UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1993
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 1-8952
INTERSTATE/JOHNSON LANE, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
56-1470946
(I.R.S. Employer Identification No.)
Interstate Tower, P.O. Box 1012, Charlotte, North Carolina 28201-1012
(Address of principal executive offices, zip code)
(704) 379-9000
(Registrant's telephone number, including area code)
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 shorter period that the registrant
was requried to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at January 31, 1994
(Common stock, $.20 par value) 6,631,266
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
Index
Page Number
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of
Financial Condition--December 31, 1993 and
September 30, 1993 3
Condensed Consolidated Statements of
Operations--Three Months Ended
December 31, 1993 and 1992 4
Condensed Consolidated Statements of
Cash Flows--Three Months Ended
December 31, 1993 and 1992 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Part II.Other Information
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(All dollars in thousands)
December 31, September 30,
1993 1993
Assets
Cash and short-term investments $11,271 $20,393
Cash and securities segregated for
regulatory purposes 129,246 117,666
Receivables under securities repurchase agreements 191,876 254,686
Receivables:
Customers 157,367 155,582
Brokers, dealers and clearing agencies 29,130 17,244
Other 6,253 5,447
Securities owned, at market 76,478 58,755
Land, buildings, and improvements, net 12,860 13,285
Office facilities and equipment, net 5,454 5,568
Goodwill and intangible assets 14,738 14,889
Other assets 13,951 10,895
$648,624 $674,410
Liabilities and Shareholders' Equity
Short-term borrowings:
Checks payable $15,276 $13,273
Bank loans 2,288
Financing repurchase agreements 21,482
Payables under securities repurchase agreements 175,444 241,205
Payables:
Customers 271,849 248,266
Brokers and dealers 8,134 15,115
Income taxes 2,552 3,952
Other 9,026 8,928
Accrued compensation and benefits 9,454 15,887
Securities sold but not yet purchased, at market 20,578 16,744
Notes payable 8,797 9,308
Other liabilities and accrued expenses 18,098 16,882
560,690 591,848
Minority interest 200 200
Subordinated debt 21,999 21,999
Shareholders' equity:
Common stock 1,377 1,377
Additional paid-in-capital 31,263 31,532
Retained earnings 35,150 29,532
67,790 62,441
Less: treasury stock, at cost (2,055) (2,078)
Total shareholders' equity 65,735 60,363
$648,624 $674,410
The accompanying notes are an integral part of the condensed
consolidated financial statements.
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended December 31,
(Unaudited)
(All dollars in thousands)
1993 1992
Revenues:
Commissions and sales credits $31,094 $24,293
Trading gains, net 2,132 2,514
Investment banking and underwriting 1,003 1,090
Asset management and advisory 1,346 1,140
Interest 5,370 4,959
Other 1,769 1,503
Total revenues 42,714 35,499
Interest expense 3,436 3,527
Net revenues 39,278 31,972
Expenses:
Compensation and benefits 23,670 18,970
Occupancy 2,010 1,934
Communications and data processing 3,060 2,714
Execution, clearance and depository 968 729
Promotion and development 1,152 930
Office supplies and postage 843 762
Other operating expenses 3,326 2,421
Total expenses 35,029 28,460
Income before income taxes, extraordinary
item and cumulative effect of a change
in accounting principle 4,249 3,512
Income tax expense 1,690 1,445
Income before extraordinary item and
cumulative effect of a change in
accounting principle 2,559 2,067
Extraordinary item:
Reduction of income taxes arising
from carryforward of prior years'
operating losses 967
Cumulative effect of a change in
accounting principle (Note 5) 3,059
Net income $5,618 $3,034
Primary earnings per share:
Income before extraordinary item and
cumulative effect of a change in
accounting principle $0.39 $0.31
Extraordinary item 0.14
Cumulative effect of a change in
accounting principle (Note 5) 0.46
Net income $0.85 $0.45
Fully diluted earnings per share:
Income before extraordinary item and
cumulative effect of change in
accounting principle $0.36 $0.29
Extraordinary item 0.11
Cumulative effect of a change in
accounting principle (Note 5) 0.38
Net income $0.74 $0.40
Weighted average shares:
Primary 6,638,798 6,777,011
Fully diluted 7,995,112 8,184,481
The accompanying notes are an integral part of the condensed
consolidated financial statements.
