SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1998 Commission File No. 0-9377
------------------- -------------
KINNARD INVESTMENTS, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-0972952
(State of incorporation) (I.R.S. Employer identification number)
920 Second Avenue South, Minneapolis, Minnesota 55402 (612) 370-2700
(Address of principal executive offices) Telephone number
Not applicable
Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for at least the past 90 days. Yes X No _____
Shares of $0.02 par value common stock outstanding at May 11, 1998: 5,977,677
<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..................................................13
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
<TABLE>
<CAPTION>
================================================================================= ==================== ====================
March 31, December 31,
1998 1997
- --------------------------------------------------------------------------------- -------------------- --------------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $3,049 $3,886
Funds held in escrow 0 1,593
Receivable from clearing firm 3,278 0
Miscellaneous receivables 3,702 3,311
Trading securities, at market 7,177 10,730
Office equipment at cost, less accumulated depreciation
of $3,053 and $2,876, respectively 1,405 1,267
Investment securities, at fair value 23,984 22,705
Other assets 421 480
- --------------------------------------------------------------------------------- -------------------- --------------------
Total assets $43,016 $43,972
================================================================================= ==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Due to clearing firm $0 $1,069
Securities sold but not yet purchased, at market 1,305 915
Accrued compensation 2,410 3,594
Other accounts payable and accrued expenses 3,020 2,584
Income taxes payable 18 18
Deferred income taxes payable 403 220
- --------------------------------------------------------------------------------- -------------------- --------------------
Total liabilities 7,156 8,400
- --------------------------------------------------------------------------------- -------------------- --------------------
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 5,963 and 5,955 shares, respectively 119 119
Additional paid-in capital 11,971 11,946
Retained earnings 23,770 23,507
- --------------------------------------------------------------------------------- -------------------- --------------------
Total shareholders' equity 35,860 35,572
- --------------------------------------------------------------------------------- -------------------- --------------------
Total liabilities and shareholders' equity $43,016 $43,972
================================================================================= ==================== ====================
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
============================================================================ ==============================================
Three Months Ended
March 31,
- ---------------------------------------------------------------------------- ----------------------------------------------
1998 1997
- ---------------------------------------------------------------------------- ---------------------- ----------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues
Commissions $3,643 $3,677
Principal transactions 5,207 6,501
Investment banking 1,981 537
Net gains (losses) on investment account 967 (683)
Interest 375 583
Other 729 558
- ---------------------------------------------------------------------------- ---------------------- ----------------------
Total revenues 12,902 11,173
- ---------------------------------------------------------------------------- ---------------------- ----------------------
Expenses
Compensation and benefits 8,715 8,168
Floor brokerage and clearance 974 982
Communications 181 187
Occupancy and equipment 1,417 1,198
Other 1,169 1,152
- ---------------------------------------------------------------------------- ---------------------- ----------------------
Total expenses 12,456 11,687
- ---------------------------------------------------------------------------- ---------------------- ----------------------
Income (loss) before income taxes 446 (514)
Income tax expense (benefit) 183 (199)
- ---------------------------------------------------------------------------- ---------------------- ----------------------
Net income (loss) $263 ($315)
============================================================================ ====================== ======================
Earnings (loss) per common share:
Basic $0.04 ($0.05)
Diluted $0.04 ($0.05)
============================================================================ ====================== ======================
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
================================================ ============================ ============== ============== ==============
Common Stock Total
------------ Paid-in Retained Shareholders'
Shares Amount Capital Earnings Equity
- ------------------------------------------------ -------------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 6,257 $125 $13,680 $11,500 $25,305
- ------------------------------------------------ -------------- ------------- -------------- -------------- --------------
Issuance of shares under employee stock
purchase plan 11 0 51 51
Issuance of shares under the employee
stock option plan 88 2 311 313
Repurchase of shares (329) (7) (1,332) (1,339)
Net income 11,699 11,699
- ------------------------------------------------ -------------- ------------- -------------- -------------- --------------
Balance, December 31, 1996 6,027 120 12,710 23,199 36,029
