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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13
OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NO. 0-9377
------------------------
KINNARD INVESTMENTS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
920 SECOND AVENUE SOUTH, MINNEAPOLIS, MINNESOTA 55402 (612) 370-2700
(Address of principal executive offices) Telephone number
MINNESOTA 41-0972952
(State of incorporation) (I.R.S. Employer
identification number)
</TABLE>
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.02
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant as of March 27, 2000, was approximately $22,672,650 (based on the
closing price of the Registrant's Common Stock on such date).
Shares of $0.02 par value Common Stock outstanding at March 27,
2000: 4,852,915
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PART I
ITEM 1. BUSINESS
GENERAL
Kinnard Investments, Inc. (the "Registrant" or "KII") is a holding company
that has provided financial products and services for over 50 years. The primary
subsidiary, John G. Kinnard and Company, Incorporated ("John G. Kinnard" or
"JGK"), is a regional broker-dealer headquartered in Minneapolis. The Registrant
and John G. Kinnard are hereinafter collectively referred to as the "Company."
John G. Kinnard is a full-service broker-dealer engaged in securities
brokerage, trading, investment banking, asset management and related financial
services to both retail and institutional customers. The focus of JGK's Capital
Markets group is generally on emerging growth companies with market
capitalizations of up to $250 million. Through its Fixed Income Originations
group, the Company raises capital for municipalities and other business
entities. Other products and services include mutual funds, insurance products,
investment management, IRA services, and fixed income securities.
NoDakBONDSinc., a wholly-owned subsidiary of John G. Kinnard, acts as a fiscal
agent in the state of North Dakota. John G. Kinnard is a member of the Chicago
Stock Exchange and the National Association of Securities
Dealers, Inc. and is registered as an investment adviser under the Investment
Advisers Act of 1940.
SOURCES OF REVENUE
The following table sets forth a breakdown of the amount and percentage of
revenues from each principal source for the three most recent fiscal years:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- --------------------- ---------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
-------- ---------- -------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commissions:
Mutual funds............................ $ 4,031 7.3% $ 4,667 11.4% $ 4,151 8.3%
Over-the-counter securities............. 4,409 8.0 2,976 7.3 2,920 5.9
Listed securities....................... 6,067 11.1 5,032 12.3 5,648 11.3
Insurance............................... 1,114 2.0 1,368 3.3 1,498 3.0
Other................................... 1,024 1.9 641 1.6 528 1.1
------- ----- ------- ----- ------- -----
16,645 30.3 14,684 35.9 14,745 29.6
------- ----- ------- ----- ------- -----
Principal transactions:
Equity securities....................... 17,421 31.8 10,934 26.7 18,837 37.8
Fixed income securities................. 5,287 9.6 5,519 13.5 7,092 14.2
------- ----- ------- ----- ------- -----
22,708 41.4 16,453 40.2 25,929 52.0
------- ----- ------- ----- ------- -----
Net gains (losses) on investment account:
Realized................................ 8,085 14.7 439 0.9 233 0.5
Unrealized.............................. (1,565) (2.8) (626) (1.5) 222 0.4
------- ----- ------- ----- ------- -----
6,520 11.9 (187) (0.6) 455 0.9
------- ----- ------- ----- ------- -----
Investment banking........................ 3,839 7.0 5,640 13.8 3,977 8.0
Interest income........................... 1,638 3.0 1,422 3.5 2,276 4.6
Other income.............................. 3,518 6.4 2,932 7.2 2,464 4.9
------- ----- ------- ----- ------- -----
TOTAL REVENUES............................ $54,868 100.0% $40,944 100.0% $49,846 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
2
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COMMISSIONS
Commission revenues are generated through securities transactions for
individual and institutional investors where the Company acts as an agent.
Commissions are received on exchange transactions, mutual funds, insurance
products, options and over-the-counter securities in which the Company does not
make a market.
PRINCIPAL TRANSACTIONS
The Company actively engages in trading as a principal in over-the-counter
equity and fixed income securities. When transactions are executed on a
principal basis, the Company, in lieu of commissions, marks up or marks down
securities and records the income as principal transaction revenues. The Company
buys, sells and maintains an inventory of a security in order to "make a market"
in that security, which tends to expose the Company to more risk than in agency
transactions. Revenues from principal transactions, including trading profits or
losses, depend upon the general trend of prices, the level of activity in the
security markets, the skills of employees engaged in market making and the size
of inventories. The Company makes a dealer market in approximately 175 equity
securities.
INVESTMENT ACCOUNT
The Company's investment account is invested in fixed income securities,
publicly traded equity securities and privately placed equity securities. Equity
securities are frequently held as a result of past investment banking activities
performed by the Company. In addition, the Company may utilize outside advisors
to manage a portion of the investment portfolio.
As part of the compensation for underwriting securities, John G. Kinnard may
receive warrants to purchase shares of its clients' common stock. These warrants
are initially carried at cost, but if the value of the underlying shares
appreciates, the warrants are valued by management consistent with historical
pricing procedures for illiquid securities. Warrants and other securities held
in the investment account are typically not immediately transferable and are
subject to holding period requirements.
The value of certain securities held in the investment account can fluctuate
significantly, with the resulting valuation changes being reported as net gains
or losses on the investment account.
INVESTMENT BANKING
The Equity Investment Banking department manages, co-manages and
participates in the underwriting of corporate equity securities, in addition to
providing merger, acquisition, valuation and advisory services. The Company
specializes in providing financing to emerging growth companies with market
capitalizations up to $250 million. During 1999, John G. Kinnard completed two
public offerings and four private placements. The mergers, acquisitions and
advisory group participated in 19 transactions in 1999.
Through the Syndicate department, the Company coordinates the distribution
of public and private underwritings and accepts invitations to participate in
competitive or negotiated underwritings managed by other investment banking
firms. In 1999, John G. Kinnard participated in 48 such offerings.
The Fixed Income investment banking department negotiates, underwrites and
participates in taxable and tax-exempt offerings for municipalities and
corporate clients. In 1999, over $220 million in capital was raised by
completing 69 financings. The Company also participated in 39 municipal
syndications.
INTEREST INCOME
The Company derives interest income primarily from customer margin loans,
fixed income securities inventories carried for resale to customers and fixed
income securities held in the investment account.
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Customer securities transactions are effected on either a cash or margin
basis. In a margin transaction, interest is charged to the customer on the
amount loaned to purchase securities. The loan is collateralized by securities
held in the customer's account.
RESEARCH DEPARTMENT
John G. Kinnard's Research Department develops investment recommendations
and market information on a wide range of growth companies, with an emphasis on
the technology, health care and medical device industries. The department
develops proprietary research on over 60 companies, which includes analysis of
financial statements, assessment of management, evaluation of products and
services and projections of estimated future financial results. The Company's
research efforts are supplemented by research services purchased from outside
research organizations.
OPERATIONS
John G. Kinnard has cleared its trades through Montgomery Clearing Services
("Montgomery") on a fully disclosed basis since June 1998. Under terms of their
agreement, Montgomery carries and clears all of John G. Kinnard's customer
securities accounts and performs the following services: (i) preparation and
mailing of monthly statements; (ii) settlement of contracts and transactions in
securities between John G. Kinnard and other broker-dealers and between John G.
Kinnard and its customers; (iii) custody and safekeeping of securities and cash,
the handling of margin accounts, dividends, exchanges, rights offerings and
tender offers; and (iv) execution of customer orders which were placed on
various exchanges. John G. Kinnard guarantees to Montgomery the performance of
every customer transaction introduced by John G. Kinnard. For eight years prior
to June 1998 JGK cleared through BT Alex. Brown pursuant to a similar agreement.
Customer transactions are recorded on a settlement date basis, which is
generally three business days after the trade date. The Company is exposed to
risk of loss on these transactions in the event of the customer's or broker's
inability to meet the terms of their contracts, in which case the Company may
have to purchase or sell financial instruments at prevailing market prices. The
customers' security activities are transacted on either a cash or margin basis.
The Company seeks to control the risks associated with customer margin
activities by requiring customers to maintain margin collateral in compliance
with various regulatory and internal guidelines. Required margin levels are
monitored daily and, pursuant to guidelines, customers may be required to
deposit additional collateral, or reduce margined positions, when necessary.
REGULATION
John G. Kinnard is registered with the Securities and Exchange Commission
("SEC") as a broker-dealer under the Securities Exchange Act of 1934, and also
as an investment adviser under the Investment Advisers Act of 1940. John G.
Kinnard is registered as a broker-dealer under the securities laws in all 50
states, and is a member of the National Association of Securities Dealers, Inc.
and Chicago Stock Exchange. Every aspect of the Company's business is subject to
comprehensive regulation and inspection by governmental and self-regulatory
authorities, all of which have the power of curtailment, suspension, revocation
or expulsion in the event of violations of their respective statutes or rules.
As a broker-dealer registered with the SEC, John G. Kinnard is subject to
prohibitions against certain types of dealings with non-members, bookkeeping
requirements, an annual audit by an independent public accountant, the filing of
periodic reports, protection of customer accounts and maintaining minimum net
capital, as defined. In addition, broker-dealers may be prohibited from
expanding their business or declaring cash dividends if the ratio of aggregate
indebtedness to net capital is greater than 10 to 1.
John G. Kinnard computes its net capital using the standard net capital
method, which requires that the ratio of aggregate indebtedness to net capital
not exceed 15 to 1. The Company has at all times maintained its net capital
above the required levels.
4
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COMPETITION
The Company encounters intense competition in all aspects of its business
and competes directly with other securities firms a significant number of which
have greater capital and other resources than the Company. Many competitors
offer a wider range of financial services than the Company. The securities
industry also faces growing competition from commercial banks, insurance
companies, firms that offer internet on-line trading and other businesses
providing financial services. The Company competes with other firms on the basis
of customer service, quality and ability of employees, the relative prices of
products and services, product availability and locations.
While the Company believes that it is competitively well positioned, it is
impossible to predict the effect of competing firms or lower prices which may be
offered by other financial institutions. In addition, there is substantial
competition among firms in the securities industry to attract and retain
qualified and successful investment executives.
EMPLOYEES
At December 31, 1999, the Company had 248 full-time employees. None of the
Company's employees are covered by a collective bargaining agreement. The
Company considers its relations with employees to be good and regards its
compensation and employee benefits, including medical, life and disability,
deferred savings and retirement plans, to be competitive with those offered by
other securities firms.
CAUTIONARY STATEMENTS
The Company wishes to caution investors that the following factors, among
others, could affect the Company's results of operations and cause such results
to differ materially from those anticipated in forward-looking statements made
in this document and elsewhere by or on behalf of the Company:
1. INDUSTRY FACTORS. The securities business is by its nature subject
to various risks, particularly in volatile or illiquid markets, including
the risk of loss resulting from the underwriting or ownership of securities,
customer or issuer fraud, employee errors and misconduct, failures in
connection with the processing of securities transactions and litigation. A
substantial part of John G. Kinnard's business involves securities of
emerging growth companies, a segment of the securities industry which may be
subject to greater risks and volatility than the industry as a whole. There
is also substantial competition among firms in the securities industry to
attract and retain qualified and successful investment executives.
2. REGULATION. The securities industry is subject to extensive
regulation, at both federal and state levels. As a matter of public policy,
various regulatory bodies are charged with safeguarding the integrity of the
securities markets and with protecting the interests of customers
participating in those markets, as opposed to the interests of the Company's
shareholders. The SEC, state securities agencies and self-regulatory
organizations such as the NASD require strict compliance with their
extensive rules and regulations. Failure to comply with such rules and
regulations could expose the Company to civil liabilities, fines and other
penalties and sanctions that could materially impair the Company's
operations.
