bank stocks which we trade in the third market was equivalent to 20% of that done on the exchanges in these stocks by all member firms combined. I would be delighted to furnish our trading volume to anybody and I'm sure Don Weeden would too. As a suggestion, why not have one tape and print on it "Third Market," Pacific Coast, Mid-West, etc., as well as the NYSE. Just place a Roman Numeral III beside our trades, P after those on Pacific, M for the Mid-West, and so on. I have a feeling, however, that this suggestion will not be accepted by the Exchange. The Exchange, as it is now constituted, is an anachronism that the events of 1970 brought into sharp focus. The public will be best served not by a monopolistic "Central" market, but by an openly competitive market where transactions are negotiated. The day must come when "listed" stocks can be handled in the same fashion as "listed" bonds. Lokamy V. Bank Jo سطا Harry V. Keefe, Jr. An Industry First KB&W, INC. IN 1970 Because we believe disclosure is good for everybody we are publishing a detailed financial picture of our firm. We believe that this is the first time that a securities firm such as ours has voluntarily revealed so much data. We hold no brief that this report is perfect since there are so few benchmarks for comparison. Our hope is that financial analysts on Wall Street will be able to use this report as a starting point for 6 getting better disclosure from all investment firms. We know that both the investment industry and their investor clients would benefit. Analyzing the securities industry is not only hampered by the paucity of disclosure and by poor accounting practices, but it is also further complicated by the fact that one-half of the firms are corporations and the others partnerships. As far as accounting is concerned, never the twain shall meet. To facilitate comparison with partnerships we have converted our net income figure by adding back income taxes, profitsharing, etc. Had we operated as a partnership, earnings would have been approximately $2,960,000 as opposed to our reported figure of $1,200,000 (see page 9 for complete income account). Book Value KB&W, Inc. began business on July 11, 1962, with $50,000 in common capital. On December 31, 1970, the earned surplus and unrealized profits on securities owned totaled $4,634,495. These two figures, more than anything else, portray our progress. Book Value per share increased in the eight years from $1.45 to $118.31, a gain in excess of 8000% for an annual compounded rate of about 70%. As our capital becomes larger it is unrealistic to expect a continuation of that rate of gain. In the past three years the Book Value increased as follows: 1967-68 +100%; 1968-69 +21%; 1969-70 + 36%. Confusion frequently arises over the way broker/dealer capital is reported. For the regulatory agencies we mark our securities to market, but do not make any tax adjustments. The accountants, on the other hand, want applicable tax adjustments made on the "mark to market." Without these adjustments our gross capital on December 31, 1970 was $6,172,180. The net capital, after adjustments, was $5,530,007. (See Balance Sheet on page 11 for details). KB&W, Inc.'s net worth ranking at year-end as determined by "Finance" magazine: As we have expanded our research staff and thereby increased the volume of material published by the firm, more and more large investors are directing stipulated amounts of commissions to us as compensation for this material. These commissions are in addition to our bank stock trading where, typically, we operate from our position at risk. Commissions received by the firm increased 123% in 1970, and we expect a further gain in 1971 as more investors avail themselves of our research services and advice. Bond Department We were most pleased that Donald C. Walsh joined us in August, as Manager of our Bond Department in Hartford. He is particularly adept at arranging "tax swaps" and in the space of just a few months has developed a large volume of this business. In 1969 we underwrote bonds for the fun of it-in 1970 we made a good profit. During the first week of December we bought and sold $6 million in bonds purchased at competitive bidding. A very respectable volume for a small firm such as ours that has only been underwriting corporate bonds for a couple of years. As we add personnel, we plan to expand further in bond underwriting. Employee Benefits We believe much of the success of our firm can be traced to the fact that we work as a team and not as individuals. There are no commission salesmen. No person owns an account; all accounts are serviced by the entire organization. We share in our success or failure as a group. During 1970, our employees received four bonus payments and have already received one payment in 1971. The Corporation pays the entire cost of the group life, as well as accident and health insurance. We believe these plans are the most generous available. Many retirement plans require three to five years of employment for eligibility, ours becomes operative immediately. Last year, as in past years, the Company contributed to the "Profit-Sharing and Retirement Plan" the maximum amount possible under the tax laws: 15% of eligible salaries without limit as to amount. The Income Account In an industry such as ours, where volume undergoes wide swings, the profit margin is the key to financial solvency. For 1970, KB&W, Inc.'s margin was 24.49% which, based on the limited data available to us, must have been one of the most favorable in the industry. In 1967, Hayden, Stone had a net income of $4 million on a gross of $94 million, a margin of but 4.3%. Obviously a very small decline in volume would bring trouble-and it certainly did. The expense account on page 9 is broken out to show fixed and variable expenses. Of total expenses of $2.5 million, 14%, or $344,513, was for supplementary payments to employees based on profit-sharing. No profits, no payments. The other variable expenses are directly tied to the volume of trading. We estimate that gross income could drop 60% and still have the Company report a profit. 8 |