- ------------------------------------------------ -------------- ------------- -------------- -------------- --------------
Issuance of shares under the employee
stock option plan 68 1 230 231
Issuance of new shares 325 7 1,700 1,707
Repurchase of shares (465) (9) (2,694) (2,703)
Net income 308 308
- ------------------------------------------------ -------------- ------------- -------------- -------------- --------------
Balance, December 31, 1997 5,955 119 11,946 23,507 35,572
- ------------------------------------------------ -------------- ------------- -------------- -------------- --------------
Issuance of shares under the employee
stock purchase plan 8 0 49 49
Issuance of shares under the employee
stock option plan 20 0 97 97
Repurchase of shares (20) 0 (121) (121)
Net income 263 263
- ------------------------------------------------ -------------- ------------- -------------- -------------- --------------
Balance, March 31, 1998 (unaudited) 5,963 $119 $11,971 $23,770 $35,860
- ------------------------------------------------ -------------- ------------- -------------- -------------- --------------
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
============================================================================== ===========================================
Three Months Ended
March 31,
1998 1997
- ------------------------------------------------------------------------------ --------------------- ---------------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers and clearing firm $12,226 $9,919
Cash paid to suppliers and employees (14,428) (14,439)
Interest received 375 565
Income taxes paid (1) (3,538)
- ------------------------------------------------------------------------------ --------------------- ---------------------
Net cash used in operating activities (1,828) (7,493)
- ------------------------------------------------------------------------------ --------------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of investment securities 7,688 3,998
Purchase of:
Office equipment (315) (89)
Investment securities (8,000) (8,671)
Funds released from escrow 1,593 0
- ------------------------------------------------------------------------------ --------------------- ---------------------
Net cash provided by (used in) investing activities 966 (4,762)
- ------------------------------------------------------------------------------ --------------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 146 50
Repurchase of common stock (121) (59)
- ------------------------------------------------------------------------------ --------------------- ---------------------
Net cash provided by (used in) financing activities 25 (9)
- ------------------------------------------------------------------------------ --------------------- ---------------------
Decrease in cash and cash equivalents (837) (12,264)
Cash and cash equivalents at beginning of period 3,886 12,518
- ------------------------------------------------------------------------------ --------------------- ---------------------
Cash and cash equivalents at end of period $3,049 $254
============================================================================== ===================== =====================
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
=============================================================================== ===========================================
Three Months Ended
March 31,
1998 1997
- ------------------------------------------------------------------------------- --------------------- ---------------------
(Unaudited) (Unaudited)
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH
USED IN OPERATING ACTIVITIES:
Net income (loss) $263 ($315)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 177 141
Net unrealized loss (gain) on investment securities (776) 698
Net realized gain on sale of investment securities (191) (15)
Deferred income taxes 183 (268)
(Increase) decrease in:
Receivable from clearing firm (3,278) (1,723)
Miscellaneous receivables (391) (354)
Trading securities, at market 3,553 (101)
Income tax receivable 0 (241)
Other assets 59 96
Increase (decrease) in:
Payable to clearing firm (1,069) 0
Securities sold but not yet purchased, at market 390 470
Accrued compensation (1,184) (2,089)
Other accounts payable and accrued expenses 436 (564)
Income taxes payable 0 (3,228)
- ------------------------------------------------------------------------------- --------------------- ---------------------
Net cash used in operating activities ($1,828) ($7,493)
=============================================================================== ===================== =====================
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, 1997. The results of operations for
the three months ended March 31, 1998 are not necessarily
indicative of the results to be expected for the year ended
December 31, 1998.
The consolidated statement of financial condition as of March 31,
1998 and other financial information for the three months ended
March 31, 1998 and 1997, 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
The Company's brokerage subsidiary is subject to the Securities
and Exchange Commission (SEC) Rule 15c3-1, Net Capital
Requirements for Brokers and Dealers, which requires the Company
to maintain minimum net capital of $640,000 as of March 31, 1998.
Also, under this rule, the ratio of aggregate indebtedness to net
capital may not exceed 15 to 1, and the Company may be prohibited
from expanding its business or paying cash dividends if its ratio
of aggregate indebtedness to net capital is greater than 10 to 1.
At March 31, 1998, the Company had net capital of $3.6 million,
and a ratio of aggregate indebtedness to net capital of 1.6 to 1.
