UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
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, 1997
----- --------------------------------
(Common stock, $.20 par value) 5,938,102
PAGE 1 OF 14
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
Index
Page Number
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of
Financial Condition--December 31, 1996 and
September 30, 1996 3
Condensed Consolidated Statements of
Operations--Three Months Ended
December, 1996 and 1995 4
Condensed Consolidated Statements of
Cash Flows--Three Months Ended
December 31, 1996 and 1995 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II. Other Information
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
Page 2
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
<TABLE>
<CAPTION>
(All dollars in thousands)
December 31, September 30,
1996 1996
------------- -------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 15,357 $ 37,285
Cash and securities segregated for
regulatory purposes 121,501 80,501
Loans under matched securities resale agreements 3,953 5,874
Receivables:
Securities resale agreements 34,233 63,801
Customers 234,930 234,779
Brokers, dealers and clearing agencies 16,941 31,406
Other 6,108 4,234
Trading securities owned 111,175 59,796
Land, buildings, and improvements, net 5,360 5,574
Office facilities and equipment, net 9,051 9,236
Goodwill and intangible assets 12,925 13,076
Other assets 22,813 22,779
------------ -----------
$ 594,347 $ 568,341
------------ -----------
------------ -----------
Liabilities and Shareholders' Equity
Short-term borrowings:
Checks payable $ 22,181 $ 16,561
Bank loans 7,200 -
Securities repurchase agreements 42,412 31,078
Borrowings under matched securities repurchase
agreements 4,038 5,983
Payables:
Customers 332,041 292,450
Brokers and dealers 7,128 7,375
Other 7,799 7,262
Accrued compensation and benefits 12,261 20,939
Securities sold but not yet purchased 35,846 65,784
Notes payable 5,997 6,208
Other liabilities and accrued expenses 17,386 16,875
----------- ----------
494,289 470,515
------------ -----------
Minority interest 201 200
------------ -----------
Long-term subordinated debt 20,999 20,999
------------ -----------
Shareholders' equity:
Common stock 1,377 1,377
Additional paid-in-capital 31,082 31,231
Retained earnings 55,936 53,670
------------ -----------
88,395 86,278
Less: treasury stock, at cost (9,537) (9,651)
------------ -----------
Total shareholders' equity 78,858 76,627
------------ -----------
$ 594,347 $ 568,341
------------ -----------
------------ -----------
The accompanying notes are an integral part of the condensed consolidated financial statements
</TABLE>
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)
1996 1995
------------- -------------
<S> <C> <C>
Revenues:
Commissions and sales credits $ 35,650 $ 34,317
Trading gains, net 1,976 2,039
Investment banking and underwriting 1,289 1,739
Asset management and advisory 2,799 2,144
Interest 8,113 8,462
Other 2,439 1,833
------------ -----------
Total revenues 52,266 50,534
Interest expense 4,726 5,558
------------ -----------
Net revenues 47,540 44,976
------------ -----------
Expenses:
Compensation and benefits 30,119 28,467
Technology and telephone 4,473 4,149
Occupancy 2,310 2,092
Execution, clearance and depository 997 1,057
Promotion and development 2,012 1,578
Professional services 1,016 795
Printing, postage and supplies 961 856
Other operating expenses 1,542 2,474
------------ -----------
Total expenses 43,430 41,468
------------ -----------
Income before income taxes 4,110 3,508
Income tax expense 1,603 1,438
------------ -----------
Net Income $ 2,507 $ 2,070
------------ -----------
------------ -----------
Earnings per share:
Primary $ 0.42 $ 0.34
------------ -----------
------------ -----------
Fully diluted $ 0.37 $ 0.31
------------ -----------
------------ -----------
Weighted average shares:
Primary 5,970,604 6,110,606
------------ -----------
------------ -----------
Fully diluted 7,499,899 7,562,021
------------ -----------
------------ -----------
The accompanying notes are an integral part of the condensed consolidated financial statements
</TABLE>
Page 4
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the three months ended December 31,
(Unaudited)
<TABLE>
<CAPTION>
(All dollars in thousands)
1996 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
- - -------------------------------------------
Net income $ 2,507 $ 2,070
------------ -----------
Adjustments to reconcile net income to cash provided (used) by operating
activities:
Depreciation and amortization 1,463 1,111
Deferred income taxes - (950)
Provision for real estate charges - 850
Other non-cash items 230 657
------------ -----------
1,693 1,668
------------ -----------
Changes in operating assets and liabilities:
Cash and securities segregated for
regulatory purposes (41,000) (6,413)
Loans under matched securities resale and
repurchase agreements, net (23) 710
Net payables to customers 39,439 (6,816)
Net receivables from brokers, dealers and clearing
agencies 14,219 11,357
Other receivables (1,875) (1,792)
Trading securities owned, net (81,316) (5,023)
Other assets (64) (1,371)
Accrued compensation and benefits (8,678) (2,405)
Other liabilities and accrued expenses 1,784 357
------------ -----------
(77,514) (11,396)
------------ -----------
Cash provided by financing activities (73,314) (7,658)
------------ -----------
Cash flows from financing activities:
- - -------------------------------------------
