return all deposited certificates and cancel all transfer
restrictions. However, the corporation may again give notice under subdivision 4
and require deposit or restrict transfer at a later time.
Subdivision 6. Supplemental payment; demand. If a dissenter believes that
the amount remitted under subdivision 5 is less than the fair value of the
shares plus interest, the dissenter may give written notice to the corporation
of the dissenter's own estimate of the fair value of the shares, plus interest,
within 30 days after the corporation mails the remittance under subdivision 5,
and demand payment of the difference. Otherwise, a dissenter is entitled only to
the amount remitted by the corporation.
Subdivision 7. Petition; determination. If the corporation receives a
demand under subdivision 6, it shall, within 60 days after receiving the demand,
either pay to the dissenter the amount demanded or agreed to by the dissenter
after discussion with the corporation or file in court a petition requesting
that the court determine the fair value of the shares, plus interest. The
petition shall be filed in the county in which the registered office of the
corporation is located, except that a surviving foreign corporation that
receives a demand relating to the shares of a constituent domestic corporation
shall file the petition in the county in this state in which the last registered
office of the constituent corporation was located. The petition shall name as
parties all dissenters who have demanded payment under subdivision 6 and who
have not reached agreement with the corporation. The corporation shall, after
filing the petition, serve all parties with a summons and copy of the petition
under the rules of civil procedure. Nonresidents of this state may be served by
registered or certified mail or by publication as provided by law. Except as
otherwise provided, the rules of civil procedure apply to this proceeding. The
jurisdiction of the court is plenary and exclusive. The court may appoint
appraisers, with powers and authorities the court deems proper, to receive
evidence on and recommend the amount of the fair value of the shares. The court
shall determine whether the shareholder or shareholders in question have fully
complied with the requirements
B-3
<PAGE>
of this section, and shall determine the fair value of the shares, taking into
account any and all factors the court finds relevant, computed by any method or
combination of methods that the court, in its discretion, sees fit to use,
whether or not used by the corporation or by a dissenter. The fair value of the
shares as determined by the court is binding on all shareholders, wherever
located. A dissenter is entitled to judgment in cash for the amount by which the
fair value of the shares as determined by the court, plus interest, exceeds the
amount, if any, remitted under subdivision 5, but shall not be liable to the
corporation for the amount, if any, by which the amount, if any, remitted to the
dissenter under subdivision 5 exceeds the fair value of the shares as determined
by the court, plus interest.
Subdivision 8. Costs; fees; expenses. (a) The court shall determine the
costs and expenses of a proceeding under subdivision 7, including the reasonable
expenses and compensation of any appraisers appointed by the court, and shall
assess those costs and expenses against the corporation, except that the court
may assess part or all of those costs and expenses against a dissenter whose
action in demanding payment under subdivision 6 is found to be arbitrary,
vexatious, or not in good faith.
(b) If the court finds that the corporation has failed to Comply
substantially with this section, the court may assess all fees and expenses of
any experts or attorneys as the court deems equitable. These fees and expenses
may also be assessed against a person who has acted arbitrarily, vexatiously, or
not in good faith in bringing the proceeding, and may be awarded to a party
injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an attorney
for the dissenters out of the amount awarded to the dissenters, if any.
B-4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant is incorporated under the Minnesota Business Corporation Act
(the "MBCA"). The Articles of Incorporation of the Registrant provide for
indemnification of directors, officers, employees and agents of the Registrant
to the full extent permitted by the MBCA, as it may be amended from time to
time. Section 302A.521 of Minnesota Statutes requires the Registrant to
indemnify a person made or threatened to be made a party to a proceeding by
reason of the former or present official capacity of the person with respect to
the Registrant, against judgments, penalties, fines, including reasonable
expenses, if such person (1) has not been indemnified by another organization or
employee benefit plan for the same judgments, penalties, fines, including,
without limitation, excise taxes assessed against the person with respect to an
employee benefit plan, settlements, and reasonable expenses, including
attorneys' fees and disbursements, incurred by the person in connection with the
proceeding with respect to the same acts or omissions; (2) acted in good faith;
(3) received no improper personal benefit, and statutory procedure has been
followed in the case of any conflict of interest by a director; (4) in the case
of a criminal proceeding, had no reasonable cause to believe the conduct was
unlawful; and (5) in the case of acts or omissions occurring in the person's
performance in the official capacity of director or, for a person not a
director, in the official capacity of officer, committee member or employee,
reasonably believed that the conduct was in the best interests of the
Registrant, or, in the case of performance by a director, officer or employee of
the Registrant as a director, officer, partner, trustee, employee or agent of
another organization or employee benefit plan, reasonably believed that the
conduct was not opposed to the best interests of the Registrant. In addition,
Section 302A.521, subd. 3, requires payment by the Registrant, upon written
request, of reasonable expenses in advance of final disposition in certain
instances. A decision as to required indemnification is made by a disinterested
majority of the Board of Directors present at a meeting at which a disinterested
quorum is present, or by a designated committee of the Board, by special legal
counsel, by the shareholders or by a court. The Registrant's Bylaws provide for
indemnification of officers, directors, employees and agents consistent with the
description of the indemnification provisions in Section 302A.421 of the MBCA
described above.
As permitted by Section 302A.251 of the Minnesota Business Corporation Act,
the Articles of Incorporation of the Registrant eliminate the liability of the
directors of the Registrant for monetary damages arising from any breach of
fiduciary duties as a member of the Registrant's Board of Directors, except for
liability (a) for any breach of the director's duty of loyalty to the Registrant
or its shareholders; (b) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; (c) under Sections
302A.559 or 80A.23 of the Minnesota Statutes; (d) for any transaction from which
a director derived an improper personal benefit; or (e) for any act or omission
that occurred prior to the adoption of these provisions in the Registrant's
Articles of Incorporation.
The Registrant currently has in effect policies of insurance which provide
insurance protection to its directors and officers against some liabilities
which may be incurred by them on account of their services to the Registrant.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of May 16, 1999, among Kinnard
Investments, Inc., Peachtree Acquisition, Inc. and MI Acquisition
Corporation (included as Appendix A to the Joint Proxy
Statement/Prospectus which is part of this Registration Statement).
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
3.1 Restated Articles of Incorporation of Registrant (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 Statement of Designation of Rights, Preferences and Limitations of
Additional Common Stock.
3.3 Bylaws of Registrant (incorporated by reference to Exhibit 3.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 1996).
3.4 Amendments to Bylaws.
5.1 Opinion of Kaplan, Strangis and Kaplan, PA. regarding the legality of the
securities being registered hereby.
8.1 Opinion of KPMG Peat Marwick LLP regarding certain tax matters.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Deloitte and Touche LLP.
