UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For this fiscal year ended September 30, 1994
OR
[ ] 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
INTERSTATE/JOHNSON LANE, INC.
(Exact name of Registrant as specified in its charter)
Delaware 56-1470946
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
121 West Trade Street, Suite 1500, Charlotte, North Carolina 28202
(Address of principal executive offices) (Zip Code)
(704) 379-9000
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
Common stock, par value $.20 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
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
Indicate by check mark if the disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.
Yes X
As of November 30, 1994, 6,405,384 shares of Common Stock, par
value $.20 per share, were outstanding, and the aggregate market value
of the shares of Common Stock of the Registrant held by non-affiliates
(based upon the closing price of the Registrant's shares on the New
York Stock Exchange on November 30, 1994, which was $8) was
$34,313,680. For purposes of this information, the outstanding shares
of Common Stock which were owned by Interstate/Johnson Lane
Corporation's Employee Stock Ownership Plan, and by all directors and
executive officers of the Registrant, were deemed to be the shares of
Common Stock held by affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Stockholders for the
fiscal year ended September 30, 1994 are incorporated by reference
into Part I, Part II and Part IV of this Report. Portions of the
Registrant's Proxy Statement for its Annual Meeting of Stockholders to
be held on January 24, 1995 are incorporated by reference into Part
III of this Report.
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
PART I
ITEM I. BUSINESS
General
Interstate/Johnson Lane, Inc. ("the Company") is a Charlotte, North
Carolina based holding company which, through its principal
subsidiary, Interstate/Johnson Lane Corporation ("IJL"), and other
subsidiaries, engages in securities and futures brokerage for
individual (retail) and institutional investors, market making and
underwriting of municipal and corporate securities, investment
management, financial advisory services, and the sale of mutual funds,
annuities and other financial products. Many of these activities are
sensitive to marketplace trading volumes and to interest rate
conditions. While the Company has clients throughout the United States
and abroad, its major geographic focus is the Southeast.
The Company was incorporated as Interstate Securities, Inc. in
Delaware in April 1985. Pursuant to a corporate reorganization in June
1985, the Company acquired all of the issued shares of common stock of
Interstate Securities Corporation and its subsidiaries at that time.
During October 1988, the Company acquired all of the outstanding
common shares of Johnson, Lane, Space, Smith & Co., Inc. ("Johnson
Lane"), a Georgia-based broker-dealer and investment banking firm
which was subsequently merged into Interstate Securities Corporation,
and the Company's name was changed to its current name. In addition to
IJL, the Company's principal operating subsidiaries are ISC Realty
Corporation, Sovereign Capital Management, Inc. d/b/a Sovereign
Advisers, Inc. ("Sovereign") and ISC Futures Corporation.
IJL is registered as a broker-dealer with the Securities and
Exchange Commission ("SEC") and as a futures commission merchant with
the Commodity Futures Trading Commission ("CFTC"). In addition to
owning three New York Stock Exchange ("NYSE") memberships and one
American Stock Exchange membership, IJL is also a member of the Boston
Stock Exchange, New York Futures Exchange, Midwest Stock Exchange,
Philadelphia Stock Exchange, the National Association of Securities
Dealers, Inc. ("NASD"), and the Securities Investor Protection
Corporation ("SIPC").
For the fiscal year ended September 30, 1994, approximately 53% of
the Company's total revenues were derived from its retail brokerage
activities, 25% from institutional brokerage activities and 22% from
dealer transactions, investment banking and other activities. The
Company's principal sources of revenue for each of the last three
fiscal years, along with other information regarding the Company's
results of operations, are presented in the consolidated financial
statements on pages 12 through 19 of the Company's 1994 Annual Report
to Shareholders, which information is incorporated herein by
reference.
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
Retail Brokerage
IJL presently serves individual investors through 56 retail offices
located in North Carolina (32), South Carolina (10), Georgia (13), and
Pennsylvania (one). Revenues from retail brokerage activities
represent a substantial portion of the Company's revenues, and are
generated primarily through commissions and sales credits earned on
client purchases and sales of listed and unlisted stocks, bonds,
options, futures, mutual funds, unit investment trusts and other
financial products. When IJL executes over the counter ("OTC")
transactions for clients on a principal basis, it may charge mark-ups
or mark-downs in lieu of commissions. In recent years IJL has
experienced rapid growth in annual "wrap" fees paid by retail clients
in lieu of commissions or sales credits on each transaction. In
connection with its strategy of providing comprehensive financial
services to its retail clientele, in 1994 IJL formed a strategic
alliance with a provider of custodial services to trusteed accounts.
During the current fiscal year, the Company continued its efforts
to build the broker- dealer's retail sales force, primarily through
recruiting and training individuals without securities industry
experience. As a result, at September 30, 1994 approximately 30% of
the Company's retail financial consultants consisted of individuals
with less than three years' experience. While this condition may bode
well for the future, periodic slowdowns in individual investor
activity could negatively impact the revenue production of a less
seasoned sales force.
Client Financing
Retail client transactions in securities are effected on either a
cash or margin basis. Margin transactions result in collateralized
interest bearing loans to clients for a portion of the underlying cost
of securities purchased. Interest charges are tied primarily to
published prime or broker loan rates of various national banks.
Client margin loans are financed by other clients' credit balances
retained in their accounts pending reinvestment. When IJL pays
interest on such credit balances, it pays a lower rate than it charges
on margin loans; the income earned on this rate spread has represented
a significant portion of the Company's profits.
Investment Research
The Company believes IJL's research services are important in
generating retail and institutional commissions in listed and OTC
stocks. IJL maintains a core research staff of 11 analysts to provide
investment recommendations and market information on selected regional
and national companies. These analysts follow approximately 140
companies, a major portion of which are headquartered in the
Southeast. IJL provides clients with specific recommendations to buy
and sell equity securities of companies followed by IJL and by its
correspondents. Management believes that the performance of these
recommended securities has assisted IJL in attracting and retaining
its clients.
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
Institutional Brokerage
IJL's institutional clients include mutual funds, commercial banks,
thrift institutions, insurance companies, pension funds and private
money managers. Most of these clients are located in the United
States and Canada; however, some are located overseas, principally in
the United Kingdom and continental Europe. IJL executes transactions
in equity and in taxable and non-taxable fixed income securities for
institutional clients on both an agency and principal basis.
Commissions charged on agency transactions are negotiated and
typically include a significant discount from IJL's standard retail
commission rates.
A significant portion of the commission revenues from transactions
in corporate securities are derived from institutional clients for
whom IJL provides research products and services, as well as brokerage
services. Most of these products and services are procured from third
parties to which IJL is contractually obligated, irrespective of
whether it receives commissions from the beneficiary clients.
Commissions paid by clients to IJL for furnishing these products and
services are commonly referred to as "soft dollars".
Market-Making and Dealer Activities
IJL commits capital to acquire and carry inventories of both equity
and fixed-income securities for sale to other dealers and to clients.
The size of these inventories fluctuates greatly depending on economic
and market conditions, management allocations of capital, underwriting
commitments, client demands and trading volume.
IJL's OTC traders make published markets in the equity securities
of approximately 231 regional and national companies. In addition,
IJL acts as a dealer in bonds issued by the United States Government
and its agencies, and by states and their political agencies and
instrumentalities thereof. The Company believes that these activities
provide an important source of product for sale to retail and
institutional clients.
Interest
In the aggregate, interest earned on reserve deposits segregated
from IJL assets under the customer protection rule of the SEC,
interest charged on margin loans in connection with its retail
brokerage business, interest earnings on loans made under securities
resale agreements, and interest on fixed income inventories account
for a significant portion of the Company's total revenues.
To facilitate institutional client financing needs, IJL lends money
under securities resale agreements and takes delivery of securities as
collateral in its custodial account at an approved clearing
corporation; it may also concurrently borrow money under repurchase
agreements, making delivery of the same or similar securities as
collateral. When the duration of the loans and borrowings, and the
underlying collateral are identical, these transactions are generally
characterized as matched repurchase agreements. Matched repurchase
agreements usually constitute a significant portion of the Company's
total assets and liabilities. IJL may earn small profits from such
transactions by charging greater amounts of interest than it is
required to pay. While IJL takes
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
Interest, continued
steps to ensure that the loans are adequately collateralized, these
transactions could subject the Company to losses if parties entering
into securities resale agreements with IJL fail to meet their
obligations to repurchase the underlying securities and IJL incurs
losses in liquidating such securities in the open market.
Corporate Finance
IJL's corporate finance group of 15 professionals provides clients
with financial advisory and consulting services on mergers and
acquisitions and on valuations of equity securities. IJL also derives
revenues from serving as a manager, co-manager, or participant in
underwriting syndicates, and as a member of selling groups formed to
distribute new issues of corporate securities. In connection with its
corporate finance activities, IJL holds a minority interest in a
venture capital fund.
Public Finance
IJL acts as a manager or co-manager of negotiated public offerings
and private placements of tax-exempt securities issued by state and
municipal governments, power agencies, industrial development and
pollution control financing authorities, sewer and water authorities
and state and local housing authorities and other units of state and
local government. As an underwriter, IJL also participates in
syndicates formed to bid competitively or negotiate privately for the
purchase and distribution of tax-exempt securities.
Investment Management
Through its Sovereign subsidiary, the Company has been providing
investment management services on a private account basis to
individuals, charitable and educational funds and employee benefit
plans. As of September 30, 1994, this registered investment adviser
had approximately $154 million under management.
As part of its strategic plan for developing the business potential
of money management, the Company made a $2 million capital investment
in Sovereign during the past two fiscal years. During fiscal 1994 the
Company also sold a significant minority interest in Sovereign to
certain of its key employees. Further capital commitments and
realignment of ownership interests may be required to maximize the
value of the Company's investment to date.
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
Real Estate
During the 1970's and 1980's ISC Realty Corporation ("Realty")
originated private placements and public offerings of limited
partnership interests in real estate programs for sale to retail
clients of IJL. Realty is currently engaged in the oversight and
disposition of many of these properties, and does not anticipate
assuming any new general partner roles.
Through various subsidiaries, the Company also holds proprietary
interests in real estate ventures originally syndicated by Johnson
Lane in the mid 1980's to acquire, rehabilitate and operate certified
historic real estate properties, principally office facilities. While
the Company has provided significant financial and management support
to these ventures in the past, it does not expect to provide further
financial or management support to these ventures beyond what is
necessary to preserve current values or facilitate disposition of the
properties or the Company's interests in the related ventures.
Administration and Operations
Administrative and operations personnel are responsible for the
processing of transactions; receipt, identification and delivery of
funds and securities; custody of clients' securities; extension of
credit to clients and dealers; internal audits; telecommunications and
other technology services; general accounting and office services
functions; administration of employee benefits and human resource
activities; establishment and monitoring of internal financial and
management controls; and compliance with legal and regulatory
requirements regarding financial, operations and sales practices.
Client transactions and transactions for the Company's own account
in listed and unlisted stocks are generally executed by stock exchange
or NASD based automated systems, or by exchange-based IJL employees.
In some instances, orders are initially routed to intermediaries for
ultimate execution, and compensation may be received from these
intermediaries in that connection. Most options and futures
transactions on exchanges are executed by member firms with which IJL
has a correspondent relationship. All securities transactions are
cleared by IJL through its own facilities in Charlotte and those of
the National Securities Clearing Corporation in New York City; futures
transactions are cleared by correspondent firms.
External computer service organizations specializing in securities
and futures industry applications are used to transmit real-time
market data to brokers and traders, to record and process all
securities, futures, and related money transactions, to generate
client and dealer confirmations and statements, to exchange
transactional information with clearing houses and depositories, and
to produce required accounting and administrative reports. Sales and
administrative personnel have on- line access to client account
information and to various external databases. In 1994 IJL commenced
a multi-million dollar program of technology improvements intended to
provide its retail sales force with a variety of software-based tools
to enhance their productivity. Over the next several years this
program will be expanded to encompass trading and financial reporting
systems which are run on computer facilities operated by IJL.
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
Administration and Operations, continued
The Company believes that its internal controls and safeguards are
adequate, although fraud and misconduct by clients and employees, and
the possibility of theft of securities, are risks inherent in the
securities industry. As required by the NYSE and other regulatory
bodies, IJL carries fidelity bonds covering loss or theft of
securities, as well as employee dishonesty, forgery and alteration of
checks or similar items and forgery of securities. The Company
believes the amounts of coverage provided by such bonds are adequate.
