SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13
of
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995 Commission File No. 0-9377
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KINNARD INVESTMENTS, INC.
(Exact name of registrant as specified in its charter)
920 Second Avenue South, Minneapolis, Minnesota 55402 (612) 370-2700
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(Address of principal executive offices) Telephone number
Minnesota 41-0972952
(State of incorporation) (I.R.S. Employer identification number)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.02
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days. Yes X No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant as of March 20, 1996, was $18,556,758 (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 20, 1996: 6,043,296.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive Proxy Statement to be filed for the
Registrant's 1996 Annual Meeting of Shareholders is incorporated by reference
into Part III.
<PAGE>
PART I
ITEM 1. BUSINESS
General
Kinnard Investments, Inc. (the "Registrant" or "KII") is a holding company
incorporated in the state of Minnesota. Through its primary subsidiaries, John
G. Kinnard and Company, Incorporated ("John G. Kinnard" or "JGK") and PRIMEVEST
Financial Services, Inc. ("PRIMEVEST" or "PFS"), the Registrant is engaged in
securities brokerage, trading, investment banking, asset management, and related
financial services. Both of these subsidiaries, along with their respective
subsidiaries, are hereinafter collectively with the Registrant referred to as
the "Company".
John G. Kinnard is a full-service broker-dealer providing securities brokerage,
trading, 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 a market
capitalization of up to $250 million. The Company also negotiates, underwrites
and participates in municipal debt offerings. Other products and services
include mutual funds, insurance products, investment management, IRA services,
and fixed income securities. Subsidiaries include Continental Funding, Inc.,
which buys and sells bank certificates of deposit, and NODAKBONDS, Inc., which
acts as a fiscal agent in the state of North Dakota. John G. Kinnard is a member
of the Chicago Stock Exchange, and is registered as an investment adviser under
the Investment Advisers Act of 1940.
PRIMEVEST Financial Services, Inc. is a self-clearing broker-dealer that
provides investment products and services to financial institutions and their
customers. PRIMEVEST provides services to banks, savings and loans, and credit
unions that are generally small to medium in size. The principal business of
PRIMEVEST is to provide securities brokerage, insurance, mortgage and various
support services. PRIMEVEST's subsidiaries include PRIMEVEST Mortgage, Inc.,
which provides residential and commercial mortgages, Granite Investment
Services, Inc., an introducing securities broker established for the purpose of
providing securities brokerage and insurance services to financial institutions,
and a number of subsidiaries that provide fixed annuity products in various
states.
On November 30, 1993, the Registrant acquired all of the outstanding common
stock of Moore, Juran and Company, Inc. ("MJC"), a Minneapolis-based securities
firm focused principally on the sale of fixed income securities, in exchange for
567,237 shares of the Registrant's common stock. The transaction was accounted
for as a pooling of interests. Therefore, financial information for all prior
periods has been restated to include the operations and balances of MJC.
<PAGE>
Sources of Revenue
The following table sets forth a breakdown of the amount and percentage of
revenues from each principal source for the three most recent fiscal years:
<TABLE>
<CAPTION>
(In thousands)
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1995 1994 1993
Amount Percentage Amount Percentage Amount Percentage
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<S> <C> <C> <C> <C> <C> <C>
Commission income
Mutual funds $9,426 12.5% $8,661 15.6% $10,924 15.2%
Over-the-counter securities 6,493 8.6 4,788 8.6 5,662 7.9
Listed securities 5,477 7.3 4,841 8.7 4,628 6.5
Insurance 3,975 5.3 4,550 8.2 3,761 5.3
Other 1,439 1.9 1,086 1.9 1,814 2.5
----------------------- ----------------------- -----------------------
26,810 35.6 23,926 43.0 26,789 37.4
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Principal transactions
Equity securities 25,993 34.5 18,874 33.9 21,351 29.8
Fixed income securities 5,794 7.7 4,676 8.4 8,232 11.5
----------------------- ----------------------- -----------------------
31,787 42.2 23,550 42.3 29,583 41.3
----------------------- ----------------------- -----------------------
Investment banking
Corporate and municipal finance 2,428 3.2 1,994 3.6 4,534 6.3
Underwriting fees and commissions 2,875 3.8 3,594 6.4 6,284 8.8
----------------------- ----------------------- -----------------------
5,303 7.0 5,588 10.0 10,818 15.1
----------------------- ----------------------- -----------------------
Investment account income (loss) 6,563 8.7 (986) (1.8) 1,022 1.4
Interest income 1,926 2.6 1,507 2.7 1,263 1.8
Other income 2,944 3.9 2,082 3.8 2,171 3.0
======================= ======================= =======================
Total revenues $75,333 100.0% $55,667 100.0% $71,646 100.0%
======================= ======================= =======================
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</TABLE>
Commission Income
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 securities, municipal bonds, corporate debt, collateralized mortgage
obligations and United States government and government agency 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 revenues. The Company buys, sells and maintains inventory of a
security in order to "make a market" in that security, which tends to expose the
Company to more risk than agency transactions. Revenues from principal
transactions, including trading profits or losses, depend upon the general trend
of prices, the level of activity in the security markets, the skills of
employees engaged in market making and the size of inventories. The Company
makes a dealer market in approximately 400 equity securities.
<PAGE>
Investment Banking
John G. Kinnard manages, co-manages and participates in the public underwriting
of corporate securities and private placement offerings. The Company specializes
in providing financing to emerging-growth companies with a market capitalization
of up to $250 million. During 1995, John G. Kinnard raised over $80 million
through its investment banking activities, which included six public offerings,
and nine private placements. In addition, John G. Kinnard provides mergers and
acquisitions, valuation, and advisory services.
The Syndicate Department coordinates the distribution of corporate underwritings
and accepts invitations to participate in competitive or negotiated
underwritings managed by other investment banking firms. In 1995, John G.
Kinnard participated in 54 offerings.
John G. Kinnard also negotiates, underwrites and participates in municipal debt
offerings through its Public Finance and Fixed Income departments. In 1995, the
Company underwrote or participated in 120 financings, including 83 that were
managed by the Company.
Investment Account
The majority of the Company's investment account is invested in short to
medium-term investment grade marketable fixed income securities. In addition,
the Company holds both publicly traded and privately placed equity securities.
As part of compensation for underwriting securities, John G. Kinnard typically
receives warrants to purchase shares of its clients' common stock. These
warrants are initially carried at cost, but if the value of the underlying
shares appreciate, the warrants, or shares obtained on exercise of the warrants,
are valued at their estimated fair value by management. Warrants and other
securities held in the investment account frequently are not immediately
transferable and are subject to holding period requirements.
The value of certain securities held in the investment account can fluctuate
substantially from month to month with the resulting valuation changes being
reported as investment account income or loss. These fluctuations in value can
have a significant impact on reported earnings.
Interest Income
The Company derives interest income primarily from the financing of customer
margin loans, fixed income securities inventories carried for resale to
customers, and fixed income securities held in the investment account.
Customer securities transactions are effected on either a cash or margin basis.
In a margin transaction, interest is charged to the customer on the amount
loaned to purchase securities. The loan is collateralized by securities held in
the customers account.
Research Department
John G. Kinnard's Research Department develops investment recommendations and
market information on companies located primarily in the Upper Midwest. The
department provides investment executives with direct access to its analysts,
and research reports are generally made available to customers. Communication
between the department and investment executives is further facilitated through
meetings and conference calls, an internal E-mail system, weekly published
updates, and numerous research and special composite reports. Opportunities are
frequently sought to provide direct contact between investment executives and
corporate managements, via visits to company headquarters, facility tours and
in-house presentations by local companies. The Company's research efforts are
supplemented by research products and services purchased from outside
consultants.
<PAGE>
Operations
Alex. Brown & Sons, Inc. ("Alex. Brown") is John G. Kinnard's clearing agent on
a fully-disclosed basis. Under the terms of their agreement, Alex. Brown 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. PRIMEVEST is a
self-clearing broker-dealer who provides all of the above-mentioned services on
its own behalf.
John G. Kinnard guarantees to Alex. Brown the performance of every customer
transaction introduced by John G. Kinnard. In the event the arrangement with
Alex. Brown is terminated, the Company believes that a new clearing arrangement
could be established with another clearing correspondent on terms acceptable to
John G. Kinnard. The Company further believes that any disruption caused by such
a change would not have a material adverse effect on John G. Kinnard's
operations.
John G. Kinnard and PRIMEVEST record customer transactions on a settlement date
basis, which is generally three business days after the trade date. The Company
is therefore 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 and PRIMEVEST are registered with the Securities and Exchange
Commission ("SEC") as broker-dealers under the Securities Exchange Act of 1934,
and also as investment advisers under the Investment Advisers Act of 1940.
PRIMEVEST is registered as a broker-dealer under the securities laws of all of
the states of the United States and the District of Columbia, and John G.
