<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
---------------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________ to________________
Commission file number 33-35889
--------
Financial Service Corporation
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-1842822
- - --------------------------------- ----------------------
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
2300 Windy Ridge Parkway, Suite 1100, Atlanta, GA 30339
- - ---------------------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (770) 916-6500
--------------
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 the past 90 days. Yes X No
--- ---
As of June 30, 1996, there were 881,241 shares of the registrant's common stock
outstanding.
(Cover page 1 of 1 page)
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Financial Service Corporation and Subsidiaries
Consolidated Balance Sheets
as of June 30, 1996 and December 31, 1995
<TABLE>
<CAPTION>
(Unaudited)
June 30 December 31
1996 1995
------------- -------------
ASSETS
- - ------
<S> <C> <C>
Cash and cash equivalents $ 6,811,644 $ 4,382,050
Cash segregated under federal regulations 2,719,746 1,723,908
Commissions and other receivables, net 5,877,540 5,501,698
Information systems and equipment, net 4,065,551 3,084,095
Deferred tax benefit, net 532,000 532,000
Prepaid expenses and other assets 628,497 1,559,010
------------ -----------
Total assets $ 20,634,978 $ 16,782,761
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ------------------------------------
Liabilities:
Commissions payable $ 5,053,057 $ 4,006,942
Accounts payable to dealers 3,176,103 2,482,023
Accounts payable and accrued expenses 3,936,162 3,470,878
------------ ------------
Total liabilities 12,165,322 9,959,843
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 5,000,000 shares
authorized; 924,680 shares issued and
outstanding 9,247 9,247
Additional paid-in capital 1,447,713 1,447,713
Retained earnings 7,099,469 5,452,731
----------- -----------
8,556,429 6,909,691
Less:
Treasury stock (43,439 shares at cost) (86,773) (86,773)
------------ ------------
Total stockholders' equity 8,469,656 6,822,918
------------ ------------
Total liabilities and stockholders' equity $ 20,634,978 $ 16,782,761
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
Financial Service Corporation and Subsidiaries
Consolidated Statements of Income
for the three and six months ended June 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Three months Three months Six months Six months
ended June 30 ended June 30 ended June 30 ended June 30
1996 1995 1996 1995
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Securities commissions $ 16,812,963 $ 10,683,295 $ 31,432,665 $ 19,550,330
Insurance commissions 11,217,945 6,083,929 19,382,841 11,481,308
Advisory services and other fees 4,318,497 2,840,940 8,271,231 5,390,373
Investment income 90,497 99,464 175,492 167,022
------------ ------------ ------------ ------------
32,439,902 19,707,628 59,262,229 36,589,033
------------ ------------ ------------ ------------
Expenses:
Securities commissions 14,241,948 8,893,579 26,373,195 16,120,970
Insurance commissions 9,871,446 5,396,716 17,017,563 10,109,393
Advisory services and other fees 2,933,857 1,879,933 5,500,235 3,626,067
Employee compensation and benefits 2,435,095 1,508,391 4,753,151 3,046,565
General and administrative 1,805,937 1,785,447 3,193,298 2,733,041
Depreciation and amortization 391,102 302,577 744,202 605,154
Interest expense 12,947 8,299 33,847 19,597
------------ ------------ ------------ ------------
31,692,332 19,774,942 57,615,491 36,260,787
------------ ------------ ------------ ------------
Net income (loss) $ 747,570 $ (67,314) $ 1,646,738 $ 328,246
============ ============ ============ ============
Net income (loss) per common share $ 0.85 $ (0.08) $ 1.87 $ 0.37
============ ============ ============ ============
Weighted average number of common
and common equivalent shares
outstanding 881,241 880,906 881,241 880,906
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
Financial Service Corporation and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity
for the six months ended June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional Retained Treasury Stock Stockholders' Equity
Shares Amount Paid-In Capital Earnings Shares Amount Total Per Share
-------- ------- ------------- ---------- ------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 924,680 $ 9,247 $ 1,447,713 $ 5,452,731 43,439 $ (86,773) $ 6,822,918 $ 7.74
1995
Net income - - - - - - 1,646,738 - - - - 1,646,738 - -
---------- --------- ------------- ------------ ------- ---------- ------------ ----------
Balance, June 30, 1996 924,680 $ 9,247 $ 1,447,713 $ 7,099,469 43,439 $ (86,773) $ 8,469,656 $ 9.61
========== ========= ============= ============ ======= ========== ============ ==========
The accompanying notes are an integral part of these consolidated financial statements.
