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, 1997 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, 1997: 6,238,179
<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...........................9
PART II
OTHER INFORMATION................................................12
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
<TABLE>
<CAPTION>
================================================================================= ==================== ====================
June 30, December 31,
1997 1996
- --------------------------------------------------------------------------------- -------------------- --------------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $2,004 $12,518
Funds held in escrow 1,551 1,513
Receivable from clearing firm and other broker-dealers 4,399 968
Miscellaneous receivables 2,863 2,140
Trading securities, at market 7,584 7,658
Office equipment at cost, less accumulated depreciation
of $3,617 and $3,327, respectively 1,072 980
Investment securities, at fair value 24,683 20,940
Income tax receivable 70 0
Other assets 280 424
- --------------------------------------------------------------------------------- -------------------- --------------------
Total assets $44,506 $47,141
================================================================================= ==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Securities sold but not yet purchased, at market $1,689 $842
Employee compensation and related taxes payable 2,707 3,900
Other accounts payable and accrued expenses 2,490 3,011
Income taxes payable 0 3,228
Deferred tax liability 106 131
- --------------------------------------------------------------------------------- -------------------- --------------------
Total liabilities 6,992 11,112
- --------------------------------------------------------------------------------- -------------------- --------------------
Shareholders' equity
Preferred stock, authorized 1,000 shares; none issued or outstanding 0 0
Undesignated stock, authorized 16,500 shares; none issued or outstanding 0 0
Common stock, $.02 par value; authorized 7,500 shares; issued and
outstanding 6,261 and 6,027 shares, respectively 125 120
Additional paid-in capital 13,805 12,710
Retained earnings 23,584 23,199
- --------------------------------------------------------------------------------- -------------------- --------------------
Total shareholders' equity 37,514 36,029
- --------------------------------------------------------------------------------- -------------------- --------------------
Total liabilities and shareholders' equity $44,506 $47,141
================================================================================= ==================== ====================
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(In thousands, except per share data)
============================================== ================================== ==== ==================================
Three Months Ended Six Months Ended
June 30, June 30,
- ---------------------------------------------- ---------------------------------- ---- ----------------------------------
1997 1996 1997 1996
- ---------------------------------------------- ---------------------------------- ---- ----------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Commission income $3,261 $10,920 $6,938 $21,027
Principal transactions 6,608 11,785 13,144 20,936
Investment account income 878 3,249 194 4,041
Investment banking 1,005 3,085 1,543 3,556
Interest 557 667 1,140 1,258
Other 589 1,226 1,111 2,275
- ---------------------------------------------- ---------------- ----------------- ---- ----------------- ----------------
Total revenues 12,898 30,932 24,070 53,093
- ---------------------------------------------- ---------------- ----------------- ---- ----------------- ----------------
Expenses:
Compensation and benefits 8,122 14,933 16,290 25,643
Bank commissions 0 4,627 0 8,765
Floor brokerage and clearance 915 1,450 1,897 2,660
Communications 196 313 383 633
Occupancy and equipment 1,283 1,585 2,481 3,080
Other 1,199 2,589 2,352 4,655
- ---------------------------------------------- ---------------- ----------------- ---- ----------------- ----------------
Total expenses 11,715 25,497 23,403 45,436
- ---------------------------------------------- ---------------- ----------------- ---- ----------------- ----------------
Income before income taxes 1,183 5,435 667 7,657
Income tax expense 482 2,175 282 3,068
- ---------------------------------------------- ---------------- ----------------- ---- ----------------- ----------------
Net income $701 $3,260 $385 $4,589
- ---------------------------------------------- ---------------- ----------------- ---- ----------------- ----------------
Earnings per common share:
Primary $0.11 $0.54 $0.06 $0.75
Fully diluted $0.11 $0.54 $0.06 $0.75
- ---------------------------------------------- ---------------- ----------------- ---- ----------------- ----------------
Weighted average number of common and
common equivalent shares outstanding:
Primary 6,364 6,038 6,236 6,108
Fully diluted 6,395 6,038 6,427 6,137
============================================== ================ ================= ==== ================= ================
See Notes to Consolidated Financial Statements
</TABLE>