Employees
As of September 30, 1994, the Company had 1,129 employees,
including approximately 500 financial consultants engaged in sales to
individual and institutional investors, and 185 other
professionals engaged in trading, investment banking, and product and
administrative support services. IJL has a four-month training
program for potential retail financial consultants which is intended
to prepare them for various registration examinations and to give them
an in-depth knowledge of the securities industry. Management
considers employee relations to be excellent.
Competition
The Company competes with other securities firms, both regional and
national, some of which offer a broader range of brokerage services
and possess substantially greater capital resources. Competition also
exists among securities firms for successful sales representatives and
product support professionals. In addition, competition from banks,
insurance companies and discount brokerages has increased
significantly; these firms generally charge lower commission rates to
their clients without offering extensive support services such as
market information, research, reports on individual companies, and
specific recommendations to buy and sell investment products. The
Company believes that its position as a major Southeastern regional
firm will permit it to compete effectively in the current environment.
Regulation
The securities and futures industries in the United States are
subject to extensive regulation under both federal and state law. The
SEC, CFTC and the Municipal Securities Rulemaking Board each
administer federal laws regulating various aspects of IJL's business.
Additional regulation of broker-dealers has been delegated to
self-regulatory organizations, principally the NASD, NYSE and other
securities and futures exchanges. Firms such as IJL are also subject
to regulation by state securities commissions in the states in which
they do business. All these authorities may conduct administrative
proceedings which can result in censure, fine, suspension or expulsion
of a broker- dealer, its officers or employees.
The principal purpose of regulation and discipline of
broker-dealers is the protection of clients and the securities
markets, rather than protection of their creditors and shareholders.
Broker-dealer regulations cover all aspects of the securities and
futures business, including sales methods,
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
Regulation, continued
trade practices, uses and safekeeping of clients' funds, capital
structure, recordkeeping, investment advisory services, and conduct of
directors, officers and employees. Additional legislation, changes in
rules promulgated by the SEC, CFTC and self-regulatory organizations,
or changes in the interpretation or enforcement of existing laws and
rules, may directly affect the operation and profitability of
broker-dealers.
Net Capital Requirements
Every registered broker-dealer doing business with the public is
subject to the Uniform Net Capital Rule (Rule 15c3-1), promulgated by
the SEC and incorporated into the rules of the NYSE, which is designed
to ensure financial soundness and liquidity through minimum capital
requirements. IJL has elected to use the Rule's alternative method of
computation, which requires that its "net capital" be not less than 2%
of its aggregate debit balances (primarily receivables from clients
and other broker- dealers). In computing net capital, various
deductions are made from net worth and qualifying subordinated debt
which include assets not readily convertible into cash, such as
intangible assets and exchange memberships. In addition, the values
of certain other assets (such as securities owned by IJL) are reduced
by various amounts to reflect the possibility of a market decline
pending their disposition. IJL is also subject to the CFTC minimum
net capital requirement which requires net capital to be at least 4%
of the amount, as adjusted, required to be segregated in separate
accounts for customers under the Commodity Exchange Act. As a member
of the NYSE, IJL may be required to reduce its business and restrict
redemption of subordinated debt if its net capital becomes less than
4% of its aggregate debit balances, and it may be prohibited from
expanding its business and declaring cash dividends if its net capital
becomes less than 5% of its aggregate debit balances.
Compliance with applicable net capital rules could limit IJL's
commitment to certain securities activities such as underwriting and
market-making, which use significant amounts of regulatory capital, as
well as to new activities requiring an infusion of capital. Further,
a significant operating loss or an extraordinary charge against net
capital could adversely affect IJL's ability to expand or even
maintain its present levels of business. While these amounts may vary
from day to day, IJL's net capital of $36.8 million at September 30,
1994 was 21.9% of its aggregate debit balances and approximately $33.5
million in excess of its minimum regulatory requirements, as such
excess capital and balances are computed under the Rule.
Item 2. Properties
The Company's headquarters are located in Charlotte, and it serves
retail and institutional clients through sales offices located in
North Carolina, South Carolina, Virginia, Georgia, Pennsylvania, New
York and Texas.
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
ITEM 2. PROPERTIES, continued
The Company leases substantially all of its office facilities. See
Note 7, "Commitments and Contingencies," of the Notes to Consolidated
Financial Statements for the fiscal year ended September 30, 1994
which information is incorporated herein by reference. Capital assets
include three office buildings (two of which are idle) in Savannah,
Georgia, and an investment property in Orlando, Florida; all were
acquired as a result of the Johnson Lane transaction. The balance of
the capital assets consist primarily of office furniture and leasehold
improvements.
Item 3. Legal Proceedings
The Company is a defendant, or otherwise has possible exposure, in
various legal actions arising out of its activities as a
broker-dealer, underwriter, or employer. Several of these actions,
including some class actions, claim substantial or unspecified damages
which could be material. While predicting the outcome of litigation
is inherently very difficult, and the ultimate resolution, range of
loss, and impact on operating results cannot reliably be estimated,
management is of the opinion, based upon its understanding of the
facts and the advice of legal counsel, that resolution of these
actions will not have a material adverse effect on IJL's financial
condition.
The Company, as managing underwriter for common stock offerings of
Del-Val Financial Corporation, is a defendant in a consolidated class
action seeking damages estimated to potentially exceed $40 million
from all defendants. No opinion can be formed at this time concerning
the outcome of this litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
The Company's common stock is traded on the New York Stock
Exchange.
The table on page 11 of the 1994 Annual Report to Shareholders
shows the high and low market prices of the Company's common stock
which information is incorporated herein by reference. In January
1994, the Company's Board of Directors declared a $.03 per share
quarterly dividend on the Company's common stock and has subsequently
declared quarterly dividends of like amount. Continued payment of
dividends in the future will depend upon the Board's evaluation of
earnings, financial condition and working capital needs of the
Company.
As of December 2, 1994, the Company had 1,133 shareholders of
record.
ITEM 6. SELECTED FINANCIAL DATA
The "Five Year Financial Summary" on the back of the facing page of
the inside cover of the 1994 Annual Report to Shareholders is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information on pages 9 through 11 of the 1994 Annual Report to
Shareholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and notes to the consolidated
financial statements for Interstate/Johnson Lane, Inc., as appearing
on pages 12 through 19 of the 1994 Annual Report to Shareholders, are
incorporated herein by reference.
Quarterly "Supplementary Financial Data" is presented on page 11 of
the 1994 Annual Report to Shareholders and is incorporated herein by
reference.
The Company reclassified, as cash equivalents, certain short-term
investments in securities resale agreements effective October 1, 1993.
Management believes that this change in classification is appropriate
because these transactions represent investments of excess cash and
have original maturities of three months or less. Furthermore, this
method of presentation is common among other firms in the securities
industry. The effect of the change was to increase stated cash and
related cash flows (and decrease stated financing resale agreements)
by $22.0 million for the year ended September 30, 1994 and $15.0 million
for the year ended September 30, 1993.
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning those directors who are executive officers
of the Registrant is presented under the caption "Election of
Directors" on pages 3 through 5 of the Proxy Statement, dated December
16, 1994, to be used in connection with the Company's Annual
Shareholders' Meeting to be held January 24, 1995, is incorporated
herein by reference.
In addition to the individuals referred to in the preceding
paragraph, the following individuals currently serve as executive
officers of the Registrant.
Edward T. Burton, III, 52, is a Director and Senior Vice President
of IJL. Mr. Burton joined IJL in 1994 after six years as President of
Rothschild Financial Services, Inc. He currently serves as the
Managing Director of IJL's Corporate Finance Department.
Edwin A. Dalrymple, Jr., 44, is a Senior Vice President of IJL and
the head of its Retail Division. Mr. Dalrymple joined IJL in 1981,
and previously served as branch manager of the Pinehurst and Charlotte
branch offices and as Associate Director of the Retail Division. He
was elected a Senior Vice President in 1989 and a Director of IJL in
1991.
Harvey D. Harrelson, 45, has been with IJL since 1981, when he
joined the firm as a bond trader, and currently serves as the head of
the Fixed Income Division, which includes a staff of 70 professionals.
He has been a Senior Vice President and a Director of IJL since 1989.
Michael D. Hearn, 42, joined IJL in 1976 and has served as
Secretary and General Counsel of the Company since 1985. He was
elected a Senior Vice President of IJL in 1978 and a Director in 1986.
George A. McElveen, III, 46, joined IJL as Senior Vice President
and Director in 1990 after a 16 year career with Smith Barney Harris
Upham and Company, Inc., serving as a managing director of that firm
since 1988. Mr. McElveen provided executive support for various
business units of IJL until October 1992 when he was elected Chairman
and Chief Executive Officer of Sovereign Capital Management, Inc.
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
W. Allen Rogers, II, 48, has been a Director and Senior Vice
President of IJL since 1990 and is an investment banker in IJL's
Corporate Finance Department. Prior to joining IJL in 1986, he was
President of Robison, McAulay & Rogers, Inc., a private investment
banking firm in Charlotte.
Lewis F. Semones, Jr., 36, joined IJL in 1985 as Controller. From
May, 1988 to November, 1989 he was chief financial officer of another
regional securities firm, after which he rejoined IJL as head of
internal audit. He was elected a Senior Vice President in 1992 and a
Director in 1994, and presently has executive responsibility for
information technology, strategic planning, and several other
administrative support functions.
Executive officers of the Company serve at the pleasure of the
Board of Directors.
ITEM 11. EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation" on pages
6 through 9 of the Proxy Statement, dated December 16, 1994, to be
used in connection with the Company's Annual Shareholders' Meeting to
be held January 24, 1995, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The information under the caption "Security Ownership of Certain
Beneficial Owners and Management" on pages 2 and 3 of the Proxy
Statement, dated December 16, 1994, to be used in connection with the
Company's Annual Shareholders' Meeting to be held January 24, 1995, is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Related Transactions" on page 8
of the Proxy Statement, dated December 16, 1994, to be used in
connection with the Company's Annual Shareholders' Meeting to be held
January 24, 1995, is incorporated herein by reference.
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) (1) and (2) Financial Statements and Schedules Reference (page)
Form 10-K Annual
Annual Shareholder
Report Report
<S> <C> <C>
Data incorporated by reference from the accompanying 1994
Annual Report to Shareholders:
Consolidated Statements of Financial Condition as of
September 30, 1994 and 1993 13
Consolidated Statements of Operations for the years ended
September 30, 1994, 1993 and 1992 14
Consolidated Statements of Cash Flows for the years
ended September 30, 1994, 1993 and 1992 15
Consolidated Statements of Changes in Shareholders' Equity
for the years ended September 30, 1994, 1993 and 1992 16
Notes to Consolidated Financial Statements 17-19
Data submitted herewith:
Report of Independent Accountants 16
Financial Statement Schedules:
VIII - Valuation and Qualifying Accounts 17
IX - Short-Term Borrowings 18
</TABLE>
All other schedules are omitted because they are not required, are
not applicable, or because the required information is given in the
consolidated financial statements or notes thereto.
With the exception of the specific pages referenced, (back of
facing page of the inside cover, 9 through 19), the 1994 Annual Report
to Shareholders is not deemed filed as part of this report.
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
Exhibits:
(i) The following exhibits are filed as part of this report:
Exhibit
11 Statement Regarding Computation of Per Share Earnings
13 1994 Annual Report to Shareholders
21 Subsidiaries
23 Consent of Independent Accountants
(ii) The following exhibits have been previously filed:
3(a) Certificate of Incorporation of the Company, as Amended,
incorporated herein by reference to the Company's Form
S-1 Registration Statement (Reg. No. 2-98424), which
became effective on July 31, 1985.
(b) By-Laws of the Company, incorporated herein by reference
to the Company's Form S-1 Registration Statement (Reg. No.
2-98424), which became effective on July 31, 1985.
(c) Amendment of the Certificate of Incorporation,
incorporated herein by reference to Form 10Q filed May
14, 1987.
(d) Restated Certificate of Incorporation of Interstate
Securities, Inc., incorporated herein by reference
to the Company's Form S-4 Registration
Statement, filed September 26, 1988.
(e) Certificate of Amendment of Restated Certificate of
Incorporation of Interstate Securities, Inc.,
incorporated herein by reference to Form 10Q filed
February 13, 1989.
4(a) Specimen Certificate of Common Stock, incorporated herein
by reference to the Company's Form S-1 Registration Statement
(Reg. No. 2-98424), which became effective on July 31, 1985.
Material Contracts:
10(a) 1985 Incentive Stock Option Plan, incorporated herein
by reference to the Company's Form S-1 Registration
Statement (Reg. No. 2-98424), which became effective on
July 31, 1985.