-3-
</TABLE>
<PAGE>
Financial Service Corporation and Subsidiaries
Consolidated Statements of Cash Flows
for the six months ended June 30, 1996 and 1995
(Unaudited)
June 30 June 30
1996 1995
----------- ----------
<TABLE>
<CAPTION>
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,646,738 $ 328,246
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 744,202 605,154
----------- ----------
2,390,940 933,400
----------- ----------
Changes in assets and liabilities:
Increase in cash segregated
under federal regulations (995,838) (738,921)
(Increase) decrease in commissions and
other receivables (375,842) 140,834
Decrease in prepaid expenses
and other assets 930,513 113,228
Increase in commissions payable 1,046,115 133,744
Increase in accounts payable to dealers 694,080 796,710
Increase (decrease) in accounts payable
and accrued expenses 465,284 (301,426)
----------- -----------
1,764,312 144,169
----------- -----------
Net cash provided by operating activities 4,155,252 1,077,569
----------- -----------
Cash flows from investing activities:
Investment in information systems and equipment (1,725,658) (531,674)
----------- -----------
Net cash used in investing activities (1,725,658) (531,674)
----------- -----------
Net increase in cash and cash equivalents 2,429,594 545,895
Cash and cash equivalents at beginning of period 4,382,050 3,304,457
----------- -----------
Cash and cash equivalents at end of period $ 6,811,644 $ 3,850,352
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
</TABLE>
<PAGE>
FINANCIAL SERVICE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
------------------------------------------
1. Preparation of interim financial statements:
-------------------------------------------
The unaudited consolidated financial statements of Financial Service
Corporation and Subsidiaries, collectively referred to as the "Company",
which include the accounts of FSC Corporation and its subsidiaries, have
been prepared in accordance with generally accepted accounting principles
and the rules and regulations of the Securities and Exchange Commission
("SEC"). In the opinion of management, these statements include all
adjustments necessary for a fair presentation of the results of all interim
periods reported herein. Certain information and footnote disclosures
prepared in accordance with generally accepted accounting principles have
either been condensed or omitted pursuant to SEC rules and regulations.
However, management believes that the disclosures made are adequate for a
fair presentation of results of operations and financial position. It is
suggested that these financial statements be read in conjunction with the
Company's annual financial statements and related notes for the year ended
December 31, 1995.
Certain reclassifications have been made to the prior year's financial
statements to conform to the 1996 presentation.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Three and six month periods ended June 30, 1996 compared to the three and six
month periods ended June 30, 1995
General
- - -------
The Company's financial results in the three and six month periods ended June
30, 1996 resulted in net income of $747,570 and $1,646,738, respectively as
compared to net income (loss) of ($67,314) and $328,246 for the comparable
periods of 1995. Total Revenues increased to $32,439,902 and $59,262,229 for the
three and six month periods ended June 30, 1996, increases of approximately 65%
and 62%, respectively over comparable 1995 periods. Total Expenses increased to
$31,692,332 and $57,615,491 for the three and six month periods ended June 30,
1996, increases over comparable 1995 periods of approximately 60% and 59%,
respectively.
The Company intends to continue its program of investing and improving its
marketing and information systems in order to provide enhanced and more
effective support services to field associates, as well as to increase the
efficiency of back-office operations. Additionally, the Company is also
investing funds in marketing and distributing existing products and services
through financial institutions. In order to improve its revenue growth, the
Company plans to maintain its strategy of recruiting high quality
representatives and licensing and transferring field forces of existing broker
dealers if such opportunities arise on an economically feasible basis. These
investments are expected to be funded from current cash flow and working
capital.