<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, 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 the 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 the employee stock
purchase plan 11 0 51
Issuance of shares under the employee
stock option plan 88 2 311
Repurchase of stock (329) (7) (1,332)
Net income 11,699
- ------------------------------------------------- ------------- ------------- ------------- -------------- -------------
Balance, December 31, 1996 6,027 120 12,710 0 23,199
- ------------------------------------------------- ------------- ------------- ------------- -------------- -------------
Issuance of shares under the employee
stock option plan 42 1 125
Issuance of new shares 325 6 1,699
Repurchase of stock (133) (2) (729)
Net income 385
- ------------------------------------------------- ------------- ------------- ------------- -------------- -------------
Balance, June 30, 1997 (unaudited) 6,261 $125 $13,805 $0 $23,584
================================================= ============= ============= ============= ============== =============
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands)
============================================================================== ===========================================
Six Months Ended
June 30,
1997 1996
- ------------------------------------------------------------------------------ --------------------- ---------------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers, broker-dealers
and clearing agencies $20,225 $39,026
Cash paid to suppliers and employees (25,365) (39,732)
Interest:
Received 1,140 1,259
Paid 0 (128)
Income taxes paid (3,606) (2,388)
- ------------------------------------------------------------------------------ --------------------- ---------------------
Net cash used in operating activities (7,606) (1,963)
- ------------------------------------------------------------------------------ --------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investment securities 10,265 9,853
Purchase of:
Office equipment (382) (647)
Investment securities (13,853) (5,881)
- ------------------------------------------------------------------------------ --------------------- ---------------------
Net cash provided by (used in) investing activities (3,970) 3,325
- ------------------------------------------------------------------------------ --------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 1,831 47
Repurchase of common stock (731) (1,123)
Net borrowings on notes payable and
revolving credit agreements 0 893
- ------------------------------------------------------------------------------ --------------------- ---------------------
Net cash provided by (used in) financing activities 1,100 (183)
- ------------------------------------------------------------------------------ --------------------- ---------------------
Increase (decrease) in cash and cash equivalents (10,476) 1,179
Cash and cash equivalents at beginning of period 14,031 5,766
- ------------------------------------------------------------------------------ --------------------- ---------------------
Cash and cash equivalents at end of period $3,555 $6,945
============================================================================== ===================== =====================
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
(In thousands)
=============================================================================== ===========================================
Six Months Ended
June 30,
1997 1996
- ------------------------------------------------------------------------------- --------------------- ---------------------
(Unaudited)
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH
USED IN OPERATING ACTIVITIES:
Net income $385 $4,589
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 290 402
Net unrealized gain on investment securities (165) (1,388)
Net realized gain on sale of investment securities (29) (2,653)
Deferred income taxes (25) 355
(Increase) decrease in:
Receivable from clearing firm and other brokers-dealers (3,431) (2,090)
Receivable from customers 0 (6,008)
Miscellaneous receivables (684) (581)
Trading securities, at market 74 (1,052)
Income tax receivable (70) 0
Other assets 144 25
Increase (decrease) in:
Due to clearing firm and other broker-dealers 0 671
Payable to customers 0 67
Securities sold but not yet purchased, at market 847 316
Employee compensation and related taxes payable (1,193) 3,127
Other accounts payable and accrued expenses (521) 1,931
Income taxes payable (3,228) 326
- ------------------------------------------------------------------------------- --------------------- ---------------------
Net cash used in operating activities ($7,606) ($1,963)
=============================================================================== ===================== =====================
See Notes to Consolidated Financial Statements
</TABLE>
<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, 1996. The results of operations for
the six months ended June 30, 1997 are not necessarily indicative
of the results to be expected for the year ended December 31,
1997.
The consolidated statement of financial condition as of June 30,
1997 and other financial information for the six months ended June
30, 1997 and 1996, 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.