23.4 Consent of Kaplan, Strangis and Kaplan, P.A. (included in Exhibit 5.1).
23.5 Consent of Briggs and Morgan, Professional Association.
24.1 Power of Attorney.
99.1 Form of Proxy Card for shareholders of Kinnard Investments, Inc.
99.2 Form of Proxy Card for shareholders of MI Acquisition Corporation.
99.3 Consent of James F. Dlugosch as a person about to become a director.
</TABLE>
(b) Financial Statement Schedules: All financial statement schedules have
been omitted because they are not applicable or the required information
is included in the financial statements or notes thereto previously filed
as part of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998.
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required in Section 10(a) (3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the Registration Statement. Notwithstanding the foregoing,
any increase or decrease in the volume of securities offered (if
the total dollar amount of securities offered would not exceed that
which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form
of prospectus filed with the SEC pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a
20 percent change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement
or any material change to such information in the
II-2
<PAGE>
Registration Statement; provided, however, that paragraphs (1) (i)
and (1) (ii) do not apply if the information required to be
included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the Registrant pursuant to
section 13 or section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the Registration Statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering;
(4) That, for purposes of determining any liability under the Securities Act
of 1933, each filing of the Registrant's annual report pursuant to
section 13(a) or section 15(d) of the Securities Exchange Act of 1934
that is incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof;
(5) That, prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this
Registration Statement, by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c), the issuer undertakes that
such reoffering prospectus will contain the information called for by the
applicable registration form with respect to reofferings by persons who
may be deemed underwriters, in addition to the information called for by
the other Items of the applicable form;
(6) That every prospectus (i) that is filed pursuant to paragraph (5)
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a) (3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any
liability under the Securities Act, each such post-effective amendment
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof; and
(7) To respond to requests for information that is incorporated by reference
into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form,
within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of
responding to the request;
(8) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved
therein, that was not the subject of and included in the Registration
Statement when it became effective.
(9) To deliver or cause to be delivered with the prospectus, to each person
to whom the prospectus is sent or given, the latest annual report to
security holders that is incorporated by reference in the prospectus and
furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule
14c-3 under the Securities Exchange Act of 1934; and, where interim
financial information required to be presented by Article 3 of Regulation
S-X are not set forth in the prospectus, to deliver, or cause to be
delivered to each person to whom the prospectus is sent or given, the
latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
II-3
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 20 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Minneapolis
and the State of Minnesota on this 23rd day of June, 1999.
<TABLE>
<S> <C> <C>
KINNARD INVESTMENTS, INC.
By: /s/ WILLIAM F. FARLEY
-----------------------------------------
William F. Farley
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chairman and Chief
/s/ WILLIAM F. FARLEY Executive Officer
- ------------------------------ (principal executive June 23, 1999
William F. Farley officer)
/s/ DANIEL R. SASS Treasurer (principal
- ------------------------------ financial and accounting June 23, 1999
Daniel R. Sass officer)
*
- ------------------------------ Director June 23, 1999
Ronald A. Erickson
*
- ------------------------------ Director June 23, 1999
John J. Fauth
*
- ------------------------------ Director June 23, 1999
Stephen H. Fischer
*
- ------------------------------ Director June 23, 1999
John H. Grunewald
*
- ------------------------------ Director June 23, 1999
Andrew J. O'Connell
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
*
- ------------------------------ Director June 23, 1999
Robert S. Spong
*
- ------------------------------ Director June 23, 1999
Robert D. Potts
</TABLE>
- ------------------------
* William F. Farley, pursuant to Powers of Attorney executed by each of the
directors listed above whose name is marked by an "*" and filed as an
exhibit hereto, by signing his name hereto does hereby sign and execute this
Registration Statement of Kinnard Investments, Inc. on behalf of each of
such officers and directors in the capacities in which the names of each
appear above.
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of May 16, 1999, among Kinnard Investments, Inc., Peachtree
Acquisition, Inc. and MI Acquisition Corporation (included as Appendix A to the Joint Proxy
Statement/Prospectus which is part of this Registration Statement).
3.1 Restated Articles of Incorporation of Registrant (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 Statement of Designation of Rights, Preferences and Limitations of Additional Common Stock.
3.3 Bylaws of Registrant (incorporated by reference to Exhibit 3.2 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1996).
3.4 Amendments to Bylaws.
5.1 Opinion of Kaplan, Strangis and Kaplan, PA. regarding the legality of the securities being registered
hereby.
8.1 Opinion of KPMG Peat Marwick LLP regarding certain tax matters.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Deloitte and Touche LLP.
23.4 Consent of Kaplan, Strangis and Kaplan, P.A. (included in Exhibit 5.1).
23.5 Consent of Briggs and Morgan, Professional Association.
24.1 Power of Attorney.
99.1 Form of Proxy Card for shareholders of Kinnard Investments, Inc.
99.2 Form of Proxy Card for shareholders of MI Acquisition Corporation.
99.3 Consent of James F. Dlugosch as a person about to become a director.
</TABLE>
II-7
<PAGE>
EXHIBIT 3.2
KINNARD INVESTMENTS, INC.
STATEMENT OF DESIGNATION
OF
RIGHTS, PREFERENCES AND LIMITATIONS
OF
ADDITIONAL COMMON STOCK
The undersigned, George F. Stroebel, Corporate Secretary of Kinnard
Investments, Inc., a Minnesota corporation, hereby certifies that the following
resolution establishing additional Common Stock of the Corporation pursuant to
Minnesota Statutes, Section 302A.401 was duly adopted by the directors of the
Corporation on May 14, 1999:
FURTHER RESOLVED, that pursuant to Section 302A.401 of the Minnesota
Business Corporation Act and the Corporation's Restated Articles of
Incorporation, and subject to the filing of the Designation of Rights,
Preferences and Limitations of Common Stock with the Minnesota Secretary of
State, there is hereby designated, out of the 16,500,000 undesignated
shares specified in the Corporation's Restated Articles of Incorporation,
4,500,000 additional shares of Common Stock, par value $.02 per share,
having the rights, preferences and limitations as provided in the Minnesota
Business Corporation Act and the Corporation's Restated Articles of
Incorporation.
IN WITNESS WHEREOF, I have subscribed my name this 25th day of May, 1999.
KINNARD INVESTMENTS, INC.
/s/ George F. Stroebel
George F. Stroebel
Corporate Secretary
<PAGE>
EXHIBIT 3.4
KINNARD INVESTMENTS, INC.
AMENDMENTS TO BYLAWS
ADOPTED AT THE ANNUAL MEETING OF SHAREHOLDERS
HELD ON MAY 20, 1999
RESOLVED, that Sections 3.2 and 3.3 of the Bylaws of Kinnard Investments,
Inc. be amended in their entirety to read as follows:
3.2) Number of Directors. At each annual meeting of shareholders, the
shareholders shall determine the number of directors, which shall be not less
than three. Between annual meetings of shareholders, the authorized number of
directors may be increased by the shareholders or by the board of directors or
decreased by the shareholders. However, notwithstanding the foregoing no
increase or decrease in the number of directors may be effected except according
to the provisions contained in Section 3.3.