The SEC has provisions with respect to net capital requirements
applicable to the operations of brokerage firms. A significant loss in any
year, changes in the net capital requirements by applicable regulatory
authorities, or an extraordinary charge against net capital could adversely
affect the ability of the Company to expand or maintain present levels of
business. Additional legislation or regulation, changes in existing laws and
rules, or changes in the interpretation or enforcement of existing law and
rules may directly affect the mode of operation and profitability of the
Company.
3. ECONOMIC AND MARKET CONDITIONS. The Company's business and its
profitability are affected by many factors, including the volatility and
price level of securities markets; the volume, size and
5
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timing of securities transactions; the demand for investment banking
services; the level and volatility of interest rates; the availability of
credit; legislation affecting the business and financial communities; and
the economy in general. Low trading volume and depressed prices may reduce
revenues, which would generally negatively impact profitability because a
portion of the Company's costs are fixed. The failure of issuers, customers
and other dealers to perform their obligations may also result in losses to
the Company.
As a market maker, John G. Kinnard maintains inventories of securities
to engage in principal transactions with retail and institutional customers
as well as other broker-dealers. The maintenance of such positions exposes
the Company to the possibility of significant losses if the market prices of
the securities comprising its inventory positions change.
4. INVESTMENT ACCOUNT. The Company maintains an investment account for
excess capital not currently required within the operating business units.
Investments include stocks, warrants and other securities or investments
that are restricted and non-marketable for varying periods of time. These
securities are recorded at their estimated fair value at the end of each
accounting period, with the resulting changes in value reported as net gains
or losses on investment account. Valuation of the investment account is
volatile, and changes may have a material effect on the Company's earnings.
5. INVESTMENT BANKING. John G. Kinnard's investment banking activities
subject the Company to certain risks, including market, credit and liquidity
risk, in the event that securities purchased in an underwriting cannot be
resold at anticipated price levels. Further, under applicable securities
laws and court decisions with respect to underwriters' liability and
limitations on indemnification by issuers, an underwriter may be exposed to
securities liabilities arising out of the public and private offering of
equity and debt instruments.
6. LITIGATION AND ARBITRATION. Many aspects of the Company's business
involve substantial risks of liability. In recent years, there has been an
increasing incidence of litigation and arbitration involving participants in
the securities industry. Claims by dissatisfied customers alleging fraud,
unauthorized trading, churning, mismanagement and breach of fiduciary duty
are periodically made against broker-dealers. Underwriters and agents are
subject to potential liability for material misstatements and omissions in
prospectuses and other communications with respect to offerings of
securities. A settlement or judgment related to these types of claims or
activities could have a material adverse effect on the Company.
ITEM 2. PROPERTIES
The Registrant's main office is located in the Kinnard Financial Center, 920
Second Avenue South, Minneapolis, Minnesota and is leased by John G. Kinnard.
John G. Kinnard has 12 branch offices located in Minnesota, North Dakota and
South Dakota, in addition to maintaining relationships with various independent
representatives. See Note 11 of the Notes to Consolidated Financial Statements
included herein for information concerning leases of the Company's branches and
offices. The Company believes these leased facilities are suitable and adequate
to support its business needs.
ITEM 3. LEGAL PROCEEDINGS
On December 10, 1999, the National Association of Securities Dealers
("NASD") issued a binding arbitration award for $16.6 million in favor of the
Company and against Dain Rauscher Corporation ("Dain") and several of its
investment executives who were wrongfully recruited by Dain from the Company
from 1997 to 1999. Dain has filed a motion with the Hennepin County District
Court in the State of Minnesota to vacate the award. See Note 2 of the Notes to
Consolidated Financial Statements included herein for additional information
concerning this award.
6
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John G. Kinnard is a defendant in various actions relating to its business,
some of which involve claims for unspecified amounts. Although the ultimate
resolution of these matters cannot be predicted with certainty, in management's
opinion, while their outcome may have a material effect on the earnings in a
particular period, the outcome will not have a material adverse effect on the
consolidated financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the Registrant's fiscal year no matter was
submitted to a vote of security holders through the solicitation of proxies or
otherwise.
EXECUTIVE OFFICERS OF THE REGISTRANT
There are no family relationships between or among any of the executive
officers of the Registrant. The term of office of each executive officer is from
one annual meeting of directors until the next annual meeting of directors or
until a successor for each is elected.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
The Registrant's common stock is traded in the over-the-counter market on
The Nasdaq Stock Market under the symbol "KINN". The following table sets forth
the high and low sale prices for the Registrant's common stock, as reported by
Nasdaq:
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C> <C>
1999 First Quarter.......................................... $6.75 $3.88
Second Quarter......................................... 5.50 3.88
Third Quarter.......................................... 4.50 3.63
Fourth Quarter......................................... 8.25 4.25
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
</TABLE>
NUMBER OF HOLDERS OF COMMON STOCK
As of March 3, 2000, there were 624 holders of record of the Registrant's
common stock and the Company estimates there are approximately 1,000 beneficial
holders of the Registrant's common stock.
DIVIDENDS
The Company does not currently pay a dividend. The payment of future
dividends, if any, rests within the discretion of the Board of Directors, and
will depend upon the Company's earnings, regulatory capital requirements and
financial condition, as well as other relevant factors. The Company is actively
engaged in a share repurchase program.
7
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ITEM 6. SELECTED FINANCIAL DATA
The table below sets forth summary historical data relating to the Company.
The information presented has been derived from the audited historical financial
statements of the Company.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Financial Condition:
Cash and cash equivalents.................... $ 8,018(1) $ 2,689 $ 3,886 $14,031 $ 5,766
Total assets................................. 40,427 36,364 43,972 47,141 45,897
Total liabilities............................ 11,463(2) 6,858 8,400 11,112 20,592
Shareholders' equity......................... 28,964 29,506 35,572 36,029 25,305
Operating Results:
Total revenues............................... 54,868 40,944 49,846 99,977 75,333
Total operating expenses..................... 50,355 46,573 49,310 80,311 69,647
Income (loss) before income taxes............ 4,513 (5,629) 536 19,666 5,686
Net income (loss)............................ 2,709 (3,376) 308 11,698 3,376
Per Share Data:
Earnings (loss)--Basic....................... 0.54 (0.58) 0.05 1.93 0.54
Earnings (loss)--Diluted..................... 0.53 (0.58) 0.05 1.92 0.54
Dividends declared........................... 0.00 0.00 0.00 0.00 0.00
Book value................................... 6.06 5.38 5.97 5.98 4.04
</TABLE>
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(1) Cash and cash equivalents increased in 1999 due to cash generated from the
exercise and sale of stock warrants in December 1999, discussed below in
Item 7--Results of Operations.
(2) Total liabilities increased in 1999 due to increases in accrued commissions
and incentives resulting from improved core operating results discussed
below in Item 7--Results of Operations.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth a summary of changes in the major categories
of revenues and expenses from the prior year's results:
<TABLE>
<CAPTION>
1999 VERSUS 1998 1998 VERSUS 1997
INCREASE (DECREASE) INCREASE (DECREASE)
---------------------- -------------------
YEARS ENDED DECEMBER 31, DOLLARS PERCENT DOLLARS PERCENT
- ------------------------ -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
Commissions.............................................. $1,961 13% $ (61) 0%
Principal transactions................................... 6,255 38 (9,476) (37)
Net gains/losses on investment account................... 6,707 N.M (642) (141)
Investment banking....................................... (1,801) (32) 1,663 42
Interest................................................. 216 15 (854) (38)
Other.................................................... 586 20 468 19
Total revenues........................................... 13,924 34 (8,902) (18)
Expenses:
Compensation and benefits................................ 3,268 10 (2,512) (7)
Floor brokerage and clearance............................ 518 15 (758) (18)
Communications........................................... (145) (16) 123 16
Occupancy and equipment.................................. (393) (7) 221 4
Other.................................................... 534 10 189 4
Total expenses........................................... 3,782 8 (2,737) (6)
Income (loss) before income taxes.......................... 10,142 N.M. (6,165) N.M.
Income tax expense (benefit)............................... 4,057 N.M. (2,481) N.M.
Net income (loss).......................................... $6,085 N.M. $(3,684) N.M.
</TABLE>
GENERAL
The Company is engaged in securities brokerage, trading, investment banking,
asset management and related financial services. Competition in these activities
is intense and sensitive to a variety of market factors, including trading
volumes, interest rates, inflation and regional economic changes, which may
result in fluctuating revenues. While revenues may be variable, a large portion
of the Company's expenses are fixed, which may result in earning that vary
significantly from period to period.
FISCAL YEARS ENDED DECEMBER 31, 1999 AND 1998
The Company earned net income of $2.7 million, or 53 cents per diluted
share, on revenues of $54.9 million for the twelve months ended December 31,
1999. This compares to a net loss of $3.4 million, or 58 cents per diluted
share, on revenues of $40.9 million for the same period in 1998. Improved
earnings were a result of substantial improvements in the core operating revenue
of all business lines and realized gains in the investment portfolio.
Commission revenues increased by $1.9 million, or 13% as a result of
industry-wide increases in transaction volumes. Revenues from principal
transactions increased by $6.3 million, or 38% driven by higher transaction
volumes and significantly higher trading profits as investor interest in small
capitalization companies in which the Company acts as a market maker increased
in the second half of 1999.
The net gain on securities held in the investment account of $6.5 million in
1999, compared to a net loss of $187,000 in 1998, included a $4.0 million gain
on the exercise and sale of stock warrants in December 1999. The investment
account has historically been a volatile source of income for the Company.
9
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Investment banking revenue decreased by $1.8 million, or 32% as the
Company's public equity offerings activity remained weak, and the industry
experienced a slowdown for public finance offerings in the fourth quarter of
1999. Revenues related to equity offerings decreased by $2.3 million, or 52% as
the Company completed two public equity offerings and four private financings,
which compares to three public offerings and two private placements in the prior
year. The mergers, acquisitions and advisory group participated in 19
transactions during 1999 compared to 15 transactions in the prior year. Revenues
related to fixed income offerings increased by $491,000, or 41% compared to
1998. The fixed income originations group raised $221 million in capital for its
municipal and corporate clients which compares to $186 million raised in 1998.
Interest income increased by $216,000, or 15% primarily as a result of
increases in customer margin balances and investments in fixed income
securities. Other income increased by $586,000, or 20% as a result of increased
fee revenue from managed accounts and cash management fees.
The expense for employee compensation and benefits increased by
$3.3 million or 10% from the prior year, due to increased commissions and
profitability incentives. A portion of this increase was offset by a reduction
in full-time employees predominately in overhead and support positions. Variable
compensation, including commissions and revenue and profit based incentive
compensation, increased $3.0 million over the prior year while fixed
compensation decreased by $463,000 compared to the prior year as a result of a
decrease in the number of full-time employees. The number of full-time employees
decreased from 297 at December 31, 1998 to 248 at December 31, 1999. The Company
also accrued for a $796,093 ESOP contribution as a result of the increased
profitability of the Company.
Floor brokerage and clearance expense increased by 15%, which is less than
the increase in associated transaction revenues. The Company continued to
benefit in 1999 from lower clearing fees as a result of converting its clearing
business to Banc of America Securities in June 1998.
The decrease in communications expense in 1999 of $145,000 or 16% reflects
the realization of cost savings from the 1998 implementation of enhanced and
expanded internal communication and information systems. Occupancy and equipment
expense decreased $393,000 or 7% due in part to office consolidations and lower
equipment rental expense. Other expense increased $534,000 or 10% from 1998.
Expense reductions in office supplies, errors and omissions insurance, postage
and travel and entertainment costs were offset by increases in professional
services expense during the year. The increase in professional services expense
was a result of $349,000 in attorney fees relating to the Dain arbitration
proceedings and $385,000 in a one-time charge relating to the termination of a
merger agreement in the third quarter.