The Company is exempt from the provisions of SEC Rule 15c3-3,
Customer Protection: Reserves and Custody of Securities, as the
Company's clearing firm is responsible for complying with these
provisions. Accordingly, the Computation for Determination of
Reserve Requirements and Information Relating to the Possession or
Control Requirements is not required for the Company.
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 the Company's subsidiary John G.
Kinnard and Co., Inc. ("John G. Kinnard") violated securities laws
by issuing false and misleading statements related to financial
results. John G. Kinnard managed the initial public offering of
Photran in May 1996. John G. Kinnard 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.
John G. Kinnard 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.
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 consolidated financial statements.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Earnings Per Share
The following reconciliation illustrates the computation of basic
and diluted earnings per share as prescribed under SFAS 128:
<TABLE>
<CAPTION>
(In thousands, except per share data)
--------------------------------------------------------------------- ----------------------------------
Three Months Ended March 31,
1998 1997
--------------------------------------------------------------------- ----------------- ----------------
<S> <C> <C>
Net income (loss) $263 ($315)
===================================================================== ================= ================
Weighted average number of common shares
outstanding 5,962 6,027
Dilutive effect of stock options and warrants 89 0
--------------------------------------------------------------------- ----------------- ----------------
Weighted average number of common and potential
dilutive common shares outstanding 6,051 6,027
===================================================================== ================= ================
Basic earnings per share $0.04 ($0.05)
Diluted earnings per share 0.04 (0.05)
===================================================================== ================= ================
</TABLE>
Note 5. Effect of Recent Accounting Standards
In December 1997 the Financial Accounting Standards Board (FASB)
issued Statement No. 130 (SFAS 130), "Reporting Comprehensive
Income". The Company adopted SFAS 130 in the first quarter of
1998. Comprehensive income is equal to net income on the
consolidated statement of operations.
<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 on Form 10-K for the year
ended December 31, 1997.
Results of Operations
The following table sets forth a summary of changes in the major
categories of revenues and expenses:
(In thousands)
<TABLE>
<CAPTION>
===================================================================================================================
Three Months Ended
Unaudited March 31, 1998 versus March 31, 1997
Increase (Decrease)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues
Commission income ($34) (1%)
Principal transactions (1,294) (20)
Investment banking 1,444 269
Net gain on investment account 1,650 242
Interest (208) (36)
Other 171 31
- -------------------------------------------------------------------------------------------------------------------
Total revenues 1,729 15
- -------------------------------------------------------------------------------------------------------------------
Expenses
Compensation and benefits 547 7
Floor brokerage and clearance (8) (1)
Communications (6) (3)
Occupancy and equipment 219 18
Other 17 1
- -------------------------------------------------------------------------------------------------------------------
Total expenses 769 7
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 960 187
Income taxes 382 192
- -------------------------------------------------------------------------------------------------------------------
Net income $578 183%
===================================================================================================================
</TABLE>
Three months ended March 31, 1998 and 1997
Net income for the current quarter was $263,000, or four cents per share, on
revenues of $12.9 million. This compares to a net loss of $315,000, or 5 cents
per share, on revenues of $11.2 million for the same quarter a year ago. While
the Company returned to profitability after incurring losses in the prior year
and previous quarter, management believes earnings have not yet reached their
potential due, in part, to costs related to building the retail distribution
network and converting to a new clearing firm. In March 1998, the Company signed
a letter of intent to transfer its clearing business to NationsBanc Montgomery
Securities.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three months ended March 31, 1998 and 1997 (continued)
Commission income declined slightly from the prior year. A 46% increase in the
sale of mutual fund products was offset by declines in listed stocks and
over-the-counter securities sold on an agency basis. Mutual funds continued to
be a popular vehicle for retail investors to participate in the equity markets.
Principal income decreased by 20% from the comparable quarter in 1997. Equity
principal transactions declined by 27% due to the effect of new order-handling
rule changes and smaller fractional pricing that took place in the latter half
of 1997. Fixed income principal transactions increased by 6%, benefiting from a
relatively stable interest rate environment and an increase in fixed income
originations.
A net gain on the investment account of $967,000 in the current period compares
to a net loss of $683,000 in the prior year. The Company's investment account
has historically been a volatile source of income.
