UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT #1 TO FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 1-8952
INTERSTATE/JOHNSON LANE, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
56-1470946
(I.R.S. Employer Identification No.)
Interstate Tower, P.O. Box 1012, Charlotte, North Carolina 28201-1012
(Address of principal executive offices, zip code)
(704) 379-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at January 31, 1996
----- --------------------------------
(Common stock, $.20 par value) 6,146,052
PAGE 1 OF 14
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
Index
<TABLE>
<CAPTION>
Page Number
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of
Financial Condition--December 31, 1995 and
September 30, 1995 3
Condensed Consolidated Statements of
Operations--Three Months Ended
December, 1995 and 1994 4
Condensed Consolidated Statements of
Cash Flows--Three Months Ended
December 31, 1995 and 1994 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II. Other Information
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
</TABLE>
Page 2
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
<TABLE>
<CAPTION>
(All dollars in thousands)
December 31, September 30,
1995 1995
------------ ------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 19,543 $ 26,537
Cash and securities segregated for
regulatory purposes 124,029 117,616
Loans under matched securities resale agreements 202,420 129,623
Receivables:
Financing resale agreements 9,624 23,848
Customers 195,372 175,328
Brokers, dealers and clearing agencies 15,488 18,048
Other 6,514 4,722
Trading securities owned 68,363 75,749
Land, buildings, and improvements, net 6,286 7,285
Office facilities and equipment, net 8,844 8,865
Goodwill and intangible assets 13,528 13,678
Other assets 17,523 15,213
------------ ------------
$ 687,534 $ 616,512
============ ============
Liabilities and Shareholders' Equity
Short-term borrowings:
Checks payable $ 20,190 $ 11,872
Bank loans 3,000 -
Financing repurchase agreements 16,123 38,561
Borrowings under matched securities repurchase agreements 203,960 130,453
Payables:
Customers 280,942 267,714
Brokers and dealers 15,416 6,619
Other 8,265 7,322
Accrued compensation and benefits 12,055 14,460
Securities sold but not yet purchased 12,896 25,305
Notes payable 6,910 7,772
Other liabilities and accrued expenses 14,198 15,864
------------ ------------
593,955 525,942
------------ ------------
Minority interests 200 200
------------ ------------
Long-term subordinated debt 20,999 20,999
------------ ------------
Shareholders' equity:
Common stock 1,377 1,377
Additional paid-in-capital 31,278 31,510
Retained earnings 46,929 45,043
------------ ------------
79,584 77,930
Less: treasury stock, at cost (7,204) (8,559)
------------ ------------
Total shareholders' equity 72,380 69,371
------------ ------------
$ 687,534 $ 616,512
============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Page 3
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended December 31,
(All dollars in thousands)
1995 1994
------------- -------------
<S> <C> <C>
Revenues:
Commissions and sales credits $ 34,317 $ 24,247
Trading gains, net 2,039 1,111
Investment banking and underwriting 1,739 955
Asset management and advisory 2,144 1,722
Interest 8,462 10,208
Other 1,833 1,424
------------- -------------
Total revenues 50,534 39,667
Interest expense 5,558 7,775
------------- -------------
Net revenues 44,976 31,892
------------- -------------
Expenses:
Compensation and benefits 28,533 20,328
Technology and telephone 4,149 3,345
Occupancy 2,092 2,092
Execution, clearance and depository 1,080 875
Promotion and development 1,489 1,199
Professional services 795 810
Printing, postage and supplies 856 712
Other operating expenses 2,474 978
------------- -------------
Total expenses 41,468 30,339
------------- -------------
Income before income taxes 3,508 1,553
Income tax expense 1,438 621
------------- -------------
Net Income $ 2,070 $ 932
============= =============
Earnings per share:
Primary $ 0.34 $ 0.15
============= =============
Fully diluted $ 0.31 $ 0.15
============= =============
Weighted average shares:
Primary 6,110,606 6,389,920
============= =============
Fully diluted 7,562,021 7,657,172
============= =============
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
Page 4
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended December 31,
(Unaudited)
<TABLE>
<CAPTION>
(All dollars in thousands)
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
- - -----------------------------------------
Net income $ 2,070 $ 932
------------ ------------
Adjustments to reconcile net income to cash provided (used) by operating
activities:
Depreciation and amortization 1,111 794
Deferred income taxes (950) -
Provision for real estate charges 850 250
Other non-cash items 657 (108)
------------ ------------
1,668 936
------------ ------------
Changes in operating assets and liabilities:
Cash and securities segregated for
regulatory purposes (6,413) (2,945)
Loans under matched securities resale and repurchase agreements, net 710 1,749
Net payables to customers (6,816) 4,935
Net receivables from brokers, dealers and clearing agencies 11,357 (4,218)
Other receivables (1,792) 1,742
Trading securities owned, net (5,023) (28,840)
Other assets (1,371) (117)
Accrued compensation and benefits (2,405) (5,778)
Other liabilities and accrued expenses 357 (105)