3.3) Election of Directors and Term of Office. The directors shall be
divided into three classes, designated Class I, Class II and Class III. Each
class shall consist, as nearly as possible, of one-third of the total number of
directors constituting the entire Board of Directors. At the 1999 Annual
Meeting of Shareholders, Class I directors shall be elected for a one-year term,
Class II directors for a two-year term and Class III directors for a three-year
term. At each succeeding annual meeting of the shareholders beginning in 2000,
successors to the class of directors whose term expires at that annual meeting
shall be elected for a three-year term. A director shall hold office until the
annual meeting for the year in which his or her term expires and until his or
her successor shall be elected and shall qualify, or until his or her earlier
death, resignation, disqualification or removal from office. If the number of
directors is changed, any increase or decrease shall be apportioned among the
classes so as to maintain, as nearly as possible, an equal number of directors
in each class. In the event an increase or decrease makes it impossible to
maintain an equal number of directors in each class, increases shall be
allocated to the class or classes with the longest remaining term, and decreases
shall be allocated to the class with the shortest remaining term. Any director
elected to fill a vacancy resulting from an increase in such class shall hold
office for a term that shall coincide with the remaining term of that class. In
no event will a decrease in the number of directors result in the elimination of
an entire class of directors, cause any class to contain a number of directors
two or more greater than any other class, or shorten the term of any incumbent
director. Any director elected to fill a vacancy not resulting from an increase
in the number of directors shall have the same remaining term as that of his or
her predecessor.
<PAGE>
EXHIBIT 5.1
[Kaplan, Strangis and Kaplan, P.A. Letterhead]
June 23, 1999
Kinnard Investments, Inc.
Kinnard Financial Center
920 Second Avenue South
Minneapolis, Minnesota 55402
Gentlemen:
We have acted as counsel to Kinnard Investments, Inc., a Minnesota
corporation (the "Company"), in connection with the preparation of the
Registration Statement on Form S-4 (the "Registration Statement") filed by the
Company with the Securities and Exchange Commission (the "Commission").
The Registration Statement relates to the proposed issuance and sale of
shares of Common Stock, par value $.01 per share (the "Common Stock"), of the
Company in connection with the proposed merger (the "Merger") of MI Acquisition
Corporation, a Minnesota corporation ("MIAC"), with and into Peachtree
Acquisition, Inc., a Minnesota corporation and wholly owned subsidiary of the
Company ("Merger Subsidiary"), pursuant to that certain Agreement and Plan of
Merger, dated as of May 16, 1999 (the "Merger Agreement"), by and among the
Company, Merger Subsidiary and MIAC. The Common Stock is described in the Joint
Proxy Statement/Prospectus included in the Registration Statement to which this
opinion is an exhibit.
We have examined and are familiar with originals or copies of such
documents, corporate records, and other instruments as we have deemed necessary
or appropriate in connection with this opinion, including, without limitation,
(i) the Registration Statement, (ii) the Merger Agreement, (iii) the Restated
Articles of Incorporation of the Company, and (iv) the Bylaws of the Company.
This opinion is delivered in accordance with the requirement of Item 601(b)(5)
of Regulation S-K under the Securities Act of 1933, as amended (the "Securities
Act").
In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, conformed, or photocopies, and the
authenticity of the originals of such latter documents. As to any facts
material to the opinions expressed herein, other than those assumed, we have
relied without independent verification upon the documents referred to above,
the accuracy of factual matters contained therein, and oral or written
statements and representations of officers and other representatives of the
Company and others, including public officials.
<PAGE>
We are members of the Bar of the State of Minnesota. This opinion is
limited to the Business Corporation Act of the State of Minnesota and the laws
of the United States. We do not express any opinion as to the laws of any other
jurisdiction or as to any other laws of the State of Minnesota.
We have assumed the due authorization, execution, and delivery by or on
behalf of each of the parties thereto of the securities and documents referred
to above, other than the Company, and that (a) the Merger will occur and be
conducted in accordance with the terms, conditions, covenants, and other
provisions of the Merger Agreement, (b) all applicable provisions of the
Securities Act of 1993, as amended, and such state "blue sky" or other
securities laws as may be applicable have been or shall duly be complied with,
and (c) the Registration Statement, as finally amended, shall become effective
under the Securities Act.
Based upon the foregoing, we are of the opinion that the shares of Common
Stock, when issued to the shareholders of MIAC in accordance with the provisions
of the Merger Agreement, will be legally issued, fully paid, and nonassessable
shares of Common Stock.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the reference to this firm under the caption "Legal Matters" in
the Joint Proxy Statement/Prospectus forming a part of the Registration
Statement. In giving such consent, we do not admit that we come within the
category of persons whose consent is required under Section 7 of the Securities
Act or the rules or regulations of the Commission promulgated thereunder.
Very truly yours,
KAPLAN, STRANGIS AND KAPLAN, P.A
/s/ Kaplan, Strangis and Kaplan, P.A.
<PAGE>
EXHIBIT 8.1
[KPMG Peat Marwick LLP Letterhead]
June 22, 1999
The Board of Directors The Board Of Directors
Kinnard Investments, Inc. MI Acquisition Corporation
Kinnard Financial Center 220 South Sixth Street
920 Second Avenue South Suite 300
Minneapolis, MN 55402 Minneapolis, MN 55402
Dear Boards of Directors:
You have requested the opinion of KPMG Peat Marwick LLP ("KPMG") regarding
certain Federal income tax consequences of a plan of statutory merger pursuant
to which MI Acquisition Corporation ("Target") will merge (the "Merger") with
and into a corporation organized under the laws of the State of Minnesota
("Merger Subsidiary"), which will at the time of the Merger be a wholly owned
first-tier subsidiary of Kinnard Investments, Inc. ("Parent"). In rendering
this opinion, we have relied upon certain documents you have submitted for our
consideration including an Agreement and Plan of Merger (the "Agreement") dated
May 16, 1999, between Parent, Merger Subsidiary, and Target. All sections
referenced herein are to the Internal Revenue Code of 1986, as amended, unless
stated otherwise.
FACTS
THE CORPORATE PARTIES
Parent is a corporation duly organized, validly existing and in good standing
under the laws of the state of Minnesota. As of April 30, 1999, Parent has 7.5
million shares of $.02 par value voting Common Stock authorized, 5.1 million
shares issued and outstanding ("Parent Common Stock"). Parent Common Stock is
the only stock of Parent that is outstanding. Merger Subsidiary is a newly
organized corporation, created solely for purposes of their transactions,
chartered under the laws of the state of Minnesota and is a wholly owned
first-tier subsidiary of Parent. Target is a corporation duly organized,
validly existing and in good standing under the laws of the state of Minnesota.