Note 2. Net Capital Requirements
Pursuant to the net capital provision of the Securities Exchange
Act of 1934, the Company's subsidiary, John G. Kinnard and
Company, Incorporated ("JGK") is required to maintain 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 JGK may be prohibited from expanding its
business or declaring cash dividends if its ratio of aggregate
indebtedness to net capital is greater than 10 to 1.
At June 30, 1997, JGK had net capital of $5.7 million, a net
capital requirement of $654,000 and a ratio of aggregate
indebtedness to net capital of .95 to 1.
Note 3. Commitments and Contingent Liabilities
In May 1997, a lawsuit seeking class action status was filed in
U.S. District Court in Minnesota alleging that Photran
Corporation, its management, and JGK violated securities laws by
issuing false and misleading statements related to financial
results. JGK managed the initial public offering of Photran in May
1996. JGK believes that it has substantial defenses against these
claims, and intends to defend itself vigorously against them. The
ultimate effect of this matter on the future operating results and
financial condition of the Company is unknown at this time.
In June 1997, a lawsuit seeking class action status was filed in
U.S. District Court in Minnesota alleging that JGK violated
securities laws by issuing false and misleading statements
relating to the initial public offering of Electroscope, Inc. that
was managed by JGK in May 1996. JGK believes that it has
substantial defenses against these claims, and intends to defend
itself vigorously against them. The ultimate effect of this matter
on the future operating results and financial condition of the
Company is unknown at this time.
JGK is a defendant in various other actions relating to its
business, some of which involve claims for unspecified amounts.
Although the resolution of these matters cannot be predicted with
certainty, the Company's management believes that while their
outcome may have a material effect on the earnings in a particular
period, the outcome will not have a material adverse effect on the
financial condition of the Company.
<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, 1996.
Results of Operations
The lack of inflationary pressure and growth in corporate earnings boosted
equity stock indices during the quarter as the Dow Jones Industrial Average and
Nasdaq Composite increased 16.6% and 18.0 %, respectively. The strong gains in
the indices were concentrated on large capitalization stocks, while increases in
small capitalization stocks tended to underperfrom the averages.
Net income for the quarter was $701,000, or 11 cents per share, on revenues of
$12.9 million. These results compare to net income of $3.3 million, or 54 cents
per share, on revenues of $30.9 million in the same quarter a year ago. Included
in the prior year are results of PRIMEVEST Financial Services, Inc. ("PFS")
which was sold by Kinnard in October 1996. If the results of PFS were excluded
from the prior year, net income for the second quarter of 1996 would have been
$2.8 million, or 46 cents per share, on revenues of $22.3 million.
For the six months ended June 30, 1997, net income was $385,000, or 6 cents per
share, on revenues of $24.1 million. This compares to net income of $4.6
million, or 75 cents per share, on revenues of $53.1 million in 1996. Excluding
PFS, prior year revenues, net income and earnings per share would have been
$36.4 million, $3.5 million and 58 cents, respectively.
Commission income in the current period declined 18% from the second quarter of
1996 (excluding PFS) and for the six month period declined 7%. Sales of mutual
fund products remained strong while listed and over-the-counter securities
declined.
Revenues from principal transactions declined by 41% (excluding PFS) in the
current quarter due in part to volatility in the small cap segment of the
market. Partially offsetting the decline in equity trading was a 62% increase in
fixed income principal transactions. The Company had a record quarter for fixed
income originations and strong retail sales of fixed income products. Principal
transaction revenues for the six month period declined by 34% (excluding PFS)
compared to the same period last year.
Income from the change in valuation of securities held in the investment account
was $878,000 for the current quarter compared to income of $3.2 million for the
same period last year. For the current six month period the gain was $194,000 in
1997 versus $4.0 million in 1996. The investment account has historically been a
volatile source of income.
Investment banking revenues declined by $2.1 million during the quarter as the
Company completed three private financings during the current quarter compared
to two initial public offerings and two private financings for the same quarter
last year. Revenues for the current six month period were $1.6 million compared
to $3.6 million for the same period last year.