Kinnard is registered in 48 states. Both subsidiaries are members of the
National Association of Securities Dealers, Inc. and the 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 broker-dealers registered with the SEC, John G. Kinnard and PRIMEVEST are
subject to prohibitions against certain types of dealings with nonmembers,
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 certain
requirements are not met. For John G. Kinnard, the restrictions would apply if
its ratio of aggregate indebtedness to net capital is greater than 10 to 1, and
for PRIMEVEST, if its net capital is less than 5% of aggregate debit balances.
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. PRIMEVEST uses the alternative method of computing net capital,
which requires that the percentage of net capital to aggregate debit items, both
as defined, be greater than 2%. At all times, both John G. Kinnard and PRIMEVEST
have maintained their net capital above the required levels.
Competition
The Company encounters intense competition in all aspects of its business and
competes directly with other securities firms, a significant number of which
have greater capital and other resources, and many of which offer a wider range
of financial services. The securities industry also faces growing competition
from commercial banks, insurance companies and other businesses providing
financial services. The Company competes with other firms on the basis of
customer service, quality and ability of employees, the relative prices of
products and services, product availability and locations.
<PAGE>
Competition (continued)
While the Company believes that it is competitively well positioned, it is
impossible to predict the effect of competing firms or the lower costs which may
be offered by certain discount brokers. 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, 1995, the Company had 500 employees. None of the Company's
employees are covered by a collective bargaining agreement. The Company
considers its relations with employees to be good and regards compensation and
employee benefits, including medical, life and disability, deferred savings and
retirement plans, to be competitive with those offered by other securities
firms.
Cautionary Statements
As provided under the Private Securities Reform Act of 1995, the Company wishes
to caution investors that the following factors, among others, could affect the
Company's results of operations and cause such results to differ materially from
those anticipated in forward-looking statements made in this document and
elsewhere by or on behalf of the Company:
1. Industry Factors. The securities business is by its nature subject to
various risks, particularly in volatile or illiquid markets, including the
risk of losses resulting from underwriting or ownership of securities,
customer or issuer fraud, employee errors and misconduct, failures in
connection with the processing of securities transactions and litigation. A
substantial part of John G. Kinnard's business involves securities of
emerging growth companies, a segment of the securities industry which may
be subject to greater risks and volatility than the industry as a whole.
PRIMEVEST provides services to financial institutions such as banks,
savings and loans, and credit unions, which are in an industry which is
undergoing significant changes and consolidations which may result in a
loss of customers by PRIMEVEST.
2. Economic and Market Conditions. The Company's business and its
profitability are affected by many factors, including the volatility and
price level of securities markets; the volume, size and timing of
securities transactions; the demand for investment banking services; the
level and volatility of interest rates; the availability of credit;
legislation affecting the business and financial communities; and the
economy in general. Low trading volume and depressed prices may reduce
revenues, which would generally negatively impact profitability because a
portion of the Company's costs are fixed. The failure of issuers, customers
and other dealers to perform their obligations may also result in losses to
the Company.
As a market maker, John G. Kinnard maintains inventories of securities to
engage in principal transactions with retail and institutional ustomers 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.
3. Investment Account. John G. Kinnard and PRIMEVEST maintain investments
in securities that are generally held for long-term appreciation. The
investments consist principally of stocks and warrants, some of which are
restricted and non-marketable for varying periods of time. As required by
generally accepted accounting principles for broker-dealers, these
securities are recorded at their estimated fair value at the end of each
accounting period, with the resulting changes in value reported as
investment account income or loss. Valuation of the investment account is
volatile and changes may have a material effect on the Company's earnings.
4. 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.
<PAGE>
Cautionary Statements (continued)
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.
5. Investment Banking. John G. Kinnard's investment banking activities subject
the Company to certain risks, including market, credit and liquidity, 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 22 branch offices located in Minnesota, North Dakota, South
Dakota, Iowa, Wisconsin and Colorado, in addition to maintaining relationships
with various independent representatives. PRIMEVEST maintains a relationship
with 585 financial institutions located throughout the United States. The
majority of PRIMEVEST operations are located in financial institutions which are
the property of those institutions. See Note 10 of the Notes to Consolidated
Financial Statements filed herein for information concerning leases of the
Company's branches and offices.
ITEM 3. LEGAL PROCEEDINGS
John G. Kinnard 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. A number of purported class action lawsuits were commenced against
John G. Kinnard alleging some or all of the following claims: violation of state
and federal securities laws, negligent and fraudulent misrepresentation and
consumer fraud. Each sought an unspecified amount of damages. In June 1995, John
G. Kinnard reached a settlement which was approved by the court (subject to
appeal) in December 1995, resolving all claims against it by class members who
accept the settlement agreement action in the putative class action lawsuits
pending in state and federal courts relating to Citi-Equity litigation. As part
of the settlement, John G. Kinnard agreed to pay $1 million in cash, to transfer
its interest in the principal amount of approximately $1.4 million Class C
Mortgage Pass-Through Certificates in the MCA Multi-Family Affordable Housing
REMIC ("MCA Certificate"), and to pay 20% of the profits, if any, to a maximum
amount of $1 million, which may be realized from the sale of shares of stock
that may be obtained through the exercise of certain warrants held by John G.
Kinnard. These warrants are exercisable during various periods through April
2000. In addition, John G. Kinnard guaranteed that principal and interest
payments on the MCA Certificate will total at least $919,750. A pre-tax charge
of approximately $2.4 million has been recorded in 1995 related to the
Citi-Equity settlement. The charge is less than the $3.4 million maximum amount
of the settlement because MCA Certificate was being carried at a value below the
principal amount, and the portion of the settlement related to warrant
appreciation will only be accrued when the value of warrants, or shares obtained
on the exercise of warrants, increases.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS (continued)
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 John G. Kinnard, alleging
violation of state and federal securities laws and common law claims. The
lawsuit sought an unspecified amount of damages. The plaintiffs sought to
represent a class of persons who purchased Palace Casinos preferred stock in a
private placement, in which John G. Kinnard acted as a selling agent. In
February 1996, the parties reached a settlement, which remains subject to
certain conditions and to receipt of final judicial approval. Under the
settlement agreement, all claims against John G. Kinnard by settling class
members who accept the class-action settlement are to be released, in exchange
for a payment by John G. Kinnard of $500,000 to plaintiffs for the benefit of
the settling class. This settlement was accrued for in 1995.
John G. Kinnard 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.
ITEM . 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the Registrant's fiscal year no matter was
submitted to a vote of security holders through the solicitation of proxies or
otherwise.
Executive Officers of the Registrant
The following table sets forth for each of the Company's current executive
officers their age, current positions with the Company, and business experience
during the past five years:
Principal Occupation and Business
Name Age Experience During Past Five Years
Hilding C. Nelson 57 Chairman of the Registrant since October 1995.
Has served as a Director of the Registrant since
1972 and as a Director of PRIMEVEST since 1993.
Is currently a member of the Audit and
Compensation Committees.
Gerald M. Gifford 51 Secretary of the Registrant since October 1979.
Executive Vice President of John G. Kinnard since
February 1990. Secretary of John G. Kinnard since
December 1973 and Treasurer of the Registrant from
February 1990 to February 1993. Treasurer of John G.
Kinnard from February 1990 to February 1991.
Stephen H. Fischer 52 Treasurer of the Registrant since February 1993.
Chief Executive Officer of PRIMEVEST since March
1992. President and Chief Financial Officer of
PRIMEVEST since August 1986, and President and
Treasurer of IRI Securities Corporation
(a brokerage firm) from 1981 to August 1986.
Served as Director of the Registrant since
February 1991.
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.
<PAGE>
PART II
ITEM.5.MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market Information
The Registrant's common stock is traded in the over-the-counter market on The
Nasdaq Stock Market under the symbol "KINN". The following table sets forth the
high and low last sale prices for the Registrant's common stock, as reported by
Nasdaq:
High Low
1995 First Quarter........................................ $2.75 $1.938
Second Quarter...................................... 4.125 2.125
Third Quarter........................................ 4.375 3.125
Fourth Quarter...................................... 4.125 3.375
1994 First Quarter........................................ $5.25 $4.00
Second Quarter ...................................... 4.375 3.125
Third Quarter........................................ 3.75 2.00
Fourth Quarter....................................... 2.875 1.875
Number of Holders of Common Stock
As of February 28, 1996, there were 840 beneficial holders of record of the
Registrant's common stock.
Dividends
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.
