SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1995 Commission File No. 0-9377
KINNARD INVESTMENTS, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-0972952
(State of incorporation) (I.R.S. Employer
identification number)
920 Second Avenue South, Minneapolis, Minnesota 55402 (612) 370-2700
(Address of principal executive offices) Telephone number
Not applicable
Former name, former address and former fiscal year, if changed since last report
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
Shares of $0.02 par value common stock outstanding at May 11, 1995: 6,261,451
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 3,589 $ 2,750
Receivable from clearing firm and other broker-dealers 3,593 1,618
Receivable from customers 5,280 3,324
Miscellaneous receivables 1,464 1,579
Trading securities, at market 7,559 9,952
Office equipment at cost, less accumulated depreciation
of $2,940 and $2,710, respectively 2,198 2,234
Investment securities, at fair value 8,404 7,193
Income tax receivable 1,384 1,187
Deferred tax asset 564 946
Other assets 727 834
Total assets $ 34,762 $ 31,617
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Notes payable $ 2,600 $ 0
Due to clearing firm and other broker-dealers 435 1,945
Payable to customers 3,066 2,152
Securities sold but not yet purchased 1,404 665
Employee compensation and related taxes payable 1,960 2,365
Other accounts payable and accrued expenses 3,041 3,415
Total liabilities 12,506 10,542
Commitments and Contingent Liabilities
Minority interest (1) 0
Shareholders' Equity
Preferred stock, authorized 1,000 shares; none issued or outstanding 0 0
Undesignated stock, authorized 16,500 shares; none issued or outstanding 0 0
Common stock, $.02 par value; authorized 7,500
shares; issued and outstanding 6,261 and
5,881 shares, respectively 125 118
Additional paid-in capital 13,706 12,861
Unearned compensation (15) (26)
Retained earnings 8,441 8,122
Total shareholders' equity 22,257 21,075
Total liabilities and shareholders' equity $ 34,762 $ 31,617
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1995 1994
(Unaudited (Unaudited)
<S> <C> <C>
Revenues:
Commission income $ 5,615 $ 6,873
Principal transactions 6,978 6,926
Investment account income 871 241
Investment banking 198 1,640
Interest 406 345
Other 835 716
Total revenues 14,903 16,741
Operating Expenses:
Compensation and benefits 7,745 9,742
Bank commissions 2,122 2,420
Floor brokerage and clearance 916 967
Communications 315 310
Occupancy, equipment and computer 1,435 1,382
Other 1,868 1,703
Total operating expenses 14,401 16,524
Income before income taxes 502 217
Income tax expense 187 66
Minority interest (2) 0
Net income $ 317 $ 151
Earnings per common share:
Primary $ .05 $ .02
Fully diluted $ .05 $ .02
Weighted average number of common and common equivalent shares outstanding:
Primary 6,052 6,274
Fully diluted 6,269 6,275
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except per share data)
<TABLE>
<CAPTION>
Additional Unearned
Common Stock Issued Paid-in Compen- Retained
Shares Amount Capital sation Earnings
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992 3,798 $ 76 $ 4,146 $ 0 $ 8,950
Issuance of shares under employee
stock purchase plan 336 7 1,374
Issuance of shares under employee
stock option plan 17 0 31
Dividends on common stock ($.15 per share) (817)
Exercise of warrants 37 1 69
Secondary public offering 1,725 35 7,023
Issuance of shares to the employee
stock ownership trust 106 2 539
Repurchase of stock (9) 0 (51)
Issuance of restricted stock 23 0 114 (107)
Net income 3,797
Balance, December 31, 1993 6,033 121 13,245 (107) 11,930
Dividends on common stock ($.10 per share) (598)
Exercise of warrants 21 0 47
Issuance of shares under employee
stock option plan 57 1 299
Repurchase of stock (230) (4) (730)
Amortization of unearned compensation 81
Net loss (3,210)
Balance, December 31, 1994 5,881 $ 118 $ 12,861 ($ 26) $ 8,122
Dividends on common stock (adjustment) 2
Exercise of warrants 381 7 850
Amortization of unearned compensation 5
Forfeiture of restricted shares (1) (5) 6
Net income 317
Balance, March 31, 1995 6,261 $ 125 $ 13,706 ($ 15) $ 8,441
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
March 31,
1995 1994
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers and clearing firm $ 13,739 $ 18,631
Cash paid to suppliers and employees (16,067) (16,978)
Minority interest 2 0
