SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1996 Commission File No. 0-9377
KINNARD INVESTMENTS, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-0972952
(State of incorporation) (I.R.S. Employer identification number)
920 Second Avenue South, Minneapolis, Minnesota 55402 (612) 370-2700
(Address of principal executive offices) Telephone number
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days. Yes X No _____
Shares of $0.02 par value common stock outstanding at August 9, 1996: 5,991,883
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONTENTS
PART I Page
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated statements of financial condition..........................3
Consolidated statements of operations...................................4
Consolidated statements of shareholders' equity.........................5
Consolidated statements of cash flows...................................6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS...................................8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................................10
PART II
OTHER INFORMATION...........................................................12
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
(Unaudited)
------- -------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 6,945 $ 5,766
Receivable from clearing firm and other broker-dealers 6,414 4,324
Receivable from customers 15,742 9,734
Miscellaneous receivables 2,130 1,549
Trading securities, at market 11,278 10,226
Office equipment at cost, less accumulated depreciation
of $4,001 and $3,604, respectively 1,985 1,740
Investment securities, at fair value 11,896 11,827
Other assets 706 731
------- -------
Total assets $57,096 $45,897
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Notes payable $ 7,200 $ 6,307
Due to clearing firm and other broker-dealers 1,076 405
Payable to customers 3,251 3,184
Securities sold but not yet purchased, at market 1,975 1,659
Employee compensation and related taxes payable 6,776 3,649
Other accounts payable and accrued expenses 6,420 4,489
Income taxes payable 672 346
Deferred tax liability 908 553
------- -------
Total liabilities 28,278 20,592
------- -------
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 5,994 and 6,257 shares,
respectively 120 125
Additional paid-in capital 12,609 13,680
Retained earnings 16,089 11,500
------- -------
Total shareholders' equity 28,818 25,305
------- -------
Total liabilities and shareholders' equity $57,096 $45,897
======= =======
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
(Unaudited) (Unaudited)
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Commission income $10,920 $ 6,851 $21,027 $12,642
Principal transactions 11,785 8,189 20,936 14,979
Investment account income 3,249 3,644 4,041 4,515
Investment banking 3,085 1,479 3,556 1,738
Interest 667 415 1,258 822
Other 1,226 694 2,275 1,333
------- ------- ------- -------
Total revenues 30,932 21,272 53,093 36,029
------- ------- ------- -------
Operating Expenses:
Compensation and benefits 14,933 10,205 25,643 18,124
Bank commissions 4,627 2,301 8,765 4,354
Floor brokerage and clearance 1,450 1,038 2,660 1,954
Communications 313 314 633 630
Occupancy and equipment 1,585 1,437 3,080 2,871
Litigation settlements 662 1,992 742 1,992
Other 1,927 1,828 3,913 3,444
------- ------- ------- -------
Total operating expenses 25,497 19,115 45,436 33,369
------- ------- ------- -------
Income before income taxes 5,435 2,157 7,657 2,660
Income tax expense 2,175 891 3,068 1,077
------- ------- ------- -------
Net income $ 3,260 $ 1,266 $ 4,589 $ 1,583
------- ------- ------- -------
Earnings per common share:
Primary $ 0.54 $ 0.20 $ 0.75 $ 0.26
Fully diluted $ 0.54 $ 0.20 $ 0.75 $ 0.25
------- ------- ------- -------
Weighted average number of common and
common equivalent shares outstanding:
Primary 6,038 6,269 6,108 6,165
Fully diluted 6,038 6,277 6,137 6,281
======= ======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except per share data)
<TABLE>
<CAPTION>
Additional Unearned
Common Stock Issued Paid-in Compen- Retained
Shares Amount Capital sation Earnings
----- ---- ------- ---- -------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 6,033 $121 $13,245 ($107) $11,930
----- ---- ------- ---- -------
Dividends on common stock ($.10 per share) (598)
Exercise of warrants 21 0 47
Issuance of shares under employee
stock option plan 57 1 299
Repurchase of stock (230) (4) (730)
Amortization of unearned compensation 81
Net loss (3,210)