ITEM . 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(In thousands, except per share data)
- --------------------------------------------------------------------------------------------------------------------------------
Fiscal Year
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1995 1994 1993 1992 1991
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Financial Condition:
Cash and cash equivalents $5,766 $2,750 $4,283 $4,452 $4,314
Total assets 45,897 31,617 40,429 28,443 21,618
Total liabilities 20,592 10,542 15,240 15,271 12,000
Shareholders' equity 25,305 21,075 25,189 13,172 9,618
Operating Results:
Total revenues 75,333 55,667 71,646 57,312 46,224
Total operating expenses 69,647 61,174 65,672 52,487 40,246
Income (loss) before income taxes 5,686 (5,507) 5,974 4,825 5,978
Net income (loss) 3,376 (3,210) 3,797 3,003 3,634
Per Share Data:
Earnings (loss) - Primary 0.54 (0.54) 0.64 0.73 0.97
Earnings (loss) - Fully diluted 0.54 (0.54) 0.63 0.71 0.93
Dividends declared 0.00 0.10 0.15 0.10 0.00
Book value 4.04 3.58 4.18 3.47 2.66
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
ITEM.7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
The following table sets forth a summary of changes in the major categories of
revenues and expenses from the prior year's results.
<TABLE>
<CAPTION>
(In thousands)
- --------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1995 versus 1994 1994 versus 1993
Increase (decrease) Increase (decrease)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Commission income $2,884 12% ($2,863) (11%)
Principal transactions 8,237 35 (6,033) (20)
Investment account income 7,549 766 (2,008) (196)
Investment banking (285) (5) (5,230) (48)
Interest 419 28 244 19
Other 862 41 (89) (4)
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Total revenues 19,666 35 (15,979) (22)
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Operating Expenses:
Compensation and benefits 3,928 11 (5,674) (14)
Bank commissions 1,166 14 143 2
Floor brokerage and clearance 495 13 (78) (2)
Communications (102) (8) 231 21
Occupancy and equipment 227 4 333 6
Litigation settlements 2,856 100 0 0
Other (97) (1) 547 8
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Total operating expenses 8,473 14 (4,498) (7)
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Income before income taxes 11,193 203 (11,481) (192)
Income tax expense 4,607 201 (4,474) (206)
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Net income $6,586 205% ($7,007) (185%)
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</TABLE>
Business Environment
The Company is engaged in securities brokerage, trading, investment banking,
asset management, mortgage and related financial services. These activities are
sensitive to market factors outside of the Company's control, including trading
volumes, interest rates, inflation, legislation and regional economies. At the
same time, a sizable portion of the Company's expenses are fixed, such as
administrative salaries, rent and depreciation. Therefore, the Company's revenue
and net income can be volatile.
In general, 1995 was a favorable year for the securities industry. Domestic
financial markets were up significantly as interest rates declined and the U.S.
economy expanded. As a result, many regional and national securities firms
experienced significant increases in revenues and profits compared to 1994.
Fiscal years ended December 31, 1995 and 1994
Revenues for 1995 increased 35% to a record $75.3 million as favorable financial
markets contributed to the strong increase in sales and trading of equity and
fixed income securities, as well as significant gains in the firm's investment
portfolio. Cost reduction efforts and improved productivity further contributed
to profitability. For the year ended December 31, 1995 primary earnings per
share were $0.54, compared to a $0.54 loss in the prior year.
<PAGE>
Fiscal years ended December 31, 1995 and 1994 (continued)
Commission income increased by 12% as sales of OTC stocks, listed securities and
mutual fund products rose in tandem with equity markets that established record
highs during the year. Revenues from the sale of insurance products declined as
lower interest rates made fixed annuities less attractive, and sales of limited
partnerships and commodities were down as the Company discontinued selling those
products.
Revenue from principal transactions increased by $8.2 million for the current
year compared to 1994. Income from equity transactions increased 38% as the
Company's sales force, research department and equity trading desk responded to
the strong Nasdaq market. Revenue from debt transactions increased 24% as
declining interest rates positively impacted revenue from fixed income
securities. The long term treasury yield ended the year just below 6% after
beginning 1995 at 7.9%.
The Company recorded a gain in its investment account of $6.6 million in 1995.
The majority of this gain resulted from the increase in valuation of securities
that were acquired in conjunction with the Company's investment banking
activity. The investment account has historically been a volatile source of
income for the Company.
Investment banking revenues declined by $285,000 due in part to a decline in
participation in other broker-dealer underwritings. The prior year also includes
$239,000 in revenues of a leasing subsidiary whose operations were ceased in the
first quarter of 1995.
The increase in interest income is attributed to higher customer margin balances
and an increase in interest earned on fixed income securities held for resale to
customers. Other income rose in part due to increased fees earned on money
market balances.
Employee compensation rose by 11% from the prior year. Revenue based
compensation increased in line with revenues while fixed salaries declined as a
result of cost reduction programs implemented during the past year. The total
number of employees at December 31, 1995 is down 6% from a year ago. The decline
in salaries was partially offset by severance charges related to staff
reductions.
Bank commissions increased by 14%, which is in line with the increase in
associated revenues. Occupancy costs increased primarily due to the expansion of
bank service facilities at PRIMEVEST along with increased depreciation charges
stemming from automation and service expansions. Floor and clearing charges
increased in relation to increased trading activity. Communication costs were
down from last year due primarily to employee reductions. Litigation settlements
reflects charges associated with the settlement of Citi-Equity and Palace Casino
litigation.
Fiscal years ended December 31, 1994 and 1993
The Company experienced declines in revenues and net income resulting in part
from the effects of the bearish bond market. The Company could not match the
record results of the prior year, as was the case with most national and
regional securities firms. Retail and institutional investors remained cautious
as they awaited the Federal Reserve's next move. Total revenues of $55.7 million
were down 22% from the prior year, and the 1994 net loss of $3.2 million
compares to a $3.8 million net profit in 1993. The primary loss per share in
1994 was $.54, versus earnings of $.64 for the previous year.
Commission income declined $2.9 million due primarily to a $2.3 million decline
in commissions from the sale of mutual fund products. Rising interest rates led
to lower sales of bond mutual funds and investors were disenchanted with mutual
fund returns. Revenues from the sale of limited partnerships and commodities
were down $808,000 as the Company discontinued selling both of these products.
This was partially offset by an increase of $788,000 in the sale of insurance
products.
Principal income from the sales of equity and debt products decreased by 20%
during 1994 from 1993. The drop in equity income was a direct result of
generally lower activity in the market along with a depressed underwriting
market. Principal income from debt products was down 43% as the bond market
suffered one of the worst years in recent memory. The long-term treasury yield
began the year at 6.4%, and rose to 7.9% by year-end.
<PAGE>
Fiscal years ended December 31, 1994 and 1993 (continued)
The Company recorded a loss on the change in valuation of its investment account
of $986,000 during 1994 versus income of $1.0 million for 1993. The change in
value of one security was responsible for approximately $817,000 of the loss in
1994. The investment account has historically produced volatile results for the
Company.
Investment banking revenues declined by $5.2 million due to lower underwriting
activity. The Company completed 13 financings for a combined value of over $90
million versus 20 financings raising $150 million during 1993. Syndicate
participations declined to 91 from 153 in 1993, and revenue from Kinnard Capital
Corporation declined by $725,000. The operations of Kinnard Capital were ceased
in the first quarter of 1995.
Interest income rose by $245,000 as a result of the overall increase in interest
rates and due to higher interest income earned on fixed income inventories.
Employee compensation declined by 14% as revenue-based compensation declined
with operating revenues and total employees declined by 8% during the year. In
addition, incentives were paid to some new sales people, and other compensation
expenses were incurred as a result of the firm's downsizing that occurred during
the year.
Bank commissions were basically unchanged in 1994 compared to 1993. This expense
as a percent of revenues increased in 1994 because of an increase in
full-service locations at PRIMEVEST which have a higher commission payout than
discount locations, and a shift to insurance products which have smaller
margins.
The increase in communication and occupancy costs is largely attributable to the
move of John G. Kinnard's corporate headquarters in 1994, including higher rent,
the leasing of furniture and a new telephone system. Other factors include the
enhancement of branch communications, addition of PC workstations for brokers
and increase in full-service locations at PRIMEVEST which require additional
communication services.
Other operating costs increased by 8% due in part to legal and professional
services, office supplies resulting from the move, allowance for doubtful
receivables and expenses incurred to expand full service locations. The Company
has implemented a substantial cost reduction program that is expected to improve
productivity in future periods.
Quarterly Results
Selected unaudited data reflecting the Company's results of operations for each
of the last twelve 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 thereof.
These operating results, however, are not necessarily indicative of results for
any future period.
<TABLE>
<CAPTION>
(In thousands, except per share data)
- ----------------------------------------------------------------------------------------------------------------------------
Three months ended
------------------------------------------------------------------------------
March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995
Revenues $14,757 $21,272 $21,538 $17,766
Net income 317 1,266 1,135 658
Primary earnings per share .05 .20 .18 .11
1994
Revenues $ 16,633 $13,898 $ 13,575 $ 11,561
Net income (loss) 151 (1,270) (830) (1,261)
Primary earnings (loss) per share .02 (.21) (.14) (.21)
1993
Revenues $ 16,162 $19,913 $ 17,199 $ 18,372
Net income 928 1,403 840 626
Primary earnings per share .17 .23 .14 .10
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Liquidity and Capital Resources
Operating Activities
A large portion of the Company's assets are cash and assets readily convertible
to cash. The majority of the Company's security investments and inventory are
stated at quoted market values and are readily marketable. The less liquid
portions of inventory and investments, which totaled $2.2 million at December
31, 1995, are stated at fair value which is determined by management's best
estimate.