Interest:
Received 406 345
Paid (17) (3)
Income taxes paid (1) (80)
Net cash provided by (used in) operating activities (1,938) 1,915
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investment securities 5,278 1,546
Purchase of:
Office equipment (193) (337)
Investment securities (5,618) (3,574)
Net cash used in investing activities (533) (2,365)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 857 246
Proceeds from notes payable 2,600 0
Dividends paid (147) (151)
Net cash provided by financing activities 3,310 95
Increase (decrease) in cash and cash equivalents 839 (355)
Cash and cash equivalents at beginning of period 2,750 4,283
Cash and cash equivalents at end of period $ 3,589 $ 3,928
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
(In thousands)
<CAPTION>
Three Months Ended
March 31,
1995 1994
(Unaudited) (Unaudited)
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income $ 317 $ 151
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 229 231
Unearned compensation 6 21
Net unrealized gain on investment securities (1,000) (249)
Net realized loss on sale of investment securities 129 8
Deferred income taxes 382 147
(Increase) decrease in:
Receivable from clearing firm and other brokers-dealers (1,975) (95)
Receivable from customers (1,956) 3,284
Miscellaneous receivables 115
Trading securities, at market 2,393 (1,859)
Income tax receivable (197) (161)
Other assets 107 (639)
Increase (decrease) in:
Due to clearing firm and other broker-dealers (1,510) 1,612
Payable to customers 914 (654)
Securities sold but not yet purchased 739 1,800
Employee compensation and related taxes payable (405) (2,280)
Other accounts payable and accrued expenses (225) 598
Minority interest (1) 0
Net cash provided by (used in) operating activities ($1,938) $ 1,915
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
The accompanying consolidated financial statements of Kinnard Investments, Inc.,
(the "Company") have been prepared in conformity with generally accepted
accounting principles and should be read in conjunction with the Company's
annual report for the year ended December 31, 1994. The results of operations
for the three months ended March 31, 1995 are not necessarily indicative of the
results to be expected for the year ended December 31, 1995.
The consolidated statement of financial condition as of March 31, 1995 and other
financial information for the three months ended March 31, 1995 and 1994, are
unaudited, but management of the Company believes that all adjustments
(consisting only of normal recurring adjustments) necessary for a fair statement
of the results of operations for the periods have been included.
For comparability, certain 1994 amounts have been reclassified to conform with
the presentation for 1995. The reclassifications had no effect on net income or
shareholders' equity as previously reported.
Note 2. Net Capital Requirements
Pursuant to the net capital provisions of the Securities Exchange Act of 1934,
the Company's subsidiaries, John G. Kinnard and Company, Inc. (JGK), and
PRIMEVEST Financial Services, Inc. (PFS), are required to maintain a minimum net
capital as defined under such provisions. 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 March 31, 1995, JGK had net capital of $3.5 million, a net capital
requirement of $728,000 and a ratio of aggregate indebtedness to net capital of
1.10 to 1. PFS had net capital of $2.1 million, a net capital requirement of
$504,000 and a ratio of aggregate indebtedness to net capital of 3.64 to 1.
Note 3. Shareholders' Equity
In February 1995, the Company announced that it had discontinued the regular
quarterly dividend until further notice. The payment of future dividends, if
any, rests within the discretion of its Board of Directors and will depend upon
the Company's earnings, regulatory capital requirements and financial condition,
as well as other relevant factors.
During the first quarter of 1995, the Company granted 50,000 options to purchase
shares of the Company's common stock at a price of $3.58 per share
At December 31, 1994 there were outstanding warrants to purchase 419,973 shares
of the Company's common stock at an exercise price of $2.25 per share with an
expiration date of February 1995. In January and February 1995, 381,056 warrants
were exercised generating proceeds of $857,000. The warrants that were not
exercised expired.
