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, 1996
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
incorporation or organization) Identification No.)
121 West Trade Street, Suite 1500, Charlotte, North Carolina 28201
(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, 1996, 6,022,292 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,
1996, which was $13.125 was $52,145,363. 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 Shareholders for the
fiscal year ended September 30, 1996, 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
Shareholders to be held on January 21, 1997, 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 and institutional investors,
market-making and underwriting of municipal and corporate securities, investment
management, investment banking and other 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
("Realty"), Sovereign Capital Management, Inc. d/b/a Sovereign Advisers, Inc.
("Sovereign"), ISC Futures Corporation and CapTrust Financial Advisors, LLC
("CapTrust").
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, 1996, approximately 61% of the
Company's total revenues were derived from its retail brokerage activities, 23%
from institutional brokerage activities and 16% 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 24 through 32 of the Company's 1996 Annual Report
to Shareholders and this information is incorporated herein by reference.
PAGE 1
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
Retail Brokerage
IJL presently serves individual investors through its Private Client
Group which has 60 retail offices located in North Carolina (32), South Carolina
(10), Georgia (15), and Virginia (3). 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 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 asset-based "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, IJL formed a
strategic alliance in 1994 with a provider of custodial services to trusteed
accounts.
At September 30, 1996, approximately 22% of the Company's retail
financial consultants had fewer than three years' industry experience.
Notwithstanding the energized securities markets of recent years, a prolonged
slowdown in individual investor activity could more severely reduce the revenue
production of a less seasoned sales force. In addition, the continuing trend of
increased regulation of the securities industry could create significant
incremental compliance costs and indirectly stifle certain revenue streams.
In July 1996, CapTrust, a NASD registered broker-dealer, was formed to
provide specialized financial consulting and asset management services to both
retail and institutional clients. It is anticipated that CapTrust will earn a
majority of its revenues through asset-based wrap fees in addition to normal
transaction-based commissions. CapTrust is currently owned jointly by two
wholly-owned subsidiaries of the Company. The strategy of CapTrust is to attract
top producing financial consultants who will serve as members of the firm rather
than employees. Members will purchase ownership interests in CapTrust upon
joining the firm and therein will be entitled to a portion of the earnings of
the firm. It is anticipated that members of CapTrust will serve clients
throughout the United States. IJL will clear trades for CapTrust on a
fully-disclosed basis and will receive certain execution and clearance fees
from CapTrust in that role. The Company expects to contribute between $2
to $3 million of capital to this venture over the next two years.
CapTrusts' application for NASD membership was approved in November 1996.
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.
PAGE 2
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
Investment Research
The Company believes IJL's research services are important in
generating retail and institutional commissions and sales credits in listed and
OTC stocks. IJL maintains a core staff of 10 analysts to provide investment
recommendations and market information on selected regional and national
companies. These analysts follow approximately 146 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.
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 markets in the equity securities of
approximately 225 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.
PAGE 3
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
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, liabilities, interest revenues and interest expenses. IJL may earn small
profits from such transactions by charging greater amounts of interest than it
is required to pay. While IJL takes 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.
Investment Banking
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 minority interests
in two venture capital funds.
Augmenting IJL's capital formation capabilities in the public markets
is a private finance group of 4 professionals specializing in raising debt and
equity in the institutional private placement markets for corporate issuers.
Revenues are derived primarily from serving as the issuer's agent in structuring
and sourcing each capital transaction. This group acts as agents on debt and
equity issues primarily in the $10-50 million dollar range for middle-market
southeastern companies, and expects to continue its focus on transactions of
this size.
PAGE 4
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
Municipal 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,
1996, this registered investment adviser had approximately $281 million under
management.
Real Estate
During the 1970s and 1980s 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. Realty is also involved in real estate
investment banking activities as well as the syndication of private placements
and certain tax-advantaged offerings. It is possible that Realty could assume
new general partnership interests as a result of these activities.
Through various subsidiaries, the Company also holds proprietary
interests in real estate ventures originally syndicated by Johnson Lane in the
mid 1980s to acquire, rehabilitate and operate certified historic real estate
properties, which are 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.
PAGE 5
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
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. The deployment of value added technology to the
retail sales force that began in 1994 has been substantially completed.
Consequently, the firm's technology focus has shifted to increased use of
Internet technology and process reengineering. The major projects in the coming
year include a firm-wide intranet and a major expansion of the current image
processing system. By mid 1997 the firm will have 32 bit operating systems on
all desktops which will foster additional software and information delivery
options.
The Company believes that its internal control structure 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.
PAGE 6
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
Employees
As of September 30, 1996, the Company had 1,229 employees, including
503 financial consultants engaged in sales to individual and institutional
investors, and approximately 200 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 that 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 ("SROs"), 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, 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 SROs,
or changes in the interpretation or enforcement of existing laws and rules, may
directly affect the operation and profitability of broker-dealers.
PAGE 7
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
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 $39.8 million
at September 30, 1996, was 15.7% of its aggregate debit balances and
approximately $34.7 million in excess of its minimum regulatory requirements, as
such excess capital and balances are computed under the Rule.
PAGE 8
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
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, and New York.
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, 1996, which is incorporated
herein by reference. Capital assets include two office buildings (one of which
is unoccupied) 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
equipment, computer hardware and software and leasehold improvements.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in certain litigation arising in the ordinary
course of business. While some actions seek substantial damages, management
believes, based upon discussion with counsel, that the outcome of this
litigation will not have a material effect on the Company's financial position.
The materiality of these legal matters to the Company's future operating results
depends on the level of future results of operations as well as the timing and
ultimate resolution of such legal matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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 34 of the 1996 Annual Report to Shareholders shows
the high and low market prices of the Company's common stock, information from
which 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 declared quarterly dividends of the same amount through July
1996. In October 1996, the Company's Board of Directors declared a $.04 per
share quarterly dividend. 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 November 29, 1996, the Company had approximately 980 shareholders
of record.
PAGE 9
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
ITEM 6. SELECTED FINANCIAL DATA
The "Five Year Financial Summary" on page 19 of the 1996 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 20 through 22 of the 1996 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 24
through 32 of the 1996 Annual Report to Shareholders, are incorporated herein by
reference.
Quarterly "Supplementary Financial Data" is presented on page 19
of the 1996 Annual Report to Shareholders and is incorporated herein by
reference.
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 4
through 6 of the Proxy Statement, dated December 17, 1996, to be used in
connection with the Company's Annual Shareholders' Meeting to be held January
21, 1997, 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.
Edwin A. Dalrymple, Jr., 46, is a Senior Managing Director of IJL and
the head of its Private Client Group. 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 Private Client Group. He was elected a
Senior Vice President in 1989 and a Director of IJL in 1991. He was elected a
Senior Managing Director in 1996.
PAGE 10
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Harvey D. Harrelson, 47, 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
Capital Markets Group, which includes a staff of 90 professionals. He was
elected a Senior Vice President and a Director of IJL in 1989. He was elected a
Senior Managing Director in 1996.
John H. Haynie, 48, is a Senior Managing Director of IJL and Director
of Operations. He joined the firm in 1973 as a Margin manager, became Assistant
Director of Operations in 1979 and assumed his current role in 1992. He was
elected a Senior Vice President in 1992 and a Director of IJL in 1995. He was
elected a Senior Managing Director in 1996.
Michael D. Hearn, 44, 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. He was elected a Senior
Managing Director in 1996.
Lewis F. Semones, Jr., 38, 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 of IJL in 1992 and a Director of IJL in 1994,
and presently has executive responsibility for information technology, strategic
planning, and several other administrative support functions. He was elected a
Senior Managing Director in 1996.
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 16
through 19 of the Proxy Statement, dated December 17, 1996, to be used in
connection with the Company's Annual Shareholders' Meeting to be held January
21, 1997, 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 13 through 15 of the Proxy Statement,
dated December 17, 1996, to be used in connection with the Company's Annual
Shareholders' Meeting to be held January 21, 1997, is incorporated herein by
reference.
PAGE 11
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INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Related Transactions" on page 18 of
the Proxy Statement, dated December 17, 1996, to be used in connection with the
Company's Annual Shareholders' Meeting to be held January 21, 1997, is
incorporated herein by reference.
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 1996
Annual Report to Shareholders:
Consolidated Statements of Financial Condition as of
September 30, 1996 and 1995 24
Consolidated Statements of Operations for the years ended
September 30, 1996, 1995 and 1994 25
Consolidated Statements of Cash Flows for the years
ended September 30, 1996, 1995 and 1994 26
Consolidated Statements of Changes in Shareholders' Equity
for the years ended September 30, 1996, 1995 and 1994 27
Notes to Consolidated Financial Statements 28-32
Data submitted herewith:
Report of Independent Accountants 17
Financial Statement Schedule:
II - Valuation and Qualifying Accounts 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, (19 through 22, 24
through 32, and page 34), the 1996 Annual Report to Shareholders is not deemed
filed as part of this report.
PAGE 12
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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 1996 Annual Report to Shareholders
21 Subsidiaries
23 Consent of Independent Accountants
27 Financial Data Schedule
(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 10-Q 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 10-Q 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 13
<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 10-K filed December 23,
1986.
(j) Interstate/Johnson Lane, Inc. 1985 Nonqualified Stock Option
Plan, incorporated herein by reference to Form 10-Q filed
February 12, 1986.
PAGE 14
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
(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 10-K filed December 2, 1988.
(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 10-K filed December 23,
1993.
(b) Reports on Form 8-K
There were no 8-K reports filed during the fourth quarter of fiscal year
1996.
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
Stock Award Plan, 10/21/96 Filed 12/16/96
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
PAGE 15
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
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
Interstate/Johnson Lane, Inc. Filed 11/07/88
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 16
<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, 1996 and
1995, and for each of the three years in the period ended September 30, 1996
which financial statements are included on pages 24 through 32 of the 1996
Annual Report to Shareholders of Interstate/Johnson Lane, Inc. and are
incorporated herein by reference. We have also audited the financial statement
schedule listed in the index on page 12 of this Form 10-K. These financial
statements and the financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and the financial statement schedule 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, 1996 and
1995, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended September 30, 1996, in conformity
with generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule referred to above, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
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."