FISCAL YEARS ENDED DECEMBER 31, 1998 AND 1997
For the year ended December 31, 1998, the Company incurred a net loss of
$3.4 million, or 58 cents per diluted share, on revenues of $40.9 million. This
compares to net earnings of $308,000, or five cents per diluted share, on
revenues of $49.8 million for the same period in 1997. Lower revenues were the
result of fewer retail transactions, a difficult equity trading environment, and
a slowdown of public equity offerings in the latter half of the year.
Commissions decreased by $61,000 in calendar 1998. Record sales of mutual
funds and options were offset by declines in listed equity securities and
insurance products.
Revenues from principal transactions decreased by $9.5 million, or 37%. The
Company experienced a difficult equity trading environment due in part to
volatile markets--particularly small-cap issues in which the Company focuses its
market making activities--and new trading rules and regulatory changes. The
Company responded by decreasing the number of stocks in which it makes a market
to under 200 from approximately 350 at December 31, 1997.
The net loss on securities held in the investment account was $187,000 in
1998, which compares to a net gain of $455,000 in 1997. The investment account
has historically been a volatile source of income for the Company.
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Investment banking revenue increased by $1.7 million or 42% from the prior
year. During 1998 the Company completed three public equity offerings and two
private financings, which compares to one public offering and nine private
placements in the prior year. Also during the current year, the mergers,
acquisitions and advisory group participated in 15 transactions. The fixed
income originations group had a record year, raising over $190 million in
capital for its municipal and corporate clients.
Interest income decreased by 38% primarily as a result of declines in fixed
income trading and investment securities, margin balances, and interest rates.
Other income increased by 19% due primarily to an increase in managed accounts
and cash management fees.
The expense for employee compensation and benefits decreased by
$2.5 million or 7% from the prior year. Variable compensation, such as
commissions paid to investment executives and incentive compensation, declined
as a result of lower revenues and profitability. Compensation and benefits were
also favorably impacted by a decline in the number of full-time employees to 297
at December 31, 1998 from 338 at year-end 1997.
Floor brokerage and clearance expense declined by 18%, which was greater
than the decline in associated transactions. The Company benefited from lower
clearing fees as a result of converting its clearing business to Banc of America
Securities in June 1998.
The increase in communications expense in 1998 reflects the cost of
enhancing and expanding the Company's internal communication and information
systems. Occupancy and equipment expense increased by 4% due in part to the
implementation of new technologies and services, some of which were associated
with the clearing conversion. Other expenses increased by 4% from the prior year
as a result of consulting fees associated with system conversions.
QUARTERLY RESULTS
Selected unaudited data reflecting the Company's results of operations for
each of the last eight quarters are shown in the following table. The
information for each of these quarters includes all normal and recurring
adjustments and accruals which the Company considers necessary for a fair
presentation. These operating results, however, are not necessarily indicative
of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1999
Revenues.......................................... $11,818 $12,806 $11,327 $18,917
Net income (loss)................................. 353 324 (368) 2,400
Basic earnings (loss) per share................... 0.07 0.06 (0.07) 0.50
Diluted earnings (loss) per share................. 0.07 0.06 (0.07) 0.49
1998
Revenues.......................................... $12,902 $ 9,910 $ 7,270 $10,862
Net income (loss)................................. 263 (1,343) (2,068) (228)
Basic earnings (loss) per share................... 0.04 (0.22) (0.36) (0.04)
Diluted earnings (loss) per share................. 0.04 (0.22) (0.36) (0.04)
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
A large portion of the Company's assets are cash and assets readily
convertible to cash. The portion of the Company's security investments and
inventory that are readily marketable are stated at quoted market values. The
less liquid portion of inventories and investments, which totaled $807,000 at
December 31,
11
<PAGE>
1999, are stated at fair value, which is determined by management's best
estimate consistent with historical pricing procedures for illiquid securities.
Inventories are generally maintained to facilitate customer transactions
rather than for market speculation. Investment securities decreased
$2.9 million in 1999 as the Company liquidated certain investment portfolio
securities, resulting in realized gains and a corresponding increase in cash.
Based on the Company's current liquidity position, available bank line, and
operating plans, it is anticipated that the Company has sufficient resources to
meet the cash requirements of its operations in the foreseeable future.
As a securities broker-dealer, John G. Kinnard is required by NASD
regulations to meet certain liquidity and capital standards. It has been in
compliance with these regulations at all times.
FINANCING ACTIVITIES
John G. Kinnard maintains a discretionary credit facility providing for
conditional short-term borrowings of up to $10 million. The facility limits the
borrowing to 90 days and is secured by the firm's marketable securities.
Advances under the facility are at the bank's sole discretion, accrue interest
at a fluctuating interest rate to be agreed upon by the Company and the bank,
and are subject to certain affirmative and negative covenants. There are no fees
or compensating balances related to the line of credit. There were no
outstanding borrowings at December 31, 1999 and 1998 nor during the years then
ended.
In 1999 and 1998 the Company received proceeds of $274,000 and $459,000,
respectively, from the issuance of common stock to participants in the Employee
Stock Purchase Plan and upon the exercise of options.
During the years 1999, 1998 and 1997 the Company repurchased 760,000,
566,000 and 465,000 shares of its common stock at a total cost of $3.6 million,
$3.1 million and $2.7 million, respectively. In November 1999, the board of
directors authorized the repurchase of an additional 1,000,000 shares in the
open market or through privately negotiated transactions, at the discretion of
the firm's management. Remaining shares authorized for repurchase at
December 31, 1999 are 1,231,491.
In April 1997, the Company entered into a Subscription and Purchase
Agreement with William F. Farley, whereby Mr. Farley purchased 325,000 Units of
securities of the Company for $1.7 million or $5.25 per Unit. Each Unit
consisted of one share of common stock of the Company and a warrant to purchase
an additional share at a price of $6.00 per share.
YEAR 2000 ISSUE
The Company invested $430,000, $1.5 million and $1.1 million in capital
equipment including software purchases in 1999, 1998 and 1997, respectively to
address the impact of the Year 2000 on the Company's computer systems. All of
the equipment modifications were completed prior to the century date change
Neither the Company nor any of its outside service providers experienced
significant disruptions as a result of the date change from December 31, 1999 to
January 1, 2000. Management will continue to monitor its mission critical
systems and those of its outside service providers for any Year 2000
issue-related problems. The Company anticipates incurring less than $5,000 in
costs associated with the ongoing monitoring of mission critical systems for
date change related issues.
EFFECTS OF INFLATION
Because the Company's assets are to a large extent liquid in nature, they
are not significantly affected by inflation. Increases in certain Company
expenses due to inflation, such as employee compensation, rent and
communications, may not be readily recoverable in the price of its services. In
addition, to the extent that inflation results in rising interest rates or has
other adverse effects on the securities markets, it may adversely affect the
Company's financial position and results of operations.
12
<PAGE>
SEGMENTS
The Company's reportable segments are: retail sales, equity capital markets,
fixed income and other. The retail segment consists of various retail branch
locations and the financial services division. Equity capital markets consists
of equity trading, institutional sales, research and investment banking. Fixed
income includes the origination, trading, and institutional sale of fixed income
securities. Other consists of general corporate, administrative support
functions and net gains or losses on the investment account. Information
concerning operations in these segments of business is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue:
Retail sales................................... $28,730 $24,737 $30,422
Equity capital markets......................... 11,720 8,660 10,192
Fixed income................................... 6,182 5,943 6,224
Other.......................................... 8,236 1,604 3,008
------- ------- -------
$54,868 $40,944 $49,846
======= ======= =======
Pretax income (loss):
Retail sales................................... $ 4,983 $ 2,501 $ 4,342
Equity capital markets......................... (1,148) (3,126) (509)
Fixed income................................... 840 1,132 1,166
Other.......................................... (162) (6,136) (4,463)
------- ------- -------
$ 4,513 ($5,629) $ 536
======= ======= =======
</TABLE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk exposure of the Company is the impact that market
and interest rate volatility may have on the value of financial securities and
underwriting commitments. The Company manages this risk exposure through a
process of internal controls, due diligence and management review. Position
limits for trading and inventory controls are established and monitored on an
ongoing basis. The trading inventory is turned over frequently throughout the
year. Decisions regarding securities to be held in the investment portfolio are
guided by an investment policy and are reviewed on a regular basis. Current and
proposed underwriting and other banking commitments are subject to due diligence
reviews by the appropriate business unit as well as by senior management. See
Note 14 in the Notes to Consolidated Financial Statements for additional
information.
The Company has evaluated its financial securities and underwriting
commitments at December 31, 1999 and assessed the related market risk. Based on
this evaluation, in the opinion of management, the market risk associated with
the Company's financial securities may have a material effect on the earnings in
a particular period, but will not have a material adverse effect on the
financial condition of the Company. See Note 4 in the Notes to Consolidated
Financial Statements for additional information.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Consolidated Financial Statements and Schedule" following
Part IV, Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
13
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
CURRENT POSITION(S) PRINCIPAL OCCUPATION(S) DIRECTOR
NOMINEE AND CLASS AGE WITH COMPANY DURING PAST FIVE YEARS SINCE
- ----------------- -------- --------------------------- --------------------------- -------------
<S> <C> <C> <C> <C>
William F. Farley
(Class III).............. 56 Chief Executive Officer, Chief Executive Officer and April 1997
Chairman and Director Chairman since May 1998,
Chief Executive Officer and
Chairman of John G. Kinnard
and Company, Incorporated
("JGK") since April 1997.
From April 1996 to April
1997, independent investor.
From March 1990 to April
1996, Vice Chairman of US
Bancorp (formerly First
Bank System).
George F. Stroebel......... 48 Secretary, Senior Vice Secretary of Kinnard N/A
President, Director of Investments, Inc. since
Corporate Development August 1998. Senior Vice
President of John G.
Kinnard since February
1998. Private Investor from
September 1997 to February
1998. Chief Executive
Officer of Origen Group, a
division of Phillips
Plastics Corporation from
June 1994 to August 1997.
Partner of Ernst & Young
from October 1987 to June
1994.
Robert S. Spong
(Class I)................ 65 Director Senior Vice President of May 1981
JGK since May 1992.
Investment Executive with
JGK since 1969.
Stephen H. Fischer
(Class I)................ 56 Director Chairman and Chief February 1991
Executive Officer, Fintegra
Financial Solutions, LLC, a
private financial products
and services company, since
November 1999. Independent
investor, business
consultant and investment
executive from February
1998 to November 1999.
Chief Executive Officer
(from March 1992 to
February 1998) and
President and Chief
Financial Officer (from
August 1986 to February
1993) of PRIMEVEST
Financial Services, Inc., a
subsidiary of ReliaStar
Financial Corporation.
Treasurer of PRIMEVEST from
February 1993 to November
1996.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
CURRENT POSITION(S) PRINCIPAL OCCUPATION(S) DIRECTOR
NOMINEE AND CLASS AGE WITH COMPANY DURING PAST FIVE YEARS SINCE
- ----------------- -------- --------------------------- --------------------------- -------------
<S> <C> <C> <C> <C>
Andrew J. O'Connell
(Class II)............... 45 Director Senior Vice President of July 1994
JGK since May 1992.
Investment Executive with
JGK since 1978.
John J. Fauth
(Class I)................ 54 Director President and Chief July 1997
Executive Officer of The
Churchill Companies, a
private investment company,
since 1982.
John H. Grunewald
(Class III).............. 63 Director Independent investor since January 1998
January 1997. From
September 1993 to January
1997, Chief Financial
Officer of Polaris
Industries Inc., a
manufacturer of
recreational vehicles. From
July 1976 to June 1993,
Chief Financial Officer of
Pentair, Inc., a
diversified industrial
manufacturer. Also, a
director of the following
public companies: Nash
Finch Company and Advantage
Learning Systems, Inc.