During 1994, the Company repurchased 229,769 shares of its common stock at a
total cost of $734,000. There were no shares repurchased in the first quarter of
1995. The Board of Directors has authorized the repurchase of up to 600,000
shares of the Company's common stock, of which a total of 242,769 shares have
been repurchased as of March 31, 1995.
<PAGE>
Note 4. Commitments and Contingent Liabilities
JGK was one of many brokerage firms across the country through whom investors
purchased limited partnership interests and mortgage loan units from a number of
limited partnerships sponsored by Citi-Equity Group, Inc. ("Citi-Equity") for
the purpose of building and maintaining affordable housing projects. On May 18,
1994, investors, assisted by JGK, commenced an involuntary bankruptcy case
against Citi-Equity, resulting in the removal of its president from control over
Citi-Equity. Although many of the projects are built, leased and functioning,
others have not been built, and many others suffer from a variety of problems. A
number of purported class action lawsuits have been commenced against JGK
alleging some or all of the following claims: violation of state and federal
securities laws, negligent and fraudulent misrepresentation and consumer fraud.
Each seeks an unspecified amount of damages. JGK believes it has substantial
defenses against these claims, and intends to defend itself vigorously. The
proportion of the money invested that investors ultimately may lose is not
ascertainable because there is insufficient information on many variables. The
ultimate effect of this matter on the future operating results and financial
condition of the Company is unknown at this time. Accordingly, no provision for
liability, if any, that may result has been recorded in the consolidated
financial statements.
In October 1994, a purported class action lawsuit was commenced in U.S. District
Court for the District of Minnesota, against Palace Casinos, Inc. ("Palace
Casinos") and a number of other defendants, including JGK, alleging violation of
state and federal securities laws and breach of fiduciary duty. The lawsuit
seeks an unspecified amount of damages. The plaintiff seeks to represent a class
of persons who purchased Palace Casinos preferred stock in a private placement,
in which JGK acted as a selling agent. In November 1994, a substantially similar
action was initiated by four named individuals in the same court, and other
actions have been threatened. JGK believes it has substantial defenses against
these claims, and intends to defend itself vigorously. The ultimate effect of
this matter on the future operating results and financial condition of the
Company is unknown at this time. Accordingly, no provision for liability, if
any, that may result has been recorded in the consolidated financial statements.
JGK is a defendant in various other actions relating to its business, some of
which involve claims for unspecified amounts. Although the ultimate outcome of
these other matters cannot be predicted with certainty, the Company's management
believes that while the outcome of these matters 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.
In the normal course of business, the Company enters into underwriting and other
commitments. The ultimate settlement of such transactions is not expected to
have a material effect on the financial statements.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with Management's Discussion and
Analysis contained in the Company's Annual Report - Form 10-K for the year ended
December 31, 1994.
Results of Operations
The following table sets forth a summary of changes in the major categories of
revenues and expenses:
Three Months Ended
Unaudited March 31, 1995 versus 1994
Increase (decrease)
Revenues:
Commission income ($1,258) (18%)
Principal transactions 52 1
Investment account income 630 261
Investment banking (1,442) (88)
Interest 61 18
Operating Expenses:
Compensation and benefits (1,997) (20)
Bank commissions (298) (12)
Floor brokerage and clearance (51) (5)
Communications 5 2
Occupancy, equipment and computer 53 4
Other 165 10
Total operating expenses (2,123) (13)
Income before income taxes 285 131
Income taxes 121 183
Minority interest (2) (100)
Net income $ 166 110%
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three months ended March 31, 1995 and 1994
During the first quarter of 1995, the Dow Jones Industrial Average broke through
the 4000 barrier and the Nasdaq Composite increased by 9.9%. The generally
favorable market conditions contributed to revenues increasing 27% from the
fourth quarter of 1994, although compared to the first quarter of 1994 revenues
decreased 11% as retail activity did not fully recover from depressed levels in
the second half of 1994. Combined with expense reductions and an increase in the
valuation of the investment account, the Company reported improved results in
the current quarter. Primary earnings per share for the three months ended March
31, 1995 were $.05, which compares to $.02 in the first quarter of last year.