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended December 31,
(Unaudited)
(All dollars in thousands)
1993 1992
Cash flows from operating activities:
Net income $5,618 $3,034
Adjustments to reconcile net income to cash provided
(used) by operating activities:
Depreciation and amortization 774 841
Provision for real estate charges 850 250
Other non-cash items 444 668
Cash and securities segregated for
regulatory purposes (11,581) (4,505)
Receivables under repurchase agreements, net (2,951) (5,701)
Net payables to customers 21,799 4,931
Net receivables from brokers, dealers and clearing agencies (18,867) (5,045)
Other receivables (805) 1,578
Securities owned, net (13,889) 15,576
Other assets (3,094) (1,417)
Income taxes payable (1,400) 97
Accrued compensation and benefits (3,919) (3,586)
Other liabilities and accrued expenses (2,196) (534)
(34,835) 3,153
Cash (used) provided by operating activities (29,217) 6,187
Cash flows from financing activities:
Proceeds from (repayment of ):
Short-term bank borrowings (285) (6,457)
Borrowings under financing repurchase agreements 21,482 (2,152)
Notes payable (512) 1,183
Proceeds from issuance of common stock 98 711
Purchase of treasury stock (519) (431)
Cash provided (used) by financing activities 20,264 (7,146)
Cash flows from investing activities:
Capital expenditures (169) (327)
Cash used by investing activities (169) (327)
Net decrease in cash (9,122) (1,286)
Cash at beginning of period 20,393 9,104
Cash at end of period $11,271 $7,818
Cash paid during the quarter for:
Interest $2,972 $3,595
Income taxes $3,168 $473
Non-cash financing activity:
Cumulative effect of a change in accounting principle $3,059
Settlement of ESOP liability with treasury stock $325
The accompanying notes are an integral part of the condensed
consolidated financial statements.
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation:
The interim financial statements are unaudited; however, such information
reflects all normal recurring adjustments which, in the opinion of management,
are necessary for a fair presentation of the results for the period. The
nature of the Company's business is such that the results of any interim period
are not necessarily indicative of results for a full fiscal year.
2. Net Capital Requirements:
As a registered broker-dealer and member of the New York Stock Exchange,
Interstate/Johnson Lane Corporation ("IJL"), the principal operating
subsidiary of the Company, is subject to the Securities and Exchange
Commission'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 December 31, 1993, IJL's net capital was 20.7% of its aggregate debit
balances and approximately $32.2 million in excess of its minimum regulatory
requirements.
3. 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:
Millions
For the nine months ended September 30, 1994 $6.7
For the fiscal year ended September 30,
1995 8.3
1996 6.0
1997 4.6
1998 4.0
Thereafter 8.3
$37.9
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Commitments and Contingencies, continued:
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 December 31, 1993, contingent liabilities under these obligations
amounted to approximately $1.4 million in the aggregate.
Of a $20 million irrevocable letter of credit available, the amount outstanding
at December 31, 1993 under this facility was $6.5 million.
4. 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 and impact on operating results cannot reliably be determined,
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.
5. 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 three months ended December 31, 1993.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Net deferred tax
assets of $4,841,000 at December 31, 1993 were comprised of the following:
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Income Taxes, continued:
Deferred tax assets attributable to:
Deferred compensation and other benefits
not currently deductible $1,744
Other accruals not currently deductible 2,732
Tax credits awaiting utilization 2,007
Other 45
Total deferred tax assets 6,528
Deferred tax liabilities attributable to:
Carrying value of partnership investments 1,687
Net deferred tax assets $4,841
6. 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. For example, IJL may be required to
liquidate a customer's margin loan collateral at prevailing market prices which
may not totally satisfy his obligations. IJL controls this risk 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 off-balance-sheet 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
December 31, 1993, IJL's commitments included forward purchase and sale
contracts involving mortgage-backed securities with long market values of
approximately $62.3 million and short market values of approximately $60.4
million and futures purchase and sale contracts with long market values of
approximately $6 million and short values of $10.5 million.