(b) Interstate Securities Corporation Profit-Sharing and
Capital Accumulation Plan and Trust, Amended and Restated
as of October 1, 1984, incorporated herein by reference
to the Company's Form S-1 Registration Statement (Reg.
No. 2-98424), which became effective on July 31, 1985.
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
(ii) Exhibits previously filed, continued:
10(c) Interstate Securities Corporation Employee Stock
Ownership and PAYSOP Plan and Trust, Amended and Restated as
of October 1, 1984, incorporated herein by reference to the
Company's Form S-1 Registration Statement (Reg. No. 2-98424),
which became effective on July 31, 1985.
(d) Lease Agreement dated January 27, 1981 between Interstate
and JACMABRUTER, a North Carolina partnership,
incorporated herein by reference to the Company's Form S-1
Registration Statement (Reg. No. 2- 98424), which became
effective on July 31, 1985.
(e) Lease Agreement dated October 21, 1983 between Interstate
and NCNB National Bank of North Carolina, co-trustee (u/w
of Walter H. Hook, Sr. and u/a Walter W. Hook, Jr.),
incorporated herein by reference to the Company's Form
S-1 Registration Statement (Reg. No. 2-98424), which
became effective on July 31, 1985.
(f) Ominbus Account Agreement dated May 1, 1984 between
Interstate and Pershing Futures, a Division of Donaldson,
Lufkin & Jenrette Securities Corporation, incorporated
herein by reference to the Company's Form S-1
Registration Statement (Reg. No. 2-98424), which became
effective on July 31, 1985.
(g) Financial Information Service Agreement dated March 5,
1981 between Interstate and Quotron Systems, Inc.,
incorporated herein by reference to the
Company's Form S-1 Registration Statement (Reg. No.
2-98424), which became effective on July 31, 1985.
(h) Financial Data Base Services Agreement dated December 3,
1984 between Interstate and Quotron Systems, Inc.,
incorporated herein by reference to the Company's Form S-1
Registration Statement (Reg. No. 2-98424), which became
effective on July 31, 1985.
(i) Form of Indemnity Agreement entered into between
Interstate Securities, Inc. and each of its Directors and
Officers, incorporated herein by reference
to Form 10K filed December 23, 1986.
(j) Interstate/Johnson Lane, Inc. 1985 Nonqualified Stock
Option Plan, incorporated herein by reference to Form 10Q
filed February 12, 1986.
(k) Lease agreement dated October 9, 1987 between Interstate
Securities, Inc., and Office On The Square Limited
Partnership, a North Carolina limited partnership,
incorporated herein by reference to Form 10K filed December 2,
1988.
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
(l) Lease agreement dated January 25, 1990, between
Interstate/Johnson Lane Corporation and RESURGENS PLAZA
SOUTH ASSOCIATES, a Georgia general partnership,
incorporated herein by reference to the Company's Form
S-1 Registration Statement (Reg. No. 2-98424), which
became effective on July 31, 1985.
(m) Lease agreement dated December 30, 1991 between
Interstate/Johnson Lane Corporation and ADP
Financial Information Services, Inc., incorporated
herein by reference to the Company's Form S-1
Registration Statement (Reg. No. 2-98424),
which became effective on July 31, 1985.
(n) Lease agreement dated June 8, 1993 between
Interstate/Johnson Lane Corporation and Vanguard/IJL
Limited Partnership incorporated herein by
reference to Form 10K filed December 23, 1993.
(b) Reports on Form 8-K
There were no 8-K reports filed during the fourth quarter of
fiscal year 1994.
For the purposes of complying with the amendments to the rules
governing Form S-8 (effective July 13, 1990) under the Securities Act
of 1933, the undersigned registrant hereby undertakes as follows,
which undertaking shall be incorporated by reference into registrant's
Registration Statements on Form S-8 as follows:
Interstate/Johnson Lane, Inc.
Amended and Restated
1987 Stock Award Plan Filed 10/26/94
Interstate/Johnson Lane, Inc.
Amended and Restated
1987 Stock Award Plan Filed 09/13/91
Interstate/Johnson Lane, Inc.
Amended and Restated
1985 Incentive Stock Option Plan Filed 11/06/89
Interstate/Johnson Lane, Inc.
1985 Non-Qualified Stock Option Plan Filed 11/06/89
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act of 1933
and is, therefore, unenforceable. In the event that a claim arises
for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer
or controlling person in connection with the securities being
registered), the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of
Interstate/Johnson Lane, Inc.:
We have audited the consolidated financial statements of
Interstate/Johnson Lane, Inc. and Subsidiaries as of September 30,
1994 and 1993, and for each of the three years in the period ended
September 30, 1994, which financial statements are included on pages
13 through 19 of the 1994 Annual Report to Shareholders of
Interstate/Johnson Lane, Inc. and incorporated by reference herein.
We have also audited the financial statement schedules listed in the
index on page 12 of this Form 10-K. These financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial condition
of Interstate/Johnson Lane, Inc. and Subsidiaries as of September 30,
1994 and 1993, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended
September 30, 1994 in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement
schedules referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material
respects, the information required to be included therein.
As discussed in Note 8 to the Consolidated Financial Statements,
the Company is a defendant in lawsuits arising from its role as
managing underwriter for a common stock offering. The ultimate
outcome of the litigation cannot presently be determined.
As discussed in Note 12 to the Consolidated Financial Statements,
on October 1, 1993, the Company adopted Financial Accounting Standards
Board Statement No. 109, "Accounting for Income Taxes."
As discussed in Note 1 to the Consolidated Financial Statements,
the Company reclassified as cash equivalents certain short-term
investments in repurchase agreements.
Charlotte, North Carolina (Signature of Coopers & Lybrand L.L.P.-- See appendix)
October 25, 1994
<PAGE>
SCHEDULE VIII -- Valuation and Qualifying Accounts
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Additions
Balance at charged to Balance at
beginning costs and end of
Description of period expenses Deductions period
<S> <C> <C> <C> <C>
Year Ended September 30, 1994
Provision for real estate charges:
Asset valuation accounts 5,493,789 1,125,000 (250,000)C 6,368,789
Reserves 550,000 150,000 (450,000)B 250,000
Reserves for uncollectible customer 442,398 (4,482) (175,681)C 262,235
accounts: Asset valuation accounts
Reserve for lease obligations 149,848 114,984 (155,328)A 109,504
Year Ended September 30, 1993
Provision for real estate charges:
Asset valuation accounts $3,838,215 $1,655,574 - $5,493,789
Reserves 2,050,000 - (575,000)A
(925,000)B 550,000
Reserves for uncollectible customer
accounts: Asset valuation accounts 1,680,056 92,075 (1,329,733)C 442,398
Reserve for lease obligations 283,995 89,552 (183,292)A
(40,407)B 149,848
Restructuring reserve 291,884 - (25,000)A
(266,884)B -
Year Ended September 30, 1992
Provision for real estate charges:
Asset valuation accounts 1,846,014 1,992,201 - 3,838,215
Reserves 2,275,000 100,000 (75,000)A
(250,000)B 2,050,000
Reserves for uncollectible customer
accounts: Asset valuation accounts 1,883,533 55,682 (259,159)C 1,680,056
Reserve for lease obligations 308,239 186,517 (210,761)A 283,995
Restructuring reserve 699,271 187,504 (594,891)A 291,884
</TABLE>
A - Payments charged to reserve
B - Reassessment of reserve
C - Specific account charge-offs
<PAGE>
SCHEDULE IX -- SHORT-TERM BORROWINGS
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Category of Maximum Average Weighted
aggregate amount amount average
short-term Balance at Weighted average outstanding outstanding interest rate
borrowings end of period interest rate during the period during the period during the period
<S> <C> <C> <C> <C> <C>
Year Ended
September 30, 1994:
Bank loans $4,996,413 6.475% $25,000,000 $11,599,891 4.01%
Year Ended
September 30, 1993:
Bank loans $2,288,106 4.75% $28,000,000 $12,842,966 3.95%
Year Ended
September 30, 1992:
Bank loans $11,600,000 5.09% $30,000,000 $10,681,594 4.76%
</TABLE>
NOTE:
Bank loans outstanding were obtained to finance securities owned by
Interstate/Johnson Lane Corporation and are payable on demand.
Interest rates on such loans fluctuate with the lending institutions'
respective broker loan rates. The average amount outstanding and
average interest rate were computed on a monthly basis.
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15d 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 on
December 22, 1994.
INTERSTATE/JOHNSON LANE, INC.
BY:
James H. Morgan, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
President, Chief Executive Officer
James H. Morgan and Director December 22, 1994
Vice President - Finance and
Edward C. Ruff Treasurer (Principal Financial
Officer) and Director December 22, 1994
Assistant Vice President
C. Fred Wagstaff, III (Principal Accounting Officer) December 22, 1994
Chairman of the Board of Directors December 22, 1994
Parks H. Dalton
Director December 22, 1994
Claude S. Abernethy, Jr.
Director December 22, 1994
Dudley G. Pearson
Director December 22, 1994
Grady G. Thomas, Jr.
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
11 Statement Regarding Computation of Per
Share Earnings
13 1994 Annual Report to Shareholders
21 Subsidiaries
23 Consent of Independent Accountants
<PAGE>
***********************************************************************
APPENDIX
On The Report of Independent Accountants page Coopers & Lybrand L.L.P.
signature appears where indicated.
On the front cover of Exhibit 13 the words INTERSTATE/JOHNSON LANE
appears in the top left corner and four pictures in each of
the corners. The picture in the upper left corner is
one of a building that has several statues and the words "Stock Exchange"
on the front. In the bottom left corner the is a picture of a
bird's nest with three eggs in it. In the upper right corner is a picture
of some gears and in the bottom right corner is a picture of
three keys on a ring with the words 1994 ANNUAL REPORT under it.
On page three of Exhibit 13 the Signatures of Parks H. Dalton
and James H. Morgan appear where indicated.
On page four of Exhibit 13 a picture appears in the bottom
left corner of a building that has several statues and the words "Stock
Exchange" on the front.
On page five of Exhibit 13 in the upper right corner a picture of
some gears appears.
On page six of Exhibit 13 in the upper left corner a picture of
a birds nest appears with three eggs in it.
On page seven of Exhibit 13 in the bottom right corner a picture of
three keys on a ring appears.
On page twelve of Exhibit 13 the Signatures of James H. Morgan,
Edward C. Ruff and Coopers & Lybrand L.L.P. appear where indicated.
On the inside back cover of Exhibit 13 in the bottom right corner a picture
of a little girl with a book is talking to a man.
On the back cover of Exhibit 13 the Interstate/Johnson Lane logo
appears in the bottom left corner.
On Exhibit 23 the Signature of Coopers & Lybrand, L.L.P. appears where
indicated.
<PAGE>
EXHIBIT 11
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Year Ended September 30,
1994 1993 1992
<S> <C> <C> <C>
Net income per share was computed as follows:
Primary:
1) Income before extraordinary item and cumulative
effect of a change in accounting principle $7,865,909 10,365,048 $6,984,124
Extraordinary item - 3,997,000 2,992,000
Cumulative effect of a change in accounting principle 3,059,000 - -
Net income $10,924,909 $14,362,048 $9,976,124
2) Weighted average shares outstanding 6,530,218 6,724,970 6,652,973
3) Incremental shares under stock options
computed under the treasury stock method
using the average market price of issuer's
stock during the periods 115,303 100,198 152,274
4) Weighted average shares and common
equivalent shares outstanding 6,645,521 6,825,168 6,805,973
5) Weighted average shares outstanding
which were used for calculation since
dilution is less than 3% 6,530,218 6,724,970 6,652,973
6) Income per share before extraordinary item
(item 1 divided by item 5) and cumulative effect of a
change in accounting principle $ 1.20 $ 1.54 $ 1.05
Extraordinary item per share - 0.60 0.45
Cumulative effect of a change in accounting principle
per share 0.47 - -
Net income per share $ 1.67 $ 2.14 $ 1.50
Fully Diluted:
1) Unadjusted income before extraordinary item
and cumulative effect of a change in accounting
principle $ 7,865,909 $10,365,048 $ 6,984,124
2) Interest on convertible subordinated
debentures, net of tax effect 984,590 1,074,099 1,074,150
3) Adjusted income before extraordinary item and
cumulative effect of a change in accounting principle 8,850,499 11,439,147 8,058,274
Extraordinary item - 3,997,000 2,992,000
Cumulative effect of a change in accounting principle 3,059,000 - -
Adjusted net income $11,909,499 15,436,147 $11,050,274
4) Weighted average shares outstanding 6,530,218 6,724,970 6,652,973
5) Incremental shares under stock options computed
under the treasury stock method using the higher
of the average or ending market price of issuer's
stock at the end of the periods 115,303 126,824 155,597
6) Incremental shares relating to convertible
subordinated debentures 1,183,042 1,183,042 1,183,042
7) Weighted average shares and common
equivalent shares outstanding 7,828,563 8,034,836 7,991,612
8) Income per share before extraordinary item
(item 3 divided by item 7) and cumulative effect of a
change in accounting principle $ 1.13 $ 1.42 $ 1.01
Extraordinary item per share - 0.50 0.37
Cumulative effect of a change in accounting principle
per share 0.39 - -
Net income per share $ 1.52 $ 1.92 $ 1.38
</TABLE>
<PAGE>
INTERSTATE/JOHNSON LANE
<PAGE>
(Four Photos appear here--see appendix)
<PAGE>
Letter To Shareholders.............2
Investing In The Future............4
The Path Of Commitment.............8
Management's Discussion
& Analysis.........................9
Financial Statements..............12
Directors.........................20
Investor Information..............20
<PAGE>
SUCCESS IN THE FINANCIAL WORLD DEMANDS
BROAD UNDERSTANDING OF MARKETS AND A KEEN SENSE
OF THE FORCES THAT INFLUENCE THEM. WE BELIEVE THAT
THE TRUE MEASURE OF OUR SUCCESS IS REFLECTED
IN THE UNWAVERING COMMITMENT WE MAKE
TO THE PROSPERITY OF OUR CLIENTS, THE
SUCCESS OF OUR FELLOW WORKERS,
AND THE HEALTH OF OUR COMMUNITIES.