/s/ Coopers and Lybrand L.L.P.
Charlotte, North Carolina
October 21, 1996
PAGE 17
<PAGE>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Additions
Balance at charged to Balance at
beginning of costs and end of
Description period expenses Deductions period
<S> <C> <C> <C> <C>
Year Ended September 30, 1996
Provision for real estate charges:
Asset valuation accounts $7,433,789 $1,101,037 - $8,534,826
Reserves 250,000 - (76,884) C 101,886
(71,250) A
Reserves for uncollectible client
accounts: Asset valuation accounts 475,918 25,689 (23,313) C 478,294
Reserve for lease obligations 37,317 63,144 (82,445) A 18,016
Year Ended September 30, 1995
Provision for real estate charges:
Asset valuation accounts $6,368,789 $1,250,000 (185,000) C $7,433,789
Reserves 250,000 - - 250,000
Reserves for uncollectible client
accounts: Asset valuation accounts 262,235 308,477 (94,794) C 475,918
Reserve for lease obligations 109,504 57,697 (129,884) A 37,317
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 client
accounts: Asset valuation accounts 442,398 (4,482) (175,681)C 262,235
Reserve for lease obligations 149,848 114,984 (155,328)A 109,504
</TABLE>
A - Payments charged to reserve
B - Reassessment of reserve
C - Specific account charge-offs
PAGE 18
<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 20, 1996.
INTERSTATE/JOHNSON LANE, INC.
BY:/s/ James H. Morgan
-------------------------------
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.
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Title Date
/s/ James H. Morgan
- - ---------------------------- President, Chief Executive Officer
James H. Morgan and Director December 20, 1996
/s/ Edward C. Ruff
- - ---------------------------- Vice President - Chief Financial
Edward C. Ruff Officer (Principal Financial
Officer) and Director December 20, 1996
/s/ C. Fred Wagstaff, III
- - ---------------------------- Assistant Vice President
C. Fred Wagstaff, III (Principal Accounting Officer) December 20, 1996
/s/ Parks H. Dalton
- - ---------------------------- Chairman of the Board of Directors December 20, 1996
Parks H. Dalton and Director
/s/ Claude S. Abernethy, Jr.
- - ---------------------------- Director December 20, 1996
Claude S. Abernethy, Jr.
/s/ Dudley G. Pearson
- - ---------------------------- Director December 20, 1996
Dudley G. Pearson
/s/ Grady G. Thomas, Jr.
- - ---------------------------- Director December 20, 1996
Grady G. Thomas, Jr.
</TABLE>
PAGE 19
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
11 Statement Regarding Computation
of Per Share Earnings
13 1996 Annual Report to Shareholders
21 Subsidiaries
23 Consent of Independent Accountants
27 Financial Data Schedule
PAGE 20
<PAGE>
EXHIBIT 11
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Net income per share was computed as follows:
Primary:
1) Income before cumulative effect of a
change in accounting principle $ 9,354,624 $ 5,928,392 $ 7,865,909
Cumulative effect of a change in accounting principle - - 3,059,000
------------- ------------- -------------
Net income $ 9,354,624 $ 5,928,392 $ 10,924,909
============= ============= =============
2) Weighted average shares outstanding 6,040,349 6,304,415 6,530,218
3) Incremental shares under stock options
computed under the treasury stock method
using the average market price of issuer's
stock during the periods 35,005 83,103 115,303
------------- ------------- -------------
4) Weighted average shares and common
equivalent shares outstanding 6,075,354 6,387,518 6,645,521
============= ============= =============
5) Weighted average shares outstanding
which were used for calculation since
dilution is less than 3% 6,040,349 6,304,415 6,530,218
============= ============= =============
6) Income per share before (item 1 divided
by item 5) cumulative effect of a
change in accounting principle $ 1.55 $ .94 $ 1.20
Cumulative effect of a change in
accounting principle per share - - 0.47
------------- ------------- -------------
Net income per share $ 1.55 $ .94 $ 1.67
============= ============= =============
Fully Diluted:
1) Unadjusted income before cumulative effect
of a change in accounting principle $ 9,354,624 $ 5,928,392 $ 7,865,909
2) Interest on convertible subordinated
debentures, net of tax effect 960,179 984,590 984,590
------------- ------------- -------------
3) Adjusted income before cumulative effect
of a change in accounting principle 10,314,803 6,912,982 8,850,499
Cumulative effect of a change in accounting principle - - 3,059,000
------------- ------------- -------------
Adjusted net income $ 10,314,803 $ 6,912,982 $ 11,909,499
============= ============= =============
4) Weighted average shares outstanding 6,040,349 6,304,415 6,530,218
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 40,553 95,108 115,303
6) Incremental shares related to long-term
incentive compensation plan 300,000 - -
7) Incremental shares relating to convertible
subordinated debentures 1,183,042 1,183,042 1,183,042
------------- ------------- -------------
8) Weighted average shares and common
equivalent shares outstanding 7,563,944 7,582,565 7,828,563
============= ============= =============
9) Income per share before (item 3 divided
by item 8) cumulative effect of a
change in accounting principle $ 1.36 $ .91 $ 1.13
Cumulative effect of a change in
accounting principle per share - - 0.39
------------- ------------- -------------
Net income per share $ 1.36 $ .91 $ 1.52
============= ============= =============
</TABLE>
<PAGE>
INTERSTATE/JOHNSON LANE
1996 ANNUAL REPORT
<PAGE>
INTERSTATE/JOHNSON LANE
TABLE OF CONTENTS
LETTER TO
SHAREHOLDERS....................3
A PORTFOLIO OF
FINANCIAL STATEMENTS............9
MANAGEMENT'S
DISCUSSION & ANALYSIS..........20
AUDITED
FINANCIAL STATEMENTS............24
OFFICERS
& DIRECTORS....................33
INVESTOR
INFORMATION....................34
<PAGE>
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. ~ IJL'S PORTFOLIO OF FINANCIAL SERVICES IS DESIGNED TO MEET THE NEEDS
OF A BROAD RANGE OF CLIENTS. THE COMPANY HAS NEARLY 1,300 EMPLOYEES, INCLUDING
APPROXIMATELY 430 FINANCIAL CONSULTANTS SERVING INDIVIDUAL INVESTORS THROUGH ITS
NETWORK OF 60 BROKERAGE OFFICES LOCATED IN NORTH CAROLINA, SOUTH CAROLINA,
GEORGIA AND VIRGINIA. ~ IN ADDITION, IJL HAS A SALES FORCE OF APPROXIMATELY 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 225 COMPANIES TRADED OVER-THE-COUNTER. ~ OUR
FIRM'S REPUTATION IS FOUNDED ON STRONG CLIENT RELATIONSHIPS THAT STAND THE TEST
OF TIME. OUR LONG-STANDING TRADITION OF DILIGENT SERVICE AND UNWAVERING FIDELITY
TO THE BEST INTERESTS OF OUR CLIENTS MAKES US ONE OF THE SOUTHEAST'S LEADING
INVESTMENT FIRMS.
Interstate/Johnson Lane is committed to being the Southeast's
(PHOTOGRAPH OF ENTRANCE TO INTERSTATE TOWER APPEARS IN
THE BACKGROUND OF PAGE.)
<PAGE>
(PHOTOGRAPH OF THE STOCK EXCHANGE APPEARS HERE.)
(PHOTOGRAPH OF A PAGE OF STOCK QUOTES APPEARS IN
THE BACKGROUND OF PAGE.)
lending investment firm. We will enhance clients financial success by
<PAGE>
Dear Fellow Shareholders
By any measure, 1996 was a year of exceptional achievement for IJL and the
clients we proudly serve. During the past twelve months, the firm set records in
many key measures of financial performance. Revenue, operating earnings per
share, and revenue per employee all reached historic highs. Assets of individual
investors entrusted to our Private Client Group increased 27 percent to $10.6
billion.
For the fiscal year ended September 30, 1996, net income increased 58
percent to $9.4 million, or $1.55 per share, from $5.9 million, or 94 cents per
share, in fiscal 1995. Total revenues for fiscal 1996 rose to $208.8 million, an
increase of 13 percent from last year's $184 million.
As a result of the continuing improvement in our financial results, your
Board of Directors increased the quarterly dividend by 33 percent to 4 cents per
share of common stock. The company also purchased 320,000 shares of its common
stock during our fiscal year as part of a 1,000,000 share ongoing repurchase
program authorized by the Board.
Attracting and retaining experienced and talented professionals has been a
principal focus of the past several years. In keeping with our philosophy that
good people make good business, we made a series of outstanding hires during
this past year. We expanded the team of professionals assisting individual
clients in their financial planning needs, with specific emphasis on the areas
of retirement planning and life insurance. We also added experienced investment
bankers and expanded the fixed income sales force to better serve our corporate
and institutional clients.
The Retail Division, which includes our four-state network of sales offices,
was renamed the Private Client Group to more accurately convey that unit's
mission. IJL has an outstanding training program for its financial consultants,
and we expanded the curriculum to add to the skills of the men and women who
represent us in communities across the Southeast. Technology has been a priority
at IJL for the last several years, and in 1996 we began to see the return from
our substantial investment. Every financial consultant in every Private Client
Group office now has a powerful workstation enhanced by software that allows us
to create investment plans, track portfolios and watch over clients' assets as
never before. Clients now have access to a broad range of information via our
Web
NET REVENUES
Dollars in Millions
1992-1996
(NET REVENUES CHART APPEARS HERE. PLOT POINTS ARE BELOW.)
1992 1993 1994 1995 1996
Net Revenues 125.4 151.3 147.9 151.5 187.6
PERMANENT CAPITAL
(Shareholders' Equity &
Long-Term Debt)
Dollars in Millions
1992-1996
(PERMANENT CAPITAL CHART APPEARS HERE. PLOT POINTS ARE BELOW.)