------------ ------------
(11,396) (33,577)
------------ ------------
Cash used by operating activities (7,658) (31,709)
------------ ------------
Cash flows from financing activities:
- - -----------------------------------------
Proceeds from (repayment of ):
Short-term bank borrowings 11,318 (2,246)
Borrowings under financing repurchase and resale agreements, net (8,214) 18,136
Notes payable (862) (45)
Purchase of stock for treasury (692) (840)
Dividends paid (185) (192)
------------ ------------
Cash provided by financing activities 1,365 14,813
------------ ------------
Cash flows from investing activities:
- - -----------------------------------------
Capital expenditures (701) (678)
------------ ------------
Cash used by investing activities (701) (678)
------------ ------------
Net decrease (increase) in cash and cash equivalents (6,994) (17,574)
Cash and cash equivalents at beginning of period 26,537 30,193
------------ ------------
Cash and cash equivalents at end of period $ 19,543 $ 12,619
============ ============
Cash paid during the quarter for:
Interest $ 5,835 $ 7,736
Income taxes $ 1,336 $ 151
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
Page 5
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION:
The interim financial statements are unaudited; however, such information
reflects all normal recurring adjustments which, in the opinion of
management, are necessary for a fair presentation of the results for the
period. The nature of the Company's business is such that the results of
any interim period are not necessarily indicative of results for a full
fiscal year.
2. NET CAPITAL REQUIREMENTS:
As a registered broker-dealer and member of the New York Stock Exchange,
Interstate/Johnson Lane Corporation ("IJL"), the principal operating
subsidiary of the Company, is subject to the Securities and Exchange
Commission's uniform net capital rule. IJL has elected to operate under the
alternative method of the rule, which prohibits a broker-dealer from
engaging in any transactions when its "net capital" is less than 2% of its
"aggregate debit balances" arising from customer transactions, as these
terms are defined in the rule. The Exchange may also impose business
restrictions on a member firm if its net capital falls below 5% of its
aggregate debit balances. IJL is also subject to the Commodity Futures
Trading Commission minimum net capital requirement.
At December 31, 1995, IJL's net capital was 20% of its aggregate debit
balances and approximately $36.4 million in excess of its minimum
regulatory requirements.
3. COMMITMENTS AND CONTINGENCIES:
Leases for office space and equipment are accounted for as operating
leases. Approximate minimum rental commitments under noncancelable leases,
some of which contain escalation clauses and renewal options, are as
follows:
Millions
For the nine months ended September 30, 1996 $7.9
For the fiscal year ended September 30,
1997 7.2
1998 5.0
1999 3.2
2000 1.3
Thereafter 4.9
--------
$ 29.5
Page 6
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. COMMITMENTS AND CONTINGENCIES, CONTINUED:
In connection with its involvement as a general partner and/or placement
agent of various real estate limited partnerships, the Company has
guaranteed certain obligations of limited partners and, with others, has
jointly or severally guaranteed mortgage loan obligations of some of the
partnerships. At December 31, 1995, contingent liabilities under these
obligations amounted to approximately $2.1 million in the aggregate.
Of a $20 million irrevocable letter of credit available, the amount
outstanding at December 31, 1995 under this facility was $2.5 million.
4. LEGAL PROCEEDINGS:
The Company is involved in certain litigation arising in the ordinary
course of business. Management believes, based upon discussion with
counsel, that the outcome of this litigation will not have a material
effect in the Company's financial position. The materiality of legal
matters on the Company's future operating results depends on the level of
future results of operations as well as the timing and ultimate outcome of
such legal matters.
5. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:
IJL's business activities involve the execution, settlement and financing
of securities transactions generating accounts receivable, and thus may
expose IJL to financial risk in the event a customer or other counterparty
is unable to fulfill its contractual obligations. IJL controls the risk
associated with collateralized loans by revaluing collateral at current
prices, monitoring compliance with applicable credit limits and industry
regulations, and requiring the posting of additional collateral when
appropriate.
Obligations arising from financial instruments sold short in connection
with its normal trading activities expose IJL to risk in the event market
prices increase, since it may be obligated to repurchase those positions at
a greater price. IJL's short selling primarily involves debt securities,
which are typically less volatile than equities or options.
Page 7
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK, CONTINUED:
Forward and futures contracts provide for the seller agreeing to make
delivery of securities or other instruments at a specified future date and
price. Risk arises from the potential inability of counterparties to honor
contract terms, and from changes in values of the underlying instruments.
