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, 1994
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 required 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, 1995
(Common stock, $.20 par value) 6,338,092
PAGE 1 OF 14
<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, 1994 and
September 30, 1994 3
Condensed Consolidated Statements of
Operations--Three Months Ended
December 31, 1994 and 1993 4
Condensed Consolidated Statements of
Cash Flows--Three Months Ended
December 31, 1994 and 1993 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II. Other Information
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
Page 2
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
<TABLE>
<CAPTION>
(All dollars in thousands)
December 31, September 30,
1994 1994
<S> <C> <C>
Assets
Cash and cash equivalents $ 12,619 $ 30,193
Cash and securities segregated for
regulatory purposes 86,928 83,983
Loans under matched securities resale agreements 370,400 339,189
Receivables:
Financing resale agreements 30,829 20,989
Customers 177,925 170,060
Brokers, dealers and clearing agencies 19,163 15,573
Other 7,676 9,418
Securities owned 94,462 57,023
Land, buildings, and improvements, net 8,735 9,135
Office facilities and equipment, net 6,705 6,406
Goodwill and intangible assets 14,134 14,285
Other assets 11,668 11,579
$841,244 $767,833
Liabilities and Shareholders' Equity
Short-term borrowings:
Checks payable $20,929 $18,179
Bank loans - 4,997
Financing repurchase agreements 39,910 11,935
Borrowings under matched securities repurchase agreements 372,737 339,777
Payables:
Customers 240,231 227,431
Brokers and dealers 5,760 6,388
Income taxes 843 297
Other 6,955 8,327
Accrued compensation and benefits 7,232 13,010
Securities sold but not yet purchased 31,858 23,258
Notes payable 8,097 8,143
Other liabilities and accrued expenses 16,748 16,922
751,300 678,664
Minority interest 200 200
Subordinated debt 20,999 20,999
Shareholders' equity:
Common stock 1,377 1,377
Additional paid-in-capital 31,414 31,589
Retained earnings 40,611 39,871
73,402 72,837
Less: treasury stock, at cost (4,657) (4,867)
Total shareholders' equity 68,745 67,970
$841,244 $767,833
The accompanying notes are an integral part of the condensed consolidated financial
statements.
Page 3
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months
Ended December 31,
1994 1993
<S> <C> <C>
Revenues:
Commissions and sales credits $ 24,247 $ 31,094
Trading gains, net 1,501 2,132
Investment banking and underwriting 955 1,003
Asset management and advisory 1,722 1,346
Interest 9,818 5,370
Other 1,424 1,769
Total revenues 39,667 42,714
Interest expense 7,775 3,436
Net revenues 31,892 39,278
Expenses:
Compensation and benefits 20,328 23,716
Occupancy 1,938 1,881
Technology and telephone 3,499 3,309
Execution, clearance and depository 875 968
Promotion and development 1,199 1,278
Professional services 810 991
Printing, postage and supplies 712 723
Other operating expenses 978 2,163
Total expenses 30,339 35,029
Income before income taxes and
cumulative effect of a change
in accounting principle 1,553 4,249
Income tax expense 621 1,690
Income before cumulative effect of a
change in accounting principle 932 2,559
Cumulative effect of a change in
accounting principle (Note 5) - 3,059
Net Income $ 932 $ 5,618
Primary earnings per share:
Income before cumulative effect of a
change in accounting principle $ 0.15 $ 0.39
Cumulative effect of a change in
accounting principle (Note 5) - 0.46
Net income $ 0.15 $ 0.85
Fully diluted earnings per share:
Income before cumulative effect of a
change in accounting principle $ 0.15 $ 0.36
Cumulative effect of a change in
accounting principle (Note 5) - 0.38
Net income $ 0.15 $ 0.74
Weighted average shares:
Primary 6,389,920 6,638,798
Fully diluted 7,657,172 7,995,112
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
Page 4
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWES
For the three months ended December 31,
(Unaudited)
<TABLE>
<CAPTION>
(All dollars in thousands)
1994 1993
<S> <C> <C>
Cash flows from operating activities:
Net income $ 932 $5,618
Adjustments to reconcile net income to cash provided
(used) by operating activities:
Depreciation and amortization 794 774
Provision for real estate charges 250 850
Other non-cash items (108) 444
936 2,068
Cash and securities segregated for
regulatory purposes (2,945) (11,581)
Loans under matched securities resale and repurchase agreements 1,749 (2,951)
Net payables to customers 4,935 21,799
Net receivables from brokers, dealers and clearing agencies (4,218) (18,867)
Other receivables 1,742 (805)
Securities owned, net (28,840) (13,889)
Other assets (117) (3,094)
Income taxes payable 546 (1,400)
Accrued compensation and benefits (5,778) (3,919)
Other liabilities and accrued expenses (1,394) (2,196)
(34,320) (36,903)
Cash (used) provided by operating activities (32,452) (29,217)
Cash flows from financing activities:
Proceeds from (repayment of ):
Short-term bank borrowings (2,246) (285)
Borrowings under financing repurchase and resale agreements,