(Photo appears here--see appendix)
1994 ANNUAL REPORT
<PAGE>
FIVE-YEAR FINANCIAL SUMMARY
(ALL DOLLARS IN MILLIONS EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Total Revenues $166.6 $163.5 $141.5 $ 121.9 $ 127.3
Net Revenues 147.9 151.3 125.3 99.7 99.6
Income (Loss) Before Taxes and
Non-Recurring Items 13.3 16.9 10.6 (0.3) (17.2)
Operating Income (Loss) 7.9 10.4 7.0 (0.3) (16.9)
Non-Recurring Items 3.0 4.0 3.0 -- --
Net Income (Loss) 10.9 14.4 10.0 (0.3) (16.9)
PRIMARY EARNINGS (LOSS) PER SHARE:
Operating $1.20 $ 1.54 $ 1.05 $ (0.04) $ (2.49)
Net 1.67 2.14 1.50 (0.04) (2.49)
DIVIDENDS PER SHARE: $0.09 -- -- -- --
FINANCIAL CONDITION:
Assets $767.8 $675.0 $556.6 $ 463.7 $ 439.8
Subordinated Debt 21.0 22.0 22.0 22.0 29.5
Shareholders' Equity 68.0 60.4 46.5 36.6 37.1
Book Value Per Share $10.74 $ 9.13 $ 7.01 $ 5.53 $ 5.58
</TABLE>
<PAGE>
(Photo appears here--see appendix)
INTERSTATE/JOHNSON LANE IS A FULL-SERVICE SECURITIES FIRM THAT HAS OFFERED
CLIENTS SOLID ADVICE AND IMPECCABLE SERVICE FOR MORE THAN 60 YEARS. BASED IN
CHARLOTTE, NORTH CAROLINA, IJL IS THE LARGEST INDEPENDENT BROKERAGE FIRM
HEADQUARTERED IN THE CAROLINAS OR GEORGIA AND ONE OF THE LARGEST IN THE ENTIRE
SOUTHEAST. THE COMPANY HAS MORE THAN 1,100 EMPLOYEES, INCLUDING APPROXIMATELY
400 FINANCIAL CONSULTANTS SERVING INDIVIDUAL INVESTORS THROUGH ITS BRANCH
NETWORK OF 56 OFFICES LOCATED PRIMARILY IN NORTH CAROLINA, SOUTH CAROLINA AND
GEORGIA. IN ADDITION, IJL HAS A SALES FORCE OF ALMOST 70 PROFESSIONALS WHO
PROVIDE A FULL RANGE OF FINANCIAL PRODUCTS AND SERVICES TO INSTITUTIONAL
INVESTORS THROUGHOUT THE UNITED STATES AND ABROAD. THE COMPANY ALSO OFFERS
INVESTMENT BANKING SERVICES TO CORPORATIONS, STATE AND LOCAL GOVERNMENTS, AND
PUBLIC AGENCIES. TRADING DESKS IN ATLANTA AND CHARLOTTE MAKE MARKETS IN THE
COMMON STOCKS OF 231 COMPANIES TRADED OVER-THE-COUNTER. OUR FIRM'S REPUTATION
IS FOUNDED ON STRONG CLIENT RELATIONSHIPS THAT STAND THE TEST OF TIME. A LONG-
STANDING TRADITION OF DILIGENT SERVICE AND UNWAVERING FIDELITY TO THE BEST
INTERESTS OF OUR CLIENTS MAKES US THE SOUTHEAST'S LEADING INVESTMENT FIRM.
Page One
<PAGE>
DEAR FELLOW SHAREHOLDERS:
The year just ended was a challenging one. We became reacquainted with
something we knew was inevitable - a much more difficult external environment
than had existed in recent years. The equity markets experienced above-average
volatility, and the bond market was the worst since 1927. The scenario was far
different than in 1993, when markets were robust and the entire securities
industry enjoyed record earnings.
But strong markets do not make strong companies. We will grow and prosper
over the long term by attracting and keeping the best and brightest people in
this business, by carefully controlling costs, by making technology add value
for us, and by constantly seeking new and better ways to meet our clients'
financial needs. In each of these key areas, IJL finished the year stronger than
ever before. Your company performed exceptionally well despite the weaker
environment, suggesting that the changes made to date have positioned us well
for future growth and success.
For the fiscal year ended September 30, 1994, operating earnings were $7.9
million, or $1.20 per share - the second-best performance in the firm's history.
Operating income for fiscal 1993 was $10.4 million, or $1.54 per share. Total
revenues for fiscal 1994 rose to $166.6 million, an increase of 2% from last
year's $163.5 million. Net income for fiscal 1994, which reflects a change in an
accounting principle, was $10.9 million, or $1.67 a share. This result compares
with 1993 net income of $14.4 million, or $2.14 per share including a $4.0
million extraordinary tax credit. Finally, the company resumed the payment of
regular quarterly dividends after a five-year hiatus.
While the numbers are down from 1993, our relative performance within the
industry was actually stronger than in 1993. Two businesses were particularly
significant contributors to our successful year. The Interstate Group improved
its profitability for the tenth consecutive year, and the Institutional Equities
Division increased its contribution to profits by 60 percent from the prior
year. Finally, our bellwether Retail Division continued to account for over half
of the firm's revenues and operating profits.
While the efforts of individual units will constantly deserve praise,
Interstate/Johnson Lane's success ultimately depends on our ability to do
something that no individual can do alone - win the trust and respect of clients
by diligently working to improve the products and services we offer.
Page Two
<PAGE>
IJL's most visible strength is its network of retail and institutional sales
offices. Several key offices are under new leadership, and revenues are growing.
Information delivery systems were expanded and improved, giving financial
consultants desktop access to an even broader range of market and research data.
New asset management services were added this year, and more are planned for
1995.
Interstate/Johnson Lane Trust Services was formed in 1994 to offer a full
spectrum of trust administration and investment services to our individual and
corporate clients. We now can remain financial planning partners with valued,
longtime clients who want to put their assets into trust.
Looking ahead, IJL will carefully and cautiously weigh opportunities to
expand products and services as well as to enhance our franchise. Within the
industry, we expect increased competition and will be challenged to search out
new sources of revenue. In addition, we see ongoing opportunities for growth in
such areas as public finance, where there is a growing need for value-added
thought processes and services.
Major political, demographic and economic changes have altered the
investment landscape in recent years, and 1995 is certain to bring us still more
surprises. With a solid balance sheet, a strong capital position, an energized
leadership team and an experienced and dedicated staff, your company is ready to
meet the challenges of tomorrow. We are looking toward the year 2000 and beyond
- - - a time frame within which we feel both our clients and our shareholders will
be well rewarded.
We thank all our employees for their exceptional efforts in 1994 and for the
success they will bring to the firm in the future.
Sincerely,
(Signature of Parks H. Dalton) (Signature of James H. Morgan)
Parks H. Dalton James H. Morgan
CHAIRMAN PRESIDENT AND CHIEF EXECUTIVE OFFICER
Page Three
<PAGE>
INVESTING IN THE FUTURE
The year just ended was one of major investments at IJL - in people, in
technology, and in new products and services. While these investments were
designed to give us long-term strength and stability, there were immediate
positive benefits as well.
During 1994, leadership was strengthened in investment banking, better
positioning us to play a major role in financing the economic expansion of the
Southeast. The firm has added expertise in four fixed-income specialties -
public finance, underwriting, trading and sales. This sector was punished by the
market in 1994, but continues to offer significant long-term potential for IJL.
Several of our major offices serving individual investors have new managers.
The aggressive recruiting and training programs implemented four years ago are
developing new talent at a brisk pace; a number of those brought into IJL under
these programs already are major contributors, and we expect their ranks to
swell in 1995. At the same time, we are enhancing the professionalism and
knowledge of our seasoned financial consultants to ensure that our clients are
receiving the best possible service. Through internships, we are bringing in
high-potential college students interested in pursuing careers in the
securities industry. The seeds planted in this program are beginning to take
root, and we are confident that this effort will provide a steady crop of
fresh young talent for IJL.
A new Operations Center opened in an office park in south Charlotte,
providing our employees a much more attractive environment in which to work, and
thus better serving clients. The new facility was designed to accommodate IJL's
unique security and document-handling needs, and there is plenty of room for us
to grow.
Across the firm, new technology made
MARKETS
(Photo appears here--see appendix)
INVESTMENT OPPORTUNITIES CROSS BORDERS
AND SPAN OCEANS. WE OFFER CLIENTS A WINDOW,
NOT JUST ON THE SOUTHEAST, BUT ON THE WORLD.
Page Four
<PAGE>
the workforce more efficient. Computers took over more and more routine
tasks, freeing up employees to use their time more creatively and productively.
The financial consultants, traders and analysts who produce revenue for IJL were
given powerful new tools to use in their work, and still more will be added
early in the new year to assist them in portfolio management and business
development. Information technology changes improved both the accessibility and
the applicability of research in daily trading.
The creation of Interstate/Johnson Lane Trust Services brought us into the
growing field of trust administration. The addition of this service will
both attract new business and help us retain clients who would otherwise
move their assets when establishing a trust.
IJL opened an institutional fixed-income sales office in Richmond in July,
and in these early months, we have found the Virginia market most fertile.
Richmond is home to our research and investment banking partners, Mann,
Armistead & Epperson, and we will look for opportunities to further augment our
presence in that city in 1995. As the year ended, IJL established a similar
office in Houston, seeking to geographically broaden our institutional client
base and capitalize on the vigorous activity in that marketplace.
All of these improvements reinforce the long-term health of
Interstate/Johnson Lane and our ability to weather the turbulent markets and
capitalize on the stable ones. In the year just ended, the markets softened and
activity slowed, but the firm still performed well. We continued to pay close
attention to controlling fixed expenses and improving efficiency; the result was
a relatively stronger bottom line than otherwise would have been the case.
TEAMWORK
(Photo appears here--see appendix)
THE MOST ENDURING STRENGTH OF IJL IS
OUR PEOPLE. A CULTURE OF COOPERATION MELDS
TALENTED INDIVIDUALS INTO A WINNING TEAM.
Page Five
<PAGE>
CLIENTS
(Photo appears here--see appendix)
OUR FIRM'S SUCCESS DEPENDS ON
BUILDING RELATIONSHIPS WITH CLIENTS
THAT STAND THE TEST OF TIME.
Our nearly $11 million of net income pushed book value per share up to
$10.74 at September 30, 1994, from $9.13 a year earlier. As the new year begins,
we are in an enviable position of being able to commit capital to augment
current businesses or to enter into new ones. A liquid balance sheet and $89
million in capital give us the financial strength and flexibility to continue
funding growth. By industry standards, our capital position is strong, and we
can - and will - act quickly to take advantage of opportunities as they arise.
On October 25, 1994, the Board of Directors named James H. Morgan as Chief
Executive Officer. Morgan, who had been President and Chief Operating Officer,
succeeded Parks H. Dalton, who remains active with the firm as Chairman of the
Board. Morgan and Dalton have worked closely for the past four years to give
IJL a clear vision and a sound structure, and that partnership continues as
they assume new roles.