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Financial Instruments with Off-Balance-Sheet Risk, continued:
IJL enters into repurchase 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 may
be converted into cash at IJL's option. It is IJL's policy to take delivery
of such underlying collateral in its custodial account. In addition, it
monitors the market value of the collateral underlying each such receivable,
and issues margin calls as necessary according to the creditworthiness of the
borrower. Approximately 93% of all receivables under securities repurchase
agreements at December 31, 1993 were from three counterparties.
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
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 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.
It is not yet clear how the economy and the investment community will
ultimately react to recent federal legislation dealing with the budget
deficit and to prospective proposals on health care and other important
economic and social issues. The ultimate outcome of congressional hearings on
payment for order flow and on 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.
During the past three 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, approximately 30% of the
Company's retail account executives consist of individuals with less than three
years' experience. While this condition may bode well for the future, any
near-term slowdown in individual investor activity could severely impact the
production output of a less seasoned sales force.
The Company's trading inventories include positions in taxable and non-taxable
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 three months
ended December 31, 1993, was $9.3 million. As of that same date, such
holdings represented $12.5 million, or 16.4%, of all securities owned by the
Company, with $3.8 million related to one issuer.
Liquidity and Capital Resources
Aggregate cash flows decreased by $9.1 million during the quarter. Operating
activities and capital expenditures consumed $29.4 million of cash, net of
$7.7 million provided by net income adjusted for depreciation and non-cash
charges. As a result, financing sources were utilized to provide $20.3
million of cash.
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued
Liquidity and Capital Resources, continued
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 repurchase agreements. Significant
cash requirements could also 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.
At December 31, 1993, the Company had $115 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,
Commodity Futures Trading Commission, and The New York Stock Exchange, and has
consistently operated well in excess of the minimum requirements. At
December 31, 1993, IJL had net capital of $35.6 million, "excess net capital"
of approximately $32.2 million, and a net capital ratio of 20.7%.
Results of Operations
For the three months ended December 31, 1993, net revenues increased $7.3
million, or 23%, from the previous year, while expenses, other than interest,
increased $6.6 million, or 23%. Operating income of $2.6 million was up
$500,000 from the same period last year and was augmented by a $3.1 million
credit from the cumulative effect of a change in accounting principle, pushing
net income up to $5.6 million, or $.85 per share.
Overall, commissions and sales credits increased by about $6.8 million, or
28% from the same three-month period of a year ago. This increase represented
gains of 45.2% and 18.8% for the institutional and retail sectors,
respectively. Institutional clients participated heavily in mortgage-backed
securities and in the secondary and new issues markets for equities. Retail
customers aggressively invested in OTC stocks, equity underwritings,
mortgage-backed securities and annuities throughout the period.
The $400,000 decrease in net trading profits during the quarter was primarily
attributable to transactions in tax-exempt securities (down 73%) and corporate
fixed-income securities (down 93%), offset to some extent by increased
revenues from government and mortgage-backed securities transactions. Asset
management and advisory revenues increased by $200,000 or 18%, due to the
continued growth of "wrap fees" paid by retail customers in lieu of
transaction-based commissions.
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued
Results of Operations, continued
Other revenues increased by about $260,000, or 18% during the quarter. The
gain was the result of increases in real estate management fees, money fund
service fees and revenue related to the sale of the management rights to a
mutual fund.
Interest revenues for the quarter increased $400,000 or 8%, while expenses
declined $100,000 (13%) when compared to the same quarter of a year ago.