Proceeds from (repayment of):
Short-term bank borrowings 12,820 11,318
Borrowings under securities repurchase and
resale agreements, net 40,902 (8,214)
Notes payable (211) (862)
Purchase of stock for treasury (1,102) (692)
Dividends paid (241) (185)
------------ -----------
Cash used by operating activities 52,168 1,365
------------ -----------
Cash flows from investing activities:
- - -------------------------------------------
Capital expenditures (782) (701)
------------ -----------
Cash used by investing activities: (782) (701)
------------ -----------
Net (decrease) in csh and cash equivalents (21,928) (6,994)
Cash and cash equivalents at beginning of period 37,285 26,537
------------ -----------
Cash and cash equivalents at end of period $ 15,357 $ 19,543
------------ -----------
------------ -----------
Cash paid during the quarter for:
Interest $ 8,187 $ 5,835
Income taxes $ 1,569 $ 1,336
The accompanying notes are an integral part of the condensed consolidated financial statements
</TABLE>
Page 5
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation:
The interim financial statements are unaudited; however, such information
reflects all normal recurring adjustments which, in the opinion of
management, are necessary for a fair presentation of the results for the
period. The nature of the Company's business is such that the results of
any interim period are not necessarily indicative of results for a full
fiscal year.
2. Net Capital Requirements:
As a registered broker-dealer and member of the New York Stock Exchange,
Interstate/Johnson Lane Corporation ("IJL"), the principal operating
subsidiary of the Company, is subject to the Securities and Exchange
Commission's uniform net capital rule. IJL has elected to operate under the
alternative method of the rule, which prohibits a broker-dealer from
engaging in any transactions when its "net capital" is less than 2% of its
"aggregate debit balances" arising from customer transactions, as these
terms are defined in the rule. The Exchange may also impose business
restrictions on a member firm if its net capital falls below 5% of its
aggregate debit balances. IJL is also subject to the Commodity Futures
Trading Commission minimum net capital requirement.
At December 31, 1996, IJL's net capital was 17% of its aggregate debit
balances and approximately $35.1 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, 1997 $6.9
For the fiscal year ended September 30,
1998 6.2
1999 3.7
2000 1.6
2001 0.7
Thereafter 4.4
--------
$ 23.5
--------
--------
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, 1996, 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, 1996 under this facility was $3.6 million.
4. 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.
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, in periods of stable interest rates,
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, 1996, IJL's commitments included forward purchase and sale
contracts involving mortgage-backed securities with long market values of
approximately $23.6 million and short market values of approximately $23.0
million and futures sale contracts with short market values of $14.2
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 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 89% of all loans under
securities resale agreements at December 31, 1996 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.
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 both of which can be cyclical and volatile. As a result,
revenues and earnings may vary significantly from quarter to quarter.
At December 31, 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 costs and
indirectly stifle certain revenue streams.
Liquidity and Capital Resources
The Company's net cash position decreased $21.9 million for the three months
ended December 31, 1996. Operating activities consumed $77.5 million of cash,
partly funded by $4.2 million of net income adjusted for depreciation and other
non-cash charges. Financing activities provided $52.2 million of cash while
capital expenditures totaled $780,000.
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, 1996,
these assets comprised approximately 92% 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 from normal business operations.
In addition, $600,000 of capital spending in the first quarter of fiscal 1997
reflects implementation of the second phase of a planned $10 million program of
technology improvements over a multi-year period.
Page 9
<PAGE>
INTERSTATE/JOHNSON LANE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, continued
Liquidity and Capital Resources, continued
At December 31, 1996, the Company had $148 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, 1996, IJL had net capital of $39.9 million,
"excess net capital" of approximately $35.1 million, and a net capital ratio of
17%.
Results of Operations
For the three months ended December 31, 1996, net revenues increased $2.6
million, or 6%, from the previous year, while expenses, other than interest,
increased $2.0 million, or 5%. Net income of $2.5 million was up $437,000 from
the results of the period of a year ago.
Overall, commissions and sales credits increased by about $1.3 million, or 4%
from the same three-month period of a year ago. Increases in listed equity
transactions, coupled with increased sales of mutual fund shares and annuity
products, contributed to the majority of the increase in the retail sector.
However, a lower level of originations had a negative impact on the
institutional sector.