Of all the achievements of the past year, one holds a special place in the
hearts of IJL employees. After our first year of involvement with the Sedgefield
Elementary School in Charlotte, test scores, which had been on the decline,
turned and began climbing. More than 70 IJL employees were working with
Sedgefield students last year, and even more have volunteered this year. We are
making a difference for these children and, in the process, enriching our own
lives. Our work at Sedgefield will not show up in the numbers you see in this
report, nor in the literature we send to our clients. But you may be proud that,
because of this worthwhile project, IJL was presented with the North Carolina
Governor's Award for Outstanding Volunteer Service.
Page Six
<PAGE>
IJL made great progress in 1994; in looking to the new year, we see
continued development of new products and services as well as expansion into
high-potential geographic markets. We will continue to carefully examine
opportunities outside the Carolinas and Georgia, while seeking ways to expand
and improve operations in the three primary states. The overriding objective
remains the same for expansion - to enhance IJL's value and increase earnings
for shareholders.
We have an aggressive technology plan mapped out for the next several years
that will build on the progress already made. This careful and measured plan
assures that we remain technologically competitive while still prudently
managing costs. We are committed to increasing your company's profile and will
work in 1995 to heighten awareness of IJL in the communities we serve.
IJL has a high-quality staff and an extraordinary level of commitment to
corporate success within that workforce. Through an employee stock ownership
plan and through direct ownership, our employees hold 44 percent of Interstate/
Johnson Lane, Inc. common stock. As a result, they think and act like the owners
that they are.
The November elections changed the political balance across the nation, and
that change most certainly will influence legislative agendas and economic
policy, which will, in turn, affect the investment climate.
While specific strategies may change with the external environment, our
underlying principles will remain steadfast. Above all, we are committed to
building long-term relationships with our clients - the individuals, families,
corporations and public agencies who rely on us to be careful stewards of their
resources. That commitment has kept us in business for more than 60 years, and
will guide us to health and prosperity in the years to come.
COMMUNITY
(Photo appears here--see appendix)
COMMUNITY INVOLVEMENT IS A KEYSTONE OF
OUR FIRM. WE ESPECIALLY SUPPORT PROGRAMS
THAT ENRICH THE LIVES OF CHILDREN.
Page Seven
<PAGE>
THE PATH OF COMMITMENT
Interstate/Johnson Lane is firmly committed to enhancing clients' financial
success by delivering superior ideas, products and service through the unique
commitment of our employees, both to personal excellence and to ensuring each
other's and the firm's success. Our success in this mission will be measured by
the degree to which individuals, institutions, corporations and public entities
regard Interstate/Johnson Lane as the firm of choice for providing solutions to
their financial needs.
WE WILL BE...
COMMITTED TO THE FINANCIAL SUCCESS OF OUR CLIENTS.
NO PRODUCT OR SERVICE WILL BE OFFERED SIMPLY TO ENHANCE OUR CORPORATE
REVENUES, AND OUR INVESTMENT ADVICE MUST BE DESIGNED TO STAND THE TEST OF TIME.
COMMITTED TO ENSURING EACH OTHER'S SUCCESS.
IN ORDER FOR ALL OF US TO WORK TOGETHER AS A TRULY UNIFIED TEAM, WE MUST
COMMUNICATE HONESTLY, DIRECTLY AND FREQUENTLY WITH ONE ANOTHER. DEPARTMENTAL
BOUNDARIES SHOULD NEVER BE PERCEIVED AS OBSTACLES TO TEAMWORK.
COMMITTED TO DRAMATICALLY RAISING OUR EXPECTATIONS OF OURSELVES AND EACH
OTHER IN TERMS OF BOTH ENERGY LEVEL AND DEPTH OF COMMITMENT.
RESPONSIBILITY WILL BE DELEGATED, AND EMPLOYEES WILL BE HELD FULLY
ACCOUNTABLE FOR THEIR PERFORMANCE. MANAGERS AND OTHER KEY LEADERS MUST SERVE AS
ROLE MODELS IN TERMS OF STRATEGIC VISION, WORK ETHIC AND ENERGY LEVEL.
COMMITTED TO ATTRACTING AND RETAINING PEOPLE WHO MEET EXTRAORDINARILY HIGH
STANDARDS OF PERSONAL INTEGRITY AND PROFESSIONAL EXCELLENCE.
WE WILL MAINTAIN A WORK ENVIRONMENT THAT IS EXCEPTIONAL IN ITS ABILITY TO
BLEND PERSONAL WARMTH WITH PROFESSIONALISM.
COMMITTED TO IMPROVING THE COMMUNITIES IN WHICH WE LIVE AND WORK.
WE WILL ENCOURAGE ALL EMPLOYEES TO BECOME ACTIVELY INVOLVED IN COMMUNITY
SERVICE, AND WE ARE ESPECIALLY COMMITTED TO IMPROVING THE EDUCATIONAL
OPPORTUNITIES AVAILABLE TO CHILDREN AND YOUTH.
COMMITTED TO ENSURING SUPERIOR FINANCIAL PERFORMANCE.
OUR RESPONSIBILITY TO OUR FELLOW EMPLOYEES AND OUR SHAREHOLDERS DEMANDS THAT
ALL OF US WORK TO ENSURE THAT THE FIRM FUNCTIONS AS PRODUCTIVELY AND COST-
EFFECTIVELY AS POSSIBLE, BY STREAMLINING PROCEDURES, BEING INNOVATIVE AND
UNBUREAUCRATIC, AND JUSTIFYING ADDITIONAL COSTS WITH ACCEPTABLE RETURNS.
Page Eight
<PAGE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL BUSINESS
ENVIRONMENT
The Company's principal activities - securities brokerage for individual
(retail) and institutional investors, market-making in equity and fixed-income
securities, investment banking and underwriting, and investment management and
advisory services are highly competitive. Strategic alliances between investment
firms and commercial banks, insurance companies, and other financial services
entities have intensified this competition. Many of the Company's revenue
sources are sensitive to marketplace trading volumes and to interest rate
conditions which can be volatile.
During the past four years, the Company has undertaken a major commitment to
build its retail sales force by recruiting and training individuals without
securities industry experience. As a result, at September 30, 1994,
approximately 30% of the Company's retail financial consultants consisted of
individuals with less than three years' experience. While this condition may
bode well for the future, slowdowns in individual investor activity could
negatively impact the revenue production of a less seasoned sales force. Recent
Securities and Exchange Commission rulings and proposals on broker-dealer
practices related to order flow, and to disclosure requirements for institutions
using "soft dollars" to pay for research services, the latter a significant
source of the Company's profits, could also have a dampening effect on operating
results.
The Company's trading inventories may include, from time to time, positions
in taxable and nontaxable debt securities which have greater risks than
positions in investment-grade securities. While these positions are required to
be valued at "market," there is a thinly traded market for such securities;
quotes are generally available from a limited number of dealers and may not
represent firm bids or offers. The average inventory of these securities during
the year ended September 30, 1994, was $9.0 million. As of that same date, such
holdings represented $10.8 million, or 19%, of all securities owned by the
Company.
LIQUIDITY AND
CAPITAL RESOURCES
The Company's cash position increased $9.8 million during the fiscal year
ended September 30, 1994. Operating activities and capital expenditures consumed
$12.1 million of cash, funded by $15.3 million of net income adjusted for
depreciation and other non-cash charges. Financing sources were utilized to
provide an additional $6.6 million of cash.
The Company's permanent capital consists of its shareholders' equity and
subordinated debt. Day-to-day financing requirements are primarily influenced by
the level of securities inventories, net receivables from customers and broker-
dealers, and net receivables under resale agreements. Significant cash
requirements could occur in connection with payments under deferred compensation
plans, repurchase of the Company's common stock and/or convertible debentures,
payment of dividends, and litigation settlements arising from normal business
operations. The Company also anticipates capital expenditures in the $7 to $10
million range over the next several years in connection with a major program of
technology improvements.
At September 30, 1994, the Company had $110 million of unused call loan
financing available. In addition, the Company maintains significant credit lines
for repurchase agreements with other financial institutions, and has financed
its customer receivables with customer payables for many years. Management
believes that these resources, together with the Company's permanent capital
base and funds provided by operations, will satisfy normal financing needs for
the foreseeable future. The Company's broker-dealer subsidiary,
Interstate/Johnson Lane Corporation ("IJL"), is subject to liquidity and capital
requirements of the Securities and Exchange Commission ("SEC"), Commodity
Futures Trading Commission ("CFTC"), and the New York Stock Exchange ("NYSE"),
and has consistently operated well in excess of the minimum requirements. At
September 30, 1994, IJL had "net capital" of $36.8 million, "excess net capital"
of $33.5 million, and a net capital ratio of 21.9%.
RESULTS OF OPERATIONS
1994 COMPARED WITH 1993
Net revenues decreased $3.5 million, or 2%, from the previous year, while
expenses, other than interest, increased a modest $150,000, or 0.1%. Operating
income decreased $2.5 million to $7.9 million, but was augmented by a $3.0
million credit from the cumulative effect of a change in accounting principle,
pushing net income up to $10.9 million, or $1.67 per share.
Overall, stagnant markets produced a decrease in commission revenues of $2.6
million, or 2%; this decline represented reduced revenues of 2% and 3%,
respectively, in the retail and institutional sectors. Fewer equity
underwritings and secondary market transactions in listed equity and taxable
debt securities were the primary contributors to the decline, with both the
retail and institutional sectors impacted.
The poorest bond market in more than 60 years precipitated trading losses in
both corporate and tax-exempt debt; these losses were partially offset by a $2.5
million improvement in government and mortgage-backed securities trading. As a
result, overall net trading profits decreased $3.1 million, or 33%.
Investment banking and underwriting profits decreased $1.8 million, or 21%,
due to a slower market for new equity and debt offerings in both the corporate
and public sectors. Asset management and
Page Nine
<PAGE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CONTINUED
advisory fees were up $1.6 million, or 35%, due to the continued growth of
"wrap fees" paid by retail clients in lieu of transaction-based commissions.
Interest revenues increased approximately $8.4 million, while expenses rose
$6.6 million from last year. The increase in revenues was attributable to higher
levels of both conventional margin loans and loans under matched resale
agreements. The increase in expense was due to higher levels of borrowings under
matched securities repurchase agreements. The improvement in net interest income
of $1.8 million can be attributed primarily to larger interest rate spreads on
higher levels of margin loans, and to improved earnings on funds segregated for
regulatory purposes.
Technology and telephone costs increased $1.0 million primarily from
increased transaction processing charges. Occupancy costs rose by $559,000 in
conjunction with the relocation of IJL's Operations Center.
Promotion and development costs increased $829,000, or 19%, in connection
with the continuing effort to build revenue. Professional services were up
$807,000, or 25%, primarily from an increase in amounts paid to third-party
money managers under "wrap fee" arrangements. Other operating expenses decreased
$2.7 million, or 30%, largely as a result of lesser charges to asset valuation
accounts and smaller provisions for legal and related matters.
RESULTS OF OPERATIONS
1993COMPARED WITH 1992
Net revenues increased $26.0 million, or 21%, from the previous year, while
expenses, other than interest, increased $19.8 million, or 17%. Operating income
improved by $6.2 million and was augmented by a $4.0 million extraordinary
credit (arising from the realization of remaining tax-loss carryforwards), thus
generating net income of $14.4 million, or $2.14 per share. Overall, vibrant
markets produced an increase in commission revenues of $18.3 million, or 19%;
this increase represented gains of 16% and 25%, respectively, in the retail and
institutional sectors. Individual and institutional investors both focused their
attention on the equities markets, as evidenced by impressive gains in listed
and OTC stock commissions (up 15%) and new issues (up 35%). Commission revenues
derived from taxable bonds were up 22%, primarily from increased activity by
institutional investors. Individuals also were attracted to investment
alternatives such as mutual funds (up 22%) and annuities (up 82%).
There was a decrease of $225,000 in net trading gains in 1993; gains from
OTC market-making activities (up $1.4 million) were offset by declines in
profits on corporate bond trading (down $542,000) and on positions in U.S.
government and mortgage-backed securities (down $1.2 million). Investment
banking and underwriting revenues increased $3.5 million, or 76%, primarily as
the result of a continued strong market for new issues. Asset management and
advisory fees increased 29%, or $1.0 million, primarily from the continued
growth of "wrap fees" paid by retail customers in lieu of transaction-based
commissions. A $624,000 increase in other revenues was principally the result of
a residual fee earned from the sale of assets by a partnership in which the
Company had a prior ownership interest.