During 1995, the Company increased its long positions of trading securities by
$274,000. Inventories are generally maintained to facilitate customer
transactions rather than for market speculation. For the same period, investment
securities increased $4.6 million due primarily to changes in the fair values of
securities held in the portfolio.
At December 31, 1995, the Company had $6.3 million of short-term debt that was
used primarily to finance significantly increased customer margin balances.
Based on the Company's current liquidity position, 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.
As securities broker-dealers, John G. Kinnard and PRIMEVEST are required by SEC
regulations to meet certain liquidity and capital standards. Both companies have
been in compliance with these regulations at all times.
Financing Activities
John G. Kinnard maintains two discretionary credit facilities providing for
conditional short-term borrowings of up to $10 million in aggregate. One
facility limits the borrowing to 90 days and is secured by firm marketable
securities. The other facility is to finance corporate bond private placement
activity and is secured on a non-recourse basis by the securities being
financed. Borrowings under the facility must be originated with a term of at
least 13 months, but may be prepaid. Advances under the facilities are at the
banks' 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
these lines of credit. Both lines had no outstanding borrowings at December 31,
1995 and 1994.
PRIMEVEST has a discretionary line of credit available from a bank totaling $5
million. Draws in excess of $5 million may be made if prior approval is granted
by the bank. The interest rate on outstanding borrowings was 5.7% at December
31, 1995. Outstanding borrowings are secured by customer margin securities,
investment securities, and certain clearing balances. Total borrowings under the
line of credit were $6.3 million and $0 at December 31, 1995 and 1994,
respectively. Prior approval was obtained for the amount in excess of $5 million
at December 31, 1995.
In 1995 and 1994, the Company received total proceeds of $872,000 and $347,000,
respectively, from the issuance of its common stock to the Employee Stock
Purchase Plan and the exercise of options and warrants.
During 1995, the Company repurchased 15,000 shares of its common stock at a
total cost of $49,000. 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 257,769
shares have been repurchased as of December 31, 1995.
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.
<PAGE>
Recent Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation". The Company has elected to continue following the guidance of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", for measurement and recognition of stock-based transactions with
employees. The Company will adopt the disclosure provisions of SFAS No. 123 in
1996.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See "Index to Consolidated Financial Statements and Schedules" on the following
page.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Other than "Executive Officers of the Registrant" which is set forth at the end
of Part I of this Form 10-K, the information required by Item 10 is incorporated
herein by reference to the sections labeled "Election of Directors" and
"Compliance with Section 16(a) of the Securities Exchange Act" which appear in
the Registrant's definitive Proxy Statement for its 1996 Annual Meeting of
Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to the
section labeled "Executive Compensation" which appears in the Registrant's
definitive Proxy Statement for its 1996 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference to the
section labeled "Principal Shareholders and Management Shareholdings" which
appears in the Registrant's definitive Proxy Statement for its 1996 Annual
Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference to the
section labeled "Election of Directors" which appears in the Registrant's
definitive Proxy Statement for its 1996 Annual Meeting of Shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Documents Filed as Part of this Report:
(1) Consolidated Financial Statements. See "Index to Consolidated Financial
Statements and Schedules" on the following page.
(2) Financial Statement Schedules. Schedule I - Condensed Financial Information
of Registrant.
(3) Exhibits. See "Exhibit Index" starting on the page following signatures.
Reports on Form 8-K
None.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page
INDEPENDENT AUDITORS' REPORT .............................................. 16
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated statements of financial condition ............................ 17
Consolidated statements of operations ..................................... 18
Consolidated statements of shareholders' equity ........................... 19
Consolidated statements of cash flows ..................................... 20
Notes to consolidated financial statements ................................ 22
Schedule I - Condensed financial information of Registrant................. 30
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Kinnard Investments, Inc. and Subsidiaries
Minneapolis, Minnesota
We have audited the accompanying consolidated statements of financial condition
of Kinnard Investments, Inc. and Subsidiaries (the "Company") as of December 31,
1995 and 1994, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1995. Our audits also included the financial statement
schedule as of December 31, 1995 and 1994, and each of the three years in the
period ended December 31, 1995 as listed in the index at Item 14(2). These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule 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
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 the Company as of
December 31, 1995 and 1994, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles. Also, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
February 2, 1996
Minneapolis, Minnesota
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
(In thousands)
- --------------------------------------------------------------------------------- -------------------- --------------------
At December 31, 1995 1994
- --------------------------------------------------------------------------------- -------------------- --------------------
- --------------------------------------------------------------------------------- -------------------- --------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 5,766 $2,750
Receivable from clearing firm and other broker-dealers 4,324 1,618
Receivable from customers 9,734 3,324
Miscellaneous receivables 1,549 1,579
Trading securities, at market 10,226 9,952
Office equipment at cost, less accumulated depreciation
of $3,604 and $2,710, respectively 1,740 2,234
Investment securities, at fair value 11,827 7,193
Income tax receivable 0 1,187
Deferred tax asset 0 946
Other assets 731 834
- --------------------------------------------------------------------------------- -------------------- --------------------
================================================================================= ==================== ====================
Total assets $45,897 $31,617
================================================================================= ==================== ====================
================================================================================= ==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Notes payable $6,307 $0
Due to clearing firm and other broker-dealers 405 1,945
Payable to customers 3,184 2,152
Securities sold but not yet purchased, at market 1,659 665
Employee compensation and related taxes payable 3,649 2,365
Other accounts payable and accrued expenses 4,489 3,415
Income taxes payable 346 0
Deferred tax liability 553 0
- --------------------------------------------------------------------------------- -------------------- --------------------
Total liabilities 20,592 10,542
- --------------------------------------------------------------------------------- -------------------- --------------------
- --------------------------------------------------------------------------------- -------------------- --------------------
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 6,257 and 5,881 shares, respectively 125 118
Additional paid-in capital 13,680 12,861
Unearned compensation 0 (26)
Retained earnings 11,500 8,122
- --------------------------------------------------------------------------------- -------------------- --------------------
- --------------------------------------------------------------------------------- -------------------- --------------------
Total shareholders' equity 25,305 21,075
- --------------------------------------------------------------------------------- -------------------- --------------------
- --------------------------------------------------------------------------------- -------------------- --------------------
- --------------------------------------------------------------------------------- -------------------- --------------------
Total liabilities and shareholders' equity $45,897 $31,617
================================================================================= ==================== ====================
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(In thousands, except per share data)
- --------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Commission income $26,810 $23,926 $26,789
Principal transactions 31,787 23,550 29,583
Investment account income (loss) 6,563 (986) 1,022
Investment banking 5,303 5,588 10,818
Interest 1,926 1,507 1,263
Other 2,944 2,082 2,171
- --------------------------------------------------------------------------------------------------------------------------
Total revenues 75,333 55,667 71,646
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Operating Expenses:
Compensation and benefits 38,748 34,820 40,494
Bank commissions 9,775 8,609 8,466
Floor brokerage and clearance 4,217 3,722 3,800
Communications 1,246 1,348 1,117
Occupancy and equipment 5,768 5,541 5,208
Litigation settlements 2,856 0 0
Other 7,037 7,134 6,587
- --------------------------------------------------------------------------------------------------------------------------
Total operating expenses 69,647 61,174 65,672
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 5,686 (5,507) 5,974
Income tax expense (benefit) 2,310 (2,297) 2,177
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) $3,376 ($3,210) $3,797
==========================================================================================================================
==========================================================================================================================
Earnings (loss) per common share:
Primary $0.54 ($0.54) $0.64
Fully diluted $0.54 ($0.54) $0.63
==========================================================================================================================
==========================================================================================================================
Weighted average number of common and
common equivalent shares outstanding:
Primary 6,230 5,994 5,975
Fully diluted 6,281 5,994 5,984
==========================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands, except per share data)
================================================ ============================ ============= ============= =============
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 to the 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
- ------------------------------------------------ -------------- ------------- ------------- ------------- -------------
- ------------------------------------------------ -------------- ------------- ------------- ------------- -------------
Forfeiture of restricted shares and adjustment