Ronald A. Erickson
(Class II)............... 63 Director President since 1970 of January 1998
Holiday Companies, a
private business entity
owning and operating
gasoline/ convenience
stores, supermarkets,
sporting goods stores and
wholesale food distribution
businesses. Also a director
of Carriage Services, Inc.
Robert D. Potts
(Class II)............... 57 Director Consultant and private May 1999
investor since January
1998. From April 1994 to
December 1997, Director,
President and Chief
Operating Officer, and from
October 1993 to April 1994
Executive Vice President of
GreenTree Financial
Corporation, a diversified
financial services company.
</TABLE>
15
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors, and persons who own more than ten percent of
the Company's Common Stock, to file with the Securities and Exchange Commission
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Officers, directors and greater than
ten percent shareholders ("Insiders") are required by SEC regulation to furnish
the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge, based on a review of the copies of such reports
furnished to the Company, during the fiscal year ended December 31, 1999, all
Section 16(a) filing requirements applicable to Insiders were complied with.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. The
Compensation Committee of the Board of Directors during fiscal 1999 was composed
of two outside directors, Ronald A. Erickson and John J. Fauth, and a third
director, Robert S. Spong. The Committee is responsible for developing and
making recommendations to the Board with respect to the compensation to be paid
to the Chief Executive Officer of the Company and to the other principal
executive officers of the Company and its operating subsidiary, JGK.
OVERVIEW AND PHILOSOPHY. The Company's executive compensation program is
comprised of base salaries, annual cash bonuses, long-term incentive
compensation in the form of stock options, and various benefits, including
participation in the Company's pension plan and employee stock ownership plan
("ESOP"), both of which are generally available to all employees of the Company
and have contribution formulas which are related to the Company's performance
and vesting schedules which reward long-term service to the Company.
The Company has followed a policy of paying annual base salaries which are
less than the industry's average as reported by the Securities Industry
Association and relying on annual cash bonuses and long-term incentive
compensation to retain executive officers. The Compensation Committee believes
long-term incentives enhance the concept of ownership which emphasize profits
and directly ties executive compensation to shareholder value. Annual cash
bonuses and long-term stock option incentives are tied to the profitability and
goals of the Company.
COMPENSATION. The Company has continued the compensation policies and
practices which have included moderate increases during profitable periods and
reductions during unprofitable periods. Base salaries of the Company's named
executive officers were unchanged in 1999.
Contributions to the Company's pension plan and ESOP are determined for
executive officers on the same basis as for all other employees. Annual
contributions to the pension plan are made at the rate of 5% of total
compensation paid during the year subject to IRS limitations. Contributions to
the ESOP are made at the discretion of the Company's Board of Directors. The
Board of Directors authorized a contribution of $796,903 to the ESOP for
calendar year 1999.
The Company provides medical and insurance benefits to its executive
officers which are generally available to all Company employees. Some executive
officers of the Company participate in the Company's employee stock purchase
plan which is also generally available to all employees and to which the Company
does not contribute. The amount of perquisites allowed to executive officers, as
determined in accordance with the rules of the Securities and Exchange
Commission, did not exceed 10% of salary for 1999.
CHIEF EXECUTIVE OFFICER COMPENSATION. In May 1998, William F. Farley was
named Chief Executive Officer and Chairman of Kinnard Investments, Inc., in
addition to his position as Chief Executive Officer
16
<PAGE>
and Chairman of JGK. Mr. Farley was paid a $250,000 base salary during 1999
pursuant to the terms of his employment contract dated April 7, 1997.
Mr. Farley also received a $150,000 bonus for 1999 based upon the Company's
performance.
Ronald A. Erickson
John J. Fauth
Robert S. Spong
MEMBERS OF THE COMPENSATION COMMITTEE
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
earned during each of the Company's last three fiscal years by each of the
Company's executive officers whose salary and bonus compensation exceeded
$100,000 for fiscal 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------- ------------
SECURITIES
UNDERLYING
FISCAL OPTIONS/SARS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($)(1) BONUS ($) (#) COMPENSATION ($)
- --------------------------- -------- ------------- --------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
William F. Farley, ................ 1999 259,615 150,000 0 33,000(2)
Chief Executive Officer and 1998 250,000 250,000 0 31,958(3)
Chairman 1997 185,577 280,000 165,000 0
Daniel R. Sass, ................... 1999 55,915 0 0 53,171(4)
Treasurer 1998 93,334 10,000 0 5,241(5)
1997 85,002 18,750 0 5,708(6)
George F. Stroebel, ............... 1999 186,923 150,000 0 4,846(7)
Secretary, Senior Vice President, 1998 148,846 0 25,000 0
Director of Corporate Development
</TABLE>
- ------------------------
(1) Includes commission income.
(2) Amount reflects Company contributions to the Pension Plan of $8,000 and a
benefits allowance of $25,000.
(3) Amount reflects Company contributions to the Pension Plan and ESOP of $6,250
and $708, respectively, as well as a benefits allowance of $25,000.
(4) Amount reflects Company contributions to the Pension Plan of $5,671 and a
payment of $47,500 in conjunction with Mr. Sass' departure on June 30, 1999.
(5) Amount reflects Company contributions to the Pension Plan and ESOP of $4,667
and $574, respectively.
(6) Amount reflects Company contributions to the Pension Plan and ESOP of $5,188
and $520, respectively.
(7) Amount reflects Company contributions to the Pension Plan of $4,846.
17
<PAGE>
OPTION/SAR GRANTS DURING 1999 AND POTENTIAL REALIZABLE VALUES
The following options were granted to the named executive officers during
fiscal 1999. The Company has not granted any stock appreciation rights.
OPTION GRANTS DURING 1999
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
--------------------------------------------- -------------------------
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES BASE PRICE EXPIRATION
NAME GRANTED (#) IN FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ---- ------------ ---------------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
William F. Farley.......... 0 -- -- -- -- --
George F. Stroebel......... 0 -- -- -- -- --
</TABLE>
OPTION EXERCISES AND VALUES FOR 1999
The following table provides information related to options exercised by the
named executive officers during the 1999 fiscal year and the number and value of
options held at fiscal year end.
AGGREGATED OPTION EXERCISES DURING 1999
AND OPTION VALUES ON DECEMBER 31, 1999
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS/SARS AT OPTIONS/SARS AT
ACQUIRED ON VALUE FY-END (#) FY-END ($)
EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE(1)
- ---- ----------- -------- ---------------- ----------------
<S> <C> <C> <C> <C>
William F. Farley..................... 0 N/A 99,000 / 66,000 142,313 / 94,875
George F. Stroebel.................... 0 N/A 5,000 / 20,000 6,875 / 27,500
</TABLE>
- ------------------------
(1) Based on the difference between the closing price of the Company's Common
Stock as reported by Nasdaq at fiscal year end and the option exercise
price.
DIRECTORS FEES
Under current compensation plans, the Company pays the directors who are not
employees of the Company or a subsidiary, for their services as directors of the
Company, the sum of $750 per month plus $500 per regular board meeting and $250
per special board and each committee meeting attended.
Under the Company's 1997 Stock Option Plan, each nonemployee director
receives, upon election or re-election to the Board by the shareholders, an
option to purchase 2,500 shares of the Company's Common Stock at a price equal
to the fair market value of the Company's Common Stock as defined in the Plan.
On May 20, 1999 the Company granted options to purchase 2,500 shares, at an
option price of $4.625 per share, to Messrs. Erickson, Fauth, Fischer, Grunewald
and Potts, who were re-elected as directors at the 1999 annual meeting of
shareholders.
EMPLOYMENT AGREEMENTS
(a) The Company has entered into an employment agreement with William F.
Farley pursuant to which he was elected President, Chief Executive Officer and
Chairman of the Board of Directors of JGK
18
<PAGE>
and Chief Operating Officer and a director of the Company. The Agreement will
expire December 31, 2000 subject to annual one-year extensions if notice of
termination is not given by either party six months prior to an expiration date.
Mr. Farley was paid base salary at a rate of $250,000 per annum in 1999 and
received a discretionary bonus of $150,000 for that period. In addition,
Mr. Farley will participate in all Company and JGK employee benefit plans and be
reimbursed for certain expenses.
Mr. Farley's agreement contains provision for payments to him in the event
of his termination of employment with the Company and JGK for certain reasons.
If he is terminated by the Company without "cause" or resigns for "good reason,"
as such terms are defined in the agreement, he will be paid his base salary,
bonus and benefits for the balance of the term of the agreement. In addition, he
will be paid his base salary and a bonus equal to two times his base salary, for
an additional 12 months. Further, Mr. Farley will become vested in all stock
options, benefits and perquisites to which he would have been entitled to
receive had he remained through the term of the agreement.
In the event of a "change of control" in the Company, as defined in the
employment agreement, vesting of Mr. Farley's stock options will accelerate and
he will be entitled to payment to cover all base salary, bonuses, benefits and
perquisites that he would receive if he were to remain employed for an
additional 36 months at his then current base salary, with his annual bonus
calculated at two times his current base salary. The payment will not be made
during any month following the change of control in which he continues in the
employment of the Company. If the change of control is not initiated by the
Company, payments to Mr. Farley will be grossed up to adjust for the impact of
any excise tax imposed on amounts exceeding limits under the Internal Revenue
Code.
Mr. Farley is subject to confidentiality restrictions under the terms of his
employment agreement and may not compete with the Company or its subsidiaries
for one year after his termination of employment.
(b) The Company has entered into an employment agreement with George F.
Stroebel pursuant to which he was elected Senior Vice President, Director of
Corporate Development of JGK. The agreement provides for employment at will.
Pursuant to such Agreement, Mr. Stroebel receives an annual salary of $180,000,
may receive an annual discretionary bonus, will participate in all Company and
JGK employee benefit plans, and was granted an option to purchase 25,000 shares
at an exercise price of $6.06 per share.
(c) The Company has entered into an employment agreement with Paul H.
Perseke pursuant to which he was elected Chief Financial Officer and Treasurer
of KII and Senior Vice President of Accounting and Chief Financial Officer of
JGK. The Agreement provides for employment at will. Pursuant to such Agreement,
Mr. Perseke receives an annual salary of $100,000, may receive an annual
discretionary bonus, will participate in all Company and JGK employee benefit
plans, and was granted an option to purchase 25,000 shares at an exercise price
of $4.25 per share.