Interest revenues decreased by about $1.2 million, or 6%, from fiscal 1992
as rates continued to fall. Decreases in revenues on segregated customer reserve
deposits (down $1.8 million) and loans under repurchase agreements (down $1.3
million) were buoyed somewhat by increased revenues (up $900,000) on higher
customer margin balances and on the firm's fixed income securities inventory (up
$1.1 million). Lower rates drove down interest expense $4.0 million, or 25%, as
average customer credit balances remained unchanged and repurchase agreement
interest expense dropped $1.4 million. The result was an increase in net
interest (income less expense) of $2.8 million from the prior fiscal year.
Compensation and benefits costs increased by about $16.4 million, or 22%.
Variable sales force compensation increased by $9.9 million, or 21%, consistent
with the increase in commission revenues. Other profit-based incentive
compensation in revenue and administrative areas increased by about $3.5
million. Technology and telephone costs increased by about $921,000, or 8%, due
primarily to higher transaction volumes applied to the variable pricing
structure of the Company's outsourcing arrangements for data processing.
Execution, clearance and depository expenses increased about $212,000 as a
result of increased execution charges associated with higher listed equity
transaction volumes. Promotion and development expenses increased $370,000, or
9%, due to higher levels of purchased research and professional development
expenses incurred with the successful effort to build revenues. Professional
services increased $583,000, or 22%, due to an increase in wrap account
management expenses. Printing, postage and supplies increased by about $354,000,
or 13%, mostly due to higher postage costs associated with increased customer
transaction volume resulting in more confirmations and statements. Other
operating expenses increased by $1.4 million, or 19%, due to increased accruals
for potential costs of litigation and bad debts.
ACCOUNTING ISSUES
In May 1993, the Financial Accounting Standards Board issued Statement No.
114, "Accounting by Creditors for Impairment of a Loan," which was subsequently
amended, in October 1994, by Financial Accounting Standards Board Statement No.
118, "Accounting by Creditors for Impairment of
Page Ten
<PAGE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CONTINUED
a Loan - Income Recognition and Disclosures," which is effective for the
Company's 1995 fiscal year. Adoption of these statements is not expected to have
a material impact on the financial condition of the Company.
INFLATION
Because the Company's assets are largely liquid, and because securities
inventories are carried at current market values, the impact of inflation is
reflected in its consolidated financial statements. However, the rate of
inflation also affects expenses such as employee compensation, rent, and
communications, and such effects may not be readily recoverable through
increased commission rates, trading profits, or fees. To the extent that
inflation has other adverse effects on prices and activities in the securities
markets and, in particular, on interest rate conditions in the credit markets,
it may adversely affect the Company's financial position and results of
operations.
<TABLE>
<CAPTION>
REVENUE & EXPENSE ANALYSIS
YEARS ENDED SEPTEMBER 30 1994 1993 1992
<S> <C> <C> <C>
DISTRIBUTION OF NET REVENUES
Commissions and sales credits 75.4% 75.4% 76.5%
Trading gains, net 4.2 6.2 7.7
Investment banking and underwriting 4.4 5.4 3.7
Asset management and advisory 4.2 3.0 2.8
Other operating revenues 6.0 5.5 6.1
Net interest 5.8 4.5 3.2
Net revenues 100.0% 100.0% 100.0%
UTILIZATION OF NET REVENUES
Compensation and benefits 61.4% 60.4% 60.0%
Technology and telephone 9.3 8.4 9.4
Occupancy 5.3 4.8 6.1
Execution, clearance and depository 2.5 2.3 2.6
Promotion and development 3.5 2.8 3.1
Professional services 2.8 2.2 2.2
Printing, postage and supplies 2.2 2.1 2.2
Other operating expenses 4.1 5.8 5.9
91.1 88.8 91.5
Minority interest - - 0.1
Income taxes 3.6 4.3 2.9
Non-recurring items (2.1) (2.6) (2.4)
92.6% 90.5% 92.1%
</TABLE>
<TABLE>
<CAPTION>
SUPPLEMENTARY FINANCIAL DATA
(ALL DOLLARS IN THOUSANDS EXCEPT COMMON STOCK
PER-SHARE AMOUNTS) INCOME EARNINGS PER SHARE PRICE RANGE
(UNAUDITED)
BEFORE TAXES BEFORE BEFORE
EXTRAORDINARY EXTRAORDINARY EXTRAORDINARY
ITEM AND ITEM AND ITEM AND
CUMULATIVE CUMULATIVE CUMULATIVE
EFFECT OF A EFFECT OF A EFFECT OF A
CHANGE IN CHANGE IN CHANGE IN
TOTAL NET ACCOUNTING ACCOUNTING ACCOUNTING
REVENUES REVENUES PRINCIPLE PRINCIPLE NET PRINCIPLE NET HIGH LOW
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fiscal 1994
Fourth Quarter $40,430 $34,586 $2,993 $1,749 $1,749 $0.27 $0.27 $8 1/4 $7 1/2
Third Quarter 38,023 33,106 1,223 734 734 0.11 0.11 9 5/8 8 1/8
Second Quarter 45,433 40,910 4,786 2,824 2,824 0.43 0.43 11 7/8 9 1/2
First Quarter 42,714 39,278 4,249 2,559 5,618 0.39 0.85 12 9 1/2
Fiscal 1993
Fourth Quarter $44,118 $41,005 $4,913 $3,259 $4,054 $0.50 $0.64 $10 $7 7/8
Third Quarter 41,074 38,263 3,885 2,260 3,301 0.33 0.48 8 1/4 7 1/2
Second Quarter 42,795 40,102 4,553 2,779 3,973 0.40 0.57 9 7 3/8
First Quarter 35,499 31,972 3,512 2,067 3,034 0.31 0.45 7 3/8 5 3/4
</TABLE>
Page Eleven
<PAGE>
FINANCIAL
REPORTING
RESPONSIBILITY
The management of Interstate/Johnson Lane is responsible for
the preparation of the Consolidated Financial Statements and related
financial information presented in this annual report. We are also responsible
for maintaining a system of internal accounting controls
records and the protection of assets. The effectiveness of internal
audit staff, which reports its findings to the Audit Committee of the Board
of Directors, comprised solely of outside directors.
The accompanying financial statements, which include amounts based on
judgments of management, have been prepared in
applied except for the adoption of a new accounting standard for income
taxes, and the reclassification of certain short-term investments. These
statements have been audited by Coopers & Lybrand L.L.P., independent
accountants, who are responsible for performing their audit in accordance with
generally accepted auditing standards and whose report follows.
Both the independent auditors and the internal auditors have access to the
Audit Committee without the presence of management; they meet regularly with
this Committee to discuss the results of their audits and to present their
opinions with respect to the adequacy of internal controls and the quality of
financial reporting.
(Signature of James H. Morgan)
James H. Morgan
CHIEF EXECUTIVE OFFICER
(Signature of Edward C. Ruff)
Edward C. Ruff
CHIEF FINANCIAL OFFICER
CHARLOTTE, NORTH CAROLINA OCTOBER 25, 1994
REPORT OF
INDEPENDENT
ACCOUNTANTS
To the Shareholders of Interstate/Johnson Lane, Inc.:
We have audited the accompanying consolidated statements of financial
condition of Interstate/Johnson Lane, Inc. and Subsidiaries as of September 30,
1994 and 1993, and the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended September 30, 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial condition of
Interstate/Johnson Lane, Inc. and Subsidiaries as of September 30, 1994 and
1993, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended September 30, 1994, in conformity
with generally accepted accounting principles.
As discussed in Note 8 to the Consolidated Financial Statements, the Company
is a defendant in lawsuits arising from its role as managing underwriter for a
common stock offering. The ultimate outcome of the litigation cannot presently
be determined.
As discussed in Note 12 to the Consolidated Financial Statements, on October
1, 1993, the Company adopted Financial Accounting Standards Board Statement No.
109, "Accounting for Income Taxes."
As discussed in Note 1 to the Consolidated Financial Statements, the Company
reclassified as cash equivalents certain short-term investments in repurchase
agreements.
(Signature of Coopers & Lybrand L.L.P.)
CHARLOTTE, NORTH CAROLINA
OCTOBER 25, 1994
Page Twelve
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS (ALL DOLLARS IN THOUSANDS)
OF FINANCIAL CONDITION SEPTEMBER 30, 1994, AND 1993
ASSETS 1994 1993
<S> <C> <C>
Cash and cash equivalents $ 30,193 $ 20,393
Cash and securities segregated for regulatory purposes 83,983 117,666
Loans under matched securities resale agreements 339,189 240,358
Receivables:
Financing resale agreements 20,989 14,328
Customers 170,060 155,582
Brokers, dealers and clearing agencies 15,573 17,244
Other 9,418 5,447
Securities owned 57,023 58,755
Land, buildings and improvements, net 9,135 13,285
Office facilities and equipment, net 6,406 5,568
Goodwill and intangible assets 14,285 14,889
Other assets 11,579 10,895
$767,833 $674,410
LIABILITIES AND SHAREHOLDERS' EQUITY 1994 1993
Short-term borrowings:
Checks payable $ 18,179 $ 13,273
Bank loans 4,997 2,288
Financing repurchase agreements 11,935 -
Borrowings under matched securities repurchase agreements 339,777 241,205
Payables:
Customers 227,431 248,266
Brokers and dealers 6,388 15,115
Income taxes 297 3,952
Other 8,327 8,928
Accrued compensation and benefits 13,010 15,887
Securities sold but not yet purchased 23,258 16,744
Notes payable 8,143 9,308
Other liabilities and accrued expenses 16,922 16,882
678,664 591,848
Minority interest 200 200
Subordinated debt 20,999 21,999
Shareholders' equity:
Common stock, $.20 par value, 30,000,000 shares
authorized, 6,883,105 shares issued in 1994 and
1993 1,377 1,377
Additional paid-in capital 31,589 31,532
Retained earnings 39,871 29,532
72,837 62,441
Less, treasury stock, at cost, 554,359 shares in 1994
and 271,722 shares in 1993 (4,867) (2,078)
Total shareholders' equity 67,970 60,363
$767,833 $674,410
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
Page Thirteen
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS (ALL DOLLARS IN THOUSANDS EXCEPT PER-SHARE AMOUNTS)
FOR THE YEARS ENDED SEPTEMBER 30,1994,1993 AND 1992
1994 1993 1992
<S> <C> <C> <C>
REVENUES:
Commissions and sales credits $111,568 $114,164 $ 95,873
Trading gains, net 6,257 9,375 9,600
Investment banking and underwriting 6,441 8,195 4,665
Asset management and advisory 6,162 4,551 3,538
Interest 27,350 18,967 20,169
Other 8,822 8,234 7,672
Total revenues 166,600 163,486 141,517
Interest expense (18,720) (12,144) (16,151)
Net revenues 147,880 151,342 125,366
EXPENSES:
Compensation and benefits 90,785 91,492 75,127
Technology and telephone 13,761 12,720 11,799
Occupancy 7,817 7,258 7,623
Execution, clearance and depository 3,744 3,508 3,296
Promotion and development 5,136 4,307 3,937
Professional services 4,092 3,285 2,702
Printing, postage and supplies 3,209 3,162 2,808
Other operating expenses 6,085 8,747 7,369
Total expenses 134,629 134,479 114,661
Income before minority interest, income
taxes, extraordinary item and cumulative
effect of a change in accounting
principle 13,251 16,863 10,705
Minority interest (80)
13,251 16,863 10,625
Income tax expense 5,385 6,498 3,641
Income before extraordinary item and cumulative
effect of a change in accounting
principle 7,866 10,365 6,984
Extraordinary item:
Reduction of income taxes arising from
carryforward of prior years' operating
losses 3,997 2,992
Cumulative effect of a change in accounting
principle 3,059
Net income $ 10,925 $ 14,362 $ 9,976
Primary earnings per share:
Income before extraordinary item and cumulative
effect of a change in accounting
principle $ 1.20 $ 1.54 $ 1.05
Extraordinary item 0.60 0.45
Cumulative effect of a change in accounting
principle 0.47
Net income $ 1.67 $ 2.14 $ 1.50
Fully diluted earnings per share:
Income before extraordinary item and cumulative
effect of a change in accounting
principle $ 1.13 $ 1.42 $ 1.01
Extraordinary item 0.50 0.37
Cumulative effect of a change in accounting
principle 0.39
Net income $ 1.52 $ 1.92 $ 1.38
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS.