----- ---- ------- ---- -------
Balance, December 31, 1994 5,881 118 12,861 (26) 8,122
----- ---- ------- ---- -------
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
----- ---- ------- ---- -------
Issuance of shares under employee
stock option plan 24 0 46
Repurchase of stock (287) (5) (1,117)
Net income 4,589
----- ---- ------- ---- -------
Balance, June 30, 1996 (unaudited) 5,994 $120 $12,609 $0 $16,089
===== ==== ======= ==== =======
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1996 1995
-------- --------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers, broker-dealers
and clearing agencies $ 39,026 $ 28,636
Cash paid to suppliers and employees (39,732) (31,157)
Minority interest 0 2
Interest:
Received 1,259 822
Paid (128) (44)
Income taxes refunded (paid) (2,388) 1,390
-------- --------
Net cash used in operating activities (1,963) (351)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investment securities 9,407 17,746
Purchase of:
Office equipment (647) (283)
Investment securities (5,435) (16,872)
-------- --------
Net cash provided by investing activities 3,325 591
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance (repurchase) of common stock (1,076) 857
Net borrowings on notes payable and revolving
credit agreements 893 370
Dividends paid 0 (147)
-------- --------
Net cash provided by (used in) financing activities (183) 1,080
-------- --------
Increase in cash and cash equivalents 1,179 1,320
Cash and cash equivalents at beginning of period 5,766 2,750
-------- --------
Cash and cash equivalents at end of period $ 6,945 $ 4,070
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1996 1995
------- -------
(Unaudited)
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH
USED IN OPERATING ACTIVITIES:
Net income $ 4,589 $ 1,583
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 402 483
Unearned compensation 0 11
Net unrealized gain on investment securities (1,388) (1,615)
Net realized gain on sale of investment securities (2,653) (2,900)
Deferred income taxes 355 247
(Increase) decrease in:
Receivable from clearing firm and other
brokers-dealers (2,090) (2,955)
Receivable from customers (6,008) (1,977)
Miscellaneous receivables (581) (20)
Trading securities, at market (1,052) 1,112
Income tax receivable 0 1,187
Other assets 25 113
Increase (decrease) in:
Due to clearing firm and other broker-dealers 671 (1,875)
Payable to customers 67 1,299
Securities sold but not yet purchased, at market 316 465
Employee compensation and related taxes payable 3,127 1,437
Income taxes payable 326 1,034
Other accounts payable and accrued expenses 1,931 2,020
------- -------
Net cash used in operating activities ($1,963) ($ 351)
======= =======
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
The accompanying consolidated financial statements of Kinnard
Investments, Inc., (the "Company") have been prepared in
conformity with generally accepted accounting principles and
should be read in conjunction with the Company's annual report for
the year ended December 31, 1995. The results of operations for
the six months ended June 30, 1996 are not necessarily indicative
of the results to be expected for the year ended December 31,
1996.
The consolidated statement of financial condition as of June 30,
1996 and other financial information for the six months ended June
30, 1996 and 1995, are unaudited, but management of the Company
believes that all adjustments (consisting only of normal recurring
adjustments) necessary for a fair statement of the results of
operations for the periods have been included.
For comparability, certain 1995 amounts have been reclassified to
conform with the presentation for 1996. The reclassifications had
no effect on net income or shareholders' equity as previously
reported.
Note 2. Net Capital Requirements
Pursuant to the net capital provisions of the Securities Exchange
Act of 1934, the Company's subsidiaries, John G. Kinnard and
Company, Inc. ("JGK"), and PRIMEVEST Financial Services, Inc.
("PFS"), are required to maintain a minimum net capital as defined
under such provisions. Also under this rule, JGK's ratio of
aggregate indebtedness to net capital may not exceed 15 to 1, and
PFS's 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 June 30, 1996, JGK had net capital of $8.2 million, a net
capital requirement of $714,000 and a ratio of aggregate
indebtedness to net capital of 1.3 to 1. PFS had net capital of
$2.8 million, a net capital requirement of $273,000 and a ratio of
net capital to aggregate debit items of 21%.