19
<PAGE>
STOCK PERFORMANCE CHART
The following chart compares the yearly percentage change in the cumulative
total shareholder return on the Company's Common Stock during the five fiscal
years ended December 31, 1999 with the cumulative total return on the Nasdaq
Composite Index and the Nasdaq Financial Index. The comparisons reflected in the
graph are not intended to forecast the future performance of the Company's
Common Stock and may not be indicative of future performance. The comparison
assumes $100 was invested on December 31, 1994 in the Company's Common Stock and
in each of the foregoing indices and assumes reinvestment of dividends.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
KINNARD INVESTMENTS, INC. NASDAQ COMPOSITE INDEX NASDAQ FINANCIAL INDEX
<S> <C> <C> <C>
Dec-94 100 100 100
Jan-95 127.96 100.43 103.9
Feb-95 121.23 105.56 109.69
Mar-95 127.96 108.68 110.7
Apr-95 124.62 112.24 112.61
May-95 141.43 114.98 116.65
Jun-95 188.58 124.14 119.4
Jul-95 195.31 133.15 124.39
Aug-95 168.37 135.66 130.35
Sep-95 195.31 138.78 134.65
Oct-95 208.78 137.78 135.52
Nov-95 208.78 140.86 142.8
Dec-95 195.31 139.92 145.16
Jan-96 188.58 140.94 145.09
Feb-96 212.15 146.29 146.36
Mar-96 222.25 146.47 149.69
Apr-96 235.72 158.33 148.75
May-96 282.86 165.36 150.9
Jun-96 249.19 157.59 151.61
Jul-96 276.13 143.7 148.89
Aug-96 276.13 151.8 158.58
Sep-96 336.74 163.16 165.72
Oct-96 282.86 162.44 172.43
Nov-96 313.17 171.9 185.63
Dec-96 309.8 171.69 185.63
Jan-97 276.13 183.5 193.97
Feb-97 269.39 174.08 203.88
Mar-97 279.5 162.47 194.37
Apr-97 282.86 167.66 197.69
May-97 316.54 186.22 211.03
Jun-97 316.54 191.77 225.04
Jul-97 309.8 211.95 243.8
Aug-97 313.17 211.09 239.64
Sep-97 390.62 224.17 262.56
Oct-97 343.48 211.93 259.87
Nov-97 313.17 212.85 268.19
Dec-97 377.15 208.83 290.88
Jan-98 319.93 215.35 276.29
Feb-98 323.27 235.45 292.52
Mar-98 350.21 244.12 304.27
Apr-98 377.15 248.47 305.94
May-98 350.21 236.56 293
Jun-98 346.87 251.97 293.4
Jul-98 323.27 249 284.14
Aug-98 282.86 199.38 228.6
Sep-98 239.11 225.26 242.08
Oct-98 235.72 235.57 263.1
Nov-98 242.46 259.26 271.74
Dec-98 255.93 291.6 282.83
Jan-99 228.99 333.25 278.82
Feb-99 255.93 304.28 271.97
Mar-99 249.19 327.33 273.19
Apr-99 269.39 338.16 309.09
May-99 218.88 328.54 295.51
Jun-99 220.58 357.22 295.34
Jul-99 198.71 350.88 276.01
Aug-99 228.99 364.29 259.25
Sep-99 235.72 365.2 247.56
Oct-99 282.86 394.49 267.7
Nov-99 299.73 443.66 267.01
Dec-99 400.75 541.16 257.48
</TABLE>
20
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS
The following table provides information concerning persons known to the
Company to be the beneficial owners of more than 5% of the Company's outstanding
Common Stock as of March 17, 2000:
<TABLE>
<CAPTION>
SHARES PERCENT
NAME AND ADDRESS BENEFICIALLY OF
OF BENEFICIAL OWNER OWNED(1) CLASS(2)
- ------------------- ------------ --------
<S> <C> <C>
William F. Farley ...................................... 819,102(3) 15.7%
920 Second Avenue S.
Minneapolis, MN 55402
John G. Kinnard and .................................... 620,974(4) 12.8%
Company, Incorporated
Employee Stock
Ownership Plan and Trust
920 Second Ave. S.
Minneapolis, MN 55402
Dimensional Fund Advisors Inc. ......................... 314,400(5) 6.5%
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
Robert S. Spong ........................................ 302,294(6) 6.2%
920 Second Avenue S.
Minneapolis, MN 55402
Sheldon Fleck .......................................... 258,750(7) 5.3%
5720 Smetana Drive #300
Minnetonka, MN 55343
</TABLE>
- ------------------------
(1) Unless otherwise indicated, each person or entity named or included in the
group has sole power to vote and sole power to direct the disposition of all
shares listed as beneficially owned by such person or entity.
(2) Shares not outstanding but deemed beneficially owned by virtue of the
individual's right to acquire them as of April 1, 2000, or within 60 days of
such date are treated as outstanding only when determining the percent of
the class owned by such individual and when determining the percent owned by
the group.
(3) Includes 374,500 shares which may be purchased pursuant to options and
warrants which are exercisable as of April 1, 2000, or will become
exercisable within 60 days of such date, 78 shares allocated to his account
under the ESOP and 4,526 shares held for Mr. Farley in the Company's 401(k)
Profit Sharing account (over which Mr. Farley has dispositive power but not
voting power).
(4) Such shares are held in trust for the benefit of participants in the
John G. Kinnard and Company, Incorporated Employee Stock Ownership Plan and
Trust (the "ESOP"). The participants have voting power over shares held by
the ESOP which have been allocated to their accounts, and the Trustees vote
shares, if any, which have not been allocated to participants' accounts.
(5) Dimensional Fund Advisors Inc. ("Dimensional") is an investment advisor
registered under Section 203 of the Investment Advisors Act of 1940. In its
role as an investment advisor or manager, Dimensional possesses sole voting
power and sole dispositive power with respect to the 314,400 shares.
Dimensional has disclaimed all beneficial ownership of such shares. The
information set forth
21
<PAGE>
herein is based on a Schedule 13G dated February 4, 2000 filed by
Dimensional with the Securities and Exchange Commission.
(6) Includes 117,297 shares held by Mr. Spong's wife, 12,458 shares allocated to
his account under the ESOP and 72,486 shares held for Mr. Spong in the
Company's 401(k) Profit Sharing account (over which Mr. Spong has
dispositive power but not voting power).
(7) Mr. Fleck has sole voting power and sole dispositive power with respect to
the 258,750 shares owned by Mr. Fleck. Mr. Fleck may be deemed to be the
beneficial owner of such shares. The information set forth herein is based
on a Schedule 13G filed with the Securities and Exchange Commission on
May 19, 1999.
DIRECTOR AND MANAGEMENT SHAREHOLDINGS
The following table sets forth the number of shares of Common Stock
beneficially owned as of March 17, 2000, by each director and nominee for
director of the Company, by each executive officer of the Company named in the
Summary Compensation table, and by all directors and executive officers
(including the named individuals) as a group:
<TABLE>
<CAPTION>
SHARES PERCENT
NAME OF BENEFICIALLY OF
BENEFICIAL OWNER OWNED(1) CLASS(2)
- ---------------- ------------ --------
<S> <C> <C>
William F. Farley.................................... 819,102(3) 15.7%
Robert S. Spong...................................... 302,294(4) 6.2%
Andrew J. O'Connell.................................. 126,040(5) 2.6%
Stephen H. Fischer................................... 113,142(6) 2.3%
George F. Stroebel................................... 45,000(7) *
John J. Fauth........................................ 15,000(8) *
Ronald A. Erickson................................... 15,000(8) *
John H. Grunewald.................................... 12,000(8) *
Robert D. Potts...................................... 2,500(9) *
All Directors and Executive Officers as a Group
(10 persons)....................................... 1,460,078(10) 27.6%
</TABLE>
- ------------------------
* Less than one percent
(1) See footnote (1) to preceding table.
(2) See footnote (2) to preceding table.
(3) Includes 374,500 shares which may be purchased pursuant to options and
warrants which are exercisable as of April 1, 2000, or will become
exercisable within 60 days of such date, 78 shares allocated to his account
under the ESOP, and 4,526 shares held for Mr. Farley in the Company's
401(k) Profit Sharing account (over which Mr. Farley has dispositive power
but not voting power).
(4) Includes 117,297 shares held by Mr. Spong's wife, 12,458 shares allocated
to his account under the ESOP and 72,486 shares held for Mr. Spong in the
Company's 401(k) Profit Sharing account (over which Mr. Spong has
dispositive power but not voting power).
(5) Includes 20,500 shares which may be purchased pursuant to options which are
exercisable as of April 1, 2000, or will become exercisable within 60 days
of such date, 19,300 shares allocated to the ESOP account of
Mr. O'Connell, and 45,910 shares held for Mr. O'Connell in the Company's
401(k) Profit Sharing account (over which Mr. O'Connell has dispositive
power but not voting power).
(6) Includes 7,500 shares which may be purchased pursuant to options which are
exercisable as of April 1, 2000 or will become exercisable within 60 days
of such date.
22
<PAGE>
(7) Includes 10,000 shares which may be purchased pursuant to options which are
exercisable as of April 1, 2000 or will become exercisable within 60 days
of such date.
(8) Includes 5,000 shares which may be purchased pursuant to options which are
exercisable as of April 1, 2000 or will become exercisable within 60 days
of such date.
(9) Includes 2,500 shares which may be purchased pursuant to options which are
exercisable as of April 1, 2000 or will become exercisable with 60 days of
such date.
(10) Includes 430,000 shares which may be purchased pursuant to options and
warrants which are exercisable as of April 1, 2000, or will become
exercisable within 60 days of such date, 31,836 shares allocated to
accounts under the ESOP, and 122,920 shares held in the Company's 401(k)
Profit Sharing Plan (over which participants have dispositive power but
not voting power).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) In addition to Mr. Farley, Andrew J. O'Connell and Robert S. Spong,
directors of the Company, are employees of JGK. They earned in 1999 commissions,
bonuses and other compensation and benefits from JGK, on the same bases and
under the same policies as other employees, in the aggregate amounts of $967,216
and $198,951, respectively.
(b) Certain directors and officers of the Company (and members of the
immediate families of such persons) maintain margin accounts with JGK and have
margin account indebtedness outstanding from time to time. All such indebtedness
is incurred in the ordinary course of business and on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons and do not involve more than
normal risk of collectibility or present other unfavorable features.
(c) In October 1996, the Company entered into a Deferred Compensation
Agreement with Stephen H. Fischer in connection with the Company's sale of
PRIMEVEST Financial Services, Inc., which provided for the payment to
Mr. Fischer of the sum of $100,000 plus interest at a rate equal to Prime plus
one point on the earlier of (i) January 4, 1999, (ii) within 60 days after a
"change of control" as defined in such Agreement or (iii) Mr. Fischer's death.
Such amount was paid to Mr. Fischer in January 1999.
(d) In conjunction with Mr. Farley's employment agreement dated April 7,
1997, the Company loaned Mr. Farley $95,000 in exchange for a non-interest
bearing promissory note which is due at the termination of his employment.
(e) In conjunction with Mr. Stroebel's employment agreement dated
February 23, 1998, the Company loaned Mr. Stoebel an amount sufficient to
purchase 25,000 shares of the Company's common stock at market prices. The loan
accrues interest at the broker call rate, and interest and principal are due and
payable on the fifth anniversary of issuance. The principal balance of the note
at December 31, 1999 was $154,836.
(f) In conjunction with Mr. Perseke's employment agreement dated
September 7, 1999, the Company loaned Mr. Perseke an amount sufficient to
purchase 25,000 shares of the Company's common stock at market prices. The loan
accrues interest at the broker call rate, and interest and principal are due and
payable on the fifth anniversary of issuance. The principal balance of the note
at December 31, 1999 was $48,396.
23
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
DOCUMENTS FILED AS PART OF THIS REPORT:
(1) Consolidated Financial Statements. See next page.
(2) Exhibits. See "Exhibit Index" starting on the page following signatures.
REPORTS ON FORM 8-K:
The following reports on Form 8-K were filed during the fourth quarter of
1999:
- The Company filed a Current Report on Form 8-K dated December 8, 1999,
with respect to the information contained in a Press Release dated
December 8, 1999.
- The Company filed a Current Report on Form 8-K on December 10, 1999, with
respect to the information contained in a Press Release dated
December 10, 1999.
- The Company filed a Current Report on December 16, 1999, with respect to
the information contained in a Press Release dated December 16, 1999.