Investment banking revenues increased by $1.4 million from the prior year as the
Company raised over $55 million in capital for businesses and municipalities.
During the quarter the Company completed two public offerings, compared to none
for the prior year, in addition to two merger and acquisition transactions, one
being the largest advisory assignment the Company has completed. The fixed
income originations business raised over $25 million through ten financings that
were managed by the Company.
Interest income decreased by 36% due to a decline in margin account balances and
fixed income securities held in the investment account. Other income increased
by 40% as a result of increases in fee-based income, primarily managed account
fees and income earned on cash management accounts.
Employee compensation increased by 7% in the current period. Commissions paid to
investment executives increased due to higher revenues, and incentive
compensation rose as a result of increased operating profits. The total number
of full-time employees was 325 at March 31, 1998, down from 358 a year ago.
Floor brokerage and clearing were basically unchanged from the prior year, which
was in line with the change in transactions that require clearing.
Communications expense declined by 3% due in part to fewer employees as well as
cost efficiencies. Occupancy expense increased 18% due to costs related to
conversion of the Company's clearing business, upgrading the Company's
technology infrastructure, and the opening of two branches. Other expenses rose
1% from the prior year.
Liquidity and Capital Resources
Operating Activities
A large portion of the Company's assets are cash and assets readily convertible
to cash. The liquid portions of the Company's trading and investment securities
are stated at quoted market values and are readily marketable. The less liquid
portions of trading and investment securities, which totaled $1.6 million at
March 31, 1998, are stated at fair value, which is determined by management's
best estimate.
Between December 31, 1997 and March 31, 1998 trading securities decreased $3.6
million and securities sold but not yet purchased increased by $389,000. Both
long and short inventories are generally maintained to facilitate customer
transactions rather than for market speculation.
<PAGE>
KINNARD INVESTMENTS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Operating Activities (continued)
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 Company's investment account is invested in fixed income securities,
publicly traded equity securities and privately placed equity securities. Equity
securities are frequently held as a result of past investment banking activities
performed by the Company. In addition, the Company may utilize outside advisors
to manage a portion of the investment portfolio.
The value of certain securities held in the investment account can fluctuate
significantly, with the resulting valuation changes being reported as net gains
or losses on the investment account. These fluctuations in value can have a
material impact on reported earnings.
Financing Activities
John G. Kinnard maintains a credit facility in order to meet short-term
operating needs. At December 31, 1997 and March 31, 1998 there were no
outstanding balances under this facility.
During the first three months of 1998, the Company repurchased 20,000 shares of
its common stock at a total cost of $121,000. For the full year of 1997, a total
of 465,000 shares were repurchased at a cost of $2.7 million. The Board of
Directors has authorized the repurchase of up to 1.6 million shares of the
Company's common stock, of which a total of 1,073,000 shares have been
repurchased as of March 31, 1998.
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 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, 1997.
<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
None
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (filed in electronic format only)
(b) Reports on Form 8-K
None
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KINNARD INVESTMENTS, INC.
/s/ Daniel R. Sass
-----------------------
Daniel R. Sass
Treasurer (principal financial and
accounting officer)
Date May 11, 1998
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
KINNARD INVESTMENTS, INC.
(Commission File Number: 0-9377)
EXHIBIT INDEX
for
Form 10-Q for the quarter ended March 31, 1998
27 Financial Data Schedule (filed in electronic form only)
<TABLE> <S> <C>
<ARTICLE> BD
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 3,049
<RECEIVABLES> 6,980
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 31,161
<PP&E> 1,405
<TOTAL-ASSETS> 43,016
<SHORT-TERM> 0
<PAYABLES> 0
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 1,305
<LONG-TERM> 0
0
0
<COMMON> 123
<OTHER-SE> 35,741
<TOTAL-LIABILITY-AND-EQUITY> 43,016
<TRADING-REVENUE> 5,207
<INTEREST-DIVIDENDS> 375
<COMMISSIONS> 3,643
<INVESTMENT-BANKING-REVENUES> 1,981
<FEE-REVENUE> 729
<INTEREST-EXPENSE> 0
<COMPENSATION> 8,715
<INCOME-PRETAX> 446
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 223
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