Note 3. Shareholders' Equity
During the first six months of 1996, the Company repurchased
287,000 shares of its common stock at a total cost of $1.1
million. The Board of Directors has authorized the repurchase of
up to 1.1 million shares of the Company's common stock, of which a
total of 545,000 shares have been repurchased as of June 30, 1996.
In the first quarter of 1996, 23,700 options with an exercise
price of $1.98 per shares were exercised, generating proceeds of
$46,000.
In 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. An additional 38,917 warrants
that were not exercised expired.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Commitments and Contingent Liabilities
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.
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 quarter-end is not expected to have a
material effect on the financial statements.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with Management's Discussion and
Analysis contained in the Company's Annual Report - Form 10-K for the year ended
December 31, 1995.
Results of Operations
The Company reported record revenues and net income for the quarter ending June
30, 1996. Revenues increased to $30.9 million from $21.3 million, and net income
increased to $3.3 million from $1.3 million. Primary earnings per share rose to
54 cents from 20 cents in the prior year. For the six months ended June 30,
1996, net income was $4.6 million, or 75 cents per share, on revenues of $53.1
million. This compares to net income of $1.6 million, or 26 cents per share, on
revenues of $36.0 million for the same period a year ago.
Revenues for the three month and six month periods increased by 45% and 47%,
respectively, due to favorable equity markets, strong results from the Capital
Markets Group, and increased productivity by retail and institutional investment
executives. The Company's outlook for the remainder of 1996 is guarded following
the significant appreciation of equity markets that has taken place during the
past eighteen months.
Commission income was up by 66% in the current six month period compared to last
year. Sales of mutual fund products and over-the-counter securities were
responsible for a majority of the increase. Vigorous equity markets provided the
groundwork for increased sales of equity products. In addition, mutual fund
sales benefited from the industry trend of record amounts of new money being
invested into mutual funds.
Income from principal transactions in 1996 increased by 44% and 40% versus the
comparable three and six month periods in 1995. Revenue from principal equity
transactions increased significantly due to favorable markets and a strong
performance by the Company's trading department. Revenues from the sale of fixed
income products declined in both periods due in part to rising interest rates.
The Company recorded income on the change in valuation of its investment account
of $3.2 million in the current quarter, down 11% from the prior year. The
majority of income in the current period was due to a gain on one security held
in the portfolio. The investment account has historically produced volatile
results.
Income from investment banking activities increased $1.6 million for the current
quarter and $1.8 million for the six months. During the quarter the Company
completed two initial public offerings and two private financings compared to
two public financings last year. The current period included the largest
lead-managed initial public offering in the Company's history.
Compensation and benefits increased 46% for the three months and 41% for the six
months. Variable compensation, such as commissions paid to investment executives
and incentives paid on revenues and profits, increased due to improved financial
results of the Company. The total number of employees at June 30, 1996 is down
1% from a year ago.
For the six month period bank commissions increased 101%, and floor brokerage
and clearance increased 36%. Both of these increases were in line with the
increase in associated revenues. Other expenses increased 14% as a result of
charges related to legal matters. The percent increase in other expenses is less
than the percent increase in revenues due in part to management's continued
focus on cost management.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
Operating Activities
A large portion of the Company's assets are cash and assets readily convertible
to cash. The liquid portion of the Company's trading and investment securities
are stated at quoted market value and are readily marketable. The less liquid
portions of trading inventory and investment securities, which totaled $3.0
million at June 30, 1996, are stated at fair value, which is determined by
management's best estimate.
Between December 31, 1995 and June 30, 1996, trading securities increased $1.1
million and securities sold but not yet purchased increased by $316,000. Both
long and short inventories are generally maintained to facilitate customer
transactions rather than for market speculation.
As securities broker-dealers, JGK and PFS are required by SEC regulations to
meet certain liquidity and capital standards. Both companies have been in
compliance with these regulations at all times.
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.