to common stock dividend (1) (5) 6 2
Exercise of warrants 381 7 850
Issuance of shares under employee
stock option plan 11 0 22
Repurchase of stock (15) 0 (48)
Amortization of unearned compensation 20
Net income 3,376
- ------------------------------------------------ -------------- ------------- ------------- ------------- -------------
Balance, December 31, 1995 6,257 $125 $13,680 $0 $11,500
- ------------------------------------------------ -------------- ------------- ------------- ------------- -------------
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands)
=================================================================== =========================================================
For Years Ended December 31,
1995 1994 1993
- ------------------------------------------------------------------- ------------------ ------------------- ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers, brokers-dealers
and clearing agencies $59,505 $61,049 $64,199
Cash paid to suppliers and employees (67,481) (62,890) (63,498)
Interest:
Received 1,926 1,507 1,263
Paid (87) (29) (51)
Income taxes refunded (paid) 722 (121) (3,218)
- ------------------------------------------------------------------- ------------------ ------------------- ------------------
Net cash used in operating activities (5,415) (484) (1,305)
- ------------------------------------------------------------------- ------------------ ------------------- ------------------
- ------------------------------------------------------------------- ------------------ ------------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investment securities 35,565 11,233 21,032
Purchase of:
Office equipment (488) (1,552) (762)
Investment securities (33,637) (9,143) (26,859)
- ------------------------------------------------------------------- ------------------ ------------------- ------------------
Net cash provided by (used in) investing activities 1,440 538 (6,589)
- ------------------------------------------------------------------- ------------------ ------------------- ------------------
- ------------------------------------------------------------------- ------------------ ------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance (repurchase) of common stock 831 (386) 9,036
Net borrowings (payments) on notes payable and
revolving credit agreements 6,307 (600) (646)
Dividends paid (147) (601) (665)
- ------------------------------------------------------------------- ------------------ ------------------- ------------------
Net cash provided by (used in) financing activities 6,991 (1,587) 7,725
- ------------------------------------------------------------------- ------------------ ------------------- ------------------
- ------------------------------------------------------------------- ------------------ ------------------- ------------------
Increase (decrease) in cash and cash equivalents 3,016 (1,533) (169)
Cash and cash equivalents at beginning of period 2,750 4,283 4,452
- ------------------------------------------------------------------- ------------------ ------------------- ------------------
Cash and cash equivalents at end of period $5,766 $2,750 $4,283
=================================================================== ================== =================== ==================
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
(In thousands)
- ------------------------------------------------------------------------ ---------------------------------------------------------
Years Ended December 31,
1995 1994 1993
- ------------------------------------------------------------------------ ------------------ ------------------- ------------------
- ------------------------------------------------------------------------ ------------------ ------------------- ------------------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME (LOSS) TO NET
CASH USED IN OPERATING ACTIVITIES:
Net income (loss) $3,376 ($3,210) $3,797
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 958 813 799
Unearned compensation 20 81 0
Net unrealized loss (gain) on investment securities (2,546) 1,333 881
Net realized gain on sale of investment securities (4,017) (347) (1,903)
Realized loss on sale of office equipment 24 131 0
Deferred income taxes 1,499 (1,426) (303)
(Increase) decrease in:
Receivable from clearing firm and other brokers-dealers (2,706) (1,174) 375
Receivable from customers (6,410) 3,635 (1,366)
Trading securities, at market (274) 3,938 (3,435)
Income tax receivable 1,187 (992) 0
Other assets 133 352 (918)
Increase (decrease) in:
Due to clearing firm and other broker-dealers (1,540) (139) 809
Payable to customers 1,032 (84) (1,246)
Securities sold but not yet purchased 994 (544) 508
Employee compensation and related taxes payable 1,284 (3,044) 820
Other accounts payable and accrued expenses 1,225 193 500
Income taxes payable 346 0 (623)
======================================================================== ================== =================== ==================
Net cash used in operating activities ($5,415) ($484) ($1,305)
======================================================================== ================== =================== ==================
</TABLE>
Supplemental Cash Flow Disclosure of Non-Cash Transaction:
Dividends declared but not yet paid of $0 in 1995, $149,000 in 1994, and
$151,000 in 1993.
See Notes to Consolidated Financial Statements
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business, Financial Instruments with Off-Balance-Sheet
Risk and Significant Accounting Policies
Nature of business:
Kinnard Investments, Inc. (the "Registrant" or "KII") is a holding company
incorporated in the state of Minnesota. Through its primary subsidiaries, John
G. Kinnard and Company, Incorporated ("JGK") and PRIMEVEST Financial Services,
Inc. ("PFS"), the Registrant is engaged in securities brokerage, trading,
investment banking, asset management, and related financial services. Both of
these subsidiaries, along with their respective subsidiaries, are hereinafter
collectively with the Registrant referred to as the "Company".
On November 30, 1993, the Registrant acquired all of the outstanding common
stock of Moore, Juran and Company, Inc. ("MJC"), a Minneapolis-based securities
firm focused principally on the sale of fixed income securities, in exchange for
567,237 shares of the Registrant's common stock. The transaction was accounted
for as a pooling of interests. Therefore, financial information for 1993 was
restated to include the operations and balances of MJC.
Financial instruments with off-balance-sheet risk:
Off-balance-sheet credit and market risk
In the normal course of business, the Company's customer activities involve the
execution, settlement and financing of various customers' securities and options
transactions. These activities may expose the Company to off-balance-sheet risk
in the event the customer is unable to fulfill its contracted obligations.
JGK clears all transactions for its customers on a fully disclosed basis with a
clearing broker or dealer (clearing firm), who carries all the customer accounts
and maintains the related records. Nonetheless, the Company is liable to the
clearing firm for the transactions of its customers. PFS executes, settles and
finances securities transactions in connection with its customer activities.
These activities may expose PFS to off-balance-sheet risk in the event a
counterparty is unable to fulfill its contractual obligations.
The Company hedges, to a limited extent, its fixed income inventories against
market interest rate fluctuations, typically by selling treasury securities
short. The Company currently has no plans to utilize interest rate swaps,
foreign currency contracts, futures, forward contracts or significant amounts of
other securities whose value is derived from other investment products
(derivatives) for either hedging or speculative purposes.
Customer securities transactions are recorded on a settlement date basis, which
is generally three business days after the trade date. The Company is therefore
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 impact of unsettled transactions is not expected to have a material
effect upon the Company's Statement of Financial Condition.
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 various regulatory and internal guidelines. The Company
monitors required margin levels daily, and pursuant to such guidelines, requires
the customers to deposit additional collateral, or reduce margin positions, when
necessary.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 1. Nature of Business, Financial Instruments with Off-Balance-Sheet
Risk and Significant Accounting Policies (continued)
Off-balance-sheet credit and market risk (continued)
The Company sells securities 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 unfavorable market prices.
Concentrations of credit risk
As a broker and dealer, the Company engages in various securities trading and
brokerage activities serving a diverse group of corporations, governments,
institutional and individual investors. The Company's exposure to credit risk
associated with the nonperformance of these customers in fulfilling their
contractual obligations pursuant to securities and options transactions can be
directly impacted by volatile securities markets, credit markets and regulatory
changes which may impair the customers' ability to satisfy their obligations to
the Company.
Summary of significant accounting policies:
Principles of consolidation
The consolidated financial statements include the accounts of Kinnard
Investments, Inc. and its subsidiaries. All intercompany accounts and
transactions have been eliminated.
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.
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 assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and reported
amounts of revenues and expenses during the reporting period. Significant
estimates include the valuation of the Company's investment account, income
taxes and legal reserves. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation". The Company has elected to continue following the guidance of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", for measurement and recognition of stock-based transactions with
employees. The Company will adopt the disclosure provisions of SFAS No. 123 in
1996.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 1. Nature of Business, Financial Instruments with Off-Balance-Sheet Risk
and Significant Accounting Policies (continued)
Office equipment
The cost of office equipment is depreciated using accelerated methods over the
estimated useful lives of three to seven years.
Reclassification
Certain amounts reflected in the 1994 and 1993 consolidated financial statements
have been reclassified to conform to the presentation for 1995. These
reclassifications had no impact on net income or shareholder's equity as
previously reported.
Security transactions
Security transactions are recognized for accounting purposes on the settlement
date, generally three business days after the trade execution date. The impact
of unsettled transactions on trading securities, securities sold but not yet
purchased and income, net of related expenses, is not material.
Marketable trading securities, securities sold but not yet purchased and
investment securities are carried at quoted market values. Securities not
readily marketable are carried at fair value as determined by management.
Unrealized gains and losses are included in operations.
Earnings per common and common equivalent share
Earnings per common and common equivalent share have been computed based upon
the weighted average number of common shares and common equivalent shares
(warrants and options) outstanding. In a period that the Company incurs a loss,
common equivalent shares are excluded because their effect would be
anti-dilutive.