At December 31, 1995, IJL's commitments included forward purchase and sale
contracts involving mortgage-backed securities with long market values of
approximately $27.9 million and short market values of approximately $23.9
million and futures purchase and sale contracts with long market values of
$600,000 and short market values of $11.1 million.
IJL enters into resale agreements, whereby it lends money by purchasing
U.S. government/agency or mortgage-backed securities from customers or
dealers with an agreement to resell them to the same customers or dealers
at a later date. Such loans are collateralized by the underlying
securities, which are held in custody by IJL and may be converted into cash
at IJL's option. In addition, IJL monitors the market value of the
collateral, and issues margin calls as necessary according to the
creditworthiness of the borrower. Approximately 98% of all loans under
securities resale agreements at December 31, 1995 were made to two
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.
6. LONG-TERM INCENTIVE COMPENSATION PLAN:
The Company's Board of Directors approved a three-year incentive
compensation plan ("the Plan") for selected executive officers at its July
1996 meeting. The Plan was approved retroactively to the beginning of the
Company's 1996 fiscal year; accordingly, quarterly financial information
has been restated to reflect adoption of the Plan. Compensation
expense recognized under the Plan for the quarter ended December
31, 1995 totaled $177,000 and is reflected in the accompanying restated
financial statements. Maximum imputed shares issuable under the Plan as
of December 31, 1995 totaled 200,000, and are included as common stock
equivalents in the computation of fully diluted earnings per share.
Page 8
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General Business Environment
The Company's principal activities -- securities brokerage for individual
(retail) and institutional investors, market-making in equity and fixed-income
securities, investment banking and underwriting, and investment management and
advisory services -- are highly competitive. Strategic alliances between
investment firms and commercial banks, insurance companies, and other financial
services entities have intensified this competition. Many of the Company's
revenue sources are sensitive to marketplace trading volumes and to interest
rate conditions which can be volatile. As a result, revenues and earnings may
vary significantly from quarter to quarter.
In recent years, the Company's retail sales force has grown in large part due to
the recruitment and training of individuals without securities industry
experience. At December 31, 1995, approximately 22% of the Company's retail
financial consultants had fewer than three years' industry experience. While
this strategy may be rewarding in the future, near-term slowdowns in individual
investor activity could negatively impact the revenue production of a less
seasoned sales force. Implementation of prospective Securities and Exchange
Commission disclosure requirements for broker-dealers regarding payment for
order flow, and for money managers regarding "soft dollar" arrangements with
broker-dealers, could also indirectly stifle certain revenue streams in the
future.
Liquidity and Capital Resources
The Company's net cash position decreased $7.0 million for the three months
ended December 31, 1995. Operating activities consumed $11.4 million of cash,
offset by $3.7 million of net income adjusted for depreciation and other
non-cash charges. Financing activities provided $1.4 million of cash while
capital expenditures totaled $700,000.
The Company's asset base consists primarily of cash, cash equivalents, and other
assets which can be converted to cash within one year; at December 31, 1995,
these assets comprised approximately 93% 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, payment of dividends, and litigation settlements arising from normal
business operations. In addition, the Company anticipates capital spending of up
to $8 million over the next several years in conjunction with a planned program
of technology improvements.
Page 9
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Liquidity and Capital Resources, continued
At December 31, 1995, the Company had $152 million of unused call loan financing
available. In addition, the Company maintains credit lines of several hundred
million dollars for collateralizing 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, Commodity Futures Trading Commission, and The New York
Stock Exchange, and consistently has operated well in excess of the minimum
requirements. At December 31, 1995, IJL had net capital of $40.5 million,
"excess net capital" of approximately $36.4 million, and a net capital ratio of
20%.
Results of Operations
For the three months ended December 31, 1995, net revenues increased $13.1
million, or 41%, from the previous year, while expenses, other than interest,
increased $11.1 million, or 37%. Net income of $2.1 million was up $1.1 million
from the results of the period of a year ago.
Overall, commissions and sales credits increased by about $10.1 million, or 42%
from the same three-month period of a year ago, representing gains of 37% in the
retail sector and 50% in the institutional sector. Increases in secondary market
transactions in both exchange listed and OTC equities contributed to the
majority of 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 improving new issues markets and increased
sale of mortgage-backed securities had a positive impact on the institutional
sector.
Increased profits of $500,000 in most areas of fixed-income trading were
augmented by a $400,000 improvement in OTC trading results to produce an overall
increase in trading gains of $900,000, or 84%.
Investment banking fees and underwriting profits increased $800,000, or 82%, for
the same three month period due to an improved capital-raising market, coupled
with an increased level of managed underwritings in the quarter. Asset
management and advisory fees were up $400,000 for the three month period due to
the continued growth of asset-based fees charged retail clients in lieu of
transaction-based commissions.