24
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
INDEPENDENT AUDITORS' REPORT................................ 26
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated statements of financial condition.............. 27
Consolidated statements of operations....................... 28
Consolidated statements of shareholders' equity............. 29
Consolidated statements of cash flows....................... 30
Notes to consolidated financial statements.................. 31
</TABLE>
25
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Kinnard Investments, Inc.:
We have audited the accompanying consolidated statements of financial
condition of Kinnard Investments, Inc. and subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated 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 Kinnard
Investments, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Minneapolis, Minnesota
February 17, 2000
26
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................. $ 8,018 $ 2,689
Receivable from clearing firm............................. 590 1,009
Miscellaneous receivables................................. 2,899 3,527
Trading securities, at market............................. 12,976 8,221
Office equipment at cost, less accumulated depreciation of
$3,594 and $2,540, respectively......................... 1,247 1,888
Investment securities, at fair value...................... 13,992 16,918
Income tax receivable..................................... 0 1,456
Deferred income taxes..................................... 354 242
Other assets.............................................. 351 414
------- -------
Total assets................................................ $40,427 $36,364
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Securities sold but not yet purchased, at market.......... 844 257
Accrued compensation...................................... 6,233 3,770
Other accounts payable and accrued expenses............... 3,158 2,831
Income taxes payable...................................... 1,228 0
------- -------
Total liabilities........................................... 11,463 6,858
------- -------
Shareholders' equity
Common stock, $.02 par value; authorized 7,500 shares;
issued and outstanding 4,782 and 5,483 shares,
respectively............................................ 96 110
Additional paid-in capital................................ 6,028 9,265
Retained earnings......................................... 22,840 20,131
------- -------
Total shareholders' equity.................................. 28,964 29,506
------- -------
Total liabilities and shareholders' equity.................. $40,427 $36,364
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
27
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Commissions............................................... $16,645 $14,684 $14,745
Principal transactions.................................... 22,708 16,453 25,929
Net gains/losses on investment account.................... 6,520 (187) 455
Investment banking........................................ 3,839 5,640 3,977
Interest.................................................. 1,638 1,422 2,276
Other..................................................... 3,518 2,932 2,464
------- ------- -------
Total revenues.............................................. 54,868 40,944 49,846
------- ------- -------
Expenses:
Compensation and benefits................................. 34,628 31,360 33,872
Floor brokerage and clearance............................. 3,931 3,413 4,171
Communications............................................ 765 910 787
Occupancy and equipment................................... 5,161 5,554 5,333
Other..................................................... 5,870 5,336 5,147
------- ------- -------
Total expenses.............................................. 50,355 46,573 49,310
------- ------- -------
Income (loss) before income taxes........................... 4,513 (5,629) 536
Income tax expense (benefit)................................ 1,804 (2,253) 228
------- ------- -------
Net income (loss)........................................... $ 2,709 $(3,376) $ 308
======= ======= =======
Earnings (loss) per common share:
Basic..................................................... $ 0.54 $ (0.58) $ 0.05
Diluted................................................... $ 0.53 $ (0.58) $ 0.05
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
28
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
-------- -------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996.................... 6,027 120 12,710 23,199 36,029
----- ---- ------- ------- -------
Issuance of shares under employee stock option
plan........................................ 68 1 230 231
Issuance of new shares........................ 325 7 1,700 1,707
Repurchase of stock........................... (465) (9) (2,694) (2,703)
Net income.................................... 308 308
----- ---- ------- ------- -------
Balance, December 31, 1997.................... 5,955 119 11,946 23,507 35,572
----- ---- ------- ------- -------
Issuance of shares under employee stock
purchase plan............................... 13 0 78 78
Issuance of shares under employee stock option
plan........................................ 81 2 379 381
Repurchase of stock........................... (566) (11) (3,138) (3,149)
Net loss...................................... (3,376) (3,376)
----- ---- ------- ------- -------
Balance, December 31, 1998.................... 5,483 $110 $ 9,265 $20,131 $29,506
----- ---- ------- ------- -------
Issuance of shares under employee stock option
plan........................................ 59 1 273 274
Repurchase of stock........................... (760) (15) (3,604) (3,619)
Tax benefit from stock options exercised...... 94 94
Net income.................................... 2,709 2,709
----- ---- ------- ------- -------
Balance, December 31, 1999.................... 4,782 $ 96 $ 6,028 $22,840 $28,964
===== ==== ======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
29
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers and clearing firm............ $ 42,960 $ 40,553 $ 45,103
Cash paid to suppliers and employees...................... (45,819) (46,550) (49,473)
Interest:
Received................................................ 1,638 1,422 2,276
Paid.................................................... 0 0 0
Income taxes (paid) refunded.............................. 862 317 (3,349)
-------- -------- --------
Net cash used in operating activities..................... (359) (4,258) (5,443)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of:
Office equipment........................................ 0 63 5
Investment securities................................... 18,220 16,285 16,511
Purchases of:
Office equipment........................................ (413) (1,505) (1,074)
Investment securities................................... (8,774) (10,685) (17,866)
Funds released from escrow................................ 0 1,593 0
-------- -------- --------
Net cash provided by (used in) investing activities....... 9,033 5,751 (2,424)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock.................................. 274 459 1,938
Repurchase of common stock................................ (3,619) (3,149) (2,703)
-------- -------- --------
Net cash used in financing activities..................... (3,345) (2,690) (765)
-------- -------- --------
Increase (decrease) in cash and cash equivalents............ 5,329 (1,197) (8,632)
Cash and cash equivalents at beginning of year.............. 2,689 3,886 12,518
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 8,018 $ 2,689 $ 3,886
======== ======== ========
RECONCILIATION OF NET INCOME (LOSS) TO
NET CASH USED IN OPERATING ACTIVITIES:
Net income (loss)......................................... $ 2,709 $ (3,376) $ 308
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization........................... 1,054 821 766
Net unrealized loss (gain) on investment securities..... (1,344) 626 (222)
Net realized gain on sale of investment securities...... (5,176) (439) (233)
Realized loss (gain) on sale of office equipment........ 0 0 21
Deferred income taxes................................... (322) (462) 89
(Increase) decrease in:
Receivable from clearing firm......................... 419 (1,009) 968
Miscellaneous receivables............................. 628 (216) (1,211)
Trading securities, at market......................... (4,755) 2,509 (3,072)
Income tax receivable................................. 1,456 (1,456) 0
Other assets.......................................... 63 66 (56)
Increase (decrease) in:
Due to clearing firm.................................. 0 (1,069) 1,069
Securities sold but not yet purchased, at market...... 587 (658) 73
Accrued compensation.................................. 2,463 176 (306)
Other accounts payable and accrued expenses........... 327 247 (427)
Income taxes payable.................................. 1,532 (18) (3,210)
-------- -------- --------
Net cash used in operating activities....................... $ (359) $ (4,258) $ (5,443)
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
30
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Kinnard Investments, Inc. (the "Registrant" or "KII") is a holding company
that has been providing financial products and services for over 50 years. The
primary subsidiary, John G. Kinnard and Company, Incorporated ("John G. Kinnard"
or "JGK"), is a regional broker-dealer headquartered in Minneapolis, Minnesota.
The Registrant and John G. Kinnard are hereinafter collectively referred to as
the "Company".
John G. Kinnard is a full-service broker-dealer engaged in securities
brokerage, trading, investment banking, asset management and related financial
services to both retail and institutional customers. Its principal business is
trading, underwriting, research and sale of securities of emerging growth
companies with market capitalizations up to $250 million. The Company also
negotiates, underwrites and participates in fixed income debt offerings. Other
products and services include mutual funds, insurance products, investment
management, IRA services and fixed income securities.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Kinnard
Investments, Inc. and its wholly owned subsidiaries. All intercompany accounts
and transactions have been eliminated in consolidation. The Company does not
present a statement of comprehensive income as there are no items. The Company
does not provide balance sheet data for segment reporting as this data is not
measured.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
SECURITIES TRANSACTIONS
Securities transactions and the related revenues and expenses are recorded
on a settlement date basis, which is not materially different than if such
transactions were recorded on trade date. Trading securities, securities sold
but not yet purchased and investment securities that are readily marketable are
stated at quoted market values. Trading and investment securities not readily
marketable are carried at fair value as determined by management. Unrealized
gains and losses are included in earnings.
MISCELLANEOUS RECEIVABLES
Included in miscellaneous receivables are forgivable loans made to
investment executives and other revenue-producing employees, typically in
connection with their recruitment. Such loans are forgivable based on continued
employment and are amortized over the term of the loan, which is generally three
to five years, using the straight-line method.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes".
Under this method, deferred tax liabilities and assets and the resultant
provision for income taxes are determined based on the difference between
31
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the financial statement and tax bases of assets and liabilities using enacted
tax rates in effect for the year in which the differences are expected to
reverse.
OFFICE EQUIPMENT
The cost of office equipment is depreciated using accelerated methods over
the estimated useful lives of two to seven years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of the Company's financial assets and liabilities are
carried at market value or at amounts which, because of their short-term nature,
approximate current fair value.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities
and disclosure of contingent liabilities at the balance sheet date, and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
EMPLOYEE STOCK COMPENSATION
The Company has elected to continue following the guidance of Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees", for measurement and recognition of stock-based transactions with
employees. The Company has adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". See Note 10 to the Consolidated
Financial Statements for additional information.
EARNINGS PER SHARE
Basic earnings per share are based upon the weighted average number of
common shares outstanding during the reporting period. Diluted earnings per
share take into account the dilutive effect, if any, of stock options and other
potential dilutive common shares outstanding during the period.
32
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following reconciliation illustrates the computation of basic and
diluted earnings per share:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Net income (loss).................................. $2,709 ($3,376) $ 308
====== ======= ======
Weighted average number of common shares
outstanding...................................... 5,050 5,825 6,149
Dilutive effect of stock options and warrants...... 22 0 82
------ ------- ------
Weighted average number of common and potential
dilutive common shares outstanding:.............. 5,072 5,825 6,231
====== ======= ======
Basic earnings (loss) per share.................... $ 0.54 ($ 0.58) $ 0.05
Diluted earnings (loss) per share.................. $ 0.53 ($ 0.58) 0.05
====== ======= ======
</TABLE>
Non-dilutive options as of December 31, 1999, 1998 and 1997 totaled 574,000,
537,000 and 447,000, respectively.
NOTE 2. BINDING ARBITRATION AWARD
On December 10, 1999, the National Association of Securities Dealers
("NASD") issued a binding arbitration award for $16.6 million in favor of the
Company and against Dain Rauscher Corporation ("Dain") and several of its
investment executives who were wrongfully recruited by Dain from the Company
from 1997 to 1999.
NASD arbitration awards are not subject to appeal. While Dain has filed a
motion with the Hennepin County District Court (the "Court") to vacate the
arbitration panel's decision, the Company believes that vacatur is unlikely due
to the narrow grounds upon which a binding arbitration award may be vacated.
Under both Federal and Minnesota Arbitration Acts, the Court must find evidence
of fraud, corruption, misconduct or partiality on the part of the arbitration
panel, or that the panel exceeded its powers in rendering its award decision.
The award included compensatory damages of $9.1 million, punitive damages of
$7.1 million and reimbursement of legal costs of $350 thousand. Upon exhaustion
of all vacatur efforts, the Company anticipates recognizing up to $16.6 million
in revenue. Recognition of such revenue may result in additional compensation
and income tax expense. The additional compensation expense would result from an
incremental ESOP contribution and additional incentive compensation, both based
on pre-tax income.
The following unaudited pro forma information has been prepared assuming
that the binding arbitration settlement had been recognized during the period
presented after the impact of certain adjustments to revenue, employee
compensation based on current formulas and the related income tax effects
thereof.
33
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. BINDING ARBITRATION AWARD (CONTINUED)
PRO FORMA STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1999
-----------------
(IN THOUSANDS,
EXCEPT PER
SHARE DATA)
(UNAUDITED)
<S> <C>
Revenues.................................................... $71,085
Expenses.................................................... $53,491
-------
Income before income taxes.................................. 17,594
Income tax expense.......................................... 7,037
-------
Net income.................................................. $10,557
=======
Earnings per common share:
Basic..................................................... $ 2.09
Diluted................................................... $ 2.08
Book value per common share:................................ $ 7.70
=======
</TABLE>
NOTE 3. OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Included in other accounts payable and accrued expenses are vendor accounts
payable, accrual for contingencies, sales incentive program accruals and
miscellaneous payables.