A 25% increase in margin interest resulted from a higher level of margin
loans; the decreased interest expense is attributable to lower rates paid on
customer credit balances and a decline in average bank loans outstanding.
Overall compensation and benefit costs increased by about $4.7 million, or
25%, from last year, consisting largely of an increase in variable sales force
compensation of $3.9 million, which correlated to the increase in overall
commission revenues. Execution and clearance expenses, as well as data
processing costs, increased 13% from the prior year, the latter due primarily
to higher transaction volumes applied to the variable pricing structures of
the Company's outsourcing arrangements. Promotional and development costs
increased 24% from the prior year in connection with the successful effort to
build revenues. Other operating expenses rose approximately $800,000,
largely as a result of increased provisions for declines in certain asset
valuations and for other contingencies.
<PAGE>
PART II. OTHER INFORMATION
Item 1. 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 and impact on operating results cannot reliably be determined,
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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Designation of Exhibit Sequential
in this Report Description Page Number
11 Statement Regarding
Computation of Per
Share Earnings 15
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months ended
December 31, 1993.
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTERSTATE/JOHNSON LANE, INC.
Registrant
Signature Title Date
_________________________ Vice President - Finance
Edward C. Ruff and Treasurer (Principal
Financial Officer) February 14, 1994
_________________________ Assistant Vice President
C. Fred Wagstaff, III (Principal Accounting
Officer) February 14, 1994
Exhibit 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months [ZW]
Ended
December [ZW]
31,
Net income per share was computed as follows: [ZW]
1993 1992
<S> [ZW]
<C> <C>
Primary:
1) Income before extraordinary item and cumulative
effect of a change in accounting principle $2,558,634 [ZW]
$2,067,073
Extraordinary [ZW]
item 967,000
Cumulative effect of a change in accounting principle 3,059,000
Net income $5,617,634 [ZW]
$3,034,073
2) Weighted average shares outstanding 6,638,798 [ZW]
6,777,011
3) Incremental shares under stock options
computed under the treasury stock method
using the average market price of
issuer's stock during the periods [ZW]
166,033 184,652
4) Weighted average shares and common
equivalent shares outstanding 6,798,831 [ZW]
6,961,663
5) Weighted average shares outstanding
which were used for calculation 6,638,798(A) [ZW]
6,777,011(A)
6) Income per share before extraordinary item
(item 1 divided by item 5) and cumulative effect [ZW]
$0.39 $0.31
of a change in accounting principle
Extraordinary item per [ZW]
share 0.14
Cumulative effect of a change in accounting principle per share 0.46
Net income per share [ZW]
$0.85 $0.45
Fully Diluted:
1) Unadjusted income before extraordinary item and
cumulative effect of a change in accounting principle $2,558,634 [ZW]
$2,067,073
2) Interest on convertible subordinated
debentures, net of tax effect [ZW]
268,525 268,525
3) Adjusted income before extraordinary item and
cumulative effect of a change in accounting principle $2,827,159 [ZW]
$2,335,598
Extraordinary [ZW]
item 967,000
Cumulative effect of a change in accounting principle 3,059,000
Adjusted net income $5,886,159 [ZW]
$3,302,598
4) Weighted average shares outstanding 6,638,798 [ZW]
6,777,011
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 [ZW]
173,272 224,428
6) Incremental shares relating to
convertible subordinated debentures 1,183,042 [ZW]
1,183,481
7) Weighted average shares and common
equivalent shares outstanding 7,995,112 [ZW]
8,184,920
8) Income per share before extraordinary item (item 3
divided by item 7) and cumulative effect of a change
in accounting principle [ZW]
$0.36 $0.29
Extraordinary item per [ZW]
share 0.11
Cumulative effect of change in accounting principle 0.38
Net income per share [ZW]
$0.74 $0.40
(A) Dilutive effect of common equivalent shares not included since dilution is [ZW]
less than 3%.
</TABLE>