Page 10
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
Results of Operations, continued
Interest revenues were down about $1.7 million for the three months ended
December 31, 1995, while expenses decreased $2.2 million for the corresponding
period. The resultant increase of $500,000 in net interest income is due
primarily to higher rates earned on increased segregated customer funds, and to
increased inventories of mortgage-backed securities. 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 $8.2 million, or 40% for the three
month period ended December 31, 1995 due primarily to an increase in
transaction-based commissions and other profit-driven incentives including the
new management LTIP described in Note 6 to the Condensed Consolidated Financial
Statements. Technology and telephone expense increased $800,000, or 24%, for the
quarter primarily due to expenses related to the Company's ongoing program of
technology improvements. Execution, clearance and depository costs increased
$200,000, or 23%, primarily from increased transaction volume. Promotion and
development costs increased $300,000, or 24%, due to the Company's continuing
effort to build revenue. Other operating expenses increased $1.5 million, or
153%, for the quarter largely as a result of increased provisions for legal and
related matters, and of adjustments to the carrying value of certain assets.
Page 11
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in certain litigation arising in the ordinary
course of business. Management believes, based upon discussion with
counsel, that the outcome of this litigation will not have a material
effect in the Company's financial position. The materiality of legal
matters on the Company's future operating results depends on the level of
future results of operations as well as the timing and ultimate outcome of
such legal matters.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Designation of Exhibit Sequential
in this Report Description Page Number
11 Statement Regarding
Computation of Per
Share Earnings 14
27 Financial
Data
Schedule 15
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months
ended December 31, 1995.
Page 12
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTERSTATE/JOHNSON LANE, INC.
Registrant
Signature Title Date
_________________________ President and Chief
James H. Morgan Executive Officer October 21, 1996
_________________________ Vice President - Finance
Edward C. Ruff and Treasurer (Principal
Financial Officer) October 21, 1996
_________________________ Assistant Vice President
C. Fred Wagstaff, III (Principal Accounting
Officer) October 21, 1996
Page 13
Exhibit 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-----------------------------------
Net income per share was computed as follows: 1995 1994
--------------- ---------------
<S> <C> <C>
Primary:
Net income $ 2,070,199 $ 931,563
=============== ===============
1) Weighted average shares outstanding 6,110,606 6,389,920
2) Incremental shares under stock options
computed under the treasury stock method
using the average market price of
issuer's stock during the periods 63,465 84,210
--------------- ---------------
3) Weighted average shares and common
equivalent shares outstanding 6,174,071 6,474,130
=============== ===============
4) Weighted average shares outstanding
which were used for calculation (A) 6,110,606 (A) 6,389,920
=============== ===============
Net income per share $ 0.34 $ 0.15
=============== ===============
Fully Diluted:
1) Unadjusted income $ 2,070,199 $ 931,563
2) Interest on convertible subordinated 246,148 246,148
--------------- ---------------
Adjusted net income $ 2,316,347 $ 1,177,711
=============== ===============
3) Weighted average shares outstanding 6,110,606 6,389,920
4) 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 68,373 84,210
5) Incremental shares relating to
convertible subordinated debentures 1,183,042 1,183,042
6) Incremental shares related to long-term
incentive compensation plan. (See Note 6) 200,000
--------------- ---------------
7) Weighted average shares and common
equivalent shares outstanding 7,562,021 7,657,172
=============== ===============
Net income per share $ 0.31 $ 0.15
=============== ===============
</TABLE>
(A) Dilutive effect of common equivalent shares not included since dilution is
less than 3%.
Page 14
<TABLE> <S> <C>
<ARTICLE> BD
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 19,543
<RECEIVABLES> 201,886
<SECURITIES-RESALE> 212,044
<SECURITIES-BORROWED> 9,727
<INSTRUMENTS-OWNED> 68,363
<PP&E> 15,130
<TOTAL-ASSETS> 687,534
<SHORT-TERM> 23,190
<PAYABLES> 304,623
<REPOS-SOLD> 220,083
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 12,896
<LONG-TERM> 27,909
1,377
0
<COMMON> 0
<OTHER-SE> 71,003
<TOTAL-LIABILITY-AND-EQUITY> 687,534
<TRADING-REVENUE> 2,039
<INTEREST-DIVIDENDS> 8,462
<COMMISSIONS> 34,317
<INVESTMENT-BANKING-REVENUES> 1,739
<FEE-REVENUE> 2,144
<INTEREST-EXPENSE> 5,558
<COMPENSATION> 28,533
<INCOME-PRETAX> 3,508
<INCOME-PRE-EXTRAORDINARY> 3,508
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,070
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.31
</TABLE>