Investment banking fees and underwriting profits decreased $450,000, or 26%, for
the same three month period due to a lower level of managed underwritings in the
quarter. Asset management and advisory fees were up $655,000, or 31%, for the
comparable three month period due to the continued growth of asset-based fees
charged retail clients in lieu of transaction-based commissions. Other income
increased $600,000, or 33%, for the same three month period due to an increase
in money fund service fees and an increase in income recognized on investments
held by the Company.
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 $350,000, while expenses decreased $832,000,
for the three months ended December 31, 1996 compared to the corresponding
period a year ago. The resultant increase of $482,000 in net interest income is
due to an increase in net interest earned on higher levels of customer debit
balances, offset by a decrease in interest earned on segregated customer funds.
The majority of the decrease in both gross revenues and expenses is attributable
to significantly lower levels of matched resale and repurchase agreements.
Compensation and benefits costs increased $1.7 million, or 6%, for the
three-months period ended December 31, 1996, due primarily to an increase in
transaction based commission expense and other profit-driven incentives.
Occupancy costs increased $218,000, or 10%, due primarily to increases in rent
on leased office space and leasehold improvements made to existing office space.
Promotion and development costs increased $434,000, or 28%, due to the Company's
continuing effort to build revenue and professional services increased $221,000,
or 28%, due to an increase in consulting services for technology projects,
various reengineering efforts and services related to the formation of CapTrust
Financial Advisors, LLC. Printing, postage and supplies costs increased
$105,000, or 12%, due primarily to increases in postage costs and
non-capitalized office equipment. Other operating expenses decreased $932,000,
or 38%, for the quarter largely as a result of decreases in the 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. 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 on 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 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, 1996.
<PAGE>
INTERSTATE/JOHNSON LANE, INC.
AND CONSOLIDATED SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTERSTATE/JOHNSON LANE, INC.
Registrant
Signature Title Date
_________________________ President and Chief
James H. Morgan Executive Officer February 14, 1997
_________________________ Vice President - Finance
Edward C. Ruff and Treasurer (Principal
Financial Officer) February 14, 1997
_________________________ Assistant Vice President
C. Fred Wagstaff, III (Principal Accounting
Officer) February 14, 1997
Page 13
<PAGE>
Exhibit 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------------------------------
Net income per share was computed as follows: 1996 1995
------------ ------------
<S> <C> <C>
Primary:
Net income $ 2,507,056 $ 2,070,199
============ ============
1) Weighted average shares outstanding 5,970,604 6,110,606
2) Incremental shares under stock options
computed under the treasury stock method
using the average market price of
issuer's stock during the periods 43,996 63,465
------------ ------------
3) Weighted average shares and common
equivalent shares outstanding 6,014,600 6,174,071
============ ============
4) Weighted average shares outstanding
which were used for calculation (A) 5,970,604 (A) 6,110,606
============ ============
Net income per share $ 0.42 $ 0.34
============ ============
Fully Diluted:
1) Unadjusted income $ 2,507,056 $ 2,070,199
2) Interest on convertible subordinated 248,182 246,148
------------ ------------
Adjusted net income $ 2,755,238 $ 2,316,347
============ ============
3) Weighted average shares outstanding 5,970,604 6,110,606
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 46,253 68,373
5) Incremental shares relating to
convertible subordinated debentures 1,183,042 1,183,042
6) Incremental shares related to long-term
incentive compensation plan. 300,000 200,000
------------ ------------
7) Weighted average shares and common
equivalent shares outstanding 7,499,899 7,562,021
============ ============
Net income per share $ 0.37 $ 0.31
============ ============
</TABLE>
(A) Dilutive effect of common equivalent shares not included since dilution is
less than 3%.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> BD
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 15,357
<RECEIVABLES> 252,492
<SECURITIES-RESALE> 38,186
<SECURITIES-BORROWED> 5,487
<INSTRUMENTS-OWNED> 111,175
<PP&E> 14,411
<TOTAL-ASSETS> 594,347
<SHORT-TERM> 29,381
<PAYABLES> 346,968
<REPOS-SOLD> 46,450
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 35,846
<LONG-TERM> 26,996
0
0
<COMMON> 1,377
<OTHER-SE> 77,481
<TOTAL-LIABILITY-AND-EQUITY> 594,347
<TRADING-REVENUE> 1,976
<INTEREST-DIVIDENDS> 8,113
<COMMISSIONS> 35,650
<INVESTMENT-BANKING-REVENUES> 1,289
<FEE-REVENUE> 2,799
<INTEREST-EXPENSE> 4,726
<COMPENSATION> 30,119
<INCOME-PRETAX> 4,110
<INCOME-PRE-EXTRAORDINARY> 4,110
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,507
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.37
</TABLE>