Target is authorized to issue 3,000,000 shares of common stock ("Target Common
Stock") and 100,000 shares of preferred stock ("Target Preferred Stock"). As of
the date of the Agreement, (a) 938,950 shares of Target Common Stock were issued
and outstanding, (b)
<PAGE>
300,000 shares of Target Common Stock were reserved for issuance pursuant to
outstanding Target Employee Options (defined below), (c) 50,000 shares of Target
Common Stock were reserved for issuance pursuant to outstanding Target Directors
Options (defined below) and (d) no shares of Target Preferred Stock were issued
and outstanding.
SHARE REPURCHASE PLANS
In November of 1993, Parent initiated a plan to repurchase 1,600,000 shares of
Parent Common Stock from the public ("the 1993 Plan"). As of October 21, 1998,
1,547,000 shares of Parent Common Stock were repurchased. On October 21, 1998,
the Parent board of directors adopted a resolution authorizing Parent to
repurchase up to 1,000,000 additional shares of Parent Common Stock from time to
time, in the open market or in privately negotiated transactions, at the
discretion of Parent's management ("the 1998 Plan"). The 1998 Plan will
commence after the completion of the 1993 Plan. Parent has no other authorized
share repurchase plans as of the date of the Merger.
THE MERGER
For what have been represented to KPMG to be valid corporate business reasons,
the Boards of Directors of Parent and Target have determined that it is in the
best interests of Parent and Target and their respective shareholders to
consummate the Merger. Therefore, the following transaction will occur:
Target will merge with and into Merger Subsidiary pursuant to the applicable
laws of the state of Minnesota, and Merger Subsidiary will be the surviving
corporation and the separate corporate existence of Target will cease. Pursuant
to the state corporate merger laws of the State of Minnesota, Merger Subsidiary
will succeed to and acquire all of the assets, and assume all of the liabilities
of Target as of the effective time of the Merger.
Pursuant to and as a result of the Merger, the common shareholders of Target
(other than dissenting shareholders who may receive cash in the Merger) shall be
entitled to receive from Parent, at the election of the holder thereof, one of
the following (the "Merger Consideration"):
1. the right to receive $19.25 in cash, without interest (the "Cash
Consideration"), or
2. the right to receive 3.5 shares (the "Exchange Ratio") of Parent
Common Stock (the "Stock Consideration").
<PAGE>
Parent will not issue any fractional shares of Parent Common Stock. If a common
shareholder of Target is entitled to receive a fractional share of Parent Common
Stock as a result of the Exchange Ratio used in determining the Stock
Consideration, then Parent will pay such shareholder cash equal in value to the
product obtained by multiplying such fractional share interest of such holder by
$19.25 (the "Fractional Share Cost").
In no event will the Cash Consideration plus the Fractional Share Cost be less
than $5,000,000 or more than $8,000,000 (the latter amount includes cash paid to
redeem Target Director Options and cash paid to dissenting shareholders.
Pursuant to the Merger, all employee stock options ("Target Employee Options")
to purchase shares of Target stock under the 1997 Stock Option Plan ("Target
Stock Option Plan"), which are then outstanding and unexercised, shall cease to
represent a right to acquire a share of Target stock and shall be converted
automatically into options to purchase shares of Parent Common Stock (also
referred to as "Parent Options"). Parent shall assume each Target Employee
Option subject to the material terms thereof, including but not limited to the
accelerated vesting of such options which shall occur in connection with or by
virtue of the Merger as and to the extent required by the Target Stock Option
Plan and agreements governing such Target Employee Options; provided, however,
that from and after the effective date of the Merger, (i) the number of shares
of Parent Common Stock purchasable upon exercise of such Target Employee Option
shall be equal to the number of shares of Target stock that were purchasable
under such Target Employee Option immediately prior to the effective date of the
merger multiplied by the Exchange Ratio, and rounding to the nearest whole
share, and (ii) the per share exercise price under each such Target Employee
Option shall be adjusted by dividing the per share exercise price of each such
Target Employee Option by the Exchange Ratio, and rounding down to the nearest
cent. Notwithstanding the foregoing, each Target Employee Option which is
intended to be an incentive stock option (as defined in Section 422) shall be
adjusted in accordance with the requirements of Section 424. Accordingly, with
respect to any incentive stock options, fractional shares shall be rounded down
to the nearest whole number of shares and where necessary the per share exercise
price shall be rounded down to the nearest cent.
Pursuant to the Merger, all director stock options ("Target Director Options")
to purchase shares of Target stock under Target's 1998 Director Stock Option
Plan ("Target Director Stock Option Plan"), which are then outstanding and
unexercised, whether vested or unvested, shall automatically become immediately
vested. Each holder of a Target Director Option shall receive within five
business days after the closing date from the Merger Subsidiary solely cash
pursuant to the Agreement (less applicable withholding taxes) in an aggregate
amount equal to the difference between $19.25 and the applicable exercise price
per share.
<PAGE>
SUBSEQUENT TRANSACTIONS
At some time subsequent to the Merger, Parent, as the sole owner of Merger
Subsidiary and Miller & Schroeder, Inc. ("MSI"), plans to merge MSI, a
wholly-owned, first tier subsidiary of Target prior to the Merger, with and into
Merger Subsidiary pursuant to a statutory merger under Minnesota law ("MSI
Merger"). All of the assets and liabilities of MSI will be transferred to
Merger Subsidiary, all of MSI's stock will be canceled, and MSI's separate
corporate existence will cease. At some time subsequent to the MSI Merger,
Merger Subsidiary may choose to dispose of no more than 5 percent of MSI's total
assets ("the Unwanted Assets").
PRIOR TRANSACTIONS
On Feb 1, 1998, Target purchased all of the issued and outstanding capital stock
of CH Brown Target, Inc. Pursuant to the stock purchase plan, Target
transferred 23,500 shares of Target Common Stock, which had a fair market value
of $235,000 and $5,000 in cash and notes in exchange for all of the issued and
outstanding shares of CH Brown. The acquisition was treated as a taxable stock
purchase.
On July 31, 1997, Target purchased all of the issued and outstanding shares of
MSI. Pursuant to the stock purchase agreement, Target transferred cash in the
amount of $13,930,415 in exchange for all of the issued and outstanding shares
of MSI. This transaction was partially financed by $6,500,000 of term debt
("Acquisition Debt"). The acquisition was treated as a taxable stock purchase.
REPRESENTATIONS
With respect to the Merger, the following representations have been made by
Parent, Target, and/or Merger Subsidiary pursuant to letters of representation
dated as of the date hereof:
1. The Merger will be consummated in compliance with the material terms
of the Agreement and none of the material terms and conditions therein
have been waived or modified and no party to the transaction has any
plan or intention to waive or modify any such material term or
condition.
2. The fair market value of the Parent Common Stock and other
consideration to be received by each shareholder of Target will be
<PAGE>
approximately equal to the fair market value of Target stock
surrendered in exchange therefor.
3. The fair market value of the Parent Options and other consideration to
be received by each holder of Target Employee Options will be
approximately equal to the fair market value of Target Employee
Options surrendered in exchange therefor.