Interest income declined by $110,000 for the current quarter compared to last
year, but increased by $201,000 when excluding the effect of PFS. The increase
was due primarily to earnings on the proceeds from the sale of PFS. For the six
month period, interest income increased by $457,000 (excluding PFS) from the
prior year.
For both the three and six month periods other income increased by 17%
(excluding PFS) due to an increase in fee based income.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations (continued)
Employee compensation for the three month period decreased by $4.9 million
(excluding PFS). This decline in variable compensation was in line with the
decrease in revenues and profits, while salary expense increased with the
addition of key personnel and salary increases. Compensation for the current six
month period declined by $5.7 million (excluding PFS).
Bank commissions, which were related to the business of PFS, are zero for the
current period. Communications expense is flat with last year (excluding PFS)
due to lower revenue levels as well as cost reductions. Other expenses for the
current quarter declined by $801,000 (excluding PFS) due to the resolution of
certain litigation matters. Correspondingly, other expenses for the current six
month period declined by $1.2 million, excluding PFS.
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 $1.9
million at June 30, 1997, are stated at fair value, which is determined by
management's best estimate.
Between December 31, 1996 and June 30, 1997, trading securities decreased
$74,000 and securities sold but not yet purchased increased by $847,000. Both
long and short inventories are generally maintained to facilitate customer
transactions rather than for market speculation.
As securities broker-dealers, JGK is required by SEC regulations to meet certain
liquidity and capital standards. It has been in compliance with these
regulations at all times.
Based on the Company's current liquidity positions, available bank lines and
operating plans, it is anticipated that the Company has sufficient resources to
meet the cash requirements of its operations in the foreseeable future.
Investing Activities
The majority of 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.
Investing activity results primarily from the maturity and repurchase of fixed
income securities, while the volatility in income earned on the portfolio
typically results from changes in valuation of the equity securities.
Financing Activities
JGK maintains a credit facility in order to meet short-term operating needs. At
December 31, 1996 and June 30, 1997 there were no outstanding balances under
this facility.
During the first six months of 1997, the Company repurchased 133,000 shares of
its common stock at a total cost of $731,000. 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 720,000 shares have been repurchased as of June 30,
1997.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Cautionary Statements
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, 1996.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
See Note 3 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 20, 1997:
1. To set the number of members of the Board of Directors at five (5).
Number of Number of Number of Number of Broker
Votes For Votes Against Abstentions Nonvotes
5,681,115 87,648 26,498 0
2. To elect members of the Board.
Number of Votes
Number of Votes For Withheld
William F. Farley 5,529,331 255,970
Stephen H. Fischer 5,445,939 255,970
Hilding C. Nelson 5,444,307 255,970
Andrew J. O'Connell 5,455,875 255,970
Robert S. Spong 5,400,562 255,970
3. To approve the 1997 Stock Option Plan.
Number of Number of Number of Number of Broker
Votes For Votes Against Abstentions Nonvotes
2,917,110 1,079,528 34,699 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
Report on Form 8-K filed on July 7, 1997 (and related
Reports on Form 8-K/A (No.1) filed on July 16th, 1997
and Form 8-K/A (No.2) filed on July 18th, 1997)
pertaining to the Registrant's dismissal of Deloitte &
Touche LLP as its outside auditor.
<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/ Daniel R. Sass
Daniel R. Sass
Treasurer (principal financial and
accounting officer)
Date 08/9/97
<TABLE> <S> <C>
<ARTICLE> BD
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 3,555
<RECEIVABLES> 7,262
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 32,267
<PP&E> 1,072
<TOTAL-ASSETS> 44,506
<SHORT-TERM> 0
<PAYABLES> 0
<REPOS-SOLD> 0
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0
0
<COMMON> 125
<OTHER-SE> 37,389
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<TRADING-REVENUE> 13,144
<INTEREST-DIVIDENDS> 1,140
<COMMISSIONS> 6,938
<INVESTMENT-BANKING-REVENUES> 1,543
<FEE-REVENUE> 1,111
<INTEREST-EXPENSE> 0
<COMPENSATION> 16,290
<INCOME-PRETAX> 667
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</TABLE>