Permanent Capital 1992 1993 1994 1995 1996
67.5 81.4 89.0 90.4 97.6
3
delivering superior ideas, products, and service, and our investment advice
<PAGE>
(PHOTOGRAPH OF PARKS DALTON APPEARS HERE.)
PARKS DALTON
page (http://www.ijl.com), and in August, we became one of the first
investment firms in the nation to offer clients access to account information
via the Internet.
The Equity Capital Markets Group completed a reorganization this year, and
the research, institutional sales, syndicate, trading and investment banking
operations are now focused on seven business sectors that have a major presence
in the Southeast and offer outstanding business opportunities. Revenues for the
Group increased 40 percent in fiscal 1996, and we anticipate continued growth in
the coming year.
While strengthening these core businesses, we also have been investing
capital to develop new sources of revenue consistent with our strategy of
undertaking new ventures only where synergies exist with existing businesses.
CapTrust Financial Advisors, a new subsidiary established after the fiscal year
ended, is designed to bring together a carefully selected group of consulting-
oriented investment professionals from around the country who have successful
business operations and who seek a more flexible environment in which to work.
CapTrust will allow these entrepreneurial advisors to run their own businesses -
but with the support and services of Interstate/Johnson Lane. Our administrative
departments in Charlotte currently provide superior quality clearing, technology
and accounting services, and that team is well prepared to handle CapTrust's
incremental business. Likewise, IJL has built outstanding support capabilities
in the areas of investment management consulting; estate and trust planning; and
retirement services - all areas of expertise that can benefit the professionals
and clients of CapTrust.
In refining the firm's strategic plan, we saw an opportunity to realign and
strengthen the management organization by creating both a Management Committee
and an Office of the President. Additionally, senior managers have joined in
leadership training that is enhancing their ability to help IJL reach its
productivity and performance goals.
In July, former U.S. Representative J. Alex McMillan, III, was elected to
our Board of Directors. Congressman McMillan retired from the House of
Representatives in 1994 after a decade of public service. He has had a
distinguished career as a business executive and an elected public official, and
PRIVATE CLIENT
GROUP PRODUCTION
Dollars in Millions
1992-1996
(PRIVATE CLIENT GROUP PRODUCTION CHART APPEARS HERE. PLOT POINTS ARE BELOW.)
1992 1993 1994 1995 1996
Private Client Group
Production 62.9 73.8 73.5 81.3 102.0
AVERAGE PRODUCTION
PER PRIVATE CLIENT
GROUP FC
Dollars in Thousands
1992-1996
(AVERAGE PRODUCTION PER PRIVATE CLIENT GROUP FC CHART APPEARS HERE. PLOT POINTS
ARE BELOW.)
1992 1993 1994 1995 1996
Average Production per
FC 178 200 185 201 244
4
will stand the test of time. The building and maintaining of long-term
<PAGE>
(PHOTOGRAPH OF JIM MORGAN APPEARS HERE.)
JIM MORGAN
we are fortunate to be able to draw on his experience. At our October board
meeting, we bid farewell to board member Dick Pechter, whose wise counsel over
the firm's 11 years as a publicly traded company helped bring IJL to where it is
today, and to Clay Hamner, who had served us since 1992. Our grateful thanks and
warm wishes go to Dick and to Clay as they close out their service to IJL.
All of these internal changes, combined with robust markets and a stable
national economy, gave our clients and shareholders a year to remember. And it
gave the IJL team a clear picture of the positive effects of the changes that
have been made in recent years. The future of your company continues to
brighten.
Throughout the firm, there is a sense of excitement about the future. IJL
has the key components for success: talented people, a healthy and growing
region, and a commitment to excellence. We see great opportunity in the year
ahead for revenue growth and for continuing improvements in productivity. Cost
controls, innovation and the wise use of technology are moving IJL toward
increased efficiency; committed and talented individuals are working smarter and
making us stronger.
At the same time, this extraordinary group is finding the time to give back
to the communities we serve - reading to young children, mentoring teens,
serving on the boards of civic and charitable organizations, cleaning up parks,
participating in charity walks and runs, helping make the holidays special for
those in need.
Improving the communities where we live and work is a cornerstone of the IJL
COMMITMENT TO EXCELLENCE. You will see the words of that document running
through this report, a reminder that our commitments - to client service, to
personal excellence, to teamwork and to caring for others are part of everything
we do.
We take great pride in the history and reputation of our firm and in the
quality and integrity of our people. We thank our employees for their many
contributions, our shareholders for their support, and our clients for their
trust.
/s/ Parks H. Dalton /s/ James H. Morgan
----------------------- -------------------------
Parks H. Dalton James H. Morgan
CHAIRMAN OF THE BOARD PRESIDENT AND CHIEF EXECUTIVE OFFICER
PRIVATE CLIENT GROUP
ASSETS UNDER
MANAGEMENT
Dollars in Billions
1992-1996
(PRIVATE CLIENT GROUP CHART APPEARS HERE. PLOT POINTS ARE BELOW.)
1992 1993 1994 1995 1996
Assets Under
Management 4.6 5.6 6.3 8.3 10.6
BOOK VALUE
PER SHARE
1992-1996
(BOOK VALUE PER SHARE CHART APPEARS HERE. PLOT POINTS ARE BELOW.)
1992 1993 1994 1995 1996
Book Value per Share 7.01 9.13 10.74 11.67 13.00
5
relationships will be central to our daily lives. ~ We will maintain a
<PAGE>
(PHOTOGRAPH OF SEVERAL MEN IN AN OFFICE APPEARS HERE.)
(PHOTOGRAPH OF COMPUTERS AND KEYBOARDS APPEARS IN THE BACKGROUND OF PAGE.)
work environment that is exceptional in its emphasis on personal excel
<PAGE>
(PHOTOGRAPH OF THREE FLAGS OUTSIDE OF A BUILDING APPEARS HERE.)
lence, teamwork and commitment to the firm's success. Our success will
<PAGE>
(PHOTOGRAPH OF TWO MEN AT A DESK APPEAR HERE.)
be measured by the degree to which individuals, institutions, corporations,
<PAGE>
A Year of Orchestrated Accomplishments
A PORTFOLIO OF FINANCIAL SERVICES
Today's Interstate/Johnson Lane is a well capitalized, technologically
sophisticated, client-oriented organization led by a strong management team that
shares a clear vision for the future.
Our goal is to be the firm of choice - for individuals seeking investment
guidance, for corporate clients looking to restructure or raise capital, for
small businesses creating retirement plans, for municipalities funding
infrastructure improvements. And while we proudly call the Southeast our home,
we want to offer the highest level of products and services to institutional
clients across the nation and the world.
To achieve this goal, IJL has created a portfolio of services designed to
meet a broad range of client needs. The common denominator of our businesses is
that they either contribute directly to the financial well-being of our clients,
or they support those who work closely with clients.
Individual investors and small businesses are served through the Private
Client Group, which includes our 430 financial consultants working in 60 offices
across the Southeast. The Equity Capital Markets Group focuses on corporate and
institutional clients through its investment banking, research, sales, trading
and syndicate operations.
The Fixed Income Capital Markets Group concentrates on the secondary
distribution of fixed income securities and also brings together issuers and
institutional clients across the country seeking attractive taxable and
municipal fixed income investments. The Interstate Group provides execution
services and a wide array of independent research products and services to
investment managers and plan sponsors.
Complementing the efforts of these major groups are Sovereign Advisers and
ISC Realty, respectively, our asset management and real estate finance
subsidiaries, plus the newest addition to our portfolio, CapTrust Financial
Advisors, a broker-dealer created to serve the needs of a select group of
investment consultants across the country.
Like any good portfolio, ours requires constant attention. It can be
something as small as a minor adjustment in a computer program. Sometimes it is
the refinement of a service, or development of a training program, or creation
of a new business unit. One of IJL's great strengths is its size: we are large
enough to take on major challenges, yet small and agile enough to respond
quickly to changing needs or environments. And by weaving people and resources
into a single fabric, we offer clients a wealth of talent for a firm of our
size.
This year's success confirmed our strategic direction and heightened our
confidence that IJL is destined for continued success. Looking to 2000 and
beyond, we see the firm growing - and growing more profitable - through
strengthening our core businesses and selectively taking advantage of new
opportunities to ensure that our portfolio of services matches the needs of our
clients.
(PHOTOGRAPH OF A MAN ON THE PHONE APPEARS HERE.)
(PHOTOGRAPH OF A COMPUTER APPEARS HERE.)
9
and public entities regard IJL as their premier financial advisor. ~
<PAGE>
(PHOTOGRAPH OF A MAN IN AN OFFICE APPEARS HERE.)
PRIVATE CLIENT GROUP
There is a great temptation to speak about the Private Client Group in
superlatives - the best financial consultants in the Southeast, the most
sophisticated technology, the broadest range of investment advice, the highest
quality client service.
Don't take our word alone; look at the result of the 1996 IJL Client Survey.
That survey found that IJL's clients have an extraordinary loyalty to us and a
high degree of satisfaction with the care and attention they receive. Fully 93
percent would recommend the firm to a friend, 93 percent would recommend their
own financial consultant, and 92 percent said that IJL meets or exceeds their
expectations.
These totals are the most positive ever recorded by us, a clear indication
that the improvements we have made in recent years are making a difference.
That, in turn, began to show up in the financial performance of the Group in
1996. Revenue per FC increased 19 percent, and the Group provided 54 percent of
total firm revenue. The total value of assets entrusted to us grew 27%, topping
$10 billion for the first time in the firm's history.
We realize that well-trained, well-supported, knowledgeable financial
consultants and branch managers are the heart and soul of our network of
brokerage offices. To that end, IJL took several steps in 1996 to make its FCs
more proficient in offering investment advice - and more efficient in their
efforts.
The rollout of FOCU$ contact and portfolio management and other advanced
financial soft-ware was completed during the year. With a few keystrokes, a
financial consultant can review a client's holdings and account activity,
analyze performance and make recommendations. The FC can create hypothetical
scenarios of investment alternatives, build asset allocation models and enjoy
almost instant access to research data. The highest praise came this year from a
financial consultant who joined IJL from another firm. "Before I came to IJL, I
felt like I was holding the reins of a mule. Here, I'm driving the space
shuttle."