4. To the best of the knowledge of the management of Target, there is no
plan or intention on the part of (i) any 5 percent or greater Target
shareholder; (ii) any Target shareholder who is on the Target board of
directors; or (iii) any Target shareholder having managerial control
over Target, to sell, directly or indirectly, any Parent Common Stock
received in the Merger to Parent, Merger Subsidiary, or any party
related to Parent or Merger Subsidiary. For purposes of this
representation, the term "to sell" includes any sale or exchange,
including, but not limited to, the open market repurchase option and
the private negotiation option of either the 1993 Plan or the 1998
Plan.
5. To the best of the knowledge of the management of Target, there is no
plan or intention on the part of any 5 percent or greater shareholder
of Target, or the remaining shareholders of Target to sell to Parent,
Merger Subsidiary, or any party related to Parent or Merger
Subsidiary, directly or indirectly, an amount of Parent Common Stock
received in the Merger, that would reduce the amount of Parent Common
Stock treated as issued in the Merger to a number of shares having a
value, as of the date of the Merger, of less than 47 percent of the
value of all of the formerly outstanding shares of Target Common Stock
(including shares held by dissenters). For purposes of this
representation, shares of Target Common Stock exchanged for cash or
other properties pursuant to the Merger, redeemed before (but in
connection with) the Merger; surrendered by dissenters, or exchanged
for cash in lieu of fractional shares of Parent Common Stock, will be
treated as outstanding Target Common Stock on the date of the Merger.
6. Merger Subsidiary will acquire at least 90 percent of the fair market
value of the net assets and at least 70 percent of the fair market
value of the gross assets held by Target immediately prior to the
Merger. For purposes of this representation, amounts paid by Target
to dissenters, amounts paid by Target to shareholders, Target Director
<PAGE>
Option holders and Target Employee Option holders who receive cash or
other property, Target assets used to pay its reorganization expenses,
and all redemptions and distributions (except for regular, normal
dividends) made by Target immediately preceding the Merger, will be
included as assets of Target held immediately prior to the Merger.
7. Prior to the Merger, Parent will be in control of Merger Subsidiary
within the meaning of Section 368(c)(1).
8. Following the Merger, Merger Subsidiary will not issue additional
shares of its stock that would result in Parent losing control of
Merger Subsidiary within the meaning of Section 368(c)(1).
9. Neither Parent nor any corporation related to Parent, has any plan or
intention to reacquire any of the Parent Common Stock issued in the
Merger.
<PAGE>
10. Parent has no plan or intention to liquidate Merger Subsidiary; to
merge Merger Subsidiary with and into another corporation (other than
the MSI Merger); to sell or otherwise dispose of any of the stock of
Merger Subsidiary; or to cause Merger Subsidiary to sell or otherwise
dispose of any of the assets of Target acquired in the Merger, except
for dispositions made in the ordinary course of business.
11. The liabilities of Target to be assumed by Merger Subsidiary and any
liabilities to which the transferred assets are subject, were incurred
by Target in the ordinary course of its business. For purposes of
this representation, 100 percent of the Acquisition Debt was used in
the acquisition of MSI.
12. After the Merger, Parent will continue the historical business of
Target or use a significant portion of Target's business assets in a
business.
13. Parent, Merger Subsidiary, Target, the shareholders of Target and the
holders of Target Employee Options will each pay their respective
expenses, if any, incurred in connection with the Merger.
14. There is no intercorporate debt existing between Parent and Target or
between Merger Subsidiary and Target, or any of their respective
subsidiaries, that was issued, acquired, or will be settled at a
discount.
15. Neither Parent, Merger Subsidiary, nor Target is an investment company
as defined in Sections 368(a)(2)(F)(iii) and (iv).
16. The fair market value of the assets of Target to be acquired by Merger
Subsidiary will equal or exceed the sum of the liabilities to be
assumed by Merger Subsidiary plus the liabilities, if any, to which
the transferred assets are subject.
17. Target is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A).
<PAGE>
18. No stock of Merger Subsidiary will be issued in the Merger.
19. The payment of cash in lieu of a fractional share of Parent Common
Stock is solely to save the expense and inconvenience of issuing and
carrying fractional shares and it is not separately bargained for
consideration. The maximum cash that any one Target shareholder will
receive in lieu of a fractional share interest of Parent Common Stock
will be less than the value of one full share and the total cash paid
in lieu of fractional share interests will be less than one percent of
the total consideration paid that will be issued in the transaction to
Target shareholders in exchange for their shares of Target stock.
20. The former shareholders of Target will own less than 50 percent of the
value and voting power of Parent after the Merger.
21. The total value of the Parent Common Stock issued by Parent to the
Target shareholders pursuant to the Merger will, in the aggregate,
represent at least 47 percent of the total fair market value of the
consideration issued in the Merger.
22. Target Employee Options granted under the Target Stock Option Plan
held by Target Employee Option holders were granted with an exercise
price equal to the fair market value of the associated stock.
23. Target Employee Options granted under the Target Stock Option Plan
held by Target Employee Option holders will be converted into options
(and any such rights) to purchase a number of shares of Parent Common
Stock pursuant to the exchange ratio provided for in the Agreement and
Plan of Merger, such that the aggregate spread between the purchase
price and fair market value following the merger shall be equal to the
aggregate spread between the purchase price and fair market vaue
immediately preceeding the merger.
24. No restricted stock was issued under the Target Stock Option Plan.
25. Neither Target Employee Options granted under the Target Stock Option
Plans nor the nonstatutory stock options following the conversion
pursuant to the Merger held by Target Employee Option holders have
been, are, or will be actively traded on an established securities
market and are not transferable by the optionees other than
<PAGE>
by will, or if an optionee dies intestate, by the laws of descent and
distribution of the state of domicile of the optionee at the time of
death, and are exercisable during the lifetime of an optionee only by
the optionee or by the guardian or legal representative of the
optionee.
With respect to the MSI Merger, the following representations have been made by
Parent, Target, and/or Merger Subsidiary pursuant to letters of representation
dated as of the date hereof:
1. Merger Subsidiary on the date of adoption of the plan of MSI Merger
and all times thereafter until the date of the MSI Merger, will be the
owner of at least 80 percent of the total combined voting power of all
classes of stock of MSI entitled to vote and the owner of at least 80
percent of the total value of all classes of stock of MSI (excluding
nonvoting stock that is limited and preferred as to dividends and
otherwise meets the requirements of Section 1504(a)(4)). MSI has no
options, warrants or other rights outstanding.
2. At no time prior to the time of Merger did Target adopt a plan of
complete liquidation with respect to MSI.
3. No shares of MSI stock will have been redeemed during the 3 years
preceding the Merger.
4. No shares of MSI stock will have been redeemed subsequent to the
Merger.
5. All Liquidating distributions from MSI to Merger Subsidiary pursuant
to the MSI Merger will be on the date of the MSI Merger. MSI will
retain no assets following the date of merger.