NOTE 4. SECURITIES
Trading securities are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Trading securities:
Corporate stocks......................................... $ 1,837 $2,298
U.S. government and municipal bonds...................... 10,226 3,702
Corporate debt securities................................ 913 2,221
------- ------
$12,976 $8,221
======= ======
Securities sold but not yet purchased:
Corporate stocks......................................... $ 433 $ 252
Corporate debt securities................................ 411 5
------- ------
$ 844 $ 257
======= ======
</TABLE>
Revenues from principal transactions are generated by market making
activities in both equity and fixed income products. Revenues from equity
principal transactions were $17.2 million, $10.9 million and $18.8 million for
the years ended December 31, 1999, 1998 and 1997. Revenues from fixed income
principal transactions were $5.5 million, $5.5 million and $7.1 million for the
years ended December 31, 1999, 1998 and 1997.
34
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. SECURITIES (CONTINUED)
Investment securities are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Investment securities:
Corporate stocks........................................ $ 3,166 $ 4,590
U.S. government bonds................................... 7,065 5,557
Outside money managers.................................. 3,761 6,771
------- -------
$13,992 $16,918
======= =======
</TABLE>
NOTE 5. NOTES PAYABLE
JGK maintains a discretionary credit facility providing for conditional
short-term borrowing of up to $10 million. The facility limits borrowing to
90 days and is secured by the firm's marketable securities. Advances under the
facility are at the bank's sole discretion, accrue interest at a fluctuating
interest rate to be agreed upon by JGK and the bank, and are subject to certain
affirmative and negative covenants. There are no fees or compensating balances
related to this line of credit. There were no outstanding borrowings at
December 31, 1999 and 1998 nor for the years then ended.
NOTE 6. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
Employees are eligible to participate in the Employee Stock Ownership Plan
and Trust (ESOP) upon completing one year of service. Contributions to the ESOP
are made at the discretion of the Company and can be made in cash or other
property, as the Trustees of the ESOP consider appropriate. These contributions
are used primarily to purchase stock of the Company. A participant is generally
fully vested after five years of service. During the years ended December 31,
1999, 1998 and 1997, the Company contributed $796,093, $0 and $0, respectively,
to the ESOP.
PENSION AND PROFIT SHARING PLANS
The Company has defined contribution pension and profit sharing plans
covering substantially all employees who have completed at least one full year
of continuous service. The Company contributes to the pension plan, on behalf of
each eligible employee, an amount equal to five percent of their annual
qualified compensation. This contribution is reflected as an operating expense
and amounted to $854,000, $781,000 and $1.0 million for the years ended
December 31, 1998, 1997 and 1996, respectively.
There were no contributions to the Profit Sharing Plan for the years ended
December 31, 1999, 1998 and 1997. The Company does not intend to make any
further contributions to the Profit Sharing Plan so long as the ESOP is in
effect.
35
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. INCOME TAXES
Income tax expense (benefit) is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................ $2,533 $(1,433) $ 97
State.............................................. (407) (358) 42
Deferred............................................. (322) (462) 89
------ ------- ----
$1,804 $(2,253) $228
====== ======= ====
</TABLE>
The provision for income taxes for the years ended December 31, 1999, 1998
and 1997, differs from the amount obtained by applying the U.S. federal income
tax rate of 34% to pretax income due to the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Ordinary federal income tax expense (benefit)........ $1,534 $(1,914) $182
State income taxes, net of federal tax benefit....... 0 (339) 46
Other................................................ 270 0 0
------ ------- ----
$1,804 $(2,253) $228
====== ======= ====
</TABLE>
The tax effects of temporary differences that give rise to the Company's
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Accruals not currently deductible......................... $ 680 $627
Receivables............................................... 219 216
Other..................................................... 386 137
----- ----
1,285 980
===== ====
Deferred tax liabilities:
Unrealized appreciation of investment securities.......... 868 658
Other..................................................... 63 80
----- ----
931 738
----- ----
Net deferred tax asset...................................... $ 354 $242
===== ====
</TABLE>
The Company has determined that there is no need to establish a valuation
allowance for the deferred tax asset. That determination is based on the
assumption that it is more likely than not that the deferred
36
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. INCOME TAXES (CONTINUED)
tax asset will be realized principally through future reversals of existing
taxable temporary differences and future taxable income.
NOTE 8. NET CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS
The Company is subject to the Securities and Exchange Commission (SEC)
Rule 15c3-1, NET CAPITAL REQUIREMENTS FOR BROKERS AND DEALERS, which required
the Company to maintain minimum net capital of $799,000 as of December 31, 1999.
Also, under this rule, the ratio of aggregate indebtedness to net capital may
not exceed 15 to 1, and the Company may be prohibited from expanding its
business or paying cash dividends if its ratio of aggregate indebtedness to net
capital is greater than 10 to 1. At December 31, 1999, the Company had net
capital of $8.0 million, and a ratio of aggregate indebtedness to net capital of
1.5 to 1.
The Company is exempt from the provisions of SEC Rule 15c3-3, CUSTOMER
PROTECTION: RESERVES AND CUSTODY OF SECURITIES, as the Company's clearing firm
is responsible for complying with these provisions. Accordingly, the Computation
for Determination of Reserve Requirements and Information Relating to the
Possession or Control Requirements is not required for the Company.
NOTE 9. EQUITY
The Company's 16.5 million shares of authorized undesignated stock may be
designated by the Board of Directors as either preferred stock or common stock.
During the years 1999, 1998 and 1997 the Company repurchased 760,000,
566,000 and 465,000 shares of its common stock at a total cost of $3.6 million,
$3.1 million and $2.7 million, respectively. In October 1998, the board of
directors authorized the repurchase of 1,000,000 shares in the open market or
through privately negotiated transactions, at the discretion of the firm's
management. In November 1999, the board of directors authorized the repurchase
of an additional 1,000,000. Remaining shares authorized for repurchase at
December 31, 1999 are 1,231,491.
In April 1997, the Company entered into a Subscription and Purchase
Agreement with William F. Farley, whereby Mr. Farley purchased 325,000 Units of
securities of the Company for $1.7 million or $5.25 per Unit. Each Unit
consisted of one share of common stock of the Company and a warrant to purchase
an additional share at a price of $6.00 per share.
The Company has an Employee Stock Purchase Plan ("ESPP") under which
1,050,000 shares are authorized for issuance. The ESPP allows employees to set
aside up to 15% of earnings to purchase shares of the Company's common stock.
Shares are issued semi-annually at a price equal to 85% of a defined market
price, but not less than book value at the end of the period. Reserved but
unissued shares under the Plan were 689,538 at December 31, 1999.
NOTE 10. STOCK OPTION PLANS
Under the Company's 1990 and 1997 Stock Option Plans, a total of 620,000 and
1 million shares, respectively, have been reserved for options to employees and
Directors of the Company. At December 31, 1999 authorized but unissued shares
were 161,857 for the 1990 Stock Option Plan and 463,500 for the 1997 Stock
Option Plan. Under terms of the plan, options are generally granted at the
current market price, but
37
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. STOCK OPTION PLANS (CONTINUED)
not less than the book value per share. The options may be exercised over the
period prescribed at the time of the grant, not to exceed ten years.
The options, in general, vest evenly over five years. Stock option
transactions are summarized below:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding at December 31, 1996...................... 368,200 $4.40
Granted............................................... 488,000 5.98
Exercised............................................. (67,693) 4.01
Forfeited or expired.................................. (131,557) 5.39
-------- -----
Outstanding at December 31, 1997...................... 656,950 5.37
Granted............................................... 250,000 5.97
Exercised............................................. (81,250) 4.69
Forfeited or expired.................................. (95,000) 5.74
-------- -----
Outstanding at December 31, 1998...................... 730,700 5.62
Granted............................................... 159,500 4.70
Exercised............................................. (58,950) 3.74
Forfeited or expired.................................. (143,000) 4.98
-------- -----
Outstanding at December 31, 1999...................... 688,250 $5.52
======== =====
Exercisable at:
December 31, 1997................................... 416,450 5.07
December 31, 1998................................... 373,700 5.37
December 31, 1999................................... 477,500 5.62
======== =====
</TABLE>
The following table summarizes information for stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
RANGE OF NUMBER AVERAGE AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------------- ----------- ------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
3.5$8 to $4.04.... 66,750 1.08 $4.00 0 N/A
4.2$5 to $5.88.... 234,500 6.71 4.91 200,000 $4.91
5.9$8 to $5.98.... 119,500 1.22 5.98 20,000 5.98
6.0$0 to $6.88.... 267,500 6.51 6.18 257,500 6.15
------- ---- ----- ------- -----
3.5$8 to $6.88.... 688,250 6.25 5.50 477,500 $5.62
======= ==== ===== ======= =====
</TABLE>
No compensation expense has been recognized for its stock option and stock
purchase plans because the exercise price of all options granted under the stock
option plan and price of shares issued under the stock purchase plan were not
deemed to be less than fair value.
38
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. STOCK OPTION PLANS (CONTINUED)
Had compensation cost for these equity instruments been determined based on
the fair value at the grant dates, the Company's net income (loss) and earnings
(loss) per share for the years ended December 31, 1999, 1998 and 1997 would have
been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Net income (loss):
As reported...................................... $2,709 ($3,376) $308
Pro forma........................................ $2,357 ($3,514) ( $145)
Basic earnings (loss) per share:
As reported...................................... $ 0.54 ($ 0.58) $0.05
Pro forma........................................ $ 0.47 ($ 0.60) ($0.02)
Diluted earnings (loss) per share:
As reported...................................... $ 0.53 ($ 0.58) $0.05
Pro forma........................................ $ 0.46 ($ 0.60) ($0.02)
====== ======= ======
</TABLE>
Using the Black-Scholes option pricing model, the estimated weighted average
fair value of options granted during 1999, 1998 and 1997 was $5.25, $2.71 and
$2.04 per share. The assumptions used in the computations for 1999, 1998 and
1997 are as follows: risk-free interest rate of 6.2%, 5.6% and 6.3%; expected
dividend yield of 0% in all three years; expected life of six, four and five
years; and expected volatility of 61%, 42% and 43%. Pro forma compensation cost
of shares issued under the Employee Stock Purchase Plan is measured based on the
discount from market value. At December 31, 1999, the closing price of the
Company's common stock was $7.44 per share.
NOTE 11. COMMITMENTS
The Company and its subsidiaries lease office space and equipment under
various operating leases with remaining terms ranging up to eight years. Certain
of these leases have escalation clauses and renewal options. Minimum rentals
required under these non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
2000........................................................ $ 758
2001........................................................ 728
2002........................................................ 709
2003........................................................ 620
2004........................................................ 322
Thereafter.................................................. 398
------
$3,535
======
</TABLE>
Rent expense was $2.8 million, $3.2 million and $2.9 million for the years
ended December 31, 1999, 1998 and 1997, respectively.
In the normal course of business, the Company enters into underwriting and
other commitments. The ultimate settlement of such transactions open at year-end
is not expected to have a material effect on the consolidated financial
statements.
39
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. LEGAL PROCEEDINGS
The Company is a defendant in various other actions relating to its
business, some of which involve claims for unspecified amounts. Although the
ultimate resolution of these matters cannot be predicted with certainty, in
management's opinion, while their outcome may have a material effect on the
earnings in a particular period, the outcome will not have a material adverse
effect on the financial condition of the Company.
NOTE 13. SEGMENTS
The Company's reportable segments are: retail sales, equity capital markets,
fixed income and other. The retail segment consists of various retail branch
locations and the financial services division. Equity capital markets consists
of equity trading, institutional sales, research and investment banking. Fixed
income includes the origination, trading, and institutional sales of fixed
income securities. Other consists of general corporate, administrative support
functions and net gains or losses on the investment account. The Company does
not provide balance sheet data for segment reporting as this data is not
measured.