In 1994, the National Association of Securities Dealers ("NASD") issued a Notice
to Members 94-44 ("NTM 94-44"). NTM 94-44 requires the Company to supervise
certain Registered Investment Adviser ("RIA") activities of registered
representatives. Management expects an increase in revenues and costs in late
1996 as the Company's involvement in these activities expands.
Results of Operations
- - ---------------------
Commission revenues increased to $28,030,908 and $50,815,506 for the three and
six month periods ended June 30, 1996. The primary causes for the 67% growth of
commission revenues in the second quarter of 1996 and 64% for the six month
period in 1996 over 1995 periods are improved cyclical market conditions, an
increased number of registered representatives associated with the Company and
the marketing of products through financial institutions. The number of
representatives associated with FSC Securities increased to 1,278 as of June 30,
1996, an increase of approximately 22% or 229 representatives since June 30,
1995.
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<PAGE>
Commission expenses increased to $24,113,394 and $43,390,758 for the three and
six month periods ended June 30, 1996. Commission expense represented 86.0% and
85.4% of gross commission revenue for the three and six month periods ended June
30, 1996 as compared to 85.2% and 84.5% for the comparable periods in 1995. The
increase in commission expense is primarily related to increased productivity of
existing and newly recruited representatives.
The increase in commission revenues resulted in an increase in net commission
revenue (commission revenue less commission expense) of $1,440,585 to $3,917,514
for the three months ended June 30, 1996 and an increase of $2,623,473 to
$7,424,748 for the six months ended June 30, 1996 over comparable periods of
1995.
Advisory Services and Other Fees
- - --------------------------------
Advisory services and other fee revenues increased to $4,318,497 and $8,271,231
for the three and six month periods ended June 30, 1996, increases of
approximately 52% and 53%, respectively over comparable 1995 periods. Fee based
business was driven primarily by an expanded range of Company offered fee based
services, industry trends, and an increase in client assets under management.
Advisory services and other fee expenses increased approximately 56% and 52%
over comparable 1995 periods to $2,933,857 and $5,500,235 for the three and six
months periods ended June 30, 1996. This is primarily related to the increase in
volume related to advisory services and other fee revenues discussed above.
Investment Income and Interest Expense
- - --------------------------------------
Investment income was $90,497 and $175,492 for the three and six month periods
end June 30, 1996. The increase in investment income for the first half of 1996
is attributable to the increase in funds available for investment in 1996 and
rising rates of return on invested funds.
The Company has no debt. Interest expense is related solely to general
securities clearing activity with Pershing Division of Donaldson, Lufkin &
Jenrette Securities Corporation ("Pershing"). Interest expense increased to
$12,947 and $33,847 for the three and six month periods ended June 30, 1996.
Employee Compensation and Benefits
- - ----------------------------------
The number of full-time personnel employed by FSC increased approximately 43%
from 107 as of June 30, 1995 to 153 as of June 30, 1996. The increase in number
of personnel is attributable to the growth in Company business as well as the
financial institution marketing program.
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<PAGE>
Total Employee Compensation and Benefits increased to $2,435,095 and $4,753,151
for the three and six month periods ended June 30, 1996, increases of
approximately 61% and 56%, respectively over comparable 1995 periods. The
increase was the result of several factors including the expense associated with
additional personnel, incentive compensation, as well as merit increases in base
salaries.
General and Administrative Expenses
- - -----------------------------------
General and administrative expenses increased approximately 1% and 17% to
$1,805,937 and $3,193,298 for the three and six month periods ended June 30,
1996. The increase is related to the growth in Company operations associated
with increases in business volume and related personnel costs, including the
marketing of products through financial institutions, and increases in legal
costs.
Depreciation and Amortization
- - -----------------------------
Depreciation and amortization expense increased to $391,102 and $744,202 for the
three and six month periods ended June 30, 1996 increases of approximately 29%
and 23%, respectively over comparable 1995 periods. The increase is the result
of continuing investment in information systems and related hardware and
software. The total capitalized investment in information systems increased to
$8,789,256 at June 30, 1996 as compared to $6,146,785 at June 30, 1995.