Last spring, IJL launched an Internet home page (http://www.ijl.com) where
"surfers" can obtain information on the firm and its services. In September, we
became one of the first firms in the nation to offer clients electronic access
to research reports and account information via the Internet, a service that has
proven popular with a small but growing list of clients.
While responding to the needs of the most computer literate and computer
friendly of our clients, we believe that most investors will continue to seek
personal attention in their investment
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10
The people of IJL are committed to the financial success of our clients.
<PAGE>
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endeavors and be more comfortable with one-on-one contact. We are pleased to
be active participants in the computer revolution, but will use it to augment,
not replace, personal contact.
Without doubt, the most precious commodity of the financial consultant is
time; there never seems to be enough to stay abreast of the markets, talk to
clients, digest the vast amount of information available on a daily basis and
find balance in a busy life. IJL's training program for financial consultants
added programs in 1996 to assist FCs with everything from selecting portfolio
managers to contacting clients.
Providing the highest level of service requires that we stay ahead of
developments across the investment landscape. It isn't enough to be skilled at
tracking a portfolio of stocks and bonds; clients need information on retirement
planning and insurance, and on creating trusts and managing estates. In these
key areas, we added specialists who are providing our financial consultants and
their clients with advice on the full spectrum of financial services.
We see excellent opportunities to build upon our reputation in the
Southeast, capitalizing on our regional knowledge as no competitor can. We have
the infrastructure in place to support additional financial consultants and will
be seeking individuals who share our team approach and commitment to client
service.
EQUITY CAPITAL MARKETS
We are well positioned to offer established and emerging companies in the
Southeast, particularly small- to middle-market growth companies, timely and
accurate advice on financial structuring, public and private offering of equity
and debt, mergers, acquisitions, divestitures and other corporate finance
services. Strong trading support gives our clients a distribution edge as well.
The middle market is our historical niche, and as the large investment banks
continue to distance themselves from this important segment, we see an abundance
of opportunity here in the rapidly growing southeastern United States.
The Equity Capital Markets Group increased revenues in 1996 by 40 percent, a
reflection of a healthy market and focused efforts by the investment banking
team to identify and pursue targeted business opportunities. The firm was lead
or co-manager on ten public equity offerings cumulating more than $500 million
in proceeds for our corporate clients, and acted in an advisory capacity for
several successfully completed merger and acquisition transactions.
We are doing business in an exciting region full of new people and new
businesses. From the bustling commerce of Northern
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11
We will deliver superior products, ideas and services, and our investment
<PAGE>
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Virginia through the high-tech labs of Research Triangle Park and the I-85
corridor; to the banking and transportation hubs of Charlotte and southward to
the diverse economy of Atlanta, there is an array of small- and mid-cap
companies that makes our geographical position the envy of firms elsewhere in
the country.
To take better advantage of these exceptional opportunities, we began
restructuring the Equity Capital Markets Group in 1996 to align our
professionals with a select group of industries chosen on the basis of regional
presence, potential for high growth and compatibility with our research and
investment banking abilities. Research, institutional sales, syndicate, trading
and investment banking are now tightly integrated around seven business sectors
that are strong in the Southeast, are growing at a healthy pace and offer
superior investment opportunities. Those sectors are financial institutions,
real estate investment trusts, technology, retailing, health care, restaurants,
and a final manufacturing-focused group we refer to as "industrials," which
includes traditionally southeastern-based industries such as textiles and
furniture.
This realignment is improving synergies and helping make IJL the firm of
choice for corporate and institutional clients who value our expertise in these
key areas. We believe we are better positioned to compete, and the backlog of
new business - public equity underwritings, mergers and acquisitions, and
private placements - at the start of fiscal 1997 indicates to us that our
strategy is on target.
In investment banking, the professional staff now numbers 20, up from 13 in
mid-1995. The additional staff has strengthened IJL's expertise across the
board, but particularly in private placements and mergers and acquisitions,
which we anticipate will become a larger part of our business mix. IJL has a
seasoned team of 10 senior research analysts located in Charlotte and Atlanta
with focus, insight and expertise on the Southeast and the industries on which
we have chosen to concentrate.
In the coming year, we will continue to upgrade the professional staff,
expand research coverage and emphasize teamwork and cross-functional support. As
a result, 1997 should be IJL's best year ever in Equity Capital Markets.
FIXED INCOME CAPITAL MARKETS
The Fixed Income Capital Markets Group is strategically focused on the
secondary distribution of fixed income securities. This unit's greatest resource
is a highly motivated and enterprising team of professionals with a special
talent for developing and maintaining close relationships with clients, both
domestically and internationally. In fiscal
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12
advice will be designed to stand the test of time. No product or service will
<PAGE>
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1996, this team did an exceptional job of marshaling capital and technology
resources to build its client base and increase sales revenues by 35 percent and
trading revenues by 20 percent.
Fiscal 1996 was truly a turnaround year for Municipal Finance. Two years
ago, IJL set the ambitious goal of dramatically improving its visibility in the
public finance arena and staking its claim as the premier provider of investment
banking and financial advisory services to governments and public agencies in
the Southeast. That goal was not only met, but exceeded this year as IJL was
involved as manager, senior manager or co-manager of 61 bond issues totaling
$3.5 billion. We were the sole or lead manager on eight negotiated municipal
bond issues with volume of $113 million, a fourfold increase from 1995.
IJL's distribution abilities have been key to the success of the Municipal
Finance operation, and to the Fixed Income Capital Markets Group as a whole. The
sales force is skilled at distributing a wide range of taxable and tax-free
products and services to a diverse institutional and individual investor base.
Our team of 34 traders, underwriters and portfolio strategists provides the
sales force - both the 50-person institutional group and the 430 financial
consultants serving individual investors - with the support necessary to access
and analyze an extensive array of products, services and market information.
With nearly $100 million in permanent capital, IJL has the financial
resources to provide liquidity in and maintain extensive inventories of
government and agency securities, corporate bonds, mortgage-backed securities
and municipal bonds.
Through the creative and effective use of technology, we are in a strong
position to add value to our clients' decision-making processes, both with
product advice and comprehensive portfolio analytics. IJL introduced custom
analysis of portfolios in 1995 and, based on the positive reception, expanded
the program in 1996.
Looking ahead, the Fixed Income Capital Markets Group will continue its
strategic focus on the secondary distribution of fixed income securities. We
will further expand our distribution capabilities by attracting and retaining
quality sales and support professionals who are committed to providing value-
added services to our clients by making use of our significant capital and
technology resources.
In the municipal finance area, we see excellent growth opportunities. IJL
has the advantage of doing business in the Southeast, a region that consistently
outpaces the nation in growth. As the population increases, schools and
hospitals must be built, water systems expanded, roads extended and services
improved. Our participation in the financing of the Southeast's growth should
continue to climb in 1997 and beyond.
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13
be offered simply to enhance corporate revenues. ~ We are committed to
<PAGE>
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INTERSTATE GROUP
During the past decade, the Interstate Group consistently has been one of
the firm's most profitable business segments, and it remained a top contributor
in fiscal 1996. This group's seasoned professionals offer equity and options
execution services and provide independently produced research to a nationwide
client base of more than 500 institutions - banks, money managers, insurance
companies, hedge funds, corporate retirement funds, endowment funds and other
types of institutional accounts.
Through the Interstate Group, IJL was one of the first securities firms to
provide independent research, and we continue in the forefront today. The Group
offers a full complement of products and services to meet the expanding needs of
its clients - specialized research within such areas as asset allocation,
economic and equity analysis; fundamental research; performance measurement;
portfolio management; portfolio strategy and a wide variety of general and
customized research.
The Group's sales force is strategically located throughout the country -
Charlotte, Atlanta, Boston, Dallas and New York - and is supported by a
Charlotte-based trading desk and client service team. With an established
reputation for outstanding execution services, the Interstate Group once again
this year was one of the leaders in block order executions on the floor of The
New York Stock Exchange. Longevity is the hallmark of the group's trading
professionals; its traders average more than 10 years' experience with IJL, and
18-plus years in the industry. The floor brokers and support team on the New
York and American exchange floors are among the most experienced in the
industry.
The keys to continued success for the Interstate Group are quality block
trading, execution skills, and an extraordinarily high level of client service.
The team is well positioned in all of these areas, and the prospects for the
coming year are excellent.
Subsidiary Operations
Complementing these units are several smaller operations that give us
additional expertise in areas where our clients have specific needs. The
missions are more targeted and the services are more specialized, but the
overarching goal remains unchanged: providing our clients with service that is
unsurpassed in quality.
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14
ensuring each other's success. We will work as a truly unified team,
<PAGE>
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Sovereign Advisers
Sovereign Advisers, our asset management subsidiary, continued its solid
record of asset growth and portfolio performance in fiscal 1996. During the past
four years, Sovereign has grown from $30 million in assets to a level
approaching $300 million, and has found an excellent niche in the market:
serving clients who have a strong desire for performance but a low tolerance for
risk.
Sovereign provides customized equity portfolios that adhere to a Dividend
Performers Philosophy. That investment strategy, pioneered 17 years ago, focuses
on seasoned companies with records of increasing their dividends for at least
ten consecutive years. In addition, our portfolio managers search for companies
with superior management, demonstrated ability to grow through all economic
cycles, market leadership, strong franchises and brand recognition and limited
vulnerability to political or social fluxes.
We also have provided customized fixed income portfolios, either free-
standing or as a component of balanced accounts, where managers are focused on
creating current income by combining fixed- and adjustable-rate government and
government-agency instruments.
This careful selection process for equity and fixed income investments has
provided a sound core investment strategy for a wide spectrum of clients.
A long-term, value-oriented approach matches well with the complexion and
character of our client base, and we see the opportunity for continuing growth
by holding steady on this course.