Page Fourteen
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS (ALL DOLLARS IN THOUSANDS)
OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1993 AND 1992
<S> <C> <C> <C>
1994 1993 1992
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,925 $ 14,362 $ 9,976
Adjustments to reconcile net income to cash
provided (used) by operating activities:
Depreciation and amortization 3,166 3,092 3,166
Deferred income taxes (997) (1,782)
Provision for real estate charges 675 731 1,742
Other non-cash items 1,536 1,741 1,981
4,380 3,782 6,889
Cash and securities segregated for
regulatory purposes 33,683 (2,016) 39,821
Loans under matched securities resale
and repurchase agreements, net (259) (8,734) (5,593)
Net payables to customers (35,313) (4,622) (43,106)
Net receivables from brokers, dealers and
clearing agencies (7,056) 6,108 (3,797)
Other receivables (1,385) (695) (606)
Securities owned, net 8,246 14,824 (41,319)
Acquisition escrow (goodwill) 2,090
Other assets 182 (2,599) (2,558)
Income taxes payable (3,655) 3,507 7
Accrued compensation and benefits (2,877) 6,001 4,675
Other liabilities and accrued expenses (1,453) 3,763 (203)
(9,887) 15,537 (50,589)
Cash provided (used) by operating activities 5,418 33,681 (33,724)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayment of):
Short-term bank borrowings 7,615 (7,741) 14,462
Borrowings under financing repurchase
and resale agreements, net 5,274 (12,332) 11,802
Notes payable (1,165) 494 (617)
Maturity of secured demand note (1,000)
Proceeds from stock options exercised 237 1,003 80
Purchase of stock for treasury (3,747) (2,378) (524)
Dividends paid (586)
Cash provided (used) by financing activities 6,628 (20,954) 25,203
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,246) (1,438) (832)
Purchase of minority interest in subsidiary (424)
Cash used by investing activities (2,246) (1,438) (1,256)
Net increase (decrease) in cash and cash equivalents 9,800 11,289 (9,777)
Cash and cash equivalents at beginning of year 20,393 9,104 18,881
Cash and cash equivalents at end of year $ 30,193 $ 20,393 $ 9,104
Cash paid during the year for:
Interest $ 17,983 $ 12,238 $ 15,976
Income taxes $ 6,930 $ 940 $ 232
Non-cash financing activity:
Settlement of ESOP liability with treasury stock $ 325
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS.
Page Fifteen
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF (ALL DOLLARS IN THOUSANDS)
CHANGES IN SHAREHOLDERS' FOR THE YEARS ENDED SEPTEMBER 30, 1994, 1993 AND 1992
EQUITY
TOTAL
COMMON STOCK ADDITIONAL RETAINED TREASURY STOCK SHAREHOLDERS'
SHARES AMOUNT PAID-IN CAPITAL EARNINGS SHARES AMOUNT EQUITY
<S> <C> <C> <C> <C> <C> <C> <C>
September 30, 1991 6,883,049 $1,377 $30,964 $ 5,194 258,656 $ (892) $36,643
Forfeiture of restricted shares, net 1 611 (2) (1)
Purchase of treasury shares 95,900 (524) (524)
Issuance of restricted shares (324) (90,408) 325 1
Amortization of restricted shares 353 353
Stock options exercised 10 (19,389) 70 80
Conversion of subordinated
debenture 56 1 1
Net income 9,976 9,976
September 30, 1992 6,883,105 1,377 31,005 15,170 245,370 (1,023) 46,529
Forfeiture of restricted shares, net 11 9,915 (45) (34)
Purchase of treasury shares 296,200 (2,378) (2,378)
Issuance of restricted shares 93 (211,715) 924 1,017
Amortization of restricted shares 549 549
Stock options exercised (126) (68,048) 444 318
Net income 14,362 14,362
September 30, 1993 6,883,105 1,377 31,532 29,532 271,722 (2,078) 60,363
Forfeiture of restricted shares, net 21 4,985 (21)
Purchase of treasury shares 397,900 (3,747) (3,747)
Issuance of restricted shares (470) (59,400) 470
Amortization of restricted shares 778 778
Stock options exercised (272) (60,848) 509 237
Net income 10,925 10,925
Dividends paid ($0.09 per share) (586) (586)
September 30, 1994 6,883,105 $1,377 $31,589 $39,871 554,359 $ (4,867) $67,970
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS.
Page Sixteen
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Interstate/
Johnson Lane, Inc. and its majority-owned subsidiaries, collectively referred to
as the "Company." All intercompany balances and transactions have been
eliminated. The Company's principal subsidiary is Interstate/ Johnson Lane
Corporation ("IJL"), a registered broker-dealer.
IJL records securities transactions on a settlement date basis, which does
not differ materially from a trade date basis. Securities and futures positions
in trading accounts are valued at market quotations. Securities not readily
marketable are carried at fair realizable value as determined by management. The
resulting unrealized gains and losses are reflected in income.
Cash and cash equivalents include cash invested in short-term instruments
with original maturities of three months or less; these amounts have been
reclassified from receivables under financing resale agreements.
Goodwill is recorded at cost less accumulated amortization of $3,200,000 at
September 30, 1994, and $2,624,000 at September 30, 1993. This amount represents
the excess of cost over fair value of net assets acquired, which is being
amortized over 30 years on the straight-line method.
Buildings and improvements, and office facilities and equipment, are stated
at cost, less accumulated depreciation and amortization of $3,235,000 and
$11,783,000 at September 30, 1994, and $2,860,000 and $11,238,000 at September
30, 1993. Depreciation and amortization are provided by using the straight-line
method over an asset's estimated useful economic life.
Primary earnings per share are based on weighted average shares outstanding
after consideration of the potential dilutive effect of certain common stock
equivalents. Fully diluted earnings per share also include equivalent shares for
the dilutive effect of stock options and the assumed conversion of the
convertible subordinated debentures, after appropriate adjustment for interest
expense.
Certain 1993 and 1992 amounts have been reclassified for comparative
purposes in 1994.
2. CASH AND SECURITIES SEGREGATED FOR REGULATORY PURPOSES
Segregated for the exclusive benefit of customers at September 30, 1994,
under the provisions of Rule 15c3-3 of the Securities and Exchange Commission
("SEC") were U.S. government securities valued at approximately $59.9 million,
plus cash and other U.S. government securities collateralizing approximately
$24.0 million of resale agreements. Also segregated under the Commodities
Exchange Act was cash of $108,000.
3. SECURITIES OWNED/SECURITIES
SOLD BUT NOT YET PURCHASED
Securities owned and securities sold but not yet purchased consist of long
and short positions, respectively, in trading accounts.
(ALL DOLLARS IN THOUSANDS) SECURITIES SOLD
SECURITIES BUT NOT YET
OWNED PURCHASED
1994 1993 1994 1993
U.S.government/
agency securities $10,761 $ 3,564 $21,976 $14,742
Mortgage-backed
securities 8,726 2,360 6 -
Corporate debt 7,865 29,113 243 978
Corporate stocks 2,294 2,108 870 752
State and
municipal debt 27,377 21,610 163 272
$57,023 $58,755 $23,258 $16,744
4. SHORT-TERM BORROWINGS
Bank loans are obtained from time to time to finance securities owned by
IJL (of which a substantial portion is pledged as collateral) and are payable on
demand. At September 30, 1994, IJL had $115.0 million of call loan arrangements,
with $5.0 million in outstanding borrowings. Interest rates on all such loans
generally fluctuate with the lending institutions' respective broker loan rates;
the weighted average interest rate for the year was 4.01%.
5. NOTES PAYABLE
Notes payable to various entities at September 30, 1994 and 1993, consisted
of the following:
1994 1993
10% note with monthly payments
of $58,127 and a balloon payment due
December 31, 1996 $6,391,856 $6,447,149
11% note with monthly payments of $43,569
through August 15, 1994 - 457,717
Note, bearing interest at 84% of prime, with
quarterly payments of $27,500 through
May 1, 2001 750,632 852,500
Note, bearing interest at 90-day adjusted LIBOR
plus 1.5%, with interest paid monthly and a single
payment of principal due November 15, 1994 1,000,000 1,335,000
Other notes - 215,938
$8,142,488 $9,308,304
The net book value of buildings and improvements
collateralizing $6.4 million of these notes was $7.7 million at September 30,
1994.
Approximate maturities of notes in each of the next five years are as
follows:
YEAR ENDING SEPTEMBER 30
1995 $1,171,000
1996 177,000
1997 6,373,000
1998 110,000
1999 110,000
6. SUBORDINATED DEBT
Borrowings under subordination agreements are as
follows:
(ALL DOLLARS IN THOUSANDS)
1994 1993
7.75% convertible subordinated
debentures, due March 31,2011 $20,999 $20,999
3.75% secured demand note payable to a
related party,due May 31, 1994 - 1,000
$20,999 $21,999
Page Seventeen
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
CONTINUED
The subordinated debentures are convertible into common stock at $17.75 per
share, and are redeemable at the option of the Company at varying rates.
Beginning in 2001, the debentures require an annual sinking fund of $1,050,000,
calculated to retire 50% of the debentures prior to maturity. Under the
indenture, conversions satisfy the scheduled sinking fund requirements.
7.COMMITMENTS AND
CONTINGENCIES
Leases for office space and equipment are accounted for as operating
leases. Approximate minimum rental commitments under noncancelable leases, some
of which contain escalation clauses and renewal options, are as follows:
YEAR ENDING SEPTEMBER 30 MILLIONS
1995 $ 10.2
1996 7.1
1997 4.8
1998 4.2
1999 2.7
Thereafter 0.7
$ 29.7
Lease expense was $7.1 million in 1994, $6.7 million in 1993, and $6.3
million in 1992.
In connection with its involvement as a general partner and/or placement
agent of various real estate limited partnerships, the Company has guaranteed
certain obligations of limited partners and, with others, has jointly or
severally guaranteed mortgage loan obligations of some of the partnerships. At
September 30, 1994, contingent liabilities under these obligations amounted to
approximately $1.6 million in the aggregate.
In lieu of margin deposits with certain clearing agencies, IJL had $6.4
million outstanding at September 30, 1994 on a $20.0 million irrevocable letter
of credit issued by a commercial bank.
8. LEGAL PROCEEDINGS
IJL is a defendant, or otherwise has possible exposure, in various legal
actions arising out of its activities as a broker-dealer, underwriter, or
employer. Several of these actions, including some class actions, claim
substantial or unspecified damages which could be material. While predicting the
outcome of litigation is inherently very difficult, and the ultimate resolution,
range of loss, and impact on operating results cannot reliably be estimated,
management is of the opinion, based upon its understanding of the facts and the
advice of legal counsel, that resolution of these actions will not have a
material adverse effect on the Company's consolidated financial condition.
IJL, as managing underwriter for common stock offerings of Del-Val Financial
Corporation, is a defendant in a consolidated class action seeking damages
estimated to potentially exceed $40 million from all defendants. No opinion can
be formed at this time concerning the outcome of this litigation.
9. FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK
IJL's business activities involve the execution, settlement and financing
of securities transactions generating accounts receivable, and thus may expose
IJL to financial risk in the event a customer or other counterparty is unable to
fulfill its contractual obligations. IJL controls the risk associated with
collateralized loans by revaluing collateral at current prices, monitoring
compliance with applicable credit limits and industry regulations, and requiring
the posting of additional collateral when appropriate.
Obligations arising from financial instruments sold short in connection with
its normal trading activities expose IJL to risk in the event market prices
increase, since it may be obligated to repurchase those positions at a greater
price. IJL's short selling primarily involves debt securities, which are
typically less volatile than equities or options.
Forward and futures contracts provide for the seller agreeing to make
delivery of securities or other instruments at a specified future date and
price. Risk arises from the potential inability of counterparties to honor
contract terms, and from changes in values of the underlying instruments. At
September 30, 1994, IJL's commitments included forward purchase and sale
contracts, involving mortgage-backed securities with long market values of
approximately $155.8 million and short market values of approximately $154.6
million, and futures sales contracts with short values of $6.4 million.
IJL enters into resale agreements, whereby it lends money by purchasing U.S.
government/agency or mortgage-backed securities from customers or dealers with
an agreement to resell them to the same customers or dealers at a later date.
Such loans are collateralized by the underlying securities, which are held in
custody by IJL and may be converted into cash at IJL's option. In addition, IJL
monitors the market value of the collateral, and issues margin calls as
necessary according to the credit-worthiness of the borrower. Approximately 88%
of all loans under securities resale agreements at September 30, 1994 were made
to four counterparties.
10.EMPLOYEE STOCK PLANS
The Company has two stock option plans under which 370,000 shares with
tandem stock appreciation rights were reserved at September 30, 1994 and 1993.