6. As soon as the first asset transfer has been, MSI will cease to be a
going concern and its activities will be limited to winding up its
affairs, paying its debts, and distributing its remaining assets to
its shareholder.
7. The distribution of MSI will be in complete cancellation or redemption
of all of its stock.
8. MSI did not acquire assets in any nontaxable transaction at any time
prior to the Merger, except for acquisitions occurring more than 3
years before the Merger.
<PAGE>
9. MSI did not acquire assets in any nontaxable transaction subsequent to
the Merger.
10. No assets of MSI have been, or will be, disposed of by MSI except for
dispositions in the ordinary course of business and dispositions
occurring more than 2 years prior to the Merger.
11. No assets of MSI have been, or will be, disposed of by either MSI or
Merger Subsidiary except for dispositions in the ordinary course of
business and dispositions occurring subsequent to the Merger.
12. The merger of MSI will not be preceded and will not be followed by the
reincorporation in, or transfer or sale to, a recipient corporation
(Recipient) of any of the businesses or assets of MSI, if persons
holding, directly or indirectly, more than 20 percent in value of the
MSI stock also hold, directly or indirectly, more than 20 percent in
the value of the stock of Recipient. For purposes of this
representation, ownership is determined by application of the
constructive ownership rules of Section 318(a) as modified by Section
304(c)(3).
13. Prior to the Merger, no assets of MSI will have been distributed in
kind, transferred, or sold to Merger Subsidiary or any affiliate of
Merger Subsidiary, except for (i) transactions that occurred in the
normal course of business and (ii) transactions that occurred more
than 3 years prior to the Merger.
14. Subsequent to the Merger, no assets of MSI will have been distributed
in kind, transferred, or sold to Merger Subsidiary or any affiliate of
Merger Subsidiary, except for (i) transactions that occurred in the
normal course of business and (ii) transactions that occurred more
than 3 years prior to the MSI Merger.
15. MSI will report all earned income represented by assets that will be
distributed to Merger Subsidiary such as receivables being reported on
a cash basis, unfinished construction contracts, commissions due, etc.
16. The fair market value of the assets of MSI will exceed its liabilities
both at the date of the MSI Merger and immediately prior to the time
of the liquidating distribution.
<PAGE>
17. There is no intercorporate debt existing between Merger Subsidiary and
MSI and none will be canceled, forgiven, or discounted.
18. Merger Subsidiary is not an organization that is exempt from federal
income tax under Section 501 or any other provision of the Internal
Revenue Code.
19. All other transactions that have been or will be undertaken
contemporaneously with, in anticipation of, in conjunction with, or in
any way related to, the merger of MSI Merger have been fully
disclosed.
20. The fair market value of the assets of MSI transferred to Merger
Subsidiary will equal or exceed the sum of the liabilities assumed by
Merger Subsidiary plus the amount of liabilities, if any, to which the
transferred assets are subject.
21. Merger Subsidiary has no plan or intention to sell or otherwise
dispose of any of the assets of MSI acquired in the transaction,
except for dispositions made in the ordinary course of business.
22. The liabilities of MSI (incurred prior to the Merger) assumed by
Merger Subsidiary and the liabilities (incurred prior to the Merger)
to which the transferred assets of MSI are subject were incurred by
MSI in the ordinary course of its business.
23. The liabilities of MSI (incurred subsequent to the Merger) assumed by
Merger Subsidiary and the liabilities (incurred subsequent to the
Merger) to which the transferred assets of MSI are subject were
incurred by MSI in the ordinary course of its business.
24. Following the MSI Merger, Merger Subsidiary will continue the
historical business of MSI of the use a significant portion of MSI's
historical business assets in a business.
25. No two parties to the MSI Merger are investment companies as defined
in Section 368(a)(2)(F)(iii) and (iv).
26. MSI is not under the jurisdiction of a court in a Title 11 or similar
case within the meaning of section 368(a)(3)(A).
<PAGE>
SCOPE OF THE OPINION
The opinions expressed below are rendered only with respect to the specific
facts and representations set forth herein, and KPMG expresses no opinion with
respect to any other federal or state income tax or any legal aspect of the
transaction. Specifically, KPMG does not express any opinion, and none was
requested, as to whether the Merger results in a section 382 limitation with
respect to any tax attribute of Target or the Parent (including any net
operating loss) and the tax effect of any separate return limitation year
limitation imposed under section 1.1502-1, ET. SEQ., of the income tax
regulations. No inference will be drawn regarding any matter not specifically
opined upon. If any of the above-stated facts, representations, or
circumstances is not entirely complete or accurate, it is imperative that we be
informed immediately in writing, as the inaccuracy or incompleteness could cause
KPMG to change its opinion.
In rendering our opinions, we are relying upon the relevant provisions of the
Code, the regulations thereunder, and judicial and administrative
interpretations thereof, all as of the date of this letter, which are subject to
change or modification by subsequent legislative, regulatory, administrative, or
judicial decisions. Because such changes can be retroactive in effect, any such
change could also have an effect on the validity of our opinions. The opinions
contained herein are not binding upon the Internal Revenue Service, any other
tax authority or any court, and no assurance can be given that a position
contrary to that expressed herein will not be asserted by a tax authority and
ultimately sustained by a court.
KPMG is rendering this opinion only to the Parent, Target, Target's Shareholders
and the holders of Target Employee Options. Therefore, this opinion cannot be
relied upon by any person or persons other than the Parent, Target, Target's
Shareholders and the holders of Target Employee Options. This opinion may not
be included in any document available to any third parties, or be incorporated
by reference in any document available to such third parties, without the
express written consent of KPMG.
OPINIONS Based solely upon the information contained in the Documents and the
FACTS and REPRESENTATIONS as stated herein, and limited pursuant to the scope of
the opinion above, it is the opinion of KPMG that the following Federal income
tax consequences should result from the Merger:
1. Provided the Merger of Target with and into Merger Subsidiary
qualifies as a statutory merger under Minnesota law, the Merger should
constitute a reorganization within the meaning of section 368(a)(1)(A)
by reason of
<PAGE>
Section 368(a)(2)(D) of the Code. Target, Parent, and Merger
Subsidiary should each be "a party to a reorganization" within the
meaning of section 368(b).
2. No gain or loss should be recognized by Target on the transfer of
substantially all of its assets to Merger Subsidiary in exchange
solely for Parent Common Stock, cash and the assumption by Merger
Subsidiary of Target's liabilities (Sections 361(a),(b) and 357(a)).
3. No gain or loss should be recognized by either Parent or Merger
Subsidiary upon the acquisition by Merger Subsidiary of substantially
all of the assets of Target in exchange for Parent Common Stock, cash
and the assumption by Merger Subsidiary of Target's liabilities (Regs.
Section 1.1032-2(b)).
4. The basis of Target assets acquired by Merger Subsidiary pursuant to
the Merger should be the same as the basis of those assets in the
hands of Target immediately prior to the Merger (Section 362(b)).