Note 2. Trading Securities
<TABLE>
<CAPTION>
Trading securities are summarized as follows:
------------------------------------------------------------------------------------------------------
December 31, 1995 1994
------------------------------------------------------------------------------------------------------
<S> <C> <C>
Long positions - trading securities
Corporate stocks $2,647 $1,886
U.S. and municipal bonds 5,326 5,107
Corporate notes and debentures 2,253 2,959
------------------------------------------------------------------------------------------------------
$10,226 $9,952
------------------------------------------------------------------------------------------------------
Short positions - securities sold but not yet purchased
Corporate stocks $1,631 $586
U.S. and municipal bonds 11 76
Corporate notes and debentures 17 3
------------------------------------------------------------------------------------------------------
$1,659 $665
------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 3. Investment Securities
Investment securities consists of fixed income securities that are primarily
short-term and liquid, and equity securities, many of which are freely tradeable
in public securities markets. However, some are restricted as to when they may
be sold. These restricted securities and those with little or no market have
been valued by management at an estimated fair value of $2.1 million and
$896,000 at December 31, 1995 and 1994, respectively.
Fair value, cost and aggregate unrealized gains and losses for investment
securities are summarized below:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
December 31, 1995 1994 1993
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fair value $11,827 $7,193 $9,827
Cost 8,603 7,438 8,766
Unrealized gains 3,227 1,016 1,339
Unrealized losses 3 1,261 278
----------------------------------------------------------------------------------------------------
Net realized and unrealized gains and losses are reflected in the
consolidated statements of operations under the caption
"investment account income (loss)" as follows:
----------------------------------------------------------------------------------------------------
Years ended December 31, 1995 1994 1993
----------------------------------------------------------------------------------------------------
Net realized gains $4,017 $347 $1,903
Net unrealized gains (loss) 2,546 (1,333) (881)
----------------------------------------------------------------------------------------------------
$6,563 ($986) $1,022
----------------------------------------------------------------------------------------------------
</TABLE>
Note 4. Notes Payable
Lines of credit
JGK maintains two discretionary credit facilities providing for conditional
short-term borrowings of up to $10 million in the aggregate. One facility limits
the borrowing to 90 days and is secured by firm marketable securities. The other
facility is to finance corporate bond private placement activity and is secured
on a non-recourse basis by the securities being financed. Borrowings under the
facility must be originated with a term of at least 13 months, but may be
prepaid. Advances under the facilities are at the banks' 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 these lines of credit. Both lines
had no outstanding borrowings at December 31, 1995 and 1994.
PFS has a discretionary line of credit available from a bank totaling $5
million. Draws in excess of $5 million may be made if prior approval is granted
by the bank. The interest rate on outstanding borrowings was 5.7% at December
31, 1995. Outstanding borrowings are secured by customer margin securities,
investment securities, and certain clearing balances. Total borrowings under the
line of credit were $6.3 million and $0 at December 31, 1995 and 1994,
respectively. Prior approval was obtained for the amount in excess of $5 million
at December 31, 1995.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 5. Employee Benefit Plans
Pension and Profit Sharing Plans
The Company has profit sharing and defined contribution pension plans covering
substantially all employees who have completed one year of service. The Company
contributes to the pension plan, on behalf of each eligible employee, an amount
equal to 5% of their qualified compensation. This contribution is reflected as
an operating expense and amounted to $1.0 million, $1.0 million and $1.1 million
for the years ended December 31, 1995, 1994 and 1993, respectively.
There were no contributions to the profit sharing plan for the years ended
December 31, 1995, 1994 or 1993. The Company does not intend to make any further
contributions to the profit sharing plan so long as the Employee Stock Ownership
Plan and Trust is in effect.
MJC had a profit sharing plan covering substantially all employees with more
than one year of service. This Plan was liquidated in 1994 as part of the merger
agreement with the Company. The contribution charged to operations in 1993 was
$143,000.
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's Board of Directors and can be made
in cash or other property as the Trustees consider appropriate. These
contributions are used primarily to purchase stock of Kinnard Investments, Inc.
A participant is generally fully vested after five years of service. During the
years ended December 31, 1995, 1994 and 1993, the Company contributed $560,000,
$0, and $1.0 million respectively, to the ESOP.
Note 6. Federal and State Income Taxes
The components of the income tax provision for the years ended December 31,
1995, 1994 and 1993, are as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
Years ended December 31, 1995 1994 1993
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal payable (refundable) $1,150 ($1,386) $1,949
State payable 0 5 531
Deferred taxes 1,160 (916) (303)
----------------------------------------------------------------------------------------------------
$2,310 ($2,297) $2,177
----------------------------------------------------------------------------------------------------
The provision for income taxes for the years ended December 31,
1995, 1994 and 1993, differs from the amount obtained by applying
the U.S. federal income tax rate to pretax income due to the
following:
----------------------------------------------------------------------------------------------------
Years ended December 31, 1995 1994 1993
----------------------------------------------------------------------------------------------------
Computed "expected" tax expense (benefit) $1,990 ($1,925) $2,031
State income taxes, net of federal effect 301 (268) 315
Other, net 19 (104) (169)
----------------------------------------------------------------------------------------------------
$2,310 ($2,297) $2,177
----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 6. Federal and State Income Taxes (continued)
The tax effects of significant items comprising the Company's net
deferred tax asset (liability) as of December 31, 1995 and 1994
are shown in the table below:
<TABLE>
<CAPTION>
---------------------------------------------------------------- ---------------- -----------------
December 31, 1995 1994
---------------------------------------------------------------- ---------------- -----------------
<S> <C> <C>
Deferred tax asset:
Other accruals not currently deductible $443 $110
Receivable allowance 160 158
Trade date/settlement date differences 105 100
Accrual for professional services 80 160
State net operating loss carryforward 20 368
Unrealized loss on investment securities 0 84
---------------------------------------------------------------- ---------------- -----------------
808 980
---------------------------------------------------------------- ---------------- -----------------
Deferred tax liability:
Unrealized appreciation of investment securities 1,284 0
Other 77 34
---------------------------------------------------------------- ---------------- -----------------
34
1,361
---------------------------------------------------------------- ---------------- -----------------
Net deferred tax asset (liability) ($553) $946
---------------------------------------------------------------- ---------------- -----------------
</TABLE>
Note 7. Net Capital Requirements and Dividend Restrictions
Pursuant to the net capital provision of the Securities Exchange Act of 1934,
JGK and PFS are required to maintain a minimum net capital as defined under such
provisions. Also under this rule, JGK's ratio of aggregate indebtedness to net
capital may not exceed 15 to 1, and for PFS the percentage of net capital to
aggregate debit items, both as defined, must be greater than 2%. In addition,
broker-dealers may be prohibited from expanding their business or declaring cash
dividends if certain requirements are not met. For JGK, the restrictions would
apply if its ratio of aggregate indebtedness to net capital is greater than 10
to 1, and for PFS, if its net capital is less than 5% of aggregate debit
balances.
At December 31, 1995, JGK had net capital of $7.0 million, a net capital
requirement of $725,000 and a ratio of aggregate indebtedness to net capital of
.89 to 1. PFS had net capital of $2.2 million, a net capital requirement of
$250,000 and a ratio of net capital to aggregate debit items of 22%.
Note 8. Equity
The Company's 16.5 million shares of authorized undesignated stock may be
designated by the Board of Directors as either preferred stock or common stock.
During 1995, the Company repurchased 15,000 shares of its common stock at a
total cost of $49,000. 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 257,769
shares have been repurchased as of December 31, 1995.
In the first quarter of 1995, 381,056 warrants with an exercise price of $2.25
per share and an expiration date of February 1995 were exercised, generating
proceeds of $857,000. The remaining 38,917 warrants that were not exercised
expired.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 9. Stock Option and Purchase Plans
Stock Option Plans
Under the Company's stock option plans, a total of 660,000 shares have been
reserved for options to employees and directors of the Company. At December 31,
1995 there were 377,550 authorized but unissued shares. Under terms of the
plans, options are generally granted at not less than market value at the date
of the grant and may be exercised over the period prescribed at the time of the
grant, not to exceed ten years from the time of the grant. Transactions
involving the stock option plans are summarized below:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
Years ended December 31, 1995 1994 1993
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding, beginning of year 218 185 152
Granted (1995: $3.55 - $3.80 per share) 70 86 50
Exercised (11) 0 (17)
Forfeited or expired (30) (53) 0
----------------------------------------------------------------------------------------------------
Outstanding, end of year
(1995: $1.98 - $7.25 per share) 247 218 185
----------------------------------------------------------------------------------------------------
</TABLE>
Employee Stock Purchase Plan
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
purchased semi-annually at a price equal to 85% of the lower of the market
prices at the beginning or end of the applicable six-month period, but not less
than book value at the end of the period. Reserved but unissued shares under the
Plan were 713,749 at December 31, 1995.
Note 10. Lease Commitments
The Company and its subsidiaries lease office space and equipment under various
operating leases with remaining terms ranging up to nine years. Certain of these
leases have escalation clauses and renewal options.