-8-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
The Company maintained a relatively strong cash and working capital position
with cash and cash equivalents comprising approximately 33% of total assets as
of June 30, 1996 and 26% of total assets as of December 31, 1995.
Operating cash increased by approximately $2,430,000 from December 31, 1995 to
June 30, 1996. This increase is affected by increased net income and the timing
of collections of commissions receivable and payments of commissions payable.
The Company has made capital investments, primarily hardware and software
enhancements to its information systems of approximately $1,726,000 during the
first half of 1996.
Certain cash required to be segregated under provisions of the Securities
Exchange Act of 1934 increased approximately $996,000 from December 31, 1995 to
June 30, 1996. The increase is entirely due to the timing of cash receipts. The
segregated cash balance of $2,719,746 represents amounts received on behalf of
customers for mutual fund purchases on or before June 30, 1996 which settled
subsequent to June 30, 1996. This cash was transferred to the appropriate mutual
fund companies upon settlement of the transactions. The related liability is
recorded as accounts payable to dealers.
As of June 30, 1996, FSC Securities had net capital of $3,529,024 which is
$2,940,472 in excess of the required net capital under the Securities Exchange
Commission Rule 15c3-1. As of December 31, 1995, FSC Securities had net capital
of $2,455,681, which was an excess of $2,034,626 over the required net capital.
Based on current operations, the Company believes its cash and working capital
position is adequate for planned future growth and cash needs.
Financial Condition
- - -------------------
The Company's financial condition continues to improve, as evidenced by
continued increases in net income, revenues, liquidity and net worth. The
recruiting of additional qualified professional representatives has primarily
contributed to the Company's growth and management believes this provides a
basis for future growth.
-9-
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
The Company and certain of its subsidiaries are parties to various legal
proceedings, including civil actions, administrative proceedings and arbitration
proceedings, relating to the business conducted by such parties. In recent
years, there has been an increased incidence of litigation involving the
securities industry, particularly with respect to retail securities firms such
as the Company's subsidiary, FSC Securities Corporation ("FSC Securities"). Such
litigation is attributable in part to the nature of the business in which FSC
Securities is engaged, which involves the execution of a substantial number of
financial transactions on behalf of thousands of customers involving substantial
financial investments. FSC Securities has been named as a defendant or a
respondent in pending litigation, including civil actions and arbitration
proceedings, concerning matters arising in connection with its retail business.
While the ultimate resolution of this litigation against the Company cannot be
predicted with certainty, after considering all relevant facts, including
insurance which covers certain of these suits, management of the Company
believes that reserves established are adequate to cover any liability resulting
from these matters.
For description of certain pending legal proceedings see the Company's report on
Form 10-K for the year ended December 31, 1995.
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<PAGE>
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) The following are filed as exhibits to this report:
Exhibit Sequential
Number Description Page Number
------- ----------- ----------
There are no exhibits.
(b) No reports on Form 8-K have been filed during the second quarter
of 1996.
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<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.
Date August 8, 1996 FINANCIAL SERVICE CORPORATION
---------------------------- -----------------------------
(Registrant)
/s/ Barry F. Kane
-----------------------------
Barry F. Kane,
Treasurer
(Duly Authorized Officer and
Principal Financial Officer)
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 6,811,644
<SECURITIES> 0
<RECEIVABLES> 5,877,540
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,569,427
<PP&E> 4,065,551
<DEPRECIATION> 0
<TOTAL-ASSETS> 20,634,978
<CURRENT-LIABILITIES> 12,165,322
<BONDS> 0
0
0
<COMMON> 9,247
<OTHER-SE> 8,460,409
<TOTAL-LIABILITY-AND-EQUITY> 20,634,978
<SALES> 0
<TOTAL-REVENUES> 59,262,229
<CGS> 0
<TOTAL-COSTS> 57,615,491
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,646,738
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,646,738
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,646,738
<EPS-PRIMARY> 1.87
<EPS-DILUTED> 0
</TABLE>