Investing Activities
The majority of investing activities during the current period resulted from the
sale and purchase of securities held in the investment account. A large portion
of the investment account is comprised of liquid investment-grade fixed income
securities.
Financing Activities
The Company's subsidiaries maintain various credit facilities in order to meet
short-term operating needs. At June 30, 1996 and December 31, 1995 there were
outstanding balances of $7.2 million and $6.3 million, respectively, under these
facilities. The outstanding debt was used primarily to finance customer margin
balances.
During the first six months of 1996, the Company repurchased 287,000 shares of
its common stock at a total cost of $1.1 million. The Board of Directors has
authorized the repurchase of up to 1.1 million shares of the Company's common
stock, of which a total of 545,000 shares have been repurchased as of June 30,
1996.
Cautionary Statements
As provided under the Private Securities Reform Act of 1995, the Company wishes
to caution investors of the following factors which 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 or elsewhere by
or on behalf of the Company: volatility in the securities markets, risks in the
ownership and underwriting of securities, consolidation in the financial
services industries, volatility in earnings and losses of investment securities,
competition, government regulation, customer litigation and arbitration, and
off-balance-sheet credit and market risks. For a more complete discussion of
these and other factors, see the Company's Annual Report on Form 10-K for the
year ended December 31, 1995.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
See Note 4 in Notes to Consolidated Financial Statements.
ITEM 2 - CHANGES IN SECURITIES
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were voted on at the Registrant's Annual Meeting
held on May 15, 1996:
1. To set the number of members of the Board of Directors at six (6).
Number of Number of Number of Number of Broker
Votes For Votes Against Abstentions Nonvotes
5,590,999 42,089 14,537 0
2. To elect members of the Board.
Number of Votes
Number of Votes For Withheld
Stephen H. Fischer 5,451,489 178,336
James W. Hansen 5,456,853 178,336
Thomas E. Moore 5,443,893 178,336
Hilding C. Nelson 5,461,329 178,336
Andrew J. O'Connell 5,467,289 178,336
Robert S. Spong 5,445,328 178,336
3. To adopt Restated Articles of Incorporation of the Company.
Number of Number of Number of Number of Broker
Votes For Votes Against Abstentions Nonvotes
5,460,324 124,536 62,765 0
4. To amend the Company's Bylaws relating to quorom and adjournment of
shareholder meeings, number and term of office of directors and filling
of vacancies on the Board and to add a bylaw providing special director
removal procedures.
Number of Number of Number of Number of Broker
Votes For Votes Against Abstentions Nonvotes
5,569,944 51,929 25,752 0
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 - Financial Data Schedule (filed in electronic format only)
(b) Reports on Form 8-K
None
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KINNARD INVESTMENTS, INC.
/s/ Stephen H. Fischer
Stephen H. Fischer
Treasurer (principal financial officer)
Date 8/09/96
<PAGE>
KINNARD INVESTMENTS, INC.
EXHIBIT INDEX
to
Form 10-Q
for Quarter Ended June 30, 1996
Exhibit
Number Description
27 Financial Data Schedule (filed in electronic format only)
<TABLE> <S> <C>
<ARTICLE> BD
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 6,945
<RECEIVABLES> 24,286
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 23,174
<PP&E> 1,985
<TOTAL-ASSETS> 57,096
<SHORT-TERM> 7,200
<PAYABLES> 4,327
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 1,975
<LONG-TERM> 0
0
0
<COMMON> 120
<OTHER-SE> 28,698
<TOTAL-LIABILITY-AND-EQUITY> 57,096
<TRADING-REVENUE> 20,936
<INTEREST-DIVIDENDS> 1,258
<COMMISSIONS> 21,027
<INVESTMENT-BANKING-REVENUES> 3,556
<FEE-REVENUE> 2,275
<INTEREST-EXPENSE> 0
<COMPENSATION> 25,643
<INCOME-PRETAX> 7,657
<INCOME-PRE-EXTRAORDINARY> 7,657
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,589
<EPS-PRIMARY> 0.75
<EPS-DILUTED> 0.75
</TABLE>