Minimum rentals required under non-cancelable operating leases for office space
and equipment rental for the next five years and thereafter are as follows:
- -------------------------------------------------------------------------------
Year Amount
- -------------------------------------------------------------------------------
1996 $1,430
1997 1,324
1998 1,235
1999 840
2000 367
Thereafter 988
- -------------------------------------------------------------------------------
$6,184
- -------------------------------------------------------------------------------
Rent expense for all operating leases was $2.9 million, $3.0 million and $2.7
million for the years ended December 31, 1995, 1994 and 1993, respectively.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 11. 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. A number of
purported class action lawsuits were 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 sought an
unspecified amount of damages. In June 1995, JGK reached a settlement which was
approved by the court (subject to appeal) in December 1995, resolving all claims
against it by class members who accept the settlement agreement action in the
putative class action lawsuits pending in state and federal courts relating to
Citi-Equity litigation. As part of the settlement, JGK agreed to pay $1 million
in cash, to transfer its interest in the principal amount of approximately $1.4
million Class C Mortgage Pass-Through Certificates in the MCA Multi-Family
Affordable Housing REMIC ("MCA Certificate"), and to pay 20% of the profits, if
any, to a maximum amount of $1 million, which may be realized from the sale of
shares of stock that may be obtained through the exercise of certain warrants
held by JGK. These warrants are exercisable during various periods through April
2000. In addition, JGK guaranteed that principal and interest payments on the
MCA Certificate will total at least $919,750. A pre-tax charge of approximately
$2.4 million has been recorded in 1995 related to the Citi-Equity settlement.
The charge is less than the $3.4 million maximum amount of the settlement
because MCA Certificate was being carried at a value below the principal amount,
and the portion of the settlement related to warrant appreciation will only be
accrued when the value of warrants, or shares obtained on the exercise of
warrants, increases.
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 common law claims. The lawsuit sought an
unspecified amount of damages. The plaintiffs sought 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 February 1996, the parties reached a
settlement, which remains subject to certain conditions and to receipt of final
judicial approval. Under the settlement agreement, all claims against JGK by
settling class members who accept the class-action settlement are to be
released, in exchange for a payment by JGK of $500,000 to plaintiffs for the
benefit of the settling class. This settlement was accrued for in 1995.
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 open at year-end is
not expected to have a material effect on the financial statements.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SCHEDULE I
The following financial statements include only Kinnard Investments, Inc.
(Registrant). The Registrant's investment in its wholly-owned subsidiaries are
recorded at the equity in their net assets and are included in the Statements of
Financial Condition. The Statements of Operations include the equity in income
of the subsidiaries. Investment in, and equity in the income of subsidiaries are
eliminated upon consolidation. These financial statements should be read in
conjunction with the consolidated financial statements and the other related
notes.
Dividends Paid to Registrant
In October 1994, JGK transferred ownership of PFS to the Registrant, which was
accounted for as a non-cash dividend. The Registrant received no cash dividends
from its subsidiaries for the years ended December 31, 1995, 1994 or 1993.
KINNARD INVESTMENTS, INC. (REGISTRANT ONLY)
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
(In thousands)
- --------------------------------------------------------------------------------- -------------------- --------------------
At December 31, 1995 1994
- --------------------------------------------------------------------------------- -------------------- --------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 85 $1,030
Investment in subsidiaries 16,371 12,932
Receivables from subsidiaries 617 300
Investment securities, at fair value 8,406 5,351
Income tax receivable 91 1,391
Deferred tax asset 0 478
Other assets 76 102
- --------------------------------------------------------------------------------- -------------------- --------------------
================================================================================= ==================== ====================
Total assets $25,646 $21,584
================================================================================= ==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
- --------------------------------------------------------------------------------- -------------------- --------------------
Other accounts payable and accrued expenses $341 $509
- --------------------------------------------------------------------------------- -------------------- --------------------
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 6,257 and 5,881, respectively 125 118
Additional paid-in capital 13,680 12,861
Unearned compensation 0 (26)
Retained earnings 11,500 8,122
- --------------------------------------------------------------------------------- -------------------- --------------------
- --------------------------------------------------------------------------------- -------------------- --------------------
Total shareholders' equity 25,305 21,075
- --------------------------------------------------------------------------------- -------------------- --------------------
- --------------------------------------------------------------------------------- -------------------- --------------------
- --------------------------------------------------------------------------------- -------------------- --------------------
Total liabilities and shareholders' equity $25,646 $21,584
================================================================================= ==================== ====================
</TABLE>
<PAGE>
KINNARD INVESTMENTS, INC. (REGISTRANT ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SCHEDULE I
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(In thousands)
- --------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Interest $378 $506 $382
Investment account income (loss) 931 (404) 0
Other 0 48 40
- --------------------------------------------------------------------------------------------------------------------------
Total revenues 1,309 150 422
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Operating Expenses:
Compensation and benefits 314 206 153
Other 258 202 243
- --------------------------------------------------------------------------------------------------------------------------
Total operating expenses 572 408 396
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 737 (258) 26
Income tax expense (benefit) 299 (171) (62)
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) before equity in earnings
(loss) of subsidiaries 438 (87) 88
- --------------------------------------------------------------------------------------------------------------------------
Equity in earnings (loss) of subsidiaries 2,938 (3,123) 3,709
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) $3,376 ($3,210) $3,797
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
KINNARD INVESTMENTS, INC. (REGISTRANT ONLY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SCHEDULE I
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands)
- ------------------------------------------------------------------- ------------------ ------------------- ------------------
For Years Ended December 31, 1995 1994 1993
- ------------------------------------------------------------------- ------------------ ------------------- ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers and subsidiaries ($317) $867 $62
Cash paid to suppliers and subsidiaries (808) (1,836) (799)
Interest received 378 506 382
Income tax payments 1,742 37 0
- ------------------------------------------------------------------- ------------------ ------------------- ------------------
Net cash provided by (used in) operating activities 995 (426) (355)
- ------------------------------------------------------------------- ------------------ ------------------- ------------------
- ------------------------------------------------------------------- ------------------ ------------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investment securities 29,915 9,387 18,663
Purchase of investment securities (32,038) (7,689) (26,137)
- ------------------------------------------------------------------- ------------------ ------------------- ------------------
Net cash provided by (used in) investing activities (2,123) 1,698 (7,474)
- ------------------------------------------------------------------- ------------------ ------------------- ------------------
- ------------------------------------------------------------------- ------------------ ------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance (repurchase) of common stock 831 (386) 9,036
Subsidiary issuance of common stock 0 0 (10)
Subsidiary pretax profit on Registrant underwriting 0 0 (153)
Transfers to subsidiaries (501) (300) 0
Dividends paid (147) (601) (665)
- ------------------------------------------------------------------- ------------------ ------------------- ------------------
Net cash provided by (used in) financing activities 183 (1,287) 8,208
- ------------------------------------------------------------------- ------------------ ------------------- ------------------
- ------------------------------------------------------------------- ------------------ ------------------- ------------------
Increase (decrease) in cash and cash equivalents (945) (15) 379
Cash and cash equivalents at beginning of period 1,030 1,045 666
- ------------------------------------------------------------------- ------------------ ------------------- ------------------
Cash and cash equivalents at end of period $85 $1,030 $1,045
- ------------------------------------------------------------------- ------------------ ------------------- ------------------
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income (loss) $3,376 ($3,210) $3,797
Adjustment to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Equity in loss (income) of subsidiaries (2,938) 3,123 (3,709)
Net unrealized loss (gain) on investment securities (992) 244 90
Net realized loss (gain) on sale of investments 60 160 (69)
Deferred income taxes 741 (127) 0
Decrease (increase) in other assets 1,179 (943) (495)
Increase (decrease) in other payables (431) 327 31
- ------------------------------------------------------------------- ------------------ ------------------- ------------------
Net cash provided by (used in) operating activities $995 ($426) ($355)
- ------------------------------------------------------------------- ------------------ ------------------- ------------------
</TABLE>
Supplemental Cash Flow Disclosure of Non-Cash Transaction:
Dividends declared but not yet paid of $0 in 1995, $149,000 in 1994, and
$151,000 in 1993.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
KINNARD INVESTMENTS, INC.
(the "Registrant")
By /s/ Hilding C. Nelson
Hilding C. Nelson
Chairman
Date: March 20, 1996
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 HILDING C.
NELSON and STEPHEN H. FISCHER his true and lawful attorneys-in-fact and agents,
each 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 attorneys-in-fact and
agents, each 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 agents,
each acting alone, or his substitute or substitutes, may lawfully do or cause to
be one by virtue thereof.
Signature Title Date
/s/ Hilding C. Nelson Chairman and Director March 20, 1996
Hilding C. Nelson (principal executive officer)
/s/ Stephen H. Fischer Treasurer and Director March 20, 1996
Stephen H. Fischer (principal financial and
accounting officer)
(Signatures continued on next page)
<PAGE>
Signature Title Date
/s/ James W. Hansen Director March 20, 1996
James W. Hansen
/s/ Thomas E. Moore Director March 20, 1996
Thomas E. Moore
/s/ Andrew J. O'Connell Director March 20, 1996
Andrew J. O'Connell
/s/ Robert S. Spong Director March 20, 1996
Robert S. Spong
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
KINNARD INVESTMENTS, INC.