We are, however, always looking for new opportunities, and for several
years, have considered creating a risk-averse, small- to medium-cap investment
fund that would give us the flexibility to take advantage of undervalued
situations and allow clients to profit from both undervalued and overvalued
securities. In mid-1995 we successfully "incubated" this investment strategy
with IJL's own capital, and the results were outstanding - a 50 percent gain
over 16 months. In early 1997 Sovereign expects to offer limited partnership
interests in an investment fund employing such a strategy.
ISC Realty
This subsidiary provides expertise in the placement of real estate equity
and debt capital with high net worth individuals and institutions. In addition,
ISC Realty provides consulting and asset management services for a large
portfolio of commercial real estate assets owned by clients of IJL.
There currently are several interesting growth opportunities. First, we seek
private
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15
communicating honestly, directly, and frequently with one another.
<PAGE>
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placement opportunities for high net worth individuals and institutions who
see the potential for above-average returns in real estate. Secondly,
corporations across the Southeast are realizing the benefits of investing in
affordable housing, namely, the high returns possible as a result of tax credits
and the positive impact on the communities where they do business.
ISC Realty has significant experience in the Southeast real estate market,
has worked with quality developers in the region, and has the ability to match
their needs with those of IJL's individual, institutional and corporate clients.
The benefits are twofold: we are well positioned to serve the capital needs of
our region's real estate development community, while at the same time offering
our clients investments that provide attractive returns.
CapTrust Financial Advisors
Finally, we are pleased to introduce the newest member of the IJL family,
CapTrust Financial Advisors. CapTrust, a newly created broker-dealer, was in its
formative stages as the fiscal year ended. A firm foundation of staffing,
services and strategy was in place, and the new subsidiary was in an excellent
position for a successful launch.
Our goal in establishing CapTrust is to take advantage of a dramatically
changing landscape in our industry. We see an increasing number of
entrepreneurial financial advisors who want greater control over their own
futures while working in a stable, professional environment. CapTrust is
targeting professionals nationwide who oversee $50 million or more in assets and
who want to build their practices in an environment where they can work and
interact with other successful professionals who share the same ideals and
visions.
With CapTrust, IJL has the opportunity to open a new revenue source by
leveraging our technical, administrative and product resources. We see in this
ambitious project not just a win-win, but a triple benefit - meeting a need in
our industry, offering financial advisors a new way of managing and growing
their businesses, and serving our shareholders by adding to the value of IJL.
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16
Responsibility will be delegated and departmental boundaries will never
<PAGE>
WITH THE ECONOMY ON A STEADY COURSE AND THE MARKETS TAKING AN UPWARD PATH, MANY
OF OUR CLIENTS' PORTFOLIOS GREW AT A HEALTHY PACE IN 1996. OUR PORTFOLIO OF
FINANCIAL SERVICES SHOWED EXCELLENT GROWTH AS WELL. ~ WE BROUGHT IN SEASONED,
SKILLED PROFESSIONALS, AUGMENTING THE CONSIDERABLE WEALTH OF TALENT ALREADY
HERE. WE PROVIDED ADDITIONAL TECHNOLOGICAL RESOURCES TO THE STAFF AND ENHANCED
THEIR SKILLS THROUGH AN EXPANDED TRAINING PROGRAM. WE EXPANDED THE MENU OF
SERVICES OFFERED TO OUR INDIVIDUAL AND INSTITUTIONAL CLIENTS. IT TRULY WAS A
YEAR OF CONSIDERABLE ACHIEVEMENT. ~ YET, AS WE LOOK TO FISCAL 1997 AND BEYOND,
WE SEE VIRTUALLY UNLIMITED OPPORTUNITY TO ACHIEVE HIGHER LEVELS OF SERVICE TO
OUR CLIENTS, STRONGER PRODUCTIVITY WITHIN OUR WORKFORCE, INCREASED PROFITABILITY
FOR THE FIRM, AND AN EVEN HIGHER RETURN TO OUR SHAREHOLDERS. THESE ARE OUR
GOALS, AND EACH MEMBER OF THE IJL FAMILY IS COMMITTED TO REACHING THEM.
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be obstacles to teamwork. Managers and other key leaders will serve
<PAGE>
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as role models in their commitment to the success of every employee.
<PAGE>
Interstate / Johnson Lane
(ALL DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
YEARS ENDED SEPTEMBER 30
FIVE YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Operating Results:
Total Revenues $208.8 $184.2 $166.6 $163.5 $141.5
Net Revenues After Interest Expense 187.6 151.5 147.9 151.3 125.3
In come Before Taxes and
Non-Recurring Items 15.6 9.9 13.3 16.9 10.6
Operating Income 9.4 5.9 7.9 10.4 7.0
Non-Recurring Items - - 3.0 4.0 3.0
Net Income 9.4 5.9 10.9 14.4 10.0
Primary Earnings Per Share:
Operating $ 1.55 $ 0.94 $ 1.20 $ 1.54 $ 1.05
Net 1.55 0.94 1.67 2.14 1.50
Dividends Per Share $ 0.12 $ 0.12 $ 0.09 - -
Financial Condition:
Total Assets $568.3 $616.5 $767.8 $675.0 $556.6
Total Assets, Net of Matched
Securities Resale Agreements 562.5 486.9 428.6 434.1 379.9
Long-Term Subordinated Debt 21.0 21.0 21.0 22.0 22.0
Shareholders' Equity 76.6 69.4 68.0 60.4 46.5
Book Value Per Share $13.00 $11.67 $10.74 $ 9.13 $ 7.01
</TABLE>
(ALL DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
SUPPLEMENTAL FINANCIAL DATA
<TABLE>
<CAPTION>
TOTAL NET INCOME NET EARNINGS
REVENUES REVENUES BEFORE TAXES INCOME PER SHARE
<S> <C> <C> <C> <C> <C>
Fiscal 1996
Fourth Quarter $50,177 $45,138 $3,573 $2,185 $0.37
Third Quarter * 52,582 47,277 3,756 2,293 0.38
Second Quarter* 55,462 50,258 4,756 2,807 0.46
First Quarter* 50,534 44,976 3,508 2,070 0.34
Fiscal 1995
Fourth Quarter $50,715 $43,549 $3,481 $2,034 $0.33
Third Quarter 48,241 39,024 2,239 1,360 0.22
Second Quarter 45,578 36,993 2,590 1,602 0.25
First Quarter 39,667 31,892 1,553 932 0.15
</TABLE>
* INCOME BEFORE TAXES, NET INCOME AND EARNINGS PER SHARE FOR THESE QUARTERS
HAVE BEEN RESTATED TO REFLECT ADOPTION OF A LONG-TERM INCENTIVE COMPENSATION
PLAN RETROACTIVE TO OCTOBER 1, 1995.
19
We are committed to personal excellence. Each of us will strive to reach
<PAGE>
Management's Discussion & Analysis of
Financial Condition & 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, both of which can be cyclical and volatile. As a result,
revenues and earnings may vary significantly from quarter to quarter and year
to year.
At September 30, 1996, approximately 22% of the Company's retail financial
consultants had fewer than three years' industry experience. Notwithstanding
the energized securities markets of recent years, a prolonged slowdown in
individual investor activity could more severely reduce the revenue production
of a less seasoned sales force. In addition, the continuing trend of increased
regulation of the securities industry could create significantly incremental
compliance costs and indirectly stifle certain revenue streams.
LIQUIDITY & CAPITAL RESOURCES
During the 1996 fiscal year, operating activities provided $62.7 million of
cash, partially funded by $12.6 million of net income adjusted for depreciation
and other non-cash charges. Financing sources and capital expenditures consumed
$52.0 million of cash. As a result, the Company's cash position increased $10.7
million to $37.3 million at September 30, 1996.
The Company's asset base consists primarily of cash, cash equivalents, and
other assets which can be converted to cash within one year; at September 30,
1996, these assets comprised approximately 91% of the balance sheet. Day-to-day
financing requirements generally are influenced by the level of securities
inventories, net receivables from customers and broker-dealers, and net
receivables under resale agreements. Significant incremental cash requirements
also may occur from time to time in connection with payments under deferred
compensation plans, repurchase of the Company's common stock and/or convertible
debentures, initial funding of new business unit activities, payment of
dividends, and litigation settlements arising out of normal business operations.
In addition, $1.7 million of capital spending in fiscal 1996 reflects
implementation of the second phase of a planned $10 million program of
technology improvements over a multi-year period.
At September 30, 1996, the Company had $155 million of call loan financing
available. In addition, the Company maintains credit lines of several hundred
million dollars for collateralized repurchase agreements with other financial
institutions, and has financed its customer receivables with customer payables
for many years. Management believes that these resources, funds provided by
operations, and permanent capital of shareholders' equity and long-term
subordinated debt, 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"), Commodities Futures Trading Commission ("CFTC"),
and the New York Stock Exchange ("NYSE"), and consistently has operated well
in excess of the minimum requirements. At September 30, 1996, IJL had "net
capital" of $39.8 million, excess net capital of $34.7 million, and a net
capital ratio of 15.7%.
20
ever higher goals and will be held fully accountable for our performance.
<PAGE>
REVENUE & EXPENSE ANALYSIS
Distribution of
Net Revenues
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30 1996 1995 1994
<S> <C> <C> <C>
Commissions and
sales credits 77.5% 76.6% 75.4%
Trading gains, net 3.8 4.5 3.6
Investment banking and
under writing 2.8 2.2 4.4
Asset management and
advisory 5.1 4.9 4.2
Other operating revenues 4.3 4.9 6.0
Net interest 6.5 6.9 6.4
Net revenues 100.0% 100.0% 100.0%
</TABLE>
Utilization of
Net Revenues
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30 1996 1995 1994
<S> <C> <C> <C>
Compensation and benefits 64.9% 63.4% 61.0%
Technology and telephone 9.3 10.1 9.0
Occupancy 4.7 5.6 5.5
Execution, clearance and
depository 2.2 2.5 2.5
Promotion and development 3.5 3.9 4.0
Professional services 1.8 2.4 2.8
Printing, postage and
supplies 1.9 2.3 2.2
Other operating expenses 3.3 3.3 4.1
91.6 93.5 91.1
Income taxes 3.3 2.6 3.6
Non-recurring items - - (2.1)
94.9% 96.1% 92.6%
</TABLE>
1996 COMPARED WITH 1995
Net revenues increased $36.2 million, or 24%, from the previous year, while
expenses, other than inter-est, increased $30.5 million, or 22%. Net income of
$9 4. million was up $3.4 million from the results of a year ago. Overall,
improved securities markets produced an increase in commission revenue of $29.4
million, or 25%. Increases in secondary market transactions in both exchange
listed and OTC equities, and increased equity underwritings contributed to the
increase in both the retail and institutional sectors. Increased sales of
mutual fund shares and annuity products also contributed to the increase in the
retail sector, while improved new issue markets and increased activity in both
U.S. Government and mortgage-backed securities had a positive impact on the
institutional sector.