net 18,136 21,482
Notes payable (45) (512)
Proceeds from stock discount program 736 -
Proceeds from stock options exercised 7 98
Purchase of stock for treasury (840) (519)
Dividends paid (192) -
Cash provided (used) by financing activities 15,556 20,264
Cash flows from investing activities:
Capital expenditures (678) (169)
Cash used by investing activities (678) (169)
Net increase (decrease) in cash and cash equivalents (17,574) (9,122)
Cash and cash equivalents at beginning of period 30,193 20,393
Cash and cash equivalents at end of period $ 12,619 11,271
Cash paid during the quarter for:
Interest $ 7,736 $ 2,972
Income taxes $ 151 $ 3,168
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
Page 5
<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, 1994, IJL's net capital was 22% of its
aggregate debit balances and approximately $34.9 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, 1995 $7.9
For the fiscal year ended September 30,
1996 7.5
1997 5.2
1998 4.5
1999 2.9
Thereafter 0.7
$28.7
Page 6
<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,
1994, contingent liabilities under these obligations amounted to
approximately $475,000 in the aggregate.
Of a $20 million irrevocable letter of credit available, the
amount outstanding at December 31, 1994 under this facility was
$450,000.
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, 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.
5. 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.
Page 7
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Financial Instruments with Off-Balance-Sheet Risk, continued:
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 December 31, 1994, IJL's
commitments included forward purchase and sale contracts involving
mortgage-backed securities with long market values of approximately
$87.9 million and short market values of approximately $88.9
million, and futures sale contracts with short values of $7.2
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
creditworthiness of the borrower. Approximately 86% of all
loans under securities resale agreements at December 31, 1994 were
made to three counterparties.
Page 8
<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 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, approximately 28% of the Company's retail financial consultants
are individuals with less than three years' experience. While this
condition may bode well for the future, a continued slowdown in
individual investor activity could negatively impact the revenue
production of a less seasoned sales force. Securities and Exchange
Commission rulings and proposals in 1994 on broker-dealer
practices related to 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.
The Company's trading inventories may include, from time to time,
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, 1994, was $11 million. As of that
same date, such holdings represented $9.7 million, or 10.2%, of all
securities owned by the Company.
Liquidity and Capital Resources
The Company's cash position decreased $17.6 million for the three
months ended December 31, 1994. Operating activities and capital
expenditures consumed $35.0 million of cash, funded in part by $1.9
million of net income adjusted for depreciation and non-cash
charges. Financing sources were utilized to provide an additional
$15.5 million of cash, and the remaining expenditures were financed from
cash on hand at the beginning of the period.
Page 9
<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 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 December 31, 1994, 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, 1994, IJL had net
capital of $38.4 million, "excess net capital" of approximately $34.9
million, and a net capital ratio of 22%.
Results of Operations
For the three months ended December 31, 1994, net revenues decreased
$7.4 million, or 19%, from the previous year, while expenses, other
than interest, decreased $4.7 million, or 13%. Net income of
$932,000 was down $4.7 million from the results of the period of a year
ago which were augmented by a $3.1 million credit from the
cumulative effect of adopting Financial Accounting Standards Board
Statement No. 109, "Accounting for Income Taxes".
Overall, commissions and sales credits decreased by about $6.8 million,
or 22% from the same three-month period of a year ago, representing
declines of 14% and 34% for the retail and institutional sectors,
respectively. Fewer equity underwritings, and fewer secondary market
transactions in both exchange listed and OTC equities and in taxable
debt securities, were the primary contributors to the decline in both
the retail and institutional sectors.
Net trading gains decreased $630,000, or 30%, from the same three
month period of a year ago due primarily to a 50% decline in
trading profits on over-the-counter stocks. Asset management and
advisory fees were up $376,000, or 28%, due to the continued growth of
"wrap fees" paid by retail clients in lieu of transaction-based
commissions.