(Commission File Number: 0-9377)
EXHIBIT INDEX
for
Form 10-K for 1995 fiscal year
Exhibit
3.1 Registrant's Restated Articles of Incorporation, as amended to date --
incorporated by reference to Exhibit 4 to the Registrant's
Registration Statement on Form S-3, Reg. No. 33-72914
3.2 Registrants Bylaws, as amended -- incorporated by reference to Exhibit
3.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995 *
10.1 ** Registrant's 1982 Incentive Stock Option Plan -- incorporated by
reference to Exhibit 10.6 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1988 *
10.2 Lease between JGK and Oxford Development Minnesota, Inc., dated July
1, 1985, covering space on the 17th floor of the Cargill Building,
Minneapolis, Minnesota -- incorporated by reference to Exhibit 10.4 to
the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1985 *
10.3 Lease between JGK and The Equitable Life Assurance Society of the
United States, dated October 12, 1988, covering space in the
Interchange Tower, St. Louis Park, Minnesota -- incorporated by
reference to Exhibit 3.1 to the Registrant's Annual Report Form 10-K
for fiscal year ended December 31, 1988 *
10.4 Lease between JGK and TPI/CMS St. Paul Limited Partnership, dated
November 1, 1988, covering space in the Norwest Center, St. Paul,
Minnesota -- incorporated by reference to Exhibit 3.1 to the
Registrant's Annual Report Form 10-K for fiscal year ended December
31, 1988 *
10.5 Lease between PFS and Norwest Center Associates, dated May 17, 1991,
covering space in Norwest Center, St. Cloud, Minnesota -- incorporated
by reference to Exhibit 10.7 to the Registrant's Annual Report Form
10-K for fiscal year ended December 31, 1991 *
10.6 Lease between THS Northstar Associates Limited Partnership and JGK,
dated October 24, 1989 covering space at Suite 1700 Northstar West,
Minneapolis, Minnesota -- incorporated by reference to Exhibit 10.9 to
the Registrant's Annual Report on form 10-K for the fiscal year ended
December 31, 1989 *
10.7 ** 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*
* Incorporated by reference to a previously filed report or document, SEC
File No. 0-9337
** Management contract or compensatory plan or arrangement
<PAGE>
Exhibit
10.8 ** 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*
10.9 Noncompetition Agreement, dated January 2, 1991 among JGK and certain
former shareholders of PFS -- incorporated by reference to Exhibit
10.1 to the Registrant's Form 8-K dated January 2, 1991 *
10.10 ** 1992 Incentive Compensation Plans for JGK, PFS and Kinnard
Investments, Inc. -- incorporated by reference to Exhibit 10.12 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.*
10.11 Amendment, dated February 19, 1992, of the Office Lease between THS
Northstar Associates Limited Partnership and JGK covering space at
1700 Northstar West -- incorporated by reference to Exhibit 10.19 to
the Registrant's Annual Report on form 10-K for the fiscal year ended
December 31, 1991 *
10.12 ** 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
10.13 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
10.14 Amendments, dated February 19, 1992, June 1, 1992 and July 2, 1992 of
office Lease between THS Northstar Associates Limited Partnership and
JGK covering space at 1700 Northstar West, Minneapolis, Minnesota --
incorporated by reference to Exhibit 10.23 to the Registrant's
Registration Statement on Form S-2, Reg. No. 33-47736
10.15 Agreement, dated November 30, 1993, among the Registrant, MJC and
others -- incorporated by reference to Exhibit 2 of the Registrant's
Form 8-K dated December 13, 1993 *
10.16 Introducing broker agreement between Linn-Waldock and JGK, dated May
14, 1993-- incorporated by reference to Exhibit 10.24 to the
Registrant's Form 10-K Annual Report for the fiscal year ended
December 31, 1993 *
10.17 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 *
10.18 Separation Agreement with Thomas J. Mulvaney dated September 21, 1995
-- incorporated by reference to Exhibit 10.1 to the Registrant's Form
10-Q for the quarter ended September 30, 1995 *
10.19 Clearing Agreement, dated February 13, 1995, between Alex. Brown &
Sons, Inc. and JGK -- incorporated by reference to Exhibit 10.20 to
the Registrant's Form 10-K Annual Report for the fiscal year ended
December 31, 1994 *
10.20 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 *
* Incorporated by reference to a previously filed report or document, SEC
File No. 0-9337
** Management contract or compensatory plan or arrangement
<PAGE>
Exhibit
11 Calculation of Weighted Average Number of Common Shares and Income for
Determination of Earnings Per Share of Common Stock
21 List of the Registrant's subsidiaries:
State of Incorporation
Subsidiary Minnesota
John G. Kinnard and Company, Incorporated Minnesota
Kinnard Futures Management Corporation Minnesota
PRIMEVEST Financial Services, Inc. Minnesota
Kinnard Capital Corporation Minnesota
Headwaters Capital Management Massachusetts
Branson Insurance Agency, Inc. Alabama
PRIMEVEST Insurance Agency of Alabama, Inc. New Mexico
PRIMEVEST Insurance Agency of New Mexico, Inc. Ohio
PRIMEVEST Insurance Agency of Ohio, Inc. Oklahoma
PRIMEVEST Insurance Agency of Oklahoma, Inc. Texas
PRIMEVEST Insurance Agency of Texas, Inc. Minnesota
Granite Investment Services, Inc. North Dakota
Continental Funding, Inc. North Dakota
NODAKBONDS, Inc. Minnesota
PRIMEVEST Mortgage, Inc.
23 Consent of Deloitte & Touche LLP
27 Financial Data Schedule (filed in electronic form only)
* Incorporated by reference to a previously filed report or document, SEC
File No. 0-9337
** Management contract or compensatory plan or arrangement
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CALCULATION OF WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND
INCOME FOR DETERMINATION OF EARNINGS PER SHARE OF COMMON STOCK
EXHIBIT 11
<TABLE>
<CAPTION>
===================================================================== ===================================================
Years Ended December 31,
1995 1994 1993
- --------------------------------------------------------------------- ---------------- ----------------- ----------------
- --------------------------------------------------------------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
Calculation of Primary Earnings Per Share:
Weighted average number of common and common
equivalent shares outstanding:
Weighted average number of common shares outstanding 6,201 5,994 5,698
Dilutive effect for stock options and warrants computed
using treasury stock method 29 0 277
- --------------------------------------------------------------------- ---------------- ----------------- ----------------
Weighted average number of common and common
equivalent shares outstanding: 6,230 5,994 5,975
- --------------------------------------------------------------------- ---------------- ----------------- ----------------
Net income (loss) applicable to common and common
equivalent shares outstanding $3,376 ($3,210) $3,797
Net income (loss) per share $0.54 ($0.54) $0.64
- --------------------------------------------------------------------- ---------------- ----------------- ----------------
Calculation of Fully Diluted Earnings Per Share:
Weighted average number of common and common
equivalent shares outstanding:
Weighted average number of common shares outstanding 6,201 5,994 5,698
Dilutive effect of stock options and warrants computed
using the treasury stock method 80 0 286
- --------------------------------------------------------------------- ---------------- ----------------- ----------------
6,281 5,994 5,984
- --------------------------------------------------------------------- ---------------- ----------------- ----------------
Adjustments to net income applicable to common stock:
Net income (loss) applicable to common stock $3,376 ($3,210) $3,797
Net income (loss) per share $0.54 ($0.54) $0.63
===================================================================== ================ ================= ================
</TABLE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-39874, No. 33-49720, No. 33-49722, No. 33-67830 and No. 33-82102 of Kinnard
Investments, Inc. on Form S-8, and No. 33-42071 and No. 33-72914 of Kinnard
Investments, Inc. on Form S-3 of our report dated February 2, 1996 on the
consolidated financial statements and schedule 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, 1995.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
March 22, 1996
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FINANCIAL STATEMENTS FOR THE YEAR ENDED 12/31/95 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 5,766
<RECEIVABLES> 15,607
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 22,380
<PP&E> 1,740
<TOTAL-ASSETS> 45,897
<SHORT-TERM> 6,307
<PAYABLES> 3,589
<REPOS-SOLD> 0
<SECURITIES-LOANED> 1,659
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 0
0
0
<COMMON> 125
<OTHER-SE> 25,180
<TOTAL-LIABILITY-AND-EQUITY> 45,897
<TRADING-REVENUE> 31,787
<INTEREST-DIVIDENDS> 1,926
<COMMISSIONS> 26,810
<INVESTMENT-BANKING-REVENUES> 5,303
<FEE-REVENUE> 2,944
<INTEREST-EXPENSE> 0
<COMPENSATION> 38,748
<INCOME-PRETAX> 5,686
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,376
<EPS-PRIMARY> 0.54
<EPS-DILUTED> 0.54
</TABLE>