Investment banking fees and underwriting profits increased $1.9 million, or
58%, due to an improved equity capital-raising environment, coupled with an
increased level of managed underwritings. Asset management and advisory fees
were up $2.2 million due to the continued growth of asset-based fees charged
retail clients in lieu of transaction-based commissions. Other income was up
$700,000 largely attributable to an increase in money fund service fees.
Interest revenues were down about $9.9 million for the year while interest
expenses decreased $11.6 million. The resultant increase of $1.7 million in net
interest income for the year is due primarily to an increase in net interest
earned on higher levels of segregated customer funds and customer debit
balances. The majority of the decrease in both revenues and expenses is
attributable to significantly lower levels of matched resale and repurchase
agreements.
Compensation and benefits costs increased $25.8 million, or 27%, due
primarily to an increase in transaction-based commissions and other profit-
driven incentives. Technology and telephone expense increased $2.3 million, or
15%, for the year primarily due to expenses related to the Company's ongoing
program of technology improvements. Promotion and development costs increased
$667,000, or 11%, in connection with the continuing effort to build revenue.
Other operating expenses increased $1.2 million, or 24%, largely as a result of
increased provisions for legal matters.
21
We will bring a visible level of energy, a keen source of urgency, a strong
<PAGE>
Management's Discussion & Analysis of
Financial Condition & Results of Operations
1995 COMPARED WITH 1994
Net revenues increased $3.6 million, or 2%, from the previous year, while
expenses, other than interest, increased $7.0 million, or 5%. Net income of
$5.9 million was down $5.0 million from the results of a year ago which were
augmented by a $3.0 million credit from the cumulative effect of adopting
Financial Accounting Standards Board Statement No. 109, "Accounting for Income
Taxes."
Overall, improved securities markets produced an increase in commission
revenues of $4.4 million, or 4%. A significant increase in secondary market
activity in both exchange listed and OTC equities contributed to a 10% increase
in the retail sector, while substantially fewer equity underwritings were the
principal cause of a 14% decline in the institutional equities sector.
A recovery in the bond market produced improved trading gains in corporate,
government and tax-exempt debt of $2.7 million; these gains were partially
offset by declines of $1.1 million in OTC trading arising out of unusually
volatile markets. As a result, overall net trading profits increased $1.6
million, or 29%.
Investment banking fees and underwriting profits decreased $3.1 million, or
48%, due to a generally sluggish new issues market, coupled with a low level of
originations during the year. Asset management and advisory fees were up $1.2
million, or 19%, due to the continued growth of "wrap fees" paid by clients in
lieu of transaction-based commissions. Other revenues were down $1.4 million, or
16%, due primarily to nonrecurring revenues in 1994 associated with the sale of
a mutual fund.
Interest revenues were up $14.9 million for the year, while interest
expenses increased $14.0 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 is attributable to higher
interest rates applied to increased customer margin loans and to customer free
credit balances. The improvement in net interest income of $915,000 is due to
higher rate spreads on funds segregated for regulatory purposes and to higher
levels of net interest-bearing customer balances.
Compensation and benefits costs increased $5.9 million, or 7%, due to an
increase in transaction-based revenues, higher acquisition costs of attracting
seasoned producers, and expansion into new markets during the year. Technology
and telephone costs increased $1.8 mil-lion, or 14%, due primarily to expenses
related to the Company's ongoing program of technology improvements. Other
operating expenses decreased $1.1 million, or 17%, as a result of smaller
provisions for legal and related matters. All other expenses increased
$614,000, or 3%, in the aggregate.
NEW ACCOUNTING PRONOUNCEMENTS
During fiscal 1996, the Financial Accounting Standards Board (FASB) issued
Statement 123, "Accounting for Stock Based Compensation" which will be
effective for the next fiscal year. The Company will adopt Statement 123
beginning October 1, 1996, however, it will continue to account for stock-based
compensation under APB Opinion 25 and will disclose the pro-forma effects of
Statement 123 in the Notes to the Consolidated Financial Statements.
In June 1996, FASB issued statement No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities," which is
effective for the Company's 1997 fiscal year. Adoption of this statement is not
expected to have a material impact on the financial condition of the Company.
EFFECTS OF 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
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.
22
work ethic and an abiding commitment to our work. ~ We are committed
<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 designed to provide
reasonable assurance of the reliability of financial records and the protection
of assets. The effectiveness of internal controls and procedures is reviewed
throughout the year by an 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 accordance with generally
accepted accounting principles consistently applied except for the adoption of a
new accounting standard for income taxes in 1994. 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 accountants 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.
/s/ James H. Morgan
- - --------------------------
James H. Morgan
CHIEF EXECUTIVE OFFICER
/s/ Edward C. Ruff
- - ---------------------------
Edward C. Ruff
CHIEF FINANCIAL OFFICER
Charlotte, North Carolina
October 21, 1996
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, 1996 and
1995, 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, 1996. 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, 1996 and
1995, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended September 30, 1996, in conformity
with generally accepted accounting principles.
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."
/s/ Coopers & Lybrand L.L.P.
- - ----------------------------------
Charlotte, North Carolina
October 21, 1996
23
to attracting and retaining people who meet extraordinarily high
<PAGE>
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
(ALL DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) SEPTEMBER 30
1996 1995
<S> <C> <C>
Assets
Cash and cash equivalents $ 37,285 $ 26,537
Cash and securities segregated for regulatory purposes 80,501 117,616
Loans under matched securities resale agreements 5,874 129,623
Receivables:
Financing resale agreements 63,801 23,848
Clients 234,779 175,328
Brokers, dealers and clearing agencies 31,406 18,048
Other 4,234 4,722
Trading securities owned 59,796 75,749
Land, buildings and improvements, net 5,574 7,285
Office facilities and equipment, net 9,236 8,865
Goodwill and intangible assets 13,076 13,678
Other assets 22,779 15,213
$ 568,341 $ 616,512
Liabilities and Shareholders' Equity
Short-term borrowings:
Checks payable $ 16,561 $ 11,872
Financing repurchase agreements 31,078 38,561
Borrowings under matched securities
repurchase agreements 5,983 130,453
Payables:
Clients 292,450 267,714
Brokers and dealers 7,375 6,619
Other 7,262 7,322
Accrued compensation and benefits 20,939 13,980
Trading securities sold but not yet purchased 65,784 25,305
Notes payable 6,208 7,772
Other liabilities and accrued expenses 16,875 16,344
470,515 525,942
Minority interests 200 200
Long-term subordinated debt 20,999 20,999
Shareholders' equity:
Common stock, $.20 par value, 30,000,000 shares
authorized, 6,883,105 shares issued in 1996 and
1995 1,377 1,377
Additional paid-in capital 31,231 31,510
Retained earnings 53,670 45,043
86,278 77,930
Less, treasury stock, at cost, 986,530 shares in
1996
and 936,783 shares in 1995 (9,651) (8,559)
Total shareholders' equity 76,627 69,371
$ 568,341 $ 616,512
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
24
standards of personal integrity and professional ability. Our work
<PAGE>
Consolidated Statements of Operations
<TABLE>
<CAPTION>
(ALL DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED SEPTEMBER 30
1996 1995 1994
<S> <C> <C> <C>
Revenues:
Commissions and sales credits $ 145,446 $ 116,003 $ 111,568
Trading gains, net 7,078 6,839 5,283
Investment banking and underwriting 5,281 3,354 6,441
Asset management and advisory 9,511 7,334 6,162
Interest 33,332 43,261 28,324
Other 8,107 7,410 8,822
Total revenues 208,755 184,201 166,600
Interest expense 21,106 32,743 18,720
Net revenues 187,649 151,458 147,880
Expenses:
Compensation and benefits 121,830 96,040 90,175
Technology and telephone 17,474 15,198 13,380
Occupancy 8,809 8,444 8,192
Execution, clearance and depository 4,098 3,809 3,744
Promotion and development 6,624 5,957 5,868
Professional services 3,376 3,611 3,976
Printing, postage and supplies 3,627 3,503 3,209
Other operating expenses 6,218 5,033 6,085
Total expenses 172,056 141,595 134,629
Income before income taxes and
cumulative effect of a change
in accounting principle 15,593 9,863 13,251
Income tax expense 6,238 3,935 5,385
Income before cumulative effect of
a change in accounting principle 9,355 5,928 7,866
Cumulative effect of a change
in accounting principle 3,059
Net Income $ 9,355 $ 5,928 $ 10,925
Primary Earnings per Share:
Income before cumulative effect of
a change in accounting principle $ 1.55 $ 0.94 $ 1.20
Cumulative effect of a change
in accounting principle 0.47
Net income $ 1.55 $ 0.94 $ 1.67
Fully Diluted Earnings per Share:
Income before cumulative effect of
a change in accounting principle $ 1.36 $ 0.91 $ 1.13
Cumulative effect of a change
in accounting principle 0.39
Net income $ 1.36 $ 0.91 $ 1.52
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
25
environment will be exceptional in its ability to blend personal warmth
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(ALL DOLLARS IN THOUSANDS) FOR THE YEARS ENDED SEPTEMBER 30
1996 1995 1994
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 9,355 $ 5,928 $ 10,925
Adjustments to reconcile net income to cash
provided (used) by operating activities:
Depreciation and amortization 5,006 3,584 3,166
Deferred income taxes (3,635) 1,413 (997)
Provision for real estate charges 850 1,250 675
Other non-cash items 1,008 222 1,536
3,229 6,469 4,380