Information concerning operations in these segments of business is as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue:
Retail sales................................... $28,760 $24,737 $30,422
Equity capital markets......................... 11,720 8,660 10,192
Fixed income................................... 6,182 5,943 6,224
Other.......................................... 8,206 1,604 3,008
------- ------- -------
$54,868 $40,944 $49,846
======= ======= =======
Pretax income (loss):
Retail sales................................... $ 4,983 $ 2,501 $ 4,342
Equity capital markets......................... (1,148) (3,126) (509)
Fixed income................................... 840 1,132 1,166
Other.......................................... (162) (6,136) (4,463)
------- ------- -------
$ 4,513 ($5,629) $ 536
======= ======= =======
</TABLE>
NOTE 14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company sells securities that are not yet purchased (short sales) for
its own account. The establishment of short positions exposes the Company to
off-balance-sheet market risk in the event prices increase, as the Company may
be obligated to acquire the securities at prevailing market prices. Due to
market fluctuations, the amount necessary to acquire and deliver securities sold
but not yet purchased may be greater than the obligation already recorded in the
consolidated financial statements.
In connection with its trading securities, the Company does not, nor does it
have plans to, utilize interest rate swaps, foreign currency contracts, futures,
forward contracts, or other derivatives.
In the normal course of business, the Company's activities involve the
execution, settlement and financing of various securities transactions. These
activities may expose the Company to off-balance-sheet
40
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (CONTINUED)
risk in the event the customer or counterparty is unable to fulfill its
contractual obligations. Such risks may be increased by volatile trading
markets.
The Company clears all transactions for its customers on a fully disclosed
basis with a clearing firm that carries all customer accounts and maintains
related records. However, the Company is liable to the clearing firm for the
transactions of its customers. These activities may expose the Company to
off-balance-sheet risk in the event a customer or counterparty is unable to
fulfill its contractual obligations. The Company maintains all of its trading
securities at the clearing firm. These trading securities may collateralize
amounts due to the clearing firm.
The Company is also exposed to the risk of loss on customer transactions in
the event of the customer's or counterparty's inability to meet the terms of
their contracts, in which case the Company may have to purchase or sell
financial instruments at prevailing market prices. The impact of unsettled
transactions is not expected to have a material effect upon the Company's
consolidated financial statements.
The Company's customer securities activities are transacted on either a cash
or margin basis. The Company seeks to control the risks associated with its
customer margin activities by requiring customers to maintain margin collateral
in compliance with regulatory and internal guidelines. The Company monitors
required margin levels daily, and pursuant to such guidelines, requires that
customers deposit additional collateral, or reduce margin positions, when
necessary.
As a broker dealer, JGK is engaged in various securities trading and
brokerage activities serving a diverse group of corporations, governments,
institutions and individual investors. JGK's exposure to credit risk associated
with the nonperformance of these customers and the related counterparties in
fulfilling their contractual obligations pursuant to securities transactions can
be directly impacted by volatile security markets, credit markets and regulatory
changes which may impair the ability of customers and/or counterparties to
satisfy their obligations to the Company. This exposure is measured on an
individual customer basis, as well as for groups of customers that share similar
attributes.
To alleviate the potential for risk concentrations, the Company has
established credit limits which are monitored on an on-going basis in light of
market conditions.
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
KINNARD INVESTMENTS, INC.
(the "Registrant")
By /s/ WILLIAM F. FARLEY
-----------------------------------------
William F. Farley
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Date: March 28, 2000
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
(POWER OF ATTORNEY)
Each person whose signature appears below constitutes and appoints
William F. Farley his true and lawful attorney-in-fact and agent, acting alone,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any or all amendments to
this Annual Report on Form 10-K and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent, acting alone, full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
said attorney-in-fact and agent, acting alone, or his substitute or substitutes,
may lawfully do or cause to be one by virtue thereof.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WILLIAM F. FARLEY Chairman and Chief Executive
------------------------------------ Officer (principal executive March 28, 2000
William F. Farley officer)
/s/ PAUL H. PERSEKE Chief Financial Officer and
------------------------------------ Treasurer (principal financial and March 28, 2000
Paul H. Perseke accounting officer)
/s/ RONALD A. ERICKSON
------------------------------------ Director March 28, 2000
Ronald A. Erickson
------------------------------------ Director March , 2000
John J. Fauth
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ STEPHEN H. FISCHER
------------------------------------ Director March 28, 2000
Stephen H. Fischer
/s/ JOHN H. GRUNEWALD
------------------------------------ Director March 28, 2000
John H. Grunewald
/s/ ANDREW J. O'CONNELL
------------------------------------ Director March 28, 2000
Andrew J. O'Connell
------------------------------------ Director March , 2000
Robert S. Spong
</TABLE>
43
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
KINNARD INVESTMENTS, INC.
(COMMISSION FILE NUMBER: 0-9377)
EXHIBIT INDEX
FOR
FORM 10-K FOR 1999 FISCAL YEAR
<TABLE>
<CAPTION>
EXHIBIT
- -------
<C> <S>
2 Stock Purchase Agreement by and between ReliaStar Financial
Corporation and Kinnard Investments, Inc. for the sale of
PRIMEVEST Financial Services, Inc.--incorporated by
reference to Exhibit 2 to the Registrant's Report on
Form 8-K dated November 12, 1996 *
3.1 Registrant's Restated Articles of Incorporation, as amended
to date--incorporated by reference to Exhibit 3.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996.*
3.2 Registrants Restated Bylaws--incorporated by reference to
Exhibit 3.2 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1996*
3.3 Statement of Designation of Rights, Preferences and
Limitations of Additional Common Stock incorporated by
reference to Exhibit 3.2 to the Registrants Registration
Statement on Form S-4, Reg. No. 333-81423.
3.4 Amendments to Bylaws, incorporated by reference to
Exhibit 3.4 to the Registrant's Registration Statements on
Form S-4, Reg. No. 333-81423.
10.1** JGK Employee Stock Ownership Plan and Trust
Agreement--incorporated by reference to Exhibit 10.12 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1989*
10.2** Registrant's 1990 Stock Option Plan--incorporated by
reference to Exhibit 10.14 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1991*
10.3** Registrant's 1992 Employee Stock Purchase Plan--incorporated
by reference to Exhibit 10.21 to the Registrant's
Registration Statement on Form S-2, Reg. No. 33-47736*
10.4 Amendment, dated June 16, 1992, of Office Lease between JGK
and TPI/CMS St. Paul Limited Partnership covering space at
Norwest Center, St. Paul Minnesota--incorporated by
reference to Exhibit 10.22 to the Registrant's Registration
Statement on Form S-2, Reg. No. 33-47736*
10.5 Lease between ITL--CER II Corporation and JGK, dated
July 20, 1993, covering space at 920 Second Avenue South in
Minneapolis, Minnesota--incorporated by reference to
Exhibit 10.25 to the Registrant's Form 10-K Annual Report
for the fiscal year ended December 31, 1993 *
10.6 Lease between Equitable Real Estate Investment Management,
Inc. and JGK, dated April 25, 1994--incorporated by
reference to Exhibit 10.20 to the Registrant's Form 10-K
Annual Report for the fiscal year ended December 31, 1994*
10.7** Deferred Compensation Agreement dated October 30, 1996,
between the Registrant and Stephen H. Fischer--incorporated
by reference to the Registrant's Form 10-K Annual Report for
the fiscal year ended December 31, 1996.*
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
- -------
<C> <S>
10.8** Registrant's 1997 Stock Option Plan, as amended, including
forms of Incentive Stock Options Agreement and Nonqualified
Stock Option Agreement--incorporated by reference to
Exhibit 10.6 to the Registrant's Form 10-Q Report for the
quarter ended March 31, 1997.*
10.9 Subscription and Purchase Agreement dated April 7, 1997
between Kinnard Investments, Inc. and William F.
Farley--incorporated by reference to Exhibit 10.1 to the
Registrant's Form 10-Q Report for the quarter ended
March 31, 1997.*
10.10 Warrant dated April 7, 1997 between Kinnard Investments,
Inc. and William F. Farley--incorporated by reference to
Exhibit 10.2 to the Registrant's Form 10-Q Report for the
quarter ended March 31, 1997.*
10.11** Employment Agreement dated April 7, 1997 among Kinnard
Investments, Inc., John G. Kinnard and Company, Incorporated
and William F. Farley--incorporated by reference to
Exhibit 10.3 to the Registrant's Form 10-Q Report for the
quarter ended March 31, 1997.*
10.12** Incentive Stock Option Agreement dated April 7, 1997 between
Kinnard Investments, Inc. and William F.
Farley--incorporated by reference to Exhibit 10.4 to the
Registrant's Form 10-Q Report for the quarter ended March
31, 1997.*
10.13** Nonqualified Stock Option Agreement dated April 7, 1997
between Kinnard Investments, Inc. and William F.
Farley--incorporated by reference to Exhibit 10.5 to the
Registrant's Form 10-Q Report for the quarter ended
March 31, 1997.*
10.14 Promissory Note dated April 30, 1997 payable to the
Registrant by William F. Farley--incorporated by reference
to Exhibit 10.7 to the Registrant's Form 10-Q Report for the
quarter ended March 31, 1997.*
10.15 Lease between Boat Works Development Company and John G.
Kinnard and Company, Incorporated dated February 11,
1997--incorporated by reference to Exhibit 10.2 to the
Registrant's Form 10-K Report for the year ended
December 31, 1997.*
10.21 Fully disclosed clearing agreement between John G Kinnard
and Company, Incorporated and Nationsbanc Montgomery
Secutities LLC dated May 1, 1998--incorporated by reference
to the Registrant's Form 10-Q report for the quarter ended
June 30, 1998.*
10.22** Employment Agreement dated February 23, 1998 among Kinnard
Investments, Inc., John G. Kinnard and Company,
Incorporated and George F. Stroebel--incorporated by
reference to Exhibit 10.22 to the Registrant's Form 10-K
Annual Report for the fiscal year ended December 31, 1998.*
10.23** Employment Agreement dated September 7, 1999, between
John G. Kinnard and Company, Incorporated and Paul H.
Perseke--incorporated by reference to Exhibit (c)(2) to the
Registrant's Schedule 14D-9 filed with the Securities and
Exchange Commission on December 21, 1999.
11 See Note 1 of the accompanying notes to consolidated
financial statements
21 List of the Registrant's subsidiaries.
23.1 Consent of KPMG LLP
27.1 Financial Data Schedule (filed in electronic form only)
</TABLE>
- ------------------------
* Incorporated by reference to a previously filed report or document, SEC File
No. 0-9337
** Management contract or compensatory plan or arrangement
45
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Shares % of
Company Organization Outstanding Ownership
------- ------------ ----------- ---------
<S> <C> <C> <C>
John G. Kinnard and Minnesota Corporation 3,568,000 100%
Company, Incorporated
Continental Funding, Inc. North Dakota Corporation 440 100%(1)
Kinnard Capital Corporation Minnesota Corporation 10,000 100%(1)
Kinnard Futures Management Minnesota Corporation 50,000 100%(1)
Corporation
NoDakBONDSinc North Dakota Corporation 1,000 100%(1)
</TABLE>
- -----------------------
(1) Owned 100% by John G. Kinnard and Company, Incorporated.
46
<PAGE>
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Shareholders
Kinnard Investments, Inc.:
We consent to the incorporation by reference in Registration Statements No.
33-39874, No. 33-49720, No. 33-49722, No. 33-67830, No. 33-82102 and No.
333-48991 of Kinnard Investments, Inc. on Form S-8 of our report dated
February 17, 2000 on the consolidated financial statements of Kinnard
Investments, Inc., appearing in this Annual Report on Form 10-K of Kinnard
Investments, Inc. and its subsidiaries for the year ended December 31, 1999.
/s/ KPMG LLP
March 28, 2000
47
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
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0
0
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