Page 10
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued
Results of Operations, continued
Interest revenues were up about $4.4 million for the three months
ended December 31, 1994, while expenses increased $4.3 million.
Roughly half of the increase in both revenues and expenses is
attributable to significantly higher levels of matched resale and
repurchase agreements; the remaining increase in revenues is
attributable to higher interest rates than a year ago.
Compensation and benefits costs decreased $3.4 million, or 14%, due
primarily to a decline in transaction-based commissions and other
incentive payments. Execution, clearance and depository costs also
decreased as a result of lower transaction volumes. Professional
services decreased $180,000, or 18%, due to a decrease in
consulting expenses related to development of a strategic technology
plan. Other operating expenses decreased $1.2 million, or 55%,
for the quarter largely as a result of decreased charges to certain
asset valuation accounts and smaller provisions for legal and related
matters.
Page 11
<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, 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.
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
27 Financial Data Schedules 16
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three
months ended December 31, 1994.
Page 12
<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
President and Chief
James H. Morgan Executive Officer February 15, 1995
Vice President - Finance
Edward C. Ruff and Treasurer (Principal
Financial Officer) February 15, 1995
Assistant Vice President
C. Fred Wagstaff, III (Principal Accounting
Officer) February 15, 1995
Page 13
<PAGE>
Exhibit 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended
December 31,
<S> <C> <C>
Net income per share was computed as follows: 1994 1993
Primary:
1) Income before cumulative effect of a
change in accounting principle $ 931,563 $2,558,634
Cumulative effect of a change in account principle - 3,059,000
Net income $ 931,563 $5,617,634
2) Weighted average shares outstanding 6,389,920 6,638,798
3) Incremental shares under stock options
computed under the treasury stock method
using the average market price of
issuer's stock during the periods 84,210 166,033
4) Weighted average shares and common
equivalent shares outstanding 6,474,130 6,798,831
5) Weighted average shares outstanding
which were used for calculation 6,389,920(A) 6,638,798(A)
6) Income per share before (item 1 divided by
item 5) cumulative effect of a
change in accounting principle $ 0.15 $ 0.39
Cumulative effect of a change in accounting
principle per share - 0.46
Net income per share $ 0.15 $ 0.85
Fully Diluted:
1) Unadjusted income before cumulative effect
of a change in accounting principle $ 931,563 $2,558,634
2) Interest on convertible subordinated
debentures, net of tax effect 246,148 268,525
3) Adjusted income before cumulative effect
of a change in accounting principle 1,177,711 2,827,159
Cumulative effect of a change in accounting principle 3,059,000
Adjusted net income 1,177,711 5,886,159
4) Weighted average shares outstanding 6,389,920 6,638,798
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 84,210 173,272
6) Incremental shares relating to
convertible subordinated debentures 1,183,042 1,183,042
7) Weighted average shares and common
equivalent shares outstanding 7,657,172 7,995,112
8) Income per share before (item 3 divided by
item 7) cumulative effect of a change
in accounting principle $ 0.15 $ 0.36
Cumulative effect of change in accounting principle - 0.38
Net income per share $ 0.15 $ 0.74
(A) Dilutive effect of common equivalent shares not included since dilution is less than 3%
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-1-1994
<PERIOD-END> DEC-31-1994
<CASH> 12,619
<RECEIVABLES> 200,172
<SECURITIES-RESALE> 401,229
<SECURITIES-BORROWED> 4,592
<INSTRUMENTS-OWNED> 94,462
<PP&E> 15,440
<TOTAL-ASSETS> 841,244
<SHORT-TERM> 20,929
<PAYABLES> 253,789
<REPOS-SOLD> 412,647
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 31,858
<LONG-TERM> 29,096
<COMMON> 1,377
0
0
<OTHER-SE> 67,368
<TOTAL-LIABILITY-AND-EQUITY> 841,244
<TRADING-REVENUE> 1,501
<INTEREST-DIVIDENDS> 9,818
<COMMISSIONS> 24,247
<INVESTMENT-BANKING-REVENUES> 955
<FEE-REVENUE> 1,722
<INTEREST-EXPENSE> 7,775
<COMPENSATION> 20,328
<INCOME-PRETAX> 1,553
<INCOME-PRE-EXTRAORDINARY> 932
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 932
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