Changes in operating assets and liabilities:
Cash and securities segregated for
regulatory purposes 37,115 (33,633) 33,683
Loans under matched securities resale
and repurchase agreements, net (721) 241 (259)
Net payables to customers (34,715) 35,015 (35,313)
Net receivables from brokers, dealers
and clearing agencies (12,602) (2,243) (7,056)
Other receivables 488 4,697 (1,385)
Trading securities owned, net 56,432 (16,680) 8,246
Other assets (4,040) (5,090) 182
Accrued compensation and benefits 6,959 1,128 (3,035)
Other liabilities and accrued expenses 1,250 (1,054) (4,945)
50,166 (17,619) (9,882)
Cash provided (used) by operating activities 62,750 (5,222) 5,423
Cash Flows from Financing Activities:
Proceeds from (repayment of):
Short-term bank borrowings 4,689 (11,305) 7,615
Borrowings under financing repurchase
and resale agreements, net (47,437) 23,767 5,274
Notes payable (1,564) (715) (1,170)
Maturity of secured demand note (1,000)
Proceeds from stock options exercised 126 137 237
Purchase of stock for treasury (3,565) (5,026) (3,747)
Dividends paid (728) (756) (586)
Cash proded (used) by financing activities (48,479) 6,102 6,623
Cash Flows from Investing Activities:
Capital expenditures (3,523) (4,536) (2,246)
Cash used by investing activities (3,523) (4,536) (2,246)
Net in crease (decrease) in cash and cash equivalents 10,748 (3,656) 9,800
Cash and cash equivalents at beginning of year 26,537 30,193 20,393
Cash and cash equivalents at end of year $ 37,285 $ 26,537 $ 30,193
Cash paid during the year for:
Interest $ 21,595 $ 32,846 $ 17,983
Income Taxes $ 9,119 $ 2,614 $ 6,930
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
26
with professionalism. We will be the firm of choice for many of the
<PAGE>
Consolidated Statements of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
(ALL DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
ADDITIONAL TOTAL
COMMON STOCK PAID-IN RETAINED TREASURY STOCK SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT EQUITY
<S> <C> <C> <C> <C> <C> <C>
Balance at
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
($.09 per share) (586) (586)
Balance at
September 30, 1994 6,883,105 1,377 31,589 39,871 554,359 (4,867) 67,970
Forfeiture of
restricted shares, net 80 12,893 (80)
Purchase of treasury shares 531,300 (5,026) (5,026)
Issuance of restricted shares (320) (123,790) 1,086 766
Amortization of
restricted shares 352 352
Stock options exercised (191) (37,979) 328 137
Net income 5,928 5,928
Dividends paid
($.12 per share) (756) (756)
Balance at
September 30, 1995 6,883,105 1,377 31,510 45,043 936,783 (8,559) 69,371
Forfeiture of
restricted shares, net 40 4,750 (40)
Purchase of treasury shares 319,600 (3,565) (3,565)
Issuance of restricted shares (434) (224,522) 2,051 1,617
Amortization of
restricted shares 377 377
Stock options exercised (336) (50,081) 462 126
Capital contribution 74 74
Net income 9,355 9,355
Dividends paid
($.12 per share) (728) (728)
Balance at
September 30, 1996 6,883,105 $ 1,377 $ 31,231 $ 53,670 986,530 $ (9,651) $ 76,627
</TABLE>
27
most talented people in our business, highly skilled individuals who
<PAGE>
Notes to Consolidated Financial Statements
NOTE ONE
Significant Accounting Policies
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 and institutional investors,
market-making and underwriting of municipal and corporate securities, investment
management, investment banking and other 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. All intercompany balances and transactions have been eliminated.
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.
Goodwill is recorded at cost less accumulated amortization of $4.4 million
at September 30, 1996, and $3.8 million at September 30, 1995. 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 $4.5 million and.
$16.9 million, respectively, at September 30, 1996, and $3.8 million and
$13.7 million, respectively, at September 30, 1995. 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, contingent stock awards, and the assumed
conversion of the convertible subordinated debentures, after appropriate
adjustment for interest expense.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Certain 1995 and 1994 amounts have been re-classified for comparative
purposes in 1996.
NOTE TWO
Cash and Securities Segregated
for Regulatory Purposes
Segregated for the exclusive benefit of clients at September 30, 1996,
under the provisions of Rule 15c3-3 of the Securities and Exchange Commission
("SEC") were cash and U.S. government securities collateralizing approximately
$80.5 million of securities resale agreements. Also segregated under the
Commodities Exchange Act was cash of $1,000.
NOTE THREE
Trading 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)
<TABLE>
<CAPTION>
TRADING TRADING SECURITIES
SECURITIES SOLD BUT NOT YET
OWNED PURCHASED
1996 1995 1996 1995
<S> <C> <C> <C> <C>
U.S. government/
agency securities $ 4,948 $12,326 $63,909 $24,184
Mortgage-backed
securities 32,854 21,796 - -
Corporate debt 2,643 15,871 231 195
Corporate stocks 2,849 4,247 1,594 737
State and
municipal debt 16,502 21,509 50 189
$59,796 $75,749 $65,784 $25,305
</TABLE>
28
believe in building strong and lasting relationships. ~ We are committed
<PAGE>
NOTE FOUR
Short-Term Borrowings
Bank loans are obtained from time to time to finance trading securities
owned by IJL (of which a substantial portion is pledged as collateral) and are
payable on demand. At September 30, 1996, IJL had $155 million of unused call
loan facilities. 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 5.84%.
NOTE FIVE
Notes Payable
Notes Payable Notes payable to various entities at September 30,
1996 and 1995, consisted of the following:
<TABLE>
<CAPTION>
(ALL DOLLARS IN THOUSANDS) 1996 1995
<S> <C> <C>
10% note with monthly payments
of $58,127 and a balloon pay-
ment due December 31, 1996 - $6,672
9.5% note with minimum
monthly payments of $75,000 $5,334 -
and a balloon payment on
December 31, 1999
Note, bearing interest at 90-day
adjusted libor plus 1.5%, with
interest paid monthly and a
single payment of principal
due December 20, 1995 - 1,100
Note, bearing interest at 30-day
libor adjusted every 30 days
with monthly payments of
$33,000 and a balloon payment
due on February 1, 1998 874 -
$6,208 $7,772
</TABLE>
The current notes represent refinancings of the 1995 obligations.
The net book value of buildings and improvements collateralizing $5.3
million of these notes was $4.9 million at September 30, 1996.
Approximate maturities of notes in each of the next
five years are as follows:
YEAR ENDING SEPTEMBER 30 (ALL DOLLARS IN THOUSANDS)
1997 ........................................................$ 909
1998 ........................................................ 1,045
1999 ........................................................ 518
2000 ........................................................ 3,736
Thereafter .................................................. -
NOTE SIX
Long-Term Subordinated Debt
Borrowings under subordination agreements are
as follows:
(ALL DOLLARS IN THOUSANDS) 1996 1995
7.75% convertible subordinated
debentures, due March 31, 2011 $20,999 $20,999
The subordinated debentures are convertible into common stock at $17.75 per
share, and are redeemable at the option of the Company at par. 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.
NOTE SEVEN
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
1997 ........................................................ $ 9.1
1998 ........................................................ 6.0
1999 ........................................................ 3.6
2000 ........................................................ 1.5
2001 ........................................................ 0.6
Thereafter .................................................. 4.5
-----
$25.3
-----
29
to ensuring superior financial performance. Our responsibility to our
<PAGE>
Notes to Consolidated Financial Statements
Lease expense was $7.8 million in 1996, $7.4 million in 1995 and $7.1
million in 1994.
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, 1996, contingent liabilities under these obligations amounted to
approximately $2.1 million in the aggregate.
In lieu of margin deposits with certain clearing agencies, IJL had $3.0
million outstanding at September 30, 1996, on a $20 million irrevocable letter
of credit issued by a commercial bank.
NOTE EIGHT
Legal Proceedings
The Company is involved in certain litigation arising in the ordinary
course of business. While some actions seek substantial damages, management
believes, based upon discussion with counsel, that the outcome of this
litigation will not have a material effect on the Company's financial position.
The materiality of these legal matters to the Company's future operating results
depends upon the level of future results of operations as well as the timing
and ultimate resolution of such legal matters.
NOTE NINE
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 client 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, in periods of stable interest rates, 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, 1996, IJL's commitments included forward purchase and sale
contracts, involving mortgage-backed securities with long market values of
approximately $109.1 million and short market values of approximately $96.0
million, and futures sales contracts with short values of $8.5 million used
primarily to hedge municipal bonds. While the Company may from time to time
participate in the trading of some derivative securities for its clients, this
trading is not a significant portion of the Company's business.
IJL enters into resale agreements, whereby it lends money by purchasing U.S.
government/agency or mort-gage-backed securities from clients or dealers with an
agreement to resell them to the same clients 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 93% of all
loans under securities resale agreements at September 30, 1996, were made to
four counterparties.
IJL incurs risk in underwriting public securities offerings to the extent
that prospective buyers fail to purchase the securities. The Company attempts to
mitigate this risk through due diligence carried out prior to undertaking the
contractual obligation.
NOTE TEN
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, 1996 and 1995.
In
30
fellow employees and our shareholders demands that the firm function
<PAGE>
addition, the Company has a stock award plan under which 1,800,000 shares
were reserved at September 30, 1996, and September 30, 1995, for issuance of
restricted stock, contingent stock awards, 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.