5. The basis of Merger Subsidiary's stock in the hands of Parent should
be an amount equal to the gross adjusted tax basis of Target assets in
the hands of Target immediately before the Merger decreased by the sum
of the amount of the liabilities of Target assumed by Merger
Subsidiary and the amount of the liabilities to which the assets of
Target are subject (Section 1.358-6(c)(1)).
6. The holding period for Target assets received by Merger Subsidiary,
pursuant to the Merger, should, in each instance, include the period
for which such assets were held by Target (section 1223(2)).
7. No gain or loss should be recognized by the shareholders of Target
upon the receipt of Parent Common Stock and in exchange for their
Target stock (Section 354(a)).
8. No gain or loss should be recognized by the holders of Target Employee
Options solely upon the receipt of Parent Options received in exchange
for their Target Options (Section 83).
9. The basis in the Parent Common Stock received by a Target shareholder
in exchange for Target Common Stock should be the same as the basis of
Target Common Stock that was exchanged therefor, decreased by the
amount of cash received or by the amount of cash received, as the case
may be, and increased
<PAGE>
by any gain recognized on the exchange or any amount treated as a
dividend (Section 358(a)(1)).
10. The holding period of the Parent Common Stock received by a Target
shareholder should include the period during which Target Common Stock
surrendered in exchange therefor was held by Target shareholder,
provided that Target Common Stock surrendered was a capital asset in
the hands of Target shareholder on the date of the Merger (Section
1223(1)).
11. Pursuant to section 381(a) of the Code and section 1.381(a)-1 of the
regulations, Merger Subsidiary should succeed to and take into account
as of the date of the proposed transfer, as defined in section
1.381(b)-1(b) of the regulations, the items of Target described in
section 381(c), subject to the conditions and limitations of sections
381, 382, 383, and 384 and the regulations thereunder.
12. As provided in section 381(c)(2) of the Code, Merger Subsidiary will
succeed to and take into account the earnings and profits or deficit
earnings and profits of Target as of the date of the transfer. Any
deficit in earnings and profits will be used only to offset earnings
and profits accumulated after the date of transfer.
Based solely on the above FACTS and REPRESENTATIONS and subject to the SCOPE OF
THE OPINION ABOVE, with respect to the federal income tax consequences of the
merger of MSI Merger, it is the opinion of KPMG that:
1. Provided the MSI Merger with and into Merger Subsidiary qualifies as a
statutory merger under Minnesota law, the MSI Merger should qualify as
a complete liquidation of MSI under section 332 and section
1.332-2(d), and a reorganization pursuant to Section 368(a)(1)(A).
2. No gain or loss should be recognized by Merger Subsidiary on its
receipt of the MSI assets. (Sections 332(a) and 361(a)).
3. No gain or loss should be recognized by MSI on the MSI Merger
(Sections 336(d)(3), 337(a) and 361(c)).
4. The basis of each MSI asset in the hands of Merger Subsidiary should
be the same as the basis of that asset in hands of MSI immediately
before the MSI Merger (Sections 334(b)(1) and 362(b)).
<PAGE>
5. The holding period of each MSI asset in the hands of Merger Subsidiary
should include the period during which the asset was held by MSI
(section 1223(2)).
6. Merger Subsidiary should succeed to and take into account the MSI
items described in section 381(c), subject to the conditions and
limitations of sections 381, 382, 383, 384, 1502 and the regulations
promulgated thereunder. Any deficit in the earnings and profits of MSI
should be used to offset only earnings and profits accumulated after
the date of the MSI Merger (section 381(a) and section 1.381(a)-1).
MSI's earnings and profits to which Merger Subsidiary should succeed
to under section 381 should be adjusted to prevent duplication in
accordance with section 1.1502-33(a)(2).
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Kinnard Investments, Inc.:
The Board of Directors
MI Acquisition Corporation:
We hereby consent to the use of our reports included or incorporated herein by
reference and to the references to our firm under the headings "SELECTED
FINANCIAL DATA" and "EXPERTS" in the Joint Proxy Statement/Prospectus.
Our report dated December 30, 1998, relating to the consolidated financial
statements of MI Acquisition Corporation, contains an explanatory paragraph
which states that effective July 31, 1997, an investor group acquired all of the
outstanding stock of Miller & Schroeder, Inc. in a business combination
accounted for as a purchase. As a result of the acquisition, the consolidated
financial information for the periods after the acquisition is presented on a
different cost basis than that for the periods before the acquisition and,
therefore, is not comparable.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
June 23, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Minneapolis, Minnesota,
June 23, 1999
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement
of Kinnard Investments, Inc. on Form S-4 of our report dated January 30, 1997,
on the consolidated statements of operations, shareholders' equity, and cash
flows of Kinnard Investments, Inc. and subsidiaries for the year ended
December 31, 1996, appearing in the Annual Report on Form 10-K of Kinnard
Investments, Inc. for the year ended December 31, 1998 and to the reference
to us under the heading "Experts" in the Joint Proxy Statement/Prospectus
which is part of this Registration Statement.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
June 18, 1999
<PAGE>
EXHIBIT 23.5
[Briggs and Morgan Letterhead]
June 22, 1999
Kinnard Investments, Inc.
Kinnard Financial Center
920 Second Avenue South
Minneapolis, MN 55402
Gentlemen:
Reference is made to the Registration Statement on Form S-4 to be filed by
Kinnard Investments, Inc. with respect to the proposed merger of MI Acquisition
Corporation with and into a subsidiary of Kinnard Investments, Inc.
We hereby consent to the reference to our firm under the caption "Legal
Matters" in the joint proxy statement/prospectus contained in the Registration
Statement.
Very truly yours,
BRIGGS & MORGAN,
PROFESSIONAL ASSOCIATION
/s/ Christopher C. Cleveland
By: Christopher C. Cleveland
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that KINNARD INVESTMENTS, INC., a Minnesota
corporation (the "Company"), and each of the undersigned directors of the
Company, hereby constitutes and appoints William F. Farley and George F.
Stroebel and each of them (with full power to each of them to act alone)
its/his/her true and lawful attorney-in-fact and agent, for it/him/her and on
it/his/her behalf and in its/his/her name, place and stead, in any and all
capacities to sign, execute, affix its/his/her seal thereto and file a
Registration Statement on Form S-4 or any other applicable form under the
Securities Act of 1933 and amendments thereto, including pre-effective and
post-effective amendments, with all exhibits and any and all documents required
to be filed with respect thereto with any regulatory authority, relating to the
proposed registration of up to 2,000,000 shares of the Company's Common Stock,
par value $.02 per share, to be issued to shareholders of MI Acquisition
Corporation.
There is hereby granted to said attorneys, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in respect of the foregoing as fully as it/he/she or
itself/himself/herself might or could do if personally present, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, may
lawfully do or cause to be done by virtue hereof.