In addition, the Company has a stock award plan under which 750,000 shares were
reserved at September 30, 1994 and 1993, for issuance of restricted stock or
stock options. Options granted are at or above the market value of the shares at
the date of grant. Options generally become exercisable at the rate of one-third
each year as of one year after the date of grant, and expire 10 years
thereafter.
Page Eighteen
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
CONTINUED
Information with respect to options under the above plans follows:
NUMBER OF OPTIONS OPTION PRICE
OUTSTANDING PER SHARE
October 1, 1991 412,648 2.25-12.75
Cancelled (23,681)
Exercised (19,389) 2.25-7.50
September 30, 1992 369,578 2.25-12.75
Cancelled (6,270)
Exercised (68,048) 2.25-7.50
September 30, 1993 295,260 2.25-12.75
Cancelled (2,000)
Exercised (60,848) 2.25-7.50
September 30, 1994 232,412 2.25-12.75
At September 30, 1994, options to purchase 232,412 shares were exercisable,
and no stock appreciation rights had been granted. The Company awarded 59,400
and 166,100 restricted shares from treasury stock during 1994 and 1993,
respectively.
11. QUALIFIED EMPLOYEE BENEFIT PLANS
IJL sponsors a Profit-Sharing and Capital Accumulation Plan (CAP) and an
Employee Stock Ownership Plan (ESOP), both of which are qualified under the
Employee Retirement Income Security Act (ERISA). Under the CAP, eligible
employees may defer a portion of their first $100,000 of annual compensation,
pursuant to Sections 401(a) and 401(k) of the Internal Revenue Code. IJL and
certain of its affiliates may match employee deferrals up to the first 3% of
eligible compensation. Provisions of the ESOP call for the IJL Board of
Directors to establish the amounts to be contributed each year. All employees
with one year of service are eligible to participate in both plans. Company
contributions to the plans are made so as not to exceed the maximum amounts
allowable as deductions under the Internal Revenue Code and totaled
approximately $1,496,000 in 1994, $1,516,000 in 1993, and $1,273,000 in 1992.
12. INCOME TAXES
Effective October 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method as required by
Financial Accounting Standards Board Statement No. 109, "Accounting for
Income Taxes." As permitted under the new rules, prior years' financial
statements have not been restated. The cumulative effect of adopting Statement
109 as of October 1, 1993, was to increase net income by approximately $3.1
million for the year ended September 30, 1994.
Income tax expense recorded for financial reporting purposes is comprised of
the following items:
(ALL DOLLARS IN THOUSANDS)
1994 1993 1992
Current:
Federal $2,269 $5,862 $3,433
State 1,054 1,312 208
3,323 7,174 3,641
Deferred:
Federal 1,897 (676) -
State 165 - -
2,062 (676) -
Total tax expense $5,385 $6,498 $3,641
Deferred tax expense or benefit results from different timing in the
recognition of certain revenue and expense items for income tax and financial
statement purposes. The source of these differences and the tax effect of each
is as follows:
(ALL DOLLARS IN THOUSANDS)
[S] [C] [C] [C]
Compensation and
other benefits $ (742) $ (378) $ -
Real estate, bad debt
and other expenses 1,131 (673) -
Partnership tax losses 144 369 -
Tax credits 1,276 - -
Other 253 6 -
Deferred tax
expense (benefit) $ 2,062 $ (676) $ 0
The principal differences between the federal statutory rate and the
effective income tax rate are as follows:
[S] [C] [C] [C]
1994 1993 1992
Federal statutory rate 35.0% 34.0% 34.0%
State taxes, less
federal benefit 6.0 5.1 1.3
Tax-exempt
interest, net (2.9) (3.1) (3.6)
Goodwill amortization 1.5 1.2 1.7
Benefit of operating
loss carryforward - (23.7) (28.2)
Other 1.0 1.3 0.9
Effective tax rate 40.6% 14.8% 6.1%
Cumulative deferred taxes not yet realized
are included in the statement of financial condition on a net basis as deferred
tax assets or liabilities. At September 30, 1994 and 1993 these were comprised
of the following:
(ALL DOLLARS IN THOUSANDS)
1994 1993
Deferred tax assets:
Compensation and
other benefits $2,462 $1,412
Real estate, bad debt
and other expenses 1,850 2,236
Tax credits 731 -
5,043 3,648
Deferred tax liabilities:
Partnership
tax losses 769 529
Other 1,495 1,337
2,264 1,866
Net deferred tax assets $2,779 $1,782
13. NET CAPITAL REQUIREMENTS
As a registered broker-dealer and member of the New York Stock Exchange,
IJL is subject to the SEC's uniform net capital rule. IJL has elected to operate
under the alternative method of the rule, which prohibits a broker-dealer from
engaging in any transactions when its "net capital" is less than 2% of its
"aggregate debit balances" arising from customer transactions, as these terms
are defined in the rule. The Exchange may also impose business restrictions on a
member firm if its net capital falls below 5% of its aggregate debit balances.
IJL is also subject to the Commodity Futures Trading Commission minimum net
capital requirement.
At September 30, 1994, IJL's net capital was $36.8 million, or 21.9% of its
aggregate debit balances, and approximately $33.5 million in excess of its
minimum regulatory requirements.
<PAGE>
INTERSTATE/JOHNSON
LANE, INC.
BOARD OF DIRECTORS
CLAUDE S. ABERNETHY, JR.
SENIOR VICE PRESIDENT
INTERSTATE/JOHNSON LANE CORPORATION
PARKS H. DALTON(3)
CHAIRMAN
INTERSTATE/JOHNSON LANE, INC.
INTERSTATE/JOHNSON LANE CORPORATION
JOHN B. ELLIS(2)(3)
PRIVATE INVESTOR
W. CLAY HAMNER(1)
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
MONTROSE CAPITAL CORPORATION
PETER R. KELLOGG(1)(2)(3)
SENIOR PARTNER AND CHIEF EXECUTIVE OFFICER
SPEAR, LEEDS & KELLOGG
JAMES H. MORGAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
INTERSTATE/JOHNSON LANE, INC.
INTERSTATE/JOHNSON LANE CORPORATION
DUDLEY G. PEARSON
SENIOR VICE PRESIDENT
INTERSTATE/JOHNSON LANE CORPORATION
RICHARD S. PECHTER (1)(2)
CHAIRMAN, FINANCIAL SERVICES GROUP
DONALDSON, LUFKIN & JENRETTE, INC.
EDWARD C. RUFF
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
INTERSTATE/JOHNSON LANE, INC.
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
INTERSTATE/JOHNSON LANE CORPORATION
GRADY G. THOMAS, JR.
SENIOR VICE PRESIDENT
INTERSTATE/JOHNSON LANE CORPORATION
J. DAVID T. JOHNSON
DIRECTOR EMERITUS
(1) AUDIT COMMITTEE MEMBER
(2) COMPENSATION COMMITTEE MEMBER
(3) NOMINATING COMMITTEE MEMBER
THIS PUBLICATION WAS PRINTED ENTIRELY ON RECYCLED PAPER.
INTERSTATE/JOHNSON
LANE CORPORATION
BOARD OF DIRECTORS
EDWIN T. BURTON, III
SENIOR VICE PRESIDENT
EDWIN A. DALRYMPLE
SENIOR VICE PRESIDENT
PARKS H. DALTON
CHAIRMAN
HARVEY D. HARRELSON
SENIOR VICE PRESIDENT
MICHAEL D. HEARN
SENIOR VICE PRESIDENT AND SECRETARY
GEORGE A. MCELVEEN, III
SENIOR VICE PRESIDENT
JAMES H. MORGAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
W. ALLEN ROGERS, II
SENIOR VICE PRESIDENT
EDWARD C. RUFF
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
LEWIS F. SEMONES, JR.
SENIOR VICE PRESIDENT
INVESTOR
INFORMATION
OPERATING SUBSIDIARIES
INTERSTATE/JOHNSON LANE CORPORATION
ISC FUTURES CORPORATION
ISC REALTY CORPORATION
SOVEREIGN CAPITAL MANAGEMENT, INC.
D/B/A SOVEREIGN ADVISERS, INC.
CORPORATE HEADQUARTERS
INTERSTATE TOWER
121 W. TRADE STREET
P.O. BOX 1012 CHARLOTTE, NC
28201-1012
(704) 379-9000
COMMON STOCK
TICKER SYMBOL: IS
NEW YORK STOCK EXCHANGE
AT DECEMBER 2, 1994, THERE WERE
APPROXIMATELY 1,133 SHAREHOLDERS OF RECORD.
REGISTRAR AND TRANSFER AGENT
FIRST UNION NATIONAL BANK
230 S. TRYON STREET CHARLOTTE, NC 28288-1153
INDEPENDENT ACCOUNTANTS
COOPERS & LYBRAND L.L.P.
NATIONSBANK CORPORATE CENTER
100 N. TRYON STREET,
SUITE 3400 CHARLOTTE, NC 28202
(704) 375-8414
SHAREHOLDER INQUIRIES
TRANSFER AGENT OR
MICHAEL D. HEARN, SECRETARY
(704) 379-9000
SECURITY ANALYST INQUIRIES
EDWARD C.RUFF, CHIEF FINANCIAL OFFICER
(704) 379-9000
FORM 10-K
INTERSTATE/JOHNSON LANE'S FORM 10-K REPORT TO THE SECURITIES AND EXCHANGE
COMMISSION FOR FISCAL 1994 IS AVAILABLE UPON WRITTEN REQUEST TO C. FRED WAGSTAFF
III, CONTROLLER.
ANNUAL MEETING
THE ANNUAL MEETING OF SHAREHOLDERS WILL BE HELD AT 3:00 P.M. ON JANUARY 24,
1995, AT THE RADISSON PLAZA HOTEL, TWO NATIONSBANK PLAZA, CHARLOTTE, NORTH
CAROLINA. SHAREHOLDERS OF RECORD AS OF DECEMBER 2, 1994, WILL BE ENTITLED TO
VOTE AT THIS MEETING.
Page Twenty
<PAGE>
EMPLOYEES OF IJL OFFER TIME AND TALENT TO
A VARIETY OF COMMUNITY PROJECTS, MANY
ADDRESSING THE SPECIAL NEEDS OF CHILDREN. WHEN
WE HELP A CHILD BUILD ACADEMIC SKILLS OR GAIN SELF
CONFIDENCE, IT IS MUCH MORE THAN A VOLUNTEER
EFFORT. IT IS A PRICELESS INVESTMENT IN THE FUTURE.
<PAGE>
OFFICE LOCATIONS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
GEORGIA Albany Atlanta (2) Columbus Macon Rome
Athens Augusta (2) LaGrange Marietta Savannah (2)
NEW YORK New York City
NORTH Asheville Gastonia High Point New Bern Salisbury
CAROLINA Brevard Goldsboro Kinston Newton Sanford
Chapel Hill Greensboro Lenoir North Wilkesboro Shelby
Charlotte (4) Greenville Morehead City Pinehurst Statesville
Clinton Hendersonville Morganton Raleigh Wilmington
Fayetteville Hickory Murphy Roanoke Rapids Winston-Salem
PENNSYLVANIA Berwyn
SOUTH Anderson Columbia Greenville Kiawah Island Rock Hill
CAROLINA Charleston Florence Greenwood Myrtle Beach Spartanburg
TEXAS Houston
VIRGINIA Richmond
<PAGE>
(logo)INTERSTATE/JOHNSON LANE
</TABLE>
<PAGE>
Exhibit 21
INTERSTATE/JOHNSON LANE, INC.
List of Subsidiaries
September 30, 1994
<TABLE>
<CAPTION>
Percentage of
State in voting securities
Name which Incorporated owned
<S> <C> <C>
Interstate/Johnson Lane Corporation North Carolina 100%
ISC Realty Corporation North Carolina 100
Sovereign Capital Management, Inc.* North Carolina 51
ISC Futures Corporation North Carolina 100
The Johnson, Lane, Space, Smith Corporation Georgia 100
</TABLE>
*d/b/a Sovereign Advisers, Inc.
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statement of Interstate/Johnson Lane, Inc. on Form S-8 (File No.
33-25323) of our report, which includes an explanatory paragraph
relating to certain lawsuits in which Interstate/Johnson Lane, Inc. is
a defendant, dated October 25, 1994, on our audits of the consolidated
financial statements and financial statement schedules of
Interstate/Johnson Lane, Inc. as of September 30, 1994 and 1993, and
for each of the three years in the period ended September 30, 1994,
which report is included in this Annual Report on Form 10-K.
Charlotte, North Carolina (Signature of Coopers & Lybrand L.L.P.--See appendix)
December 22, 1994