Information with respect to options under the
NUMBER OF OPTIONS OPTION PRICE
OUTSTANDING PER SHARE
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
Cancelled (8,000)
Exercised (37,979) 2.25-6.00
September 30, 1995 186,433 2.25-12.75
Cancelled (32,500)
Exercised (59,833) 2.25-9.63
September 30, 1996 94,100 6.00-9.15
At September 30, 1996, options to purchase 94,100 shares were exercisable,
and no stock appreciation rights had been granted. The Company awarded 224,522
and 123,790 restricted shares from treasury stock during 1996 and 1995,
respectively.
NOTE ELEVEN
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 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 calendar quarter 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 $1.7 million in
1996, $1.2 million in 1995, and $1.5 million in 1994.
NOTE TWELVE
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:
<TABLE>
<CAPTION>
(ALL DOLLARS IN THOUSANDS)
1996 1995 1994
<S> <C> <C> <C>
Current:
Federal $ 8,260 $1,524 $2,269
State 1,613 998 1,054
9,873 2,522 3,323
Deferred:
Federal (3,270) 1,611 1,897
State (365) (198) 165
(3,635) 1,413 2,062
Total tax expense $ 6,238 $3,935 $5,385
</TABLE>
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 sources of these differences and the tax effect of each
are as follows:
<TABLE>
<CAPTION>
(ALL DOLLARS IN THOUSANDS) 1996 1995 1994
<S> <C> <C> <C>
Compensation and
benefits $ (1,201) $ (640) $ (742)
Real estate, bad debt
and other expenses (12) 846 1,131
Partnership tax losses (745) 154 144
Tax credits - 353 1,276
Other (1,677) 700 253
Deferred tax
expense (benefit) $ (3,635) $1,413 $ 2,062
</TABLE>
31
as productively and cost-effectively as possible. We will work to grow
<PAGE>
Notes to Consolidated Financial Statements
The principal differences between the federal statu-
tory rate and the effective income tax rate are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Federal statutory rate 35.0% 34.0% 35.0%
State taxes, less federal
benefit 5.2 5.4 6.0
Tax-exempt interest, net (3.4) (4.8) (2.9)
Goodwill amortization 1.3 2.0 1.5
Other 1.9 3.3 1.0
Effective tax rate 40.0% 39.9% 40.6%
</TABLE>
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, 1996 and 1995, these were comprised of the following:
<TABLE>
<CAPTION>
(ALL DOLLARS IN THOUSANDS) 1996 1995
<S> <C> <C>
Deferred tax assets:
Compensation and benefits $4,279 $3,103
Real estate, bad debt and
other expenses 1,193 943
Tax credits - 378
5,472 4,424
Deferred tax liabilities:
Partnership t ax losses 171 924
Other 300 2,134
471 3,058
Net deferred tax assets $5,001 $1,366
</TABLE>
NOTE THIRTEEN
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 client 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, 1996, IJL's net capital was $39.8 million, or 15.7% of its
aggregate debit balances, and approximately $34.7 million in excess of its
minimum regulatory requirements.
32
revenues, streamline procedures and to be innovative and unbureaucratic.
<PAGE>
Interstate / Johnson Lane,
Incorporated
PRINCIPAL OFFICERS & DIRECTORS
Claude S. Abernethy, Jr.
SENIOR VICE PRESIDENT
INTERSTATE/JOHNSON LANE CORPORATION
Parks H. Dalton (3)
CHAIRMAN OF THE BOARD
John B. Ellis (2) (3)
PRIVATE INVESTOR
Peter R. Kellogg (1) (2) (3)
SENIOR PARTNER AND CHIEF EXECUTIVE OFFICER
SPEAR, LEEDS & KELLOGG
The Hon. J. Alex McMillan, III (1) (2)
PRESIDENT
THE MCMILLAN GROUP
James H. Morgan
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Dudley G. Pearson
SENIOR VICE PRESIDENT
INTERSTATE/JOHNSON LANE CORPORATION
Edward C. Ruff
CHIEF FINANCIAL OFFICER
Grady G. Thomas, Jr.
SENIOR VICE PRESIDENT
INTERSTATE/JOHNSON LANE CORPORATION
J. David T. Johnson
DIRECTOR EMERITUS
(1) AUDIT COMMITTEE MEMBER
(2) COMPENSATION & STOCK PLANS COMMITTEE MEMBER
(3) NOMINATING COMMITTEE MEMBER
Interstate / Johnson Lane
Corporation
EXECUTIVE OFFICERS & DIRECTORS
Douglas R. Aldridge
SENIOR MANAGING DIRECTOR
PRIVATE CLIENT GROUP
Edwin A. Dalrymple, Jr. (1)
SENIOR MANAGING DIRECTOR
PRIVATE CLIENT GROUP
Parks H. Dalton
CHAIRMAN OF THE BOARD
Harvey D. Harrelson (1)
SENIOR MANAGING DIRECTOR
FIXED INCOME CAPITAL MARKETS GROUP
John H. Haynie
SENIOR MANAGING DIRECTOR
OPERATIONS
Michael D. Hearn
SENIOR MANAGING DIRECTOR, SECRETARY AND
GENERAL COUNSEL
James H. Morgan (1) (2)
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Edward C. Ruff (1) (2)
SENIOR MANAGING DIRECTOR AND
CHIEF FINANCIAL OFFICER
Lewis F. Semones, Jr. (1) (2)
SENIOR MANAGING DIRECTOR
STRATEGIC PLANNING AND BUSINESS DEVELOPMENT
(1) MANAGEMENT COMMITTEE
(2) OFFICE OF THE PRESIDENT
33
We are committed to improving the communities in which we live and
<PAGE>
Office Locations
Corporate Headquarters
Interstate Tower
121 W. Trade Street
P.O. Box 1012
Charlotte, NC
28201-1012
(704) 379-9000
http://www.ijl.com
Georgia
Albany Columbus Rome
Athens LaGrange Savannah (2)
Atlanta (2) Macon Statesboro
Augusta (2) Marietta Warner-Robins
New York
New York City
North Carolina
Asheville Hendersonville North Wilkesboro
Brevard Hickory Pinehurst
Chapel Hill High Point Raleigh
Charlotte (4) Kinston Roanoke Rapids
Clinton Lenoir Salisbury
Fayetteville Morehead City Sanford
Gastonia Morganton Shelby
Goldsboro Murphy Statesville
Greensboro New Bern Wilmington
Greenville Newton Winston-Salem
South Carolina
Anderson Greenville Rock Hill
Charleston Greenwood Spartanburg
Columbia Kiawah Island
Florence Myrtle Beach
Virginia
Richmond Roanoke Virginia Beach
Common
Stock Price
Fiscal 1996
high low
4th Q $12 5/8 $11
3rd Q 12 1/4 10 5/8
2nd Q 11 3/4 10 3/4
1st Q 10 5/8 9 5/8
Common
Stock Price
Fiscal 1995
high low
4th Q $11 $ 9 3/4
3rd Q 10 1/8 9 5/8
2nd Q 9 7/8 7 5/8
1st Q 8 1/4 7 1/4
Investor Information
Operating Subsidiaries
CapTrust Financial Advisors, LLC
Interstate/Johnson Lane Corporation
ISC Futures Corporation
ISC Realty Corporation
Sovereign Capital Management, Inc.
d/b/a Sovereign Advisers, Inc.
Common Stock
Ticker Symbol: IJL
New York Stock Exchange
At November 29, 1996, there were
approximately 980 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 1996 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 21,
1997, at the Radisson Plaza Hotel, Two NationsBank Plaza, Charlotte, North
Carolina. Shareholders of record as of November 29, 1996, will be entitled to
vote at this meeting.
34
work. We will encourage all employees to become actively involved in
<PAGE>
(PHOTOGRAPH OF THE STOCK MARKET APPEARS HERE.)
community service, especially in efforts to improve educational
<PAGE>
(PHOTOGRAPH OF A WOMAN AT A DESK APPEARS HERE.)
(PHOTOGRAPH OF A BUILDING WITH PEOPLE OUTSIDE OF IT APPEARS IN THE BACKGROUND
OF THE PAGE.)
opportunities for children and youth, and to improve their daily lives.
Exhibit 21
INTERSTATE/JOHNSON LANE, INC.
List of Subsidiaries
September 30, 1996
Percentage of
State in voting securities
Name which Incorporated owned
Interstate/Johnson Lane Corporation North Carolina 100%
ISC Realty Corporation North Carolina 100
Sovereign Capital Management, Inc.* North Carolina 100
ISC Futures Corporation North Carolina 100
The Johnson, Lane, Space, Smith Corporation Georgia 100
IJL Financial, Inc. North Carolina 100
IJL Holdings, Inc. North Carolina 100
*d/b/a Sovereign Advisers, Inc.
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. 333-17995) of
our report dated October 21, 1996, on our audits of the consolidated financial
statements and financial statement schedule of Interstate/Johnson Lane, Inc. as
of September 30, 1996 and 1995, and for each of the three years in the period
ended September 30, 1996, which report is included in this Annual Report on Form
10-K.
Charlotte, North Carolina
December 20, 1996
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<ARTICLE> BD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 37,285
<RECEIVABLES> 258,007
<SECURITIES-RESALE> 69,675
<SECURITIES-BORROWED> 12,412
<INSTRUMENTS-OWNED> 59,796
<PP&E> 14,810
<TOTAL-ASSETS> 568,341
<SHORT-TERM> 16,561
<PAYABLES> 307,087
<REPOS-SOLD> 37,061
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 65,784
<LONG-TERM> 27,207
0
0
<COMMON> 1,377
<OTHER-SE> 75,250
<TOTAL-LIABILITY-AND-EQUITY> 568,341
<TRADING-REVENUE> 7,078
<INTEREST-DIVIDENDS> 33,332
<COMMISSIONS> 145,446
<INVESTMENT-BANKING-REVENUES> 5,281
<FEE-REVENUE> 9,511
<INTEREST-EXPENSE> 21,106
<COMPENSATION> 121,830
<INCOME-PRETAX> 15,593
<INCOME-PRE-EXTRAORDINARY> 15,593
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,355
<EPS-PRIMARY> 1.55
<EPS-DILUTED> 1.36
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