This Power of Attorney may be executed in any number of counterparts, each
of which shall be an original, but all of which taken together shall constitute
one and the same instrument and any of the undersigned directors may execute
this Power of Attorney by signing any such counterpart.
KINNARD INVESTMENTS INC. has caused this Power of Attorney to be executed
in its name by its Chief Executive Officer on the 22nd day of June, 1999.
KINNARD INVESTMENTS, INC.
By: /s/ William F. Farley, II
---------------------------------------
William F. Farley, II
Chairman and Chief Executive Officer
<PAGE>
The undersigned directors of KINNARD INVESTMENTS, INC. have executed this
Power of Attorney as of the 22nd day of June, 1999.
/s/ William F. Farley, II /s/ Andrew J. O'Connell
- ----------------------------- --------------------------
William F. Farley, II Andrew J. O'Connell
/s/ Robert S. Spong /s/ Ronald A. Erickson
- ----------------------------- --------------------------
Robert S. Spong Ronald A. Erickson
/s/ John J. Fauth /s/ Stephen H. Fischer
- ----------------------------- --------------------------
John J. Fauth Stephen H. Fischer
/s/ John H. Grunewald /s/ Robert D. Potts
- ----------------------------- --------------------------
John H. Grunewald Robert D. Potts
DIRECTORS
<PAGE>
Exhibit 99.1
KINNARD INVESTMENTS, INC.
PROXY FOR COMMON STOCK
SOLICITED BY THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF SHAREHOLDERS
, 1999
The undersigned shareholder of Kinnard Investments, Inc. ("Kinnard") hereby
appoints William F. Farley and George F. Stroebel or either of them, as
attorneys, agents and proxies of the undersigned, with full power of
substitution in each of them, to vote, in the name and on behalf of the
undersigned at the Special Meeting of Shareholders (the "Special Meeting") of
Kinnard to be held on September , 1999 at 10:00 a.m., at 920 Second Avenue
South, Minneapolis, Minnesota, and at all adjournments thereof, all of the
shares of common stock of Kinnard which the undersigned would be entitled to
vote if personally present, with all powers the undersigned would possess if
personally present.
PROPOSAL--To approve the issuance of 2,000,000 shares of Kinnard common
stock pursuant to the Agreement of Plan and Merger dated as of May 16, 1999,
among Kinnard, Peachtree Acquisition Corp. and MI Acquisition Corporation.
________ FOR ________ AGAINST ________ ABSTAIN
The Board of Directors recommends a vote "FOR" this proposal.
The undersigned hereby acknowledges receipt of the Notice of Special Meeting
and the Joint Proxy Statement/Prospectus dated , 1999 relating to the
Special Meeting.
(CONTINUED, AND TO BE SIGNED AND DATED, ON THE REVERSE SIDE)
<PAGE>
ALL SHARES WILL BE VOTED AS SPECIFIED. IF NO CHOICE IS SPECIFIED, THE SHARES
WILL BE VOTED FOR APPROVAL OF THE ISSUANCE OF SHARES OF KINNARD COMMON STOCK IN
CONNECTION WITH THE MERGER AND AT THE DISCRETION OF THE PROXY HOLDERS AS TO ANY
OTHER MATTER THAT MAY PROPERLY COME BEFORE THE MEETING.
Either of said attorneys or their substitutes who shall be present and act,
or if only one shall attend, then that one, shall have and may exercise all the
powers of said attorneys hereunder.
When signing as attorney, guardian, executor, administrator or trustee,
please give title. If the signer is a corporation, please give the full
corporate name, and sign by a duly authorized officer, showing the officer's
title. EACH joint owner is required to sign.
Dated: ___________, 1999
------------------------------
(Signature)
------------------------------
(Joint Owner's Signature)
PLEASE EXECUTE AND RETURN THIS PROXY PROMPTLY.
YOUR COOPERATION WILL BE APPRECIATED.
<PAGE>
Exhibit 99.2
MI ACQUISITION CORPORATION
PROXY FOR COMMON STOCK
SOLICITED BY THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF SHAREHOLDERS
, 1999
The undersigned shareholder of MI Acquisition Corporation ("MIAC") hereby
appoints James F. Dlugosch and Tom S. Nelson or either of them, as attorneys,
agents and proxies of the undersigned, with full power of substitution in each
of them, to vote, in the name and on behalf of the undersigned at the Special
Meeting of Shareholders (the "Special Meeting") of MIAC to be held on September
, 1999 at 10:00 a.m., at 220 South Sixth Street, Suite 300, Minneapolis,
Minnesota, and at all adjournments thereof, all of the shares of common stock of
MIAC which the undersigned would be entitled to vote if personally present, with
all powers the undersigned would possess if personally present.
PROPOSAL--To approve and adopt the Agreement and Plan of Merger, dated as of
May 16, 1999 (the "merger agreement"), by and among MIAC, Kinnard Investments,
Inc., a Minnesota corporation ("Kinnard") and Peachtree Acquisition, Inc., a
Minnesota corporation and a wholly owned subsidiary of Kinnard ("Merger
Subsidiary"), and to approve the transactions contemplated thereby, including
the merger of MIAC with and into Merger Subsidiary.
________ FOR ________ AGAINST ________ ABSTAIN
The Board of Directors recommends a vote "FOR" this proposal.
The undersigned hereby acknowledges receipt of the Notice of Special Meeting
and the Joint Proxy Statement/Prospectus dated , 1999 relating to the
Special Meeting.
(CONTINUED, AND TO BE SIGNED AND DATED, ON THE REVERSE SIDE)
<PAGE>
ALL SHARES WILL BE VOTED AS SPECIFIED. IF NO CHOICE IS SPECIFIED, THE SHARES
WILL BE VOTED FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND AT THE
DISCRETION OF THE PROXY HOLDERS AS TO ANY OTHER MATTER THAT MAY PROPERLY COME
BEFORE THE MEETING.
Either of said attorneys or their substitutes who shall be present and act,
or if only one shall attend, then that one, shall have and may exercise all the
powers of said attorneys hereunder.
When signing as attorney, guardian, executor, administrator or trustee,
please give title. If the signer is a corporation, please give the full
corporate name, and sign by a duly authorized officer, showing the officer's
title. EACH joint owner is required to sign.
Dated: ___________, 1999
------------------------------
(Signature)
------------------------------
(Joint Owner's Signature)
PLEASE EXECUTE AND RETURN THIS PROXY PROMPTLY.
YOUR COOPERATION WILL BE APPRECIATED.
<PAGE>
EXHIBIT 99.3
DIRECTOR'S CONSENT
Pursuant to Rule 438 promulgated under the Securities Act of 1933, as
amended, I, James F. Dlugosch, hereby consent to be named as a person about to
become a director of Kinnard Investments, Inc. in the Registration Statement on
Form S-4 of Kinnard Investments, Inc. dated June 23, 1999.
Dated: June 23, 1999 /s/ James F. Dlugosch
------------------------------------
James F. Dlugosch