Commissions from sales of mutual fund products decreased by $1.0 million during
the first quarter of 1995 versus the same quarter in 1994 contributing to the
$1.3 million decrease in commission income. Revenues from the sale of limited
partnerships and commodities decreased $253,000 as the Company discontinued
selling these products. These declines were offset by increases from the sales
of over-the-counter equities and insurance products.
Income from principal transactions was virtually the same between the first
quarter of 1994 and 1995. Income from equity principal transactions declined
$764,000 because of relatively strong results in the prior year. Income from
fixed income transactions increased $816,000 due in part to a decline in
interest rates. The long-term treasury yield began the year at 7.9% and
decreased to 7.4% by quarter-end.
The Company recorded an increase in the valuation of the investment account of
$871,000 during the period, compared to an increase of $241,000 for the same
period last year. The investment account has historically produced volatile
results for the Company.
Investment banking revenues declined by $1.4 million due to a weak underwriting
market in the current period. The Company did not complete any financings during
the quarter, versus two public offerings and one private placement for the same
period last year.
Employee compensation declined by $2.0 million as revenue based compensation
declined with operating revenues and the implementation of a cost containment
program which lead to lower employment levels. The total number of full-time
employees at March 31, 1995 is down 8% from a year ago.
Bank commissions decreased by $298,000, which was in line with the decrease in
corresponding revenues. Other operating costs increased by $165,000 or 10% due
to expenditures incurred to close JGK's Phoenix branch office and legal services
associated with ongoing litigation.
Liquidity and Capital Resources
Operating Activities
A large portion of the Company's assets are cash and assets readily convertible
to cash. The liquid portion of the Company's trading and investment securities
are stated at quoted market value and are readily marketable. The less liquid
trading and investment securities are stated at fair value as determined by
management's best estimate.
During the three months ended March 31, 1995, the value of trading securities
decreased $2.4 million and securities sold but not yet purchased increased by
$739,000. The decline in trading securities was primarily due
<PAGE>
to lower market volumes, but was also the result of more extensive risk
management practices.
As securities broker-dealers, JGK and PFS are required by SEC regulations to
meet certain liquidity and capital standards. JGK and PFS have been in
compliance with these regulations at all times.
Based on the Company's current liquidity positions, available bank lines and
operating plans, it is anticipated that the Company has sufficient resources to
meet the cash requirements of its operations in the foreseeable future.
Investing Activities
The majority of investment activity during the current period resulted from the
sale and repurchase of securities held in the Company's investment account. A
large portion of the investment account is comprised of liquid investment-grade
fixed income securities, which matured or were sold and the proceeds were then
re-invested.
Financing Activities
The Company's subsidiaries maintain various credit facilities in order to meet
short-term operating needs. At March 31, 1995 and December 31, 1994 there were
outstanding balances of $2.6 million and $0, respectively, under these
facilities.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
See Note 4 in Notes to Consolidated Financial Statements.
ITEM 2 - CHANGES IN SECURITIES
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial Data Schedule (filed in electronic format only)
(b) Reports on Form 8-K
None
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KINNARD INVESTMENTS, INC.
/s/ Stephen H. Fischer
Stephen H. Fischer
Treasurer (principal financial officer)
Date 05/11/95
<PAGE>
KINNARD INVESTMENTS, INC.
EXHIBIT INDEX TO FORM 10-Q
FOR QUARTER ENDED MARCH 31, 1995
EXHIBIT NO. DESCRIPTION
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S.Dollars
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<EXCHANGE-RATE> 1
<CASH> 3,589
<SECURITIES> 7,559
<RECEIVABLES> 1,464
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 2,198
<DEPRECIATION> 2,940
<TOTAL-ASSETS> 34,762
<CURRENT-LIABILITIES> 0
<BONDS> 0
<COMMON> 13,831
0
0
<OTHER-SE> 8,426
<TOTAL-LIABILITY-AND-EQUITY> 34,762
<SALES> 0
<TOTAL-REVENUES> 14,903
<CGS> 0
<TOTAL-COSTS> 14,401
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 502
<INCOME-TAX> 187
<INCOME-CONTINUING> 315
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 317